IAS 1
The objective of IAS 1 (2007) is to prescribe the basis for presentation of general
purpose financial statements, to ensure comparability both with the entity's financial
statements of previous periods and with the financial statements of other entities.
IAS 1 sets out the overall requirements for the presentation of financial statements,
guidelines for their structure and minimum requirements for their content. [IAS 1.1]
Standards for recognising, measuring, and disclosing specific transactions are
addressed in other Standards and Interpretations. [IAS 1.3]
Scope
IAS 1 applies to all general purpose financial statements that are prepared and
presented in accordance with International Financial Reporting Standards (IFRSs).
[IAS 1.2]
General purpose financial statements are those intended to serve users who are
not in a position to require financial reports tailored to their particular information
needs. [IAS 1.7]
Objective of financial statements
The objective of general purpose financial statements is to provide information
about the financial position, financial performance, and cash flows of an entity that
is useful to a wide range of users in making economic decisions. To meet that
objective, financial statements provide information about an entity's: [IAS 1.9]
assets
liabilities
equity
income and expenses, including gains and losses
contributions by and distributions to owners (in their capacity as
owners)
cash flows.
That information, along with other information in the notes, assists users of financial
statements in predicting the entity's future cash flows and, in particular, their timing
and certainty.
Components of financial statements
A complete set of financial statements includes: [IAS 1.10]
a statement of financial position (balance sheet) at the end of the
period
a statement of profit or loss and other comprehensive income for the
period (presented as a single statement, or by presenting the profit or loss section
in a separate statement of profit or loss, immediately followed by a statement
presenting comprehensive income beginning with profit or loss)
a statement of changes in equity for the period
a statement of cash flows for the period
notes, comprising a summary of significant accounting policies and
other explanatory notes
comparative information prescribed by the standard.
An entity may use titles for the statements other than those stated above. All
financial statements are required to be presented with equal prominence. [IAS
1.10]
When an entity applies an accounting policy retrospectively or makes a
retrospective restatement of items in its financial statements, or when it reclassifies
items in its financial statements, it must also present a statement of financial
position (balance sheet) as at the beginning of the earliest comparative period.
Reports that are presented outside of the financial statements including financial
reviews by management, environmental reports, and value added statements are
outside the scope of IFRSs. [IAS 1.14]
Fair presentation and compliance with IFRSs
The financial statements must "present fairly" the financial position, financial
performance and cash flows of an entity. 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 set out in the Framework. The application of IFRSs, with additional
disclosure when necessary, is presumed to result in financial statements that
achieve a fair presentation. [IAS 1.15]
IAS 1 requires an entity whose financial statements comply with IFRSs to make an
explicit and unreserved statement of such compliance in the notes. Financial
statements cannot be described as complying with IFRSs unless they comply with
all the requirements of IFRSs (which includes International Financial Reporting
Standards, International Accounting Standards, IFRIC Interpretations and SIC
Interpretations). [IAS 1.16]
Inappropriate accounting policies are not rectified either by disclosure of the
accounting policies used or by notes or explanatory material. [IAS 1.18]
IAS 1 acknowledges that, in extremely rare circumstances, management may
conclude that compliance with an IFRS requirement would be so misleading that it
would conflict with the objective of financial statements set out in the Framework. In
such a case, the entity is required to depart from the IFRS requirement, with
detailed disclosure of the nature, reasons, and impact of the departure. [IAS 1.19-
21]
Going concern
The Conceptual Framework notes that financial statements are normally prepared
assuming the entity is a going concern and will continue in operation for the
foreseeable future. [Conceptual Framework, paragraph 4.1]
IAS 1 requires management to make an assessment of an entity's ability to
continue as a going concern. If management has significant concerns about the
entity's ability to continue as a going concern, the uncertainties must be disclosed. If
management concludes that the entity is not a going concern, the financial
statements should not be prepared on a going concern basis, in which case IAS 1
requires a series of disclosures. [IAS 1.25]
Accrual basis of accounting
IAS 1 requires that an entity prepare its financial statements, except for cash flow
information, using the accrual basis of accounting. [IAS 1.27]
Consistency of presentation
The presentation and classification of items in the financial statements shall be
retained from one period to the next unless a change is justified either by a change
in circumstances or a requirement of a new IFRS. [IAS 1.45]
Materiality and aggregation
Each material class of similar items must be presented separately in the financial
statements. Dissimilar items may be aggregated only if the are individually
immaterial. [IAS 1.29]
However, information should not be obscured by aggregating or by providing
immaterial information, materiality considerations apply to the all parts of the
financial statements, and even when a standard requires a specific disclosure,
materiality considerations do apply. [IAS 1.30A-31]*
* Added by Disclosure Initiative (Amendments to IAS 1), effective 1 January 2016.
Offsetting
Assets and liabilities, and income and expenses, may not be offset unless required
or permitted by an IFRS. [IAS 1.32]
Comparative information
IAS 1 requires that comparative information to be disclosed in respect of the
previous period for all amounts reported in the financial statements, both on the
face of the financial statements and in the notes, unless another Standard requires
otherwise. Comparative information is provided for narrative and descriptive where
it is relevant to understanding the financial statements of the current period. [IAS
1.38]
An entity is required to present at least two of each of the following primary financial
statements: [IAS 1.38A]
statement of financial position*
statement of profit or loss and other comprehensive income
separate statements of profit or loss (where presented)
statement of cash flows
statement of changes in equity
related notes for each of the above items.
* A third statement of financial position is required to be presented if the entity
retrospectively applies an accounting policy, restates items, or reclassifies items,
and those adjustments had a material effect on the information in the statement of
financial position at the beginning of the comparative period. [IAS 1.40A]
Where comparative amounts are changed or reclassified, various disclosures are
required. [IAS 1.41]
Structure and content of financial statements in general
IAS 1 requires an entity to clearly identify: [IAS 1.49-51]
the financial statements, which must be distinguished from other
information in a published document
each financial statement and the notes to the financial statements.
In addition, the following information must be displayed prominently, and repeated
as necessary: [IAS 1.51]
the name of the reporting entity and any change in the name
whether the financial statements are a group of entities or an individual
entity
 information about the reporting period
the presentation currency (as defined by IAS 21 The Effects of
Changes in Foreign Exchange Rates)
the level of rounding used (e.g. thousands, millions).
Reporting period
There is a presumption that financial statements will be prepared at least annually.
If the annual reporting period changes and financial statements are prepared for a
different period, the entity must disclose the reason for the change and state that
amounts are not entirely comparable. [IAS 1.36]
Statement of financial position (balance sheet)
Current and non-current classification
An entity must normally present a classified statement of financial position,
separating current and non-current assets and liabilities, unless presentation based
on liquidity provides information that is reliable. [IAS 1.60] In either case, if an asset
(liability) category combines amounts that will be received (settled) after 12 months
with assets (liabilities) that will be received (settled) within 12 months, note
disclosure is required that separates the longer-term amounts from the 12-month
amounts. [IAS 1.61]
Current assets are assets that are: [IAS 1.66]
expected to be realised in the entity's normal operating cycle
held primarily for the purpose of trading
expected to be realised within 12 months after the reporting period
cash and cash equivalents (unless restricted).
All other assets are non-current. [IAS 1.66]
Current liabilitiesare those: [IAS 1.69]
expected to be settled within the entity's normal operating cycle
held for purpose of trading
due to be settled within 12 months
for which the entity does not have an unconditional right to defer
settlement beyond 12 months (settlement by the issue of equity instruments does
not impact classification).
Other liabilities are non-current.
When a long-term debt is expected to be refinanced under an existing loan facility,
and the entity has the discretion to do so, the debt is classified as non-current, even
if the liability would otherwise be due within 12 months. [IAS 1.73]
If a liability has become payable on demand because an entity has breached an
undertaking under a long-term loan agreement on or before the reporting date, the
liability is current, even if the lender has agreed, after the reporting date and before
the authorisation of the financial statements for issue, not to demand payment as a
consequence of the breach. [IAS 1.74] However, the liability is classified as non-
current if the lender agreed by the reporting date to provide a period of grace
ending at least 12 months after the end of the reporting period, within which the
entity can rectify the breach and during which the lender cannot demand immediate
repayment. [IAS 1.75]
Line items
The line items to be included on the face of the statement of financial position are:
[IAS 1.54]
(a) property, plant and equipment
(b) investment property
(c) intangible assets
(d) financial assets (excluding amounts shown under (e), (h), and (i))
(e) investments accounted for using the equity method
(f) biological assets
(g) inventories
(h) trade and other receivables
(i) cash and cash equivalents
(j) assets held for sale
(k) trade and other payables
(l) provisions
(m) financial liabilities (excluding amounts shown under (k) and (l))
(n) current tax liabilities and current tax assets, as defined in IAS 12
(o) deferred tax liabilities and deferred tax assets, as defined in IAS 12
(p) liabilities included in disposal groups
(q) non-controlling interests, presented within equity
(r) issued capital and reserves attributable to owners of the parent.
Additional line items, headings and subtotals may be needed to fairly present the
entity's financial position. [IAS 1.55]
When an entity presents subtotals, those subtotals shall be comprised of line items
made up of amounts recognised and measured in accordance with IFRS; be
presented and labelled in a clear and understandable manner; be consistent from
period to period; and not be displayed with more prominence than the required
subtotals and totals. [IAS 1.55A]*
* Added by Disclosure Initiative (Amendments to IAS 1), effective 1 January 2016.
Further sub-classifications of line items presented are made in the statement or in
the notes, for example: [IAS 1.77-78]:
classes of property, plant and equipment
disaggregation of receivables
disaggregation of inventories in accordance with IAS 2 Inventories
disaggregation of provisions into employee benefits and other items
classes of equity and reserves.
Format of statement
IAS 1 does not prescribe the format of the statement of financial position. Assets
can be presented current then non-current, or vice versa, and liabilities and equity
can be presented current then non-current then equity, or vice versa. A net asset
presentation (assets minus liabilities) is allowed. The long-term financing approach
used in UK and elsewhere fixed assets + current assets - short term payables =
long-term debt plus equity is also acceptable.
Share capital and reserves
Regarding issued share capital and reserves, the following disclosures are
required: [IAS 1.79]
numbers of shares authorised, issued and fully paid, and issued but not
fully paid
par value (or that shares do not have a par value)
a reconciliation of the number of shares outstanding at the beginning
and the end of the period
description of rights, preferences, and restrictions
treasury shares, including shares held by subsidiaries and associates
shares reserved for issuance under options and contracts
a description of the nature and purpose of each reserve within equity.
Additional disclosures are required in respect of entities without share capital and
where an entity has reclassified puttable financial instruments. [IAS 1.80-80A]
Statement of profit or loss and other comprehensive income
Concepts of profit or loss and comprehensive income
Profit or loss is defined as "the total of income less expenses, excluding the
components of other comprehensive income". Other comprehensive income is
defined as comprising "items of income and expense (including reclassification
adjustments) that are not recognised in profit or loss as required or permitted by
other IFRSs". Total comprehensive income is defined as "the change in equity
during a period resulting from transactions and other events, other than those
changes resulting from transactions with owners in their capacity as owners". [IAS
1.7]
Comprehensive Income = Profit + Other
for the period or Loss Comprehensive Income
All items of income and expense recognised in a period must be included in profit or
loss unless a Standard or an Interpretation requires otherwise. [IAS 1.88] Some
IFRSs require or permit that some components to be excluded from profit or loss
and instead to be included in other comprehensive income.
Examples of items recognised outside of profit or loss
Changes in revaluation surplus where the revaluation method
is used under IAS 16 Property, Plant and Equipment and IAS 38 Intangible
Assets
Remeasurements of a net defined benefit liability or asset
recognised in accordance with IAS 19 Employee Benefits (2011)
Exchange differences from translating functional currencies
into presentation currency in accordance with IAS 21 The Effects of
Changes in Foreign Exchange Rates

Gains and losses on remeasuring available-for-sale financial
assets in accordance with IAS 39 Financial Instruments: Recognition and
Measurement
The effective portion of gains and losses on hedging
instruments in a cash flow hedge under IAS 39 or IFRS 9 Financial
Instruments
Gains and losses on remeasuring an investment in equity
instruments where the entity has elected to present them in other
comprehensive income in accordance with IFRS 9
The effects of changes in the credit risk of a financial liability
designated as at fair value through profit and loss under IFRS 9.
In addition, IAS 8 Accounting Policies, Changes in Accounting Estimates and
Errors requires the correction of errors and the effect of changes in accounting
policies to be recognised outside profit or loss for the current period. [IAS 1.89]
Choice in presentation and basic requirements
An entity has a choice of presenting:
a single statement of profit or loss and other comprehensive income,
with profit or loss and other comprehensive income presented in two sections, or
two statements:
o a separate statement of profit or loss
o a statement of comprehensive income, immediately
following the statement of profit or loss and beginning with profit or loss [IAS 1.10A]
The statement(s) must present: [IAS 1.81A]
profit or loss
total other comprehensive income
comprehensive income for the period
an allocation of profit or loss and comprehensive income for the period
between non-controlling interests and owners of the parent.
Profit or loss section or statement
The following minimum line items must be presented in the profit or loss section (or
separate statement of profit or loss, if presented): [IAS 1.82-82A]
revenue
gains and losses from the derecognition of financial assets measured
at amortised cost
finance costs
share of the profit or loss of associates and joint ventures accounted for
using the equity method
certain gains or losses associated with the reclassification of financial
assets
tax expense
a single amount for the total of discontinued items
Expenses recognised in profit or loss should be analysed either by nature (raw
materials, staffing costs, depreciation, etc.) or by function (cost of sales, selling,
administrative, etc). [IAS 1.99] If an entity categorises by function, then additional
information on the nature of expenses at a minimum depreciation, amortisation
and employee benefits expense must be disclosed. [IAS 1.104]
Other comprehensive income section
The other comprehensive income section is required to present line items which are
classified by their nature, and grouped between those items that will or will not be
reclassified to profit and loss in subsequent periods. [IAS 1.82A]
An entity's share of OCI of equity-accounted associates and joint ventures is
presented in aggregate as single line items based on whether or not it will
subsequently be reclassified to profit or loss. [IAS 1.82A]*
* Clarified by Disclosure Initiative (Amendments to IAS 1), effective 1 January 2016.
When an entity presents subtotals, those subtotals shall be comprised of line items
made up of amounts recognised and measured in accordance with IFRS; be
presented and labelled in a clear and understandable manner; be consistent from
period to period; not be displayed with more prominence than the required subtotals
and totals; and reconciled with the subtotals or totals required in IFRS. [IAS 1.85A-
85B]*
* Added by Disclosure Initiative (Amendments to IAS 1), effective 1 January 2016.
Other requirements
Additional line items may be needed to fairly present the entity's results of
operations. [IAS 1.85]
Items cannot be presented as 'extraordinary items' in the financial statements or in
the notes. [IAS 1.87]
Certain items must be disclosed separately either in the statement of
comprehensive income or in the notes, if material, including: [IAS 1.98]
write-downs of inventories to net realisable value or of property, plant
and equipment to recoverable amount, as well as reversals of such write-downs
restructurings of the activities of an entity and reversals of any
provisions for the costs of restructuring
disposals of items of property, plant and equipment
disposals of investments
discontinuing operations
litigation settlements
other reversals of provisions
Statement of cash flows
Rather than setting out separate requirements for presentation of the statement of
cash flows, IAS 1.111 refers to IAS 7 Statement of Cash Flows.
Statement of changes in equity
IAS 1 requires an entity to present a separate statement of changes in equity. The
statement must show: [IAS 1.106]
total comprehensive income for the period, showing separately
amounts attributable to owners of the parent and to non-controlling interests
the effects of any retrospective application of accounting policies or
restatements made in accordance with IAS 8, separately for each component of
other comprehensive income
reconciliations between the carrying amounts at the beginning and the
end of the period for each component of equity, separately disclosing:
o profit or loss
o other comprehensive income*
o transactions with owners, showing separately contributions
by and distributions to owners and changes in ownership interests in subsidiaries
that do not result in a loss of control
* An analysis of other comprehensive income by item is required to be presented
either in the statement or in the notes. [IAS 1.106A]
The following amounts may also be presented on the face of the statement of
changes in equity, or they may be presented in the notes: [IAS 1.107]
amount of dividends recognised as distributions
the related amount per share.
Notes to the financial statements
The notes must: [IAS 1.112]
present information about the basis of preparation of the financial
statements and the specific accounting policies used
disclose any information required by IFRSs that is not presented
elsewhere in the financial statements and
provide additional information that is not presented elsewhere in the
financial statements but is relevant to an understanding of any of them
Notes are presented in a systematic manner and cross-referenced from the face of
the financial statements to the relevant note. [IAS 1.113]
IAS 1.114 suggests that the notes should normally be presented in the following
order:*
a statement of compliance with IFRSs
a summary of significant accounting policies applied, including: [IAS
1.117]
o the measurement basis (or bases) used in preparing the
financial statements
o the other accounting policies used that are relevant to an
understanding of the financial statements
supporting information for items presented on the face of the statement
of financial position (balance sheet), statement(s) of profit or loss and other
 comprehensive income, statement of changes in equity and statement of cash
flows, in the order in which each statement and each line item is presented country of incorporation

other disclosures, including: address of registered office or principal place of business

o contingent liabilities (see IAS 37) and unrecognised
contractual commitments description of the entity's operations and principal activities

o non-financial disclosures, such as the entity's financial risk if it is part of a group, the name of its parent and the ultimate parent of
management objectives and policies (see IFRS 7 Financial Instruments: the group
Disclosures)
* Disclosure Initiative (Amendments to IAS 1), effective 1 January 2016, clarifies if it is a limited life entity, information regarding the length of the life
this order just to be an example of how notes can be ordered and adds additional
examples of possible ways of ordering the notes to clarify that understandability and Terminology
comparability should be considered when determining the order of the notes. The 2007 comprehensive revision to IAS 1 introduced some new terminology.
Other disclosures Consequential amendments were made at that time to all of the other existing
IFRSs, and the new terminology has been used in subsequent IFRSs including
Judgements and key assumptions amendments. IAS 1.8 states: "Although this Standard uses the terms 'other
An entity must disclose, in the summary of significant accounting policies or other comprehensive income', 'profit or loss' and 'total comprehensive income', an entity
notes, the judgements, apart from those involving estimations, that management may use other terms to describe the totals as long as the meaning is clear. For
has made in the process of applying the entity's accounting policies that have the example, an entity may use the term 'net income' to describe profit or loss." Also,
most significant effect on the amounts recognised in the financial statements. [IAS IAS 1.57(b) states: "The descriptions used and the ordering of items or aggregation
1.122] of similar items may be amended according to the nature of the entity and its
Examples cited in IAS 1.123 include management's judgements in determining: transactions, to provide information that is relevant to an understanding of the
when substantially all the significant risks and rewards of ownership of entity's financial position."
financial assets and lease assets are transferred to other entities
Term before 2007 Term as amended by IAS 1 (2007)
whether, in substance, particular sales of goods are financing revision of IAS 1
arrangements and therefore do not give rise to revenue.
An entity must also disclose, in the notes, information about the key assumptions balance sheet statement of financial position
concerning the future, and other key sources of estimation uncertainty at the end of
the reporting period, that have a significant risk of causing a material adjustment to
the carrying amounts of assets and liabilities within the next financial year. [IAS cash flow statement statement of cash flows
1.125] These disclosures do not involve disclosing budgets or forecasts. [IAS 1.130]
income statement statement of comprehensive income
Dividends (income statement is retained in case
In addition to the distributions information in the statement of changes in equity (see of a two-statement approach)
above), the following must be disclosed in the notes: [IAS 1.137]
the amount of dividends proposed or declared before the financial recognised in the income recognised in profit or loss
statements were authorised for issue but which were not recognised as a statement
distribution to owners during the period, and the related amount per share

the amount of any cumulative preference dividends not recognised. recognised [directly] in recognised in other comprehensive
equity (only for OCI income
components)
Capital disclosures
An entity discloses information about its objectives, policies and processes for
managing capital. [IAS 1.134] To comply with this, the disclosures include: [IAS recognised [directly] in recognised outside profit or loss (either
1.135] equity (for recognition both in OCI or equity)
qualitative information about the entity's objectives, policies and in OCI and equity)
processes for managing capital, including>
o description of capital it manages removed from equity and reclassified from equity to profit or loss
recognised in profit or loss as a reclassification adjustment
o nature of external capital requirements, if any ('recycling')

o how it is meeting its objectives Standard or/and IFRSs

quantitative data about what the entity regards as capital Interpretation

changes from one period to another

on the face of in
whether the entity has complied with any external capital requirements
and equity holders owners (exception for 'ordinary equity
holders')
if it has not complied, the consequences of such non-compliance.
balance sheet date end of the reporting period
Puttable financial instruments
IAS 1.136A requires the following additional disclosures if an entity has a puttable reporting date end of the reporting period
instrument that is classified as an equity instrument:
summary quantitative data about the amount classified as equity
after the balance sheet after the reporting period
date
the entity's objectives, policies and processes for managing its
obligation to repurchase or redeem the instruments when required to do so by the
instrument holders, including any changes from the previous period

the expected cash outflow on redemption or repurchase of that class of

financial instruments and

information about how the expected cash outflow on redemption or

repurchase was determined.
Other information
The following other note disclosures are required by IAS 1 if not disclosed
elsewhere in information published with the financial statements: [IAS 1.138]
domicile and legal form of the entity

IAS 2
The objective of IAS 2 is to prescribe the accounting treatment for inventories. It
provides guidance for determining the cost of inventories and for subsequently
recognising an expense, including any write-down to net realisable value. It also
provides guidance on the cost formulas that are used to assign costs to inventories.
Scope
Inventories include assets held for sale in the ordinary course of business (finished
goods), assets in the production process for sale in the ordinary course of business
(work in process), and materials and supplies that are consumed in production (raw
materials). [IAS 2.6]
However, IAS 2 excludes certain inventories from its scope: [IAS 2.2]
work in process arising under construction contracts (see IAS
11 Construction Contracts)
financial instruments (see IAS 39 Financial Instruments: Recognition
and Measurement)
biological assets related to agricultural activity and agricultural produce
at the point of harvest (see IAS 41 Agriculture).
Also, while the following are within the scope of the standard, IAS 2 does not apply
to the measurement of inventories held by: [IAS 2.3]
producers of agricultural and forest products, agricultural produce after
harvest, and minerals and mineral products, to the extent that they are measured at
net realisable value (above or below cost) in accordance with well-established
practices in those industries. When such inventories are measured at net realisable
value, changes in that value are recognised in profit or loss in the period of the
change
commodity brokers and dealers who measure their inventories at fair
value less costs to sell. When such inventories are measured at fair value less
costs to sell, changes in fair value less costs to sell are recognised in profit or loss
in the period of the change.
Fundamental principle of IAS 2
Inventories are required to be stated at the lower of cost and net realisable value
(NRV). [IAS 2.9]
Measurement of inventories
Cost should include all: [IAS 2.10]
costs of purchase (including taxes, transport, and handling) net of trade
discounts received
in which the write-down occurs. Any reversal should be recognised in the income
statement in the period in which the reversal occurs. [IAS 2.34]
Expense recognition
IAS 18 Revenue addresses revenue recognition for the sale of goods. When
inventories are sold and revenue is recognised, the carrying amount of those
inventories is recognised as an expense (often called cost-of-goods-sold). Any
write-down to NRV and any inventory losses are also recognised as an expense
when they occur. [IAS 2.34]
Disclosure
Required disclosures: [IAS 2.36]
accounting policy for inventories
carrying amount, generally classified as merchandise, supplies,
materials, work in progress, and finished goods. The classifications depend on what
is appropriate for the entity
carrying amount of any inventories carried at fair value less costs to sell
amount of any write-down of inventories recognised as an expense in
the period
amount of any reversal of a write-down to NRV and the circumstances
that led to such reversal
carrying amount of inventories pledged as security for liabilities
cost of inventories recognised as expense (cost of goods sold).
IAS 2 acknowledges that some enterprises classify income statement expenses by
nature (materials, labour, and so on) rather than by function (cost of goods sold,
selling expense, and so on). Accordingly, as an alternative to disclosing cost of
goods sold expense, IAS 2 allows an entity to disclose operating costs recognised
during the period by nature of the cost (raw materials and consumables, labour
costs, other operating costs) and the amount of the net change in inventories for the
period). [IAS 2.39] This is consistent with IAS 1 Presentation of Financial
Statements, which allows presentation of expenses by function or nature.

costs of conversion (including fixed and variable manufacturing

overheads) and

other costs incurred in bringing the inventories to their present location

and condition
IAS 23 Borrowing Costs identifies some limited circumstances where borrowing
costs (interest) can be included in cost of inventories that meet the definition of a
qualifying asset. [IAS 2.17 and IAS 23.4]
Inventory cost should not include: [IAS 2.16 and 2.18]
abnormal waste

storage costs

administrative overheads unrelated to production

selling costs

foreign exchange differences arising directly on the recent acquisition

of inventories invoiced in a foreign currency

interest cost when inventories are purchased with deferred settlement

terms.
The standard cost and retail methods may be used for the measurement of cost,
provided that the results approximate actual cost. [IAS 2.21-22]
For inventory items that are not interchangeable, specific costs are attributed to the
specific individual items of inventory. [IAS 2.23]
For items that are interchangeable, IAS 2 allows the FIFO or weighted average cost
formulas. [IAS 2.25] The LIFO formula, which had been allowed prior to the 2003
revision of IAS 2, is no longer allowed.
The same cost formula should be used for all inventories with similar characteristics
as to their nature and use to the entity. For groups of inventories that have different
characteristics, different cost formulas may be justified. [IAS 2.25]
Write-down to net realisable value
NRV is the estimated selling price in the ordinary course of business, less the
estimated cost of completion and the estimated costs necessary to make the sale.
[IAS 2.6] Any write-down to NRV should be recognised as an expense in the period

IAS 7
The objective of IAS 7 is to require the presentation of information about the
historical changes in cash and cash equivalents of an entity by means of a
statement of cash flows, which classifies cash flows during the period according to
operating, investing, and financing activities.
Fundamental principle in IAS 7
All entities that prepare financial statements in conformity with IFRSs are required
to present a statement of cash flows. [IAS 7.1]
The statement of cash flows analyses changes in cash and cash equivalents during
a period. Cash and cash equivalents comprise cash on hand and demand deposits,
together with short-term, highly liquid investments that are readily convertible to a
known amount of cash, and that are subject to an insignificant risk of changes in
value. Guidance notes indicate that an investment normally meets the definition of a
cash equivalent when it has a maturity of three months or less from the date of
acquisition. Equity investments are normally excluded, unless they are in substance
a cash equivalent (e.g. preferred shares acquired within three months of their
specified redemption date). Bank overdrafts which are repayable on demand and
which form an integral part of an entity's cash management are also included as a
component of cash and cash equivalents. [IAS 7.7-8]
Presentation of the Statement of Cash Flows
Cash flows must be analysed between operating, investing and financing activities.
[IAS 7.10]
Key principles specified by IAS 7 for the preparation of a statement of cash flows
are as follows:
operating activities are the main revenue-producing activities of the
entity that are not investing or financing activities, so operating cash flows include
cash received from customers and cash paid to suppliers and employees [IAS 7.14]
investing activities are the acquisition and disposal of long-term
assets and other investments that are not considered to be cash equivalents [IAS
7.6]
financing activities are activities that alter the equity capital and
borrowing structure of the entity [IAS 7.6]
interest and dividends received and paid may be classified as
operating, investing, or financing cash flows, provided that they are classified
consistently from period to period [IAS 7.31]
cash flows arising from taxes on income are normally classified as
operating, unless they can be specifically identified with financing or investing
activities [IAS 7.35]
for operating cash flows, the direct method of presentation is
encouraged, but the indirect method is acceptable [IAS 7.18]
The direct method shows each major class of gross cash receipts and gross cash
payments. The operating cash flows section of the statement of cash flows under
the direct method would appear something like this:
Cash receipts from customers xx,xxx
Cash paid to suppliers xx,xxx
Cash paid to employees xx,xxx
Cash paid for other operating expenses xx,xxx
Interest paid xx,xxx
Income taxes paid xx,xxx
Net cash from operating activities xx,xxx
The indirect method adjusts accrual basis net profit or loss for the
effects of non-cash transactions. The operating cash flows section of the statement
of cash flows under the indirect method would appear something like this:
Profit before interest and income taxes xx,xxx
Add back depreciation xx,xxx
Add back impairment of assets xx,xxx
Increase in receivables xx,xxx
Decrease in inventories xx,xxx
Increase in trade payables xx,xxx
Interest expense xx,xxx
Less Interest accrued but not yet paid xx,xxx
Interest paid xx,xxx
Income taxes paid xx,xxx
Net cash from operating activities xx,xxx
the exchange rate used for translation of transactions denominated in a
foreign currency should be the rate in effect at the date of the cash flows [IAS 7.25]
cash flows of foreign subsidiaries should be translated at the exchange
rates prevailing when the cash flows took place [IAS 7.26]
as regards the cash flows of associates, joint ventures, and
subsidiaries, where the equity or cost method is used, the statement of cash flows
should report only cash flows between the investor and the investee; where
proportionate consolidation is used, the cash flow statement should include the
venturer's share of the cash flows of the investee [IAS 7.37]
aggregate cash flows relating to acquisitions and disposals of
subsidiaries and other business units should be presented separately and classified
as investing activities, with specified additional disclosures. [IAS 7.39] The
aggregate cash paid or received as consideration should be reported net of cash
and cash equivalents acquired or disposed of [IAS 7.42]
cash flows from investing and financing activities should be reported
gross by major class of cash receipts and major class of cash payments except for
the following cases, which may be reported on a net basis: [IAS 7.22-24]
o cash receipts and payments on behalf of customers (for
example, receipt and repayment of demand deposits by banks, and receipts
collected on behalf of and paid over to the owner of a property)
o cash receipts and payments for items in which the turnover
is quick, the amounts are large, and the maturities are short, generally less than
three months (for example, charges and collections from credit card customers, and
purchase and sale of investments)
o cash receipts and payments relating to deposits by
financial institutions
o cash advances and loans made to customers and
repayments thereof
investing and financing transactions which do not require the use of
cash should be excluded from the statement of cash flows, but they should be
separately disclosed elsewhere in the financial statements [IAS 7.43]
entities shall provide disclosures that enable users of financial
statements to evaluate changes in liabilities arising from financing activities [IAS
7.44A-44E]*
the components of cash and cash equivalents should be disclosed, and
a reconciliation presented to amounts reported in the statement of financial position
[IAS 7.45]
the amount of cash and cash equivalents held by the entity that is not
available for use by the group should be disclosed, together with a commentary by
management [IAS 7.48]
* Added by Disclosure Initiative amendments, effective 1 January 2017.

IAS 8
Key definitions [IAS 8.5]
Accounting policies are the specific principles, bases, conventions,
rules and practices applied by an entity in preparing and presenting financial
statements.
A change in accounting estimate is an adjustment of the carrying
amount of an asset or liability, or related expense, resulting from reassessing the
expected future benefits and obligations associated with that asset or liability.
International Financial Reporting Standardsare standards and
interpretations adopted by the International Accounting Standards Board (IASB).
They comprise:
o International Financial Reporting Standards (IFRSs)
o International Accounting Standards (IASs)
o Interpretations developed by the International Financial
Reporting Interpretations Committee (IFRIC) or the former Standing Interpretations
Committee (SIC) and approved by the IASB.
Materiality. Omissions or misstatements of items are material if they
could, by their size or nature, individually or collectively, influence the economic
decisions of users taken on the basis of the financial statements.
Prior period errors are omissions from, and misstatements in, an
entity's financial statements for one or more prior periods arising from a failure to
use, or misuse of, reliable information that was available and could reasonably be
expected to have been obtained and taken into account in preparing those
statements. Such errors result from mathematical mistakes, mistakes in applying
accounting policies, oversights or misinterpretations of facts, and fraud.
Selection and application of accounting policies
When a Standard or an Interpretation specifically applies to a transaction, other
event or condition, the accounting policy or policies applied to that item must be
determined by applying the Standard or Interpretation and considering any relevant
Implementation Guidance issued by the IASB for the Standard or Interpretation.
[IAS 8.7]
In the absence of a Standard or an Interpretation that specifically applies to a
transaction, other event or condition, management must use its judgement in
developing and applying an accounting policy that results in information that is
relevant and reliable. [IAS 8.10]. In making that judgement, management must refer
to, and consider the applicability of, the following sources in descending order:
the requirements and guidance in IASB standards and interpretations
dealing with similar and related issues; and
the definitions, recognition criteria and measurement concepts for
assets, liabilities, income and expenses in the Framework. [IAS 8.11]
Management may also consider the most recent pronouncements of other
standard-setting bodies that use a similar conceptual framework to develop
accounting standards, other accounting literature and accepted industry practices,
to the extent that these do not conflict with the sources in paragraph 11. [IAS 8.12]
Consistency of accounting policies
An entity shall select and apply its accounting policies consistently for similar
transactions, other events and conditions, unless a Standard or an Interpretation
specifically requires or permits categorisation of items for which different policies
may be appropriate. If a Standard or an Interpretation requires or permits such
categorisation, an appropriate accounting policy shall be selected and applied
consistently to each category. [IAS 8.13]
Changes in accounting policies
An entity is permitted to change an accounting policy only if the change:
is required by a standard or interpretation; or
results in the financial statements providing reliable and more relevant
information about the effects of transactions, other events or conditions on the
entity's financial position, financial performance, or cash flows. [IAS 8.14]
Note that changes in accounting policies do not include applying an accounting
policy to a kind of transaction or event that did not occur previously or were
immaterial. [IAS 8.16]
If a change in accounting policy is required by a new IASB standard or
interpretation, the change is accounted for as required by that new pronouncement
or, if the new pronouncement does not include specific transition provisions, then
the change in accounting policy is applied retrospectively. [IAS 8.19]
Retrospective application means adjusting the opening balance of each affected
component of equity for the earliest prior period presented and the other
comparative amounts disclosed for each prior period presented as if the new
accounting policy had always been applied. [IAS 8.22]
However, if it is impracticable to determine either the period-specific
effects or the cumulative effect of the change for one or more prior periods
presented, the entity shall apply the new accounting policy to the carrying amounts
of assets and liabilities as at the beginning of the earliest period for which
retrospective application is practicable, which may be the current period, and shall
make a corresponding adjustment to the opening balance of each affected
component of equity for that period. [IAS 8.24]
Also, if it is impracticable to determine the cumulative effect, at the
beginning of the current period, of applying a new accounting policy to all prior
periods, the entity shall adjust the comparative information to apply the new
accounting policy prospectively from the earliest date practicable. [IAS 8.25]
Disclosures relating to changes in accounting policies
Disclosures relating to changes in accounting policy caused by a new standard or
interpretation include: [IAS 8.28]
the title of the standard or interpretation causing the change
the nature of the change in accounting policy
a description of the transitional provisions, including those that might
have an effect on future periods
for the current period and each prior period presented, to the extent
practicable, the amount of the adjustment:
o for each financial statement line item affected, and
o for basic and diluted earnings per share (only if the entity is
applying IAS 33)
the amount of the adjustment relating to periods before those
presented, to the extent practicable
if retrospective application is impracticable, an explanation and
description of how the change in accounting policy was applied.
Financial statements of subsequent periods need not repeat these disclosures.
Disclosures relating to voluntary changes in accounting policy include: [IAS 8.29]
the nature of the change in accounting policy
the reasons why applying the new accounting policy provides reliable
and more relevant information
for the current period and each prior period presented, to the extent
practicable, the amount of the adjustment:
o for each financial statement line item affected, and
o for basic and diluted earnings per share (only if the entity is
applying IAS 33)
the amount of the adjustment relating to periods before those
presented, to the extent practicable
if retrospective application is impracticable, an explanation and
description of how the change in accounting policy was applied.
Financial statements of subsequent periods need not repeat these disclosures.
 If an entity has not applied a new standard or interpretation that has been issued
but is not yet effective, the entity must disclose that fact and any and known or
reasonably estimable information relevant to assessing the possible impact that the
new pronouncement will have in the year it is applied. [IAS 8.30]
Changes in accounting estimates
The effect of a change in an accounting estimate shall be recognised prospectively
by including it in profit or loss in: [IAS 8.36]
the period of the change, if the change affects that period only, or
the period of the change and future periods, if the change affects both.
However, to the extent that a change in an accounting estimate gives rise to
changes in assets and liabilities, or relates to an item of equity, it is recognised by
adjusting the carrying amount of the related asset, liability, or equity item in the
period of the change. [IAS 8.37]
Disclosures relating to changes in accounting estimates
Disclose:
the nature and amount of a change in an accounting estimate that has
an effect in the current period or is expected to have an effect in future periods
if the amount of the effect in future periods is not disclosed because
estimating it is impracticable, an entity shall disclose that fact. [IAS 8.39-40]
Errors
The general principle in IAS 8 is that an entity must correct all material prior period
errors retrospectively in the first set of financial statements authorised for issue after
their discovery by: [IAS 8.42]
restating the comparative amounts for the prior period(s) presented in
which the error occurred; or
if the error occurred before the earliest prior period presented, restating
the opening balances of assets, liabilities and equity for the earliest prior period
presented.
However, if it is impracticable to determine the period-specific effects of an error on
comparative information for one or more prior periods presented, the entity must
restate the opening balances of assets, liabilities, and equity for the earliest period
for which retrospective restatement is practicable (which may be the current
period). [IAS 8.44]
Further, if it is impracticable to determine the cumulative effect, at the beginning of
the current period, of an error on all prior periods, the entity must restate the
comparative information to correct the error prospectively from the earliest date
practicable. [IAS 8.45]
Disclosures relating to prior period errors
Disclosures relating to prior period errors include: [IAS 8.49]
the nature of the prior period error
for each prior period presented, to the extent practicable, the amount of
the correction:
o for each financial statement line item affected, and
o for basic and diluted earnings per share (only if the entity is
applying IAS 33)
the amount of the correction at the beginning of the earliest prior period
presented
if retrospective restatement is impracticable, an explanation and
description of how the error has been corrected.
Financial statements of subsequent periods need not repeat these disclosures.
IAS 10
Key definitions
Event after the reporting period: An event, which could be favourable or
unfavourable, that occurs between the end of the reporting period and the date that
the financial statements are authorised for issue. [IAS 10.3]
Adjusting event: An event after the reporting period that provides further evidence
of conditions that existed at the end of the reporting period, including an event that
indicates that the going concern assumption in relation to the whole or part of the
enterprise is not appropriate. [IAS 10.3]
Non-adjusting event: An event after the reporting period that is indicative of a
condition that arose after the end of the reporting period. [IAS 10.3]
Accounting
Adjust financial statements for adjusting events - events after the
balance sheet date that provide further evidence of conditions that existed at the
end of the reporting period, including events that indicate that the going concern
assumption in relation to the whole or part of the enterprise is not appropriate. [IAS
10.8]
Do not adjust for non-adjusting events - events or conditions that arose
after the end of the reporting period. [IAS 10.10]
If an entity declares dividends after the reporting period, the entity shall
not recognise those dividends as a liability at the end of the reporting period. That is
a non-adjusting event. [IAS 10.12]
Going concern issues arising after end of the reporting period
An entity shall not prepare its financial statements on a going concern basis if
management determines after the end of the reporting period either that it intends
to liquidate the entity or to cease trading, or that it has no realistic alternative but to
do so. [IAS 10.14]
Disclosure
Non-adjusting events should be disclosed if they are of such importance that non-
disclosure would affect the ability of users to make proper evaluations and
decisions. The required disclosure is (a) the nature of the event and (b) an estimate
of its financial effect or a statement that a reasonable estimate of the effect cannot
be made. [IAS 10.21]
A company should update disclosures that relate to conditions that existed at the
end of the reporting period to reflect any new information that it receives after the
reporting period about those conditions. [IAS 10.19]
Companies must disclose the date when the financial statements were authorised
for issue and who gave that authorisation. If the enterprise's owners or others have
the power to amend the financial statements after issuance, the enterprise must
disclose that fact. [IAS 10.17]
IAS 11
The objective of IAS 11 is to prescribe the accounting treatment of revenue and
costs associated with construction contracts.
What is a construction contract?
A construction contract is a contract specifically negotiated for the construction of
an asset or a group of interrelated assets. [IAS 11.3]
Under IAS 11, if a contract covers two or more assets, the construction of each
asset should be accounted for separately if (a) separate proposals were submitted
for each asset, (b) portions of the contract relating to each asset were negotiated
separately, and (c) costs and revenues of each asset can be measured. Otherwise,
the contract should be accounted for in its entirety. [IAS 11.8]
Two or more contracts should be accounted for as a single contract if they were
negotiated together and the work is interrelated. [IAS 11.9]
If a contract gives the customer an option to order one or more additional assets,
construction of each additional asset should be accounted for as a separate
contract if either (a) the additional asset differs significantly from the original
asset(s) or (b) the price of the additional asset is separately negotiated. [IAS 11.10]
What is included in contract revenue and costs?
Contract revenue should include the amount agreed in the initial contract, plus
revenue from alternations in the original contract work, plus claims and incentive
payments that (a) are expected to be collected and (b) that can be measured
reliably. [IAS 11.11]
 Contract costs should include costs that relate directly to the specific contract, plus
costs that are attributable to the contractor's general contracting activity to the
extent that they can be reasonably allocated to the contract, plus such other costs
that can be specifically charged to the customer under the terms of the contract.
[IAS 11.16]
Accounting
If the outcome of a construction contract can be estimated reliably, revenue and
costs should be recognised in proportion to the stage of completion of contract
activity. This is known as the percentage of completion method of accounting. [IAS
11.22]
To be able to estimate the outcome of a contract reliably, the entity must be able to
make a reliable estimate of total contract revenue, the stage of completion, and the
costs to complete the contract. [IAS 11.23-24]
If the outcome cannot be estimated reliably, no profit should be recognised. Instead,
contract revenue should be recognised only to the extent that contract costs
incurred are expected to be recoverable and contract costs should be expensed as
incurred. [IAS 11.32]
The stage of completion of a contract can be determined in a variety of ways -
including the proportion that contract costs incurred for work performed to date bear
to the estimated total contract costs, surveys of work performed, or completion of a
physical proportion of the contract work. [IAS 11.30]
An expected loss on a construction contract should be recognised as an expense
as soon as such loss is probable. [IAS 11.22 and 11.36]
Disclosure
o amount of contract revenue recognised; [IAS 11.39(a)]
o method used to determine revenue; [IAS 11.39(b)]
o method used to determine stage of completion; [IAS 11.39(c)] and
o for contracts in progress at balance sheet date: [IAS 11.40]
o aggregate costs incurred and recognised profit
o amount of advances received
o amount of retentions
Presentation
The gross amount due from customers for contract work should be shown as an
asset. [IAS 11.42]
The gross amount due to customers for contract work should be shown as a liability.
[IAS 11.42]
Objective of IAS 12
The objective of IAS 12 (1996) is to prescribe the accounting treatment for income
taxes.
In meeting this objective, IAS 12 notes the following:
o It is inherent in the recognition of an asset or liability that that asset
or liability will be recovered or settled, and this recovery or settlement may
give rise to future tax consequences which should be recognised at the
same time as the asset or liability
o An entity should account for the tax consequences of transactions
and other events in the same way it accounts for the transactions or other
events themselves.
Key definitions
[IAS 12.5]
Tax base The tax base of an asset or liability is the amount
attributed to that asset or liability for tax purposes
Temporary Differences between the carrying amount of an asset
differences or liability in the statement of financial position and
its tax bases
Taxable Temporary differences that will result in taxable
temporary amounts in determining taxable profit (tax loss) of
differences future periods when the carrying amount of the asset
or liability is recovered or settled
Deductible Temporary differences that will result in amounts that
temporary are deductible in determining taxable profit (tax loss)
differences of future periods when the carrying amount of the
asset or liability is recovered or settled
Deferred tax The amounts of income taxes payable in future
liabilities periods in respect of taxable temporary differences
Deferred tax The amounts of income taxes recoverable in future
assets periods in respect of:
a. deductible temporary differences
b. the carryforward of unused tax losses,
and
c. the carryforward of unused tax credits
Current tax
Current tax for the current and prior periods is recognised as a liability to the extent
that it has not yet been settled, and as an asset to the extent that the amounts
already paid exceed the amount due. [IAS 12.12] The benefit of a tax loss which
can be carried back to recover current tax of a prior period is recognised as an
asset. [IAS 12.13]
Current tax assets and liabilities are measured at the amount expected to be paid to
(recovered from) taxation authorities, using the rates/laws that have been enacted
or substantively enacted by the balance sheet date. [IAS 12.46]
Calculation of deferred taxes
Formulae
Deferred tax assets and deferred tax liabilities can be calculated using the following
formulae:
Temporary Difference = Carrying Amount Tax base
Deferred Tax Asset = Temporary Difference X Tax rates
or Liability
The following formula can be used in the calculation of deferred taxes arising from
unused tax losses or unused tax credits:
Deferred Tax Asset = Unused tax loss or unused tax credits X Tax rates
Tax bases
The tax base of an item is crucial in determining the amount of any temporary
difference, and effectively represents the amount at which the asset or liability
would be recorded in a tax-based balance sheet. IAS 12 provides the following
guidance on determining tax bases:
o Assets. The tax base of an asset is the amount that will be
deductible against taxable economic benefits from recovering the carrying
amount of the asset. Where recovery of an asset will have no tax
consequences, the tax base is equal to the carrying amount. [IAS 12.7]
o Revenue received in advance. The tax base of the recognised
liability is its carrying amount, less revenue that will not be taxable in future
periods [IAS 12.8]
o Other liabilities. The tax base of a liability is its carrying amount,
less any amount that will be deductible for tax purposes in respect of that
liability in future periods [IAS 12.8]
o Unrecognised items. If items have a tax base but are not
recognised in the statement of financial position, the carrying amount is nil
[IAS 12.9]
o Tax bases not immediately apparent. If the tax base of an item is
not immediately apparent, the tax base should effectively be determined in
such as manner to ensure the future tax consequences of recovery or
settlement of the item is recognised as a deferred tax amount [IAS 12.10]
o Consolidated financial statements. In consolidated financial
statements, the carrying amounts in the consolidated financial statements
are used, and the tax bases determined by reference to any consolidated tax
return (or otherwise from the tax returns of each entity in the group). [IAS
12.11]
Examples
The determination of the tax base will depend on the applicable tax laws
and the entity's expectations as to recovery and settlement of its assets

and liabilities. The following are some basic examples:
o Property, plant and equipment. The tax base of property,
plant and equipment that is depreciable for tax purposes that is used
in the entity's operations is the unclaimed tax depreciation permitted
as deduction in future periods
o Receivables. If receiving payment of the receivable has no
tax consequences, its tax base is equal to its carrying amount
o Goodwill. If goodwill is not recognised for tax purposes, its
tax base is nil (no deductions are available)
o Revenue in advance. If the revenue is taxed on receipt
but deferred for accounting purposes, the tax base of the liability is
equal to its carrying amount (as there are no future taxable
amounts). Conversely, if the revenue is recognised for tax purposes
when the goods or services are received, the tax base will be equal
to nil
o Loans. If there are no tax consequences from repayment
of the loan, the tax base of the loan is equal to its carrying amount. If
the repayment has tax consequences (e.g. taxable amounts or
deductions on repayments of foreign currency loans recognised for
tax purposes at the exchange rate on the date the loan was drawn
down), the tax consequence of repayment at carrying amount is
adjusted against the carrying amount to determine the tax base
(which in the case of the aforementioned foreign currency loan
would result in the tax base of the loan being determined by
reference to the exchange rate on the draw down date).
Recognition and measurement of deferred taxes
Recognition of deferred tax liabilities
The general principle in IAS 12 is that a deferred tax liability is recognised for all
taxable temporary differences. There are three exceptions to the requirement to
recognise a deferred tax liability, as follows:
o liabilities arising from initial recognition of goodwill [IAS 12.15(a)]
o liabilities arising from the initial recognition of an asset/liability other
than in a business combination which, at the time of the transaction, does
not affect either the accounting or the taxable profit [IAS 12.15(b)]
o liabilities arising from temporary differences associated with
investments in subsidiaries, branches, and associates, and interests in joint
arrangements, but only to the extent that the entity is able to control the
timing of the reversal of the differences and it is probable that the reversal
will not occur in the foreseeable future. [IAS 12.39]
Example
An entity undertaken a business combination which results in the
recognition of goodwill in accordance with IFRS 3 Business Combinations.
The goodwill is not tax depreciable or otherwise recognised for tax
purposes.
As no future tax deductions are available in respect of the goodwill, the tax
base is nil. Accordingly, a taxable temporary difference arises in respect of
the entire carrying amount of the goodwill. However, the taxable temporary
difference does not result in the recognition of a deferred tax liability
because of the recognition exception for deferred tax liabilities arising from
goodwill.
Recognition of deferred tax assets
A deferred tax asset is recognised for deductible temporary differences, unused tax
losses and unused tax credits to the extent that it is probable that taxable profit will
be available against which the deductible temporary differences can be utilised,
unless the deferred tax asset arises from: [IAS 12.24]
o the initial recognition of an asset or liability other than in a business
combination which, at the time of the transaction, does not affect accounting
profit or taxable profit.
Deferred tax assets for deductible temporary differences arising from investments in
subsidiaries, branches and associates, and interests in joint arrangements, are only
recognised to the extent that it is probable that the temporary difference will reverse
in the foreseeable future and that taxable profit will be available against which the
temporary difference will be utilised. [IAS 12.44]
The carrying amount of deferred tax assets are reviewed at the end of each
reporting period and reduced to the extent that it is no longer probable that sufficient
taxable profit will be available to allow the benefit of part or all of that deferred tax
asset to be utilised. Any such reduction is subsequently reversed to the extent that
it becomes probable that sufficient taxable profit will be available. [IAS 12.37]
A deferred tax asset is recognised for an unused tax loss carryforward or unused
tax credit if, and only if, it is considered probable that there will be sufficient future
taxable profit against which the loss or credit carryforward can be utilised.
[IAS 12.34]
Measurement of deferred tax
Deferred tax assets and liabilities are measured at the tax rates that are expected
to apply to the period when the asset is realised or the liability is settled, based on
tax rates/laws that have been enacted or substantively enacted by the end of the
reporting period. [IAS 12.47] The measurement reflects the entity's expectations, at
the end of the reporting period, as to the manner in which the carrying amount of its
assets and liabilities will be recovered or settled. [IAS 12.51]
IAS 12 provides the following guidance on measuring deferred taxes:
o Where the tax rate or tax base is impacted by the manner in which
the entity recovers its assets or settles its liabilities (e.g. whether an asset is
sold or used), the measurement of deferred taxes is consistent with the way
in which an asset is recovered or liability settled [IAS 12.51A]
o Where deferred taxes arise from revalued non-depreciable assets
(e.g. revalued land), deferred taxes reflect the tax consequences of selling
the asset [IAS 12.51B]
o Deferred taxes arising from investment property measured at fair
value under IAS 40 Investment Property reflect the rebuttable presumption
that the investment property will be recovered through sale [IAS 12.51C-
51D]
o If dividends are paid to shareholders, and this causes income taxes
to be payable at a higher or lower rate, or the entity pays additional taxes or
receives a refund, deferred taxes are measured using the tax rate applicable
to undistributed profits [IAS 12.52A]
Deferred tax assets and liabilities cannot be discounted. [IAS 12.53]
Recognition of tax amounts for the period
Amount of income tax to recognise
The following formula summarises the amount of tax to be recognised in an
accounting period:
Tax Recognize = Current tax for the Period + Movement in deferred Tax balances
for the period for the period
Where to recognise income tax for the period
Consistent with the principles underlying IAS 12, the tax consequences of
transactions and other events are recognised in the same way as the items giving
rise to those tax consequences. Accordingly, current and deferred tax is recognised
as income or expense and included in profit or loss for the period, except to the
extent that the tax arises from: [IAS 12.58]
o transactions or events that are recognised outside of profit or loss
(other comprehensive income or equity) - in which case the related tax
amount is also recognised outside of profit or loss [IAS 12.61A]
o a business combination - in which case the tax amounts are
recognised as identifiable assets or liabilities at the acquisition date, and
accordingly effectively taken into account in the determination of goodwill
when applying IFRS 3 Business Combinations. [IAS 12.66]
Example
An entity undertakes a capital raising and incurs incremental costs directly
attributable to the equity transaction, including regulatory fees, legal costs
and stamp duties. In accordance with the requirements of IAS 32 Financial
Instruments: Presentation, the costs are accounted for as a deduction from
equity.
Assume that the costs incurred are immediately deductible for tax
purposes, reducing the amount of current tax payable for the period. When
the tax benefit of the deductions is recognised, the current tax amount
associated with the costs of the equity transaction is recognised directly in
equity, consistent with the treatment of the costs themselves.
 IAS 12 provides the following additional guidance on the recognition of income tax
for the period:
o Where it is difficult to determine the amount of current and deferred
tax relating to items recognised outside of profit or loss (e.g. where there are
graduated rates or tax), the amount of income tax recognised outside of
profit or loss is determined on a reasonable pro-rata allocation, or using
another more appropriate method [IAS 12.63]
o In the circumstances where the payment of dividends impacts the
tax rate or results in taxable amounts or refunds, the income tax
consequences of dividends are considered to be more directly linked to past
transactions or events and so are recognised in profit or loss unless the past
transactions or events were recognised outside of profit or loss [IAS 12.52B]
o The impact of business combinations on the recognition of pre-
combination deferred tax assets are not included in the determination of
goodwill as part of the business combination, but are separately recognised
[IAS 12.68]
o The recognition of acquired deferred tax benefits subsequent to a
business combination are treated as 'measurement period' adjustments
(see IFRS 3 Business Combinations) if they qualify for that treatment, or
otherwise are recognised in profit or loss [IAS 12.68]
o Tax benefits of equity settled share based payment transactions
that exceed the tax effected cumulative remuneration expense are
considered to relate to an equity item and are recognised directly in equity.
[IAS 12.68C]
Presentation
Current tax assets and current tax liabilities can only be offset in the statement of
financial position if the entity has the legal right and the intention to settle on a net
basis. [IAS 12.71]
Deferred tax assets and deferred tax liabilities can only be offset in the statement of
financial position if the entity has the legal right to settle current tax amounts on a
net basis and the deferred tax amounts are levied by the same taxing authority on
the same entity or different entities that intend to realise the asset and settle the
liability at the same time. [IAS 12.74]
The amount of tax expense (or income) related to profit or loss is required to be
presented in the statement(s) of profit or loss and other comprehensive income.
[IAS 12.77]
The tax effects of items included in other comprehensive income can either be
shown net for each item, or the items can be shown before tax effects with an
aggregate amount of income tax for groups of items (allocated between items that
will and will not be reclassified to profit or loss in subsequent periods). [IAS 1.91]
Disclosure
IAS 12.80 requires the following disclosures:
o major components of tax expense (tax income) [IAS 12.79]
Examples include:
o current tax expense (income)
o any adjustments of taxes of prior periods
o amount of deferred tax expense (income) relating
to the origination and reversal of temporary differences
o amount of deferred tax expense (income) relating
to changes in tax rates or the imposition of new taxes
o amount of the benefit arising from a previously
unrecognised tax loss, tax credit or temporary difference of a prior
period
o write down, or reversal of a previous write down, of
a deferred tax asset
o amount of tax expense (income) relating to
changes in accounting policies and corrections of errors.
IAS 12.81 requires the following disclosures:
o aggregate current and deferred tax relating to items recognised
directly in equity
o tax relating to each component of other comprehensive income
o explanation of the relationship between tax expense (income) and
the tax that would be expected by applying the current tax rate to accounting
profit or loss (this can be presented as a reconciliation of amounts of tax or a
reconciliation of the rate of tax)
o changes in tax rates
o amounts and other details of deductible temporary differences,
unused tax losses, and unused tax credits
o temporary differences associated with investments in subsidiaries,
branches and associates, and interests in joint arrangements
o for each type of temporary difference and unused tax loss and
credit, the amount of deferred tax assets or liabilities recognised in the
statement of financial position and the amount of deferred tax income or
expense recognised in profit or loss
o tax relating to discontinued operations
o tax consequences of dividends declared after the end of the
reporting period
o information about the impacts of business combinations on an
acquirer's deferred tax assets
o recognition of deferred tax assets of an acquiree after the
acquisition date.
Other required disclosures:
o details of deferred tax assets [IAS 12.82]
o tax consequences of future dividend payments. [IAS 12.82A]
In addition to the disclosures required by IAS 12, some disclosures relating to
income taxes are required by IAS 1 Presentation of Financial Statements, as
follows:
o Disclosure on the face of the statement of financial position about
current tax assets, current tax liabilities, deferred tax assets, and deferred
tax liabilities [IAS 1.54(n) and (o)]
o Disclosure of tax expense (tax income) in the profit or loss section
of the statement of profit or loss and other comprehensive income (or
separate statement if presented). [IAS 1.82(d)]