IFRS Essentials

Dr. Dieter Christian is a lecturer at the Vienna University of Economics and Business, several other Austrian universities and various private seminar companies. He is an author in the area of IFRS and Austrian GAAP. He was formerly a Senior Manager and head of the department for IFRS and Austrian GAAP at BDO Austria and also worked in the IFRS department for PricewaterhouseCoopers in Austria. He has a Doctorate in Business Administration and an MBA from Vienna University of Economics and Business. He is a Member of the IFRS working group of the Austrian Financial Reporting and Auditing Committee (AFRAC).Dr. Norbert Lüdenbach is a tax advisor and chartered accountant, and is Head of the IFRS Department of BDO Germany. He is an author of commentaries on IFRS and German GAAP as well as being a lecturer at the University of Freiburg (Germany). He is also the publisher of a practice-oriented German IFRS journal which is published on a monthly basis.

• Preface xviiAbbreviations xixThe Conceptual Framework for Financial Reporting 11 Introduction 12 The Objective of General Purpose Financial Reporting 13 Going Concern 24 Qualitative Characteristics of Useful Financial Information 24.1 Introduction 24.2 Fundamental Qualitative Characteristics 24.2.1 Relevance 34.2.2 FaithfulRepresentation 34.3 Enhancing Qualitative Characteristics 44.3.1 Comparability 54.3.2 Verifiability 54.3.3 Timeliness 54.3.4 Understandability 55 The Cost Constraint on Useful Financial Reporting 56 The Elements of Financial Statements 66.1 Definitions 66.2 Recognition 66.3 Measurement 77 Exampleswith Solutions 7IAS 1 Presentation of Financial Statements 111 Introduction and Scope 112 Going Concern 113 Fair Presentation of the Financial Statements and Compliance with IFRSs 114 General Principles Relating to Presentation 124.1 Materiality and Aggregation 124.2 Offsetting 124.3 Frequency of Reporting 124.4 Comparative Information 124.5 Consistency of Presentation 135 Components of the Financial Statements 136 Structure and Content of the Components of the Financial Statements 136.1 Statement of Financial Position (Balance Sheet) 136.2 Statement of Comprehensive Income and Separate Income Statement 146.2.1 Profit or Loss, Other Comprehensive Income and How They Interrelate 146.2.2 Preparation of the Statement(s) 166.3 Statement of Changes in Equity 197 Exampleswith Solutions 207.1 Examples that can be Solved Without the Knowledge of Other Chapters of theBook 217.2 Examples that Require Knowledge of Other Sections of the Book 25IAS 2 Inventories 331 Scope 332 Measurement 332.1 Measurement at Recognition 332.2 Measurement after Recognition 343 Presentation and Derecognition 354 Exampleswith Solutions 35IAS 7 Statement ofCash Flows 431 Introduction 432 Preparation of the Statement of Cash Flows 442.1 Operating Activities 442.2 Investing and Financing Activities 443 Special Topics 453.1 Interest and Dividends 453.2 Income Taxes 454 Consolidated Statements ofCash Flows 454.1 Introduction 454.2 Acquisitions and Disposals of Subsidiaries 464.3 Associates 465 Exampleswith Solutions 46IAS 8 Accounting Policies, Changes in Accounting Estimates, and Errors 551 Introduction 552 Accounting Policies 552.1 Selection and Application of Accounting Policies 552.2 The Principle ofConsistency 562.3 When an Accounting Policy Has to be Changed 572.4 Consequences of a Change in Accounting Policy 573 Changes in Accounting Estimates 573.1 Introduction 573.2 Accounting Treatment 584 Correction of Prior Period Errors 585 Exampleswith Solutions 59IAS 10 Events after the Reporting Period 711 Overview 712 Exampleswith Solutions 72IAS 11 Construction Contracts 751 Introduction 752 Contract Revenue 753 ContractCosts 764 Percentage of Completion Method 764.1 Introduction 764.2 Reliable Estimate of the Outcome of a Contract 774.3 Determining the Stage ofCompletion 774.4 Recognition of Expected Losses 784.5 Uncertainties in Collectibility 784.6 Presentation andDisclosure 785 When the Outcome of a Contract Cannot be Estimated Reliably 796 Exampleswith Solutions 79IAS 12 Income Taxes 911 Introduction 912 Current Tax 913 Deferred Tax 913.1 The Logic Behind Recognizing Deferred Tax 913.2 Recognition Criteria 933.2.1 Taxable Temporary Differences 933.2.2 Deductible Temporary Differences 933.2.3 Unused Tax Losses andUnused TaxCredits 943.2.4 Reassessment of Unrecognized Deferred Tax Assets 943.2.5 Outside Basis Differences vs Inside Basis Differences 943.3 Measurement 943.3.1 Applicable Tax Rates and Tax Laws 943.3.2 Manner of Recovery or Settlement of the Carrying Amount of an Asset or a Liability 953.3.3 Prohibition of Discounting 953.3.4 Impairment and Reversal of Impairment 953.4 Presentation 953.5 Specific Issues 963.5.1 Change in the Tax Rate 963.5.2 BusinessCombinations 964 Tax (or Tax Rate) Reconciliation 965 Exampleswith solutions 97IAS 16 Property, Plant, and Equipment 1111 Introduction 1112 Recognition 1113 Measurement at Recognition 1124 Measurement after Recognition 1134.1 Cost Model and Revaluation Model 1134.2 Depreciation 1134.2.1 Depreciable Amount 1134.2.2 Depreciation Period 1144.2.3 DepreciationMethod 1144.2.4 Component Accounting 1154.3 Impairment 1154.4 Changes in Existing Decommissioning, Restoration, and Similar Liabilities 1155 Derecognition 1166 Exampleswith solutions 116IAS 17Leases 1271 Introduction and Scope 1272 DefinitionsRelating to Time 1273 Classification of Leases as Finance Leases or Operating Leases 1273.1 Introduction 1273.2 Primary LeaseClassificationCriteria 1283.3 Supplemental Indicators of a Finance Lease 1294 Accounting of Leases by Lessees 1304.1 Finance Leases 1304.2 Operating Leases 1305 Accounting of Leases by Lessors 1315.1 Finance Leases 1315.2 Operating Leases 1316 Sale and Leaseback Transactions 1327 Exampleswith Solutions 132IAS 18 Revenue 1431 Introduction and Scope 1432 Measurement of Revenue 1433 Sale of Goods 1444 Rendering of Services 1455 Interest, Royalties, and Dividends 1456 Multiple Element Transactions and Linked Transactions 1466.1 Introduction 1466.2 Multiple Element Transactions 1466.2.1 Sale onCredit 1466.2.2 Servicing Component 1476.2.3 Customer Loyalty Programs 1476.3 Linked Transactions 1487 Exampleswith solutions 148IAS 19 Employee Benefits and IAS 26 Accounting and Reporting by Retirement Benefit Plans 1551 Introduction 1552 Financial Reporting without Early Application of the Amendments to IAS 19 Issued in June 2011 1552.1 Introduction and Scope 1552.2 Short-term Employee Benefits 1562.3 Post-employment Benefits 1562.3.1 Introduction 1562.3.2 Defined Contribution Plans 1572.3.3 Defined Benefit Plans 1572.4 Other Long-term Employee Benefits 1602.5 Termination Benefits 1602.6 Exampleswith Solutions 1613 The Amendments to IAS 19 Issued in June 2011 1693.1 Post-employment Benefits 1703.2 Termination Benefits 1713.2.1 Recognition 1713.2.2 Measurement 172IAS 20 Government Grants 1731 Introduction and Scope 1732 Recognition and Measurement 1733 Presentation 1743.1 GrantsRelated toAssets 1743.2 Grants Related to Income 1744 Repayment of Government Grants 1755 Exampleswith Solutions 175IAS 21 The Effects of Changes in Foreign Exchange Rates 1831 Scope 1832 Monetary vs non-Monetary Items 1833 Translation of Foreign Currency Transactions 1843.1 Initial Recognition 1843.2 Subsequent Reporting – Monetary Items 1843.3 Subsequent Reporting – Non-monetary Items 1844 Translation of Financial Statements of Foreign Operations When Preparing the Consolidated Financial Statements 1854.1 Determining the Functional Currency and the Method of Foreign Currency Translation 1854.2 CurrentRate (orClosingRate)Method 1864.3 Monetary/Non-monetary Method 1875 Exampleswith Solutions 188IAS 23BorrowingCosts 1971 Introduction 1972 Specific and General Borrowings 1973 Period ofCapitalization 1984 Exampleswith Solutions 199IAS 24Related PartyDisclosures 2031 Introduction 2032 Related Parties andRelationshipswith Them 2033 Disclosures 2044 Application of IAS 24 in the Consolidated Financial Statements 2055 Exampleswith Solutions 205IAS 26 Accounting and Reporting by Retirement Benefit Plans: see the Chapter on IAS 19/IAS 26 209IAS 27 (2008) Consolidated and Separate Financial Statements, IAS 27 (2011) Separate Financial Statements, and IFRS 10 (2011) Consolidated Financial Statements 2111 Introduction 2112 Financial Reporting without Early Application of IFRS 10 and IAS 27 (2011) 2122.1 The Concept of “Control” 2122.2 Balance Sheet Date of the Consolidated Financial Statements and Diverging Balance Sheet Dates of Subsidiaries 2132.3 Preparing the Consolidated Financial Statements 2132.3.1 Overview 2132.3.2 Elimination of Intragroup Receivables and Liabilities 2142.3.3 Elimination of Intragroup Income and Expenses 2152.3.4 Elimination of Intragroup Profits and Losses that are Recognized in the Carrying Amounts of Assets 2152.3.5 Non-controlling Interests 2152.4 Acquisition and Disposal of Shares 2162.5 Investments in Subsidiaries, Jointly Controlled Entities, and Associates in Separate Financial Statements 2172.6 Exampleswith Solutions 2183 IFRS 10 (Issued in May 2011) 2283.1 Introduction 2283.2 AssessingControl 2283.2.1 Overview 2283.2.2 Power 2293.2.3 Exposure or Rights to Variable Returns 2313.2.4 LinkBetween Power andReturns 2313.2.5 Conclusion 2323.3 Examplewith Solution 2324 The New Version of IAS 27 (Issued in May 2011) 233IAS 28 Investments in Associates and IAS 28 (2011) Investments in Associates and JointVentures 2351 Introduction 2352 Financial Reporting without Early Application of the Amendments to IAS 28 Issued in May 2011 2352.1 The Term “Associate” and Scope of IAS 28 2352.2 The EquityMethod 2362.2.1 Overview 2362.2.2 Impairment Losses and Reversals of Impairment Losses 2382.2.3 Uniform Accounting Policies 2382.2.4 Elimination of Intragroup Profits and Losses 2392.2.5 Continuing Losses 2392.2.6 Balance Sheet Date of the Financial Statements of the Associate 2392.2.7 Application of the Concept of Materiality 2392.3 Presentation 2402.4 Separate Financial Statements of the Investor 2402.5 Preparation of the Consolidated Financial Statements 2402.6 Exampleswith Solutions 2413 The Amendments to IAS 28 Issued in May 2011 252IAS 29 Financial Reporting in Hyperinflationary Economies 2531 Introduction 2532 Application of IAS 29 Relating to Foreign Operations: the “7-Step-Approach” 2533 Reporting Period in Which an Entity Identifies Hyperinflation when the Currency was not Hyperinflationary in the Prior Period 2544 Examplewith Solution 255IAS 31 Interests in Joint Ventures and IFRS 11 Joint Arrangements 2611 Introduction 2612 IAS 31 “Interests in JointVentures” 2612.1 The Term“JointVenture” and Forms of JointVentures 2612.2 Accounting Treatment in the Financial Statements of the Venturer 2622.2.1 Jointly Controlled Operations in Consolidated and Separate Financial Statements 2622.2.2 Jointly Controlled Assets in Consolidated and Separate Financial Statements 2622.2.3 Jointly Controlled Entities 2622.3 Examplewith Solution 2633 IFRS 11 “Joint Arrangements” (Issued in May 2011) 2653.1 Introduction 2653.2 Assessing JointControl 2663.3 Types of Joint Arrangement 2673.3.1 Introduction 2673.3.2 Structure of the Joint Arrangement 2673.4 Consolidated Financial Statements of Parties to a Joint Arrangement 2683.4.1 JointOperations 2693.4.2 JointVentures 2693.5 Separate Financial Statements of Parties to a Joint Arrangement 2693.5.1 JointOperations 2703.5.2 JointVentures 2703.6 Examplewith Solution 270IAS 32 Financial Instruments: Presentation 2731 The Term “Financial Instrument” 2732 Scope 2743 Differentiation Between Equity and Liabilities 2744 Accounting for a Convertible Bond after Recognition by the Issuer 2755 Treasury Shares 2756 Costs of an Equity Transaction 2767 Offsetting 2778 Exampleswith Solutions 277IAS 33 Earnings per Share 2831 Introduction and Scope 2832 Ordinary Shares and Potential Ordinary Shares 2833 Basic Earnings per Share 2834 Diluted Earnings per Share 2845 Presentation andDisclosure 2856 Exampleswith Solutions 285IAS 34 Interim Financial Reporting 2931 Introduction 2932 Content of an Interim Financial Report 2932.1 Components 2932.2 Periods and Dates to be Presented in Interim Reports 2943 Materiality 2944 Recognition and Measurement 2944.1 Discrete Approach vs Integral Approach 2944.2 Independence of the Annual Result from the Frequency of Reporting 2954.3 Quantity Component and Price Component 2955 Exampleswith Solutions 296IAS 36 Impairment ofAssets 3011 Introduction and Scope of IAS 36 3012 When to Test for Impairment 3013 When toReverse an Impairment Loss 3024 Determining the Recoverable Amount for an Individual Asset or for an Asset’s CGU? 3025 Determining the Recoverable Amount 3035.1 General Aspects 3035.2 FairValue LessCosts to Sell 3045.3 Value inUse 3045.3.1 Introduction 3045.3.2 Estimating the FutureCash Flows 3055.3.3 Determining the Discount Rate 3066 Determining the Carrying Amount of a CGU 3077 Goodwill 3077.1 Allocating Goodwill to CGUs 3077.2 Multi-level Impairment Test 3078 CorporateAssets 3089 Recognizing and Reversing an Impairment Loss 30810 Non-controlling Interests 30911 Exampleswith Solutions 310IAS 37 Provisions, Contingent Liabilities, and Contingent Assets 3251 Scope 3252 Definition and Recognition of Provisions 3252.1 Overview 3252.2 Existence of a Present Obligation 3252.3 Past Event 3262.4 Probability of an Outflow of Resources 3262.5 Reliable Estimate of the Amount of the Obligation 3272.6 Distinction from Other Liabilities 3273 Contingent Liabilities 3274 Contingent Assets 3275 Measurement 3286 Reimbursements 3287 Changes in Provisions 3298 Specific Issues 3298.1 OnerousContracts 3298.2 Provisions for Decommissioning, Restoration, and Similar Obligations 3298.3 Restructurings 3308.4 Decommissioning Funds 3319 Exampleswith solutions 331IAS 38 Intangible Assets 3371 Scope of IAS 38 3372 The Term “Intangible Asset” 3373 Recognition and Initial Measurement 3383.1 Introduction 3383.2 Separate Acquisition of Intangible Assets 3383.3 Acquisition of Intangible Assets as Part of a Business Combination 3383.4 Internally Generated Intangible Assets 3394 Further Prohibitions ofCapitalization 3415 Measurement after Recognition 3415.1 Cost Model and Revaluation Model 3415.2 Intangible Assets With Finite Useful Lives 3425.3 Intangible Assets With Indefinite Useful Lives 3435.4 Impairment 3436 Derecognition 3447 Exampleswith Solutions 344IAS 39 Financial Instruments: Recognition and Measurement: see the Chapter on IFRS 9/IAS 39 351IAS 40 Investment Property 3531 The Concept of “Investment Property” 3532 Recognition 3543 Measurement at Recognition 3544 Measurement after Recognition 3544.1 Introduction 3544.2 Fair Value Model 3554.3 Cost Model 3565 Derecognition 3566 Presentation 3577 Exampleswith solutions 357IAS 41Agriculture 3651 Introduction and Scope 3652 Recognition 3653 Measurement 3654 GovernmentGrants 3665 Exampleswith Solutions 367IFRS 1 First-time Adoption of International Financial Reporting Standards 3711 Introduction and Scope 3712 Recognition and Measurement 3722.1 Accounting Policies 3722.2 Exceptions to Retrospective Application of Other IFRSs (Mandatory) 3732.3 Exemptions from Other IFRSs (Optional) 3732.3.1 Overview 3732.3.2 Measurement of Property, Plant, and Equipment 3732.3.3 ForeignCurrencyReserve 3742.3.4 BusinessCombinations 3742.4 Deferred Tax 3743 Presentation andDisclosure 3754 Exampleswith Solutions 375IFRS 2 Share-based Payment 3791 A general introduction to Employee Share Options 3792 Scope of IFRS 2 3803 The Accounting of Employee Share Options 3803.1 Introduction 3803.2 Equity-settled Transactions 3813.3 Cash-settled Transactions 3824 Exampleswith Solutions 383IFRS 3BusinessCombinations 3891 Introduction and Scope 3892 Acquisition of Shares vs Acquisition of the Individual Assets 3893 Identifying the Acquirer 3904 Acquisition Date 3905 Acquisition-related Costs 3906 Accounting for a Business Combination on the Acquisition Date 3906.1 Overview 3906.2 Identifiable Assets Acquired and Liabilities Assumed 3916.2.1 Recognition in the Statement of Financial Position 3916.2.2 Classifications andDesignations 3926.2.3 Measurement 3926.2.4 Exception to the Recognition Rules 3936.2.5 Exceptions to the Recognition and Measurement Rules 3936.2.6 Exception to the Measurement Rules 3936.3 Non-controlling Interest 3936.4 Goodwill and Gain on a Bargain Purchase 3946.5 Business Combination Achieved in Stages 3946.6 Consideration Transferred (Including Contingent Consideration) 3956.7 Measurement Period 3967 Subsequent Measurement and Accounting 3978 Deferred tax 3989 Entries Necessary in Order to Prepare the Consolidated Financial Statements 39810 DeterminingWhat is Part of theBusinessCombination Transaction 39911 Exampleswith Solutions 400IFRS 4 Insurance Contracts 4211 Introduction and Scope 4212 Insurance Contracts, Insurance Risk, and the Scope of IFRS 4 4213 Financial Reporting for Insurance Contracts 4214 Examplewith Solution 422IFRS 5 Non-current Assets Held for Sale and Discontinued Operations 4251 Introduction and Overview 4252 Scope 4263 Non-current Assets and Disposal Groups held for Sale 4263.1 Classification as “Held for Sale” 4263.2 Measurement of Non-current Assets and Disposal Groups Classified as “Held for Sale” 4283.2.1 General Aspects 4283.2.2 Changes to a Plan of Sale 4293.3 Presentation 4294 Presentation of Discontinued Operations 4304.1 General Aspects 4304.2 Selected Specifics in Consolidated Financial Statements 4315 Exampleswith Solutions 431IFRS 6 Exploration for and Evaluation of Mineral Resources 4411 Introduction and Scope 4412 Financial Reporting 4413 Stripping Costs in the Production Phase of a Surface Mine 4424 Examplewith Solution 443IFRS 7 Financial Instruments: Disclosures 4451 Introduction 4452 Significance of Financial Instruments for Financial Position and Performance 4453 Nature and Extent of Risks Arising from Financial Instruments 4464 Transfers of Financial Assets 4475 Exampleswith Solutions 447IFRS 8 Operating Segments 4511 Introduction 4512 Scope 4513 Operating Segments andChiefOperatingDecisionMaker 4514 Reportable Segments 4524.1 Overview 4524.2 Aggregation ofOperating Segments 4534.3 Quantitative Thresholds 4534.4 RemainingOperating Segments 4535 SegmentDisclosures 4545.1 Determination of the Amounts to be Disclosed 4545.2 Disclosure Requirements 4545.2.1 Segment Profit or Loss 4545.2.2 Segment Assets and Segment Liabilities 4555.2.3 Reconciliations 4555.2.4 OtherDisclosures 4566 Entity-wide Disclosures 4567 Exampleswith Solutions 457IFRS 9 Financial Instruments and IAS 39 Financial Instruments: Recognition andMeasurement 4611 Introduction 4612 Financial Instruments Accounting According to IFRS 9 (as Issued in 2010) and its Consequential Amendments to IAS 39 4622.1 Scope 4622.2 Initial Recognition 4622.3 Measurement 4622.3.1 Derivatives and Financial Instruments Held for Trading 4622.3.2 Initial Measurement 4632.3.3 Subsequent Measurement of Financial Assets 4632.3.4 Subsequent Measurement of Financial Liabilities 4652.3.5 Measurement at Amortized Cost: Determining the Effective InterestRate 4652.3.6 Determining Fair Values After Recognition 4662.3.7 Presentation of FairValueGains and Losses 4662.3.8 Impairment Losses and Reversals of Impairment Losses 4672.4 HybridContracts 4682.4.1 Introduction 4682.4.2 Hybrid Contracts with Financial Asset Hosts 4682.4.3 OtherHybridContracts 4682.5 Derecognition of Financial Assets 4692.6 Financial Guarantee Contracts From the Issuer’s Perspective 4702.7 Hedge Accounting 4712.7.1 Introduction 4712.7.2 TheRules inMoreDetail 4732.8 Exampleswith Solutions 4753 Financial Instruments Accounting Prior to IFRS 9 4953.1 Scope 4953.2 Subsequent Measurement 4953.2.1 Assigning a Financial Asset or a Financial Liability to a MeasurementCategory 4953.2.2 Gains and Losses and Technical Aspects 4973.2.3 Determining Fair Values After Recognition 4973.2.4 Impairment Losses and Reversals of Impairment Losses 4973.3 HybridContracts 4993.4 Exampleswith Solutions 499IFRS 10 Consolidated Financial Statements: see the Chapter on IAS 27/IFRS10 503IFRS 11 Joint Arrangements: see the Chapter on IAS 31/IFRS 11 505IFRS 12Disclosure of Interests inOtherEntities 5071 Introduction 5072 The Term “Structured Entity” 5073 The Individual Disclosure Requirements of IFRS 12 5083.1 Significant Judgments and Assumptions 5083.2 Interests in Subsidiaries 5093.3 Interests in Joint Arrangements and Associates 5103.4 Interests in Unconsolidated Structured Entities 5114 Exampleswith Solutions 511IFRS 13 FairValueMeasurement 5131 Introduction 5132 Scope 5133 The Measurement Requirements of IFRS 13 5143.1 Definition of Fair Value 5143.2 The Asset or Liability 5143.3 The Transaction 5153.4 Market Participants 5163.5 The Price 5163.6 Application to Non-financial Assets 5173.7 Application to Liabilities and the Entity’s Own Equity Instruments 5173.8 Fair Value at Initial Recognition 5183.9 Valuation Techniques 5183.10 Inputs to Valuation Techniques 5193.11 FairValueHierarchy 5193.11.1 Level 1 Inputs 5203.11.2 Level 2 Inputs 5203.11.3 Level 3 Inputs 5204 Illustration of the Application of Selected Valuation Techniques 5214.1 Measuring Owner-occupied Items of Property, Plant, and Equipment 5214.2 Measuring American Options According to the Binomial Model 5214.3 Measuring a Brand According to the Relief from Royalty Method 5214.4 The Tax Amortization Benefit 5225 Exampleswith Solutions 522Index 527