Objective of 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 assetsare 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]

= Profit + Other
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:

a separate statement of profit or loss

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:

profit or loss

other comprehensive income*

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]

the measurement basis (or bases) used in preparing the financial statements

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
other disclosures, including:

contingent liabilities (see IAS 37) and unrecognised contractual commitments

non-financial disclosures, such as the entity's financial risk management objectives and policies
(see IFRS 7 Financial Instruments: Disclosures)

* Disclosure Initiative (Amendments to IAS 1), effective 1 January 2016, clarifies 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 comparability should be considered when determining the
order of the notes.

Other disclosures

Judgements and key assumptions

An entity must disclose, in the summary of significant accounting policies or other notes, the
judgements, apart from those involving estimations, that management has made in the process of
applying the entity's accounting policies that have the most significant effect on the amounts recognised
in the financial statements. [IAS 1.122]

Examples cited in IAS 1.123 include management's judgements in determining:

when substantially all the significant risks and rewards of ownership of financial assets and lease assets
are transferred to other entities

whether, in substance, particular sales of goods are financing arrangements and therefore do not give
rise to revenue.

An entity must also disclose, in the notes, information about the key assumptions 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 1.125] These disclosures do not involve disclosing budgets or forecasts. [IAS
1.130]

Dividends

In addition to the distributions information in the statement of changes in equity (see above), the
following must be disclosed in the notes: [IAS 1.137]

the amount of dividends proposed or declared before the financial statements were authorised for issue
but which were not recognised as a distribution to owners during the period, and the related amount
per share
the amount of any cumulative preference dividends not recognised.

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 1.135]

qualitative information about the entity's objectives, policies and processes for managing capital,
including>

description of capital it manages

nature of external capital requirements, if any

how it is meeting its objectives

quantitative data about what the entity regards as capital

changes from one period to another

whether the entity has complied with any external capital requirements and

if it has not complied, the consequences of such non-compliance.

Puttable financial instruments

IAS 1.136A requires the following additional disclosures if an entity has a puttable instrument that is
classified as an equity instrument:

summary quantitative data about the amount classified as equity

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

country of incorporation

address of registered office or principal place of business

description of the entity's operations and principal activities

if it is part of a group, the name of its parent and the ultimate parent of the group

if it is a limited life entity, information regarding the length of the life

Terminology

The 2007 comprehensive revision to IAS 1 introduced some new terminology. 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 amendments. IAS 1.8 states: "Although this Standard uses the
terms 'other comprehensive income', 'profit or loss' and 'total comprehensive income', an entity may
use other terms to describe the totals as long as the meaning is clear. For example, an entity may use
the term 'net income' to describe profit or loss." Also, IAS 1.57(b) states: "The descriptions used and the
ordering of items or aggregation of similar items may be amended according to the nature of the entity
and its transactions, to provide information that is relevant to an understanding of the entity's financial
position."
Term before 2007 revision of IAS 1 Term as amended by IAS 1 (2007)

balance sheet statement of financial position

cash flow statement statement of cash flows

income statement statement of comprehensive income (income statement is

retained in case of a two-statement approach)

recognised in the income statement recognised in profit or loss

recognised [directly] in equity (only for recognised in other comprehensive income

OCI components)

recognised [directly] in equity (for recognised outside profit or loss (either in OCI or equity)
recognition both in OCI and equity)

removed from equity and recognised in reclassified from equity to profit or loss as a
profit or loss ('recycling') reclassification adjustment

Standard or/and Interpretation IFRSs

on the face of in

equity holders owners (exception for 'ordinary equity holders')

balance sheet date end of the reporting period

reporting date end of the reporting period

after the balance sheet date after the reporting period

Objective of 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]
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)

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)

cash receipts and payments relating to deposits by financial institutions

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]
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:

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

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 or liability in the

differences statement of financial position and its tax bases

Taxable temporary Temporary differences that will result in taxable amounts in determining
differences taxable profit (tax loss) of future periods when the carrying amount of the asset
or liability is recovered or settled

Deductible Temporary differences that will result in amounts that are deductible in
temporary determining taxable profit (tax loss) of future periods when the carrying
differences amount of the asset or liability is recovered or settled

Deferred tax The amounts of income taxes payable in future periods in respect of taxable
liabilities temporary differences

Deferred tax assets The amounts of income taxes recoverable in future periods in respect of:

deductible temporary differences

 the carryforward of unused tax losses, and

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 amou

Deferred tax asset or liability = Temporary dif

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

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:

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]

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]

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]

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]

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]

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:

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
Receivables. If receiving payment of the receivable has no tax consequences, its tax base is equal to its
carrying amount

Goodwill. If goodwill is not recognised for tax purposes, its tax base is nil (no deductions are available)

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

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:

liabilities arising from initial recognition of goodwill [IAS 12.15(a)]

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)]

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]

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:

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]

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]

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]

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 to recognise for the period = Current tax 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]
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]

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:

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]

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]

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]

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]
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:

major components of tax expense (tax income) [IAS 12.79] Examples include:

current tax expense (income)

any adjustments of taxes of prior periods

amount of deferred tax expense (income) relating to the origination and reversal of temporary
differences

amount of deferred tax expense (income) relating to changes in tax rates or the imposition of new taxes

amount of the benefit arising from a previously unrecognised tax loss, tax credit or temporary difference
of a prior period

write down, or reversal of a previous write down, of a deferred tax asset

amount of tax expense (income) relating to changes in accounting policies and corrections of errors.

IAS 12.81 requires the following disclosures:

aggregate current and deferred tax relating to items recognised directly in equity

tax relating to each component of other comprehensive income

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)

changes in tax rates

amounts and other details of deductible temporary differences, unused tax losses, and unused tax
credits

temporary differences associated with investments in subsidiaries, branches and associates, and
interests in joint arrangements

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

tax relating to discontinued operations

tax consequences of dividends declared after the end of the reporting period

information about the impacts of business combinations on an acquirer's deferred tax assets

recognition of deferred tax assets of an acquiree after the acquisition date.

Other required disclosures:

details of deferred tax assets [IAS 12.82]

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:

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)]

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)]
Summary of IAS 29

Objective of IAS 29

The objective of IAS 29 is to establish specific standards for entities reporting in the currency of a
hyperinflationary economy, so that the financial information provided is meaningful.

Restatement of financial statements

The basic principle in IAS 29 is that the financial statements of an entity that reports in the currency of a
hyperinflationary economy should be stated in terms of the measuring unit current at the balance sheet
date. Comparative figures for prior period(s) should be restated into the same current measuring unit.
[IAS 29.8]

Restatements are made by applying a general price index. Items such as monetary items that are already
stated at the measuring unit at the balance sheet date are not restated. Other items are restated based
on the change in the general price index between the date those items were acquired or incurred and
the balance sheet date.

A gain or loss on the net monetary position is included in net income. It should be disclosed separately.
[IAS 29.9]

The restated amount of a non-monetary item is reduced, in accordance with appropriate IFRSs, when it
exceeds its the recoverable amount. [IAS 29.19]

The Standard does not establish an absolute rate at which hyperinflation is deemed to arise - but allows
judgement as to when restatement of financial statements becomes necessary. Characteristics of the
economic environment of a country which indicate the existence of hyperinflation include: [IAS 29.3]

the general population prefers to keep its wealth in non-monetary assets or in a relatively stable foreign
currency. Amounts of local currency held are immediately invested to maintain purchasing power;

the general population regards monetary amounts not in terms of the local currency but in terms of a
relatively stable foreign currency. Prices may be quoted in that currency;

sales and purchases on credit take place at prices that compensate for the expected loss of purchasing
power during the credit period, even if the period is short;

interest rates, wages, and prices are linked to a price index; and
the cumulative inflation rate over three years approaches, or exceeds, 100%.

IAS 29 describes characteristics that may indicate that an economy is hyperinflationary. However, it
concludes that it is a matter of judgement when restatement of financial statements becomes
necessary.

When an economy ceases to be hyperinflationary and an entity discontinues the preparation and
presentation of financial statements in accordance with IAS 29, it should treat the amounts expressed in
the measuring unit current at the end of the previous reporting period as the basis for the carrying
amounts in its subsequent financial statements. [IAS 29.38]

Disclosure

Gain or loss on monetary items [IAS 29.9]

The fact that financial statements and other prior period data have been restated for changes in the
general purchasing power of the reporting currency [IAS 29.39]

Whether the financial statements are based on an historical cost or current cost approach [IAS 29.39]

Identity and level of the price index at the balance sheet date and moves during the current and
previous reporting period [IAS 29.39]

Which jurisdictions are hyperinflationary?

IAS 29 defines and provides general guidance for assessing whether a particular jurisdiction's economy is
hyperinflationary. But the IASB does not identify specific jurisdictions. The International Practices Task
Force (IPTF) of the Centre for Audit Quality monitors the status of 'highly inflationary' countries. The
Task Force's criteria for identifying such countries are similar to those for identifying 'hyperinflationary
economies' under IAS 29. From time to time, the IPTF issues reports of its discussions with SEC staff on
the IPTF's recommendations of which countries should be considered highly inflationary, and which
countries are on the Task Force's inflation 'watch list'. The IPTF's discussion document for the 16 May
2018 meeting state the following view of the Task Force:

Countries with three-year cumulative inflation rates exceeding 100%:

Angola

South Sudan

Suriname

Venezuela

Countries with projected three-year cumulative inflation rates exceeding 100%:

Argentina

Democratic Republic of Congo

Countries where the three-year cumulative inflation rates had exceeded 100% in recent years:

Sudan

Countries with recent three-year cumulative inflation rates exceeding 100% after a spike in inflation in a
discrete period:

Ukraine

Countries with projected three-year cumulative inflation rates between 70% and 100% or with a
significant (25% or more) increase in inflation during the current period

Egypt

Lybia

Yemen

Objective of IAS 33

The objective of IAS 33 is to prescribe principles for determining and presenting earnings per share (EPS)
amounts to improve performance comparisons between different entities in the same reporting period
and between different reporting periods for the same entity. [IAS 33.1]

Scope

IAS 33 applies to entities whose securities are publicly traded or that are in the process of issuing
securities to the public. [IAS 33.2] Other entities that choose to present EPS information must also
comply with IAS 33. [IAS 33.3]

If both parent and consolidated statements are presented in a single report, EPS is required only for the
consolidated statements. [IAS 33.4]

Key definitions [IAS 33.5]

Ordinary share: also known as a common share or common stock. An equity instrument that is
subordinate to all other classes of equity instruments.

Potential ordinary share: a financial instrument or other contract that may entitle its holder to ordinary
shares.
Common examples of potential ordinary shares

convertible debt

convertible preferred shares

share warrants

share options

share rights

employee stock purchase plans

contractual rights to purchase shares

contingent issuance contracts or agreements (such as those arising in business combination)

Dilution: a reduction in earnings per share or an increase in loss per share resulting from the assumption
that convertible instruments are converted, that options or warrants are exercised, or that ordinary
shares are issued upon the satisfaction of specified conditions.

Antidilution: an increase in earnings per share or a reduction in loss per share resulting from the
assumption that convertible instruments are converted, that options or warrants are exercised, or that
ordinary shares are issued upon the satisfaction of specified conditions.

Requirement to present EPS

An entity whose securities are publicly traded (or that is in process of public issuance) must present, on
the face of the statement of comprehensive income, basic and diluted EPS for: [IAS 33.66]
profit or loss from continuing operations attributable to the ordinary equity holders of the parent entity;
and

profit or loss attributable to the ordinary equity holders of the parent entity for the period for each class
of ordinary shares that has a different right to share in profit for the period.

If an entity presents the components of profit or loss in a separate income statement, it presents EPS
only in that separate statement. [IAS 33.4A]

Basic and diluted EPS must be presented with equal prominence for all periods presented. [IAS 33.66]

Basic and diluted EPS must be presented even if the amounts are negative (that is, a loss per share). [IAS
33.69]

If an entity reports a discontinued operation, basic and diluted amounts per share must be disclosed for
the discontinued operation either on the face of the of comprehensive income (or separate income
statement if presented) or in the notes to the financial statements. [IAS 33.68 and 68A]

Basic EPS

Basic EPS is calculated by dividing profit or loss attributable to ordinary equity holders of the parent
entity (the numerator) by the weighted average number of ordinary shares outstanding (the
denominator) during the period. [IAS 33.10]

The earnings numerators (profit or loss from continuing operations and net profit or loss) used for the
calculation should be after deducting all expenses including taxes, minority interests, and preference
dividends. [IAS 33.12]

The denominator (number of shares) is calculated by adjusting the shares in issue at the beginning of
the period by the number of shares bought back or issued during the period, multiplied by a time-
weighting factor. IAS 33 includes guidance on appropriate recognition dates for shares issued in various
circumstances. [IAS 33.20-21]

Contingently issuable shares are included in the basic EPS denominator when the contingency has been
met. [IAS 33.24]

Diluted EPS

Diluted EPS is calculated by adjusting the earnings and number of shares for the effects of dilutive
options and other dilutive potential ordinary shares. [IAS 33.31] The effects of anti-dilutive potential
ordinary shares are ignored in calculating diluted EPS. [IAS 33.41]
Guidance on calculating dilution

Convertible securities. The numerator should be adjusted for the after-tax effects of dividends and
interest charged in relation to dilutive potential ordinary shares and for any other changes in income
that would result from the conversion of the potential ordinary shares. [IAS 33.33] The denominator
should include shares that would be issued on the conversion. [IAS 33.36]

Options and warrants. In calculating diluted EPS, assume the exercise of outstanding dilutive options
and warrants. The assumed proceeds from exercise should be regarded as having been used to
repurchase ordinary shares at the average market price during the period. The difference between the
number of ordinary shares assumed issued on exercise and the number of ordinary shares assumed
repurchased shall be treated as an issue of ordinary shares for no consideration. [IAS 33.45]

Contingently issuable shares. Contingently issuable ordinary shares are treated as outstanding and
included in the calculation of both basic and diluted EPS if the conditions have been met. If the
conditions have not been met, the number of contingently issuable shares included in the diluted EPS
calculation is based on the number of shares that would be issuable if the end of the period were the
end of the contingency period. Restatement is not permitted if the conditions are not met when the
contingency period expires. [IAS 33.52]

Contracts that may be settled in ordinary shares or cash. Presume that the contract will be settled in
ordinary shares, and include the resulting potential ordinary shares in diluted EPS if the effect is dilutive.
[IAS 33.58]

Retrospective adjustments

The calculation of basic and diluted EPS for all periods presented is adjusted retrospectively when the
number of ordinary or potential ordinary shares outstanding increases as a result of a capitalisation,
bonus issue, or share split, or decreases as a result of a reverse share split. If such changes occur after
the balance sheet date but before the financial statements are authorised for issue, the EPS calculations
for those and any prior period financial statements presented are based on the new number of shares.
Disclosure is required. [IAS 33.64]

Basic and diluted EPS are also adjusted for the effects of errors and adjustments resulting from changes
in accounting policies, accounted for retrospectively. [IAS 33.64]

Diluted EPS for prior periods should not be adjusted for changes in the assumptions used or for the
conversion of potential ordinary shares into ordinary shares outstanding. [IAS 33.65]

Disclosure

If EPS is presented, the following disclosures are required: [IAS 33.70]

the amounts used as the numerators in calculating basic and diluted EPS, and a reconciliation of those
amounts to profit or loss attributable to the parent entity for the period

the weighted average number of ordinary shares used as the denominator in calculating basic and
diluted EPS, and a reconciliation of these denominators to each other

instruments (including contingently issuable shares) that could potentially dilute basic EPS in the future,
but were not included in the calculation of diluted EPS because they are antidilutive for the period(s)
presented

a description of those ordinary share transactions or potential ordinary share transactions that occur
after the balance sheet date and that would have changed significantly the number of ordinary shares or
potential ordinary shares outstanding at the end of the period if those transactions had occurred before
the end of the reporting period. Examples include issues and redemptions of ordinary shares issued for
cash, warrants and options, conversions, and exercises [IAS 34.71]

An entity is permitted to disclose amounts per share other than profit or loss from continuing
operations, discontinued operations, and net profit or loss earnings per share. Guidance for calculating
and presenting such amounts is included in IAS 33.73 and 73A.

Scope

Scope exclusions

IAS 39 applies to all types of financial instruments except for the following, which are scoped out of
IAS 39: [IAS 39.2]

interests in subsidiaries, associates, and joint ventures accounted for under IAS 27 Consolidated and
Separate Financial Statements, IAS 28 Investments in Associates, or IAS 31 Interests in Joint
Ventures (or, for periods beginning on or after 1 January 2013, IFRS 10 Consolidated Financial
Statements, IAS 27 Separate Financial Statements or IAS 28 Investments in Associates and Joint
Ventures); however IAS 39 applies in cases where under those standards such interests are to be
accounted for under IAS 39. The standard also applies to most derivatives on an interest in a subsidiary,
associate, or joint venture

employers' rights and obligations under employee benefit plans to which IAS 19 Employee
Benefits applies
forward contracts between an acquirer and selling shareholder to buy or sell an acquiree that will result
in a business combination at a future acquisition date

rights and obligations under insurance contracts, except IAS 39 does apply to financial instruments that
take the form of an insurance (or reinsurance) contract but that principally involve the transfer of
financial risks and derivatives embedded in insurance contracts

financial instruments that meet the definition of own equity under IAS 32 Financial Instruments:
Presentation

financial instruments, contracts and obligations under share-based payment transactions to

which IFRS 2 Share-based Payment applies

rights to reimbursement payments to which IAS 37 Provisions, Contingent Liabilities and Contingent
Assets applies

Leases

IAS 39 applies to lease receivables and payables only in limited respects: [IAS 39.2(b)]

IAS 39 applies to lease receivables with respect to the derecognition and impairment provisions

IAS 39 applies to lease payables with respect to the derecognition provisions

IAS 39 applies to derivatives embedded in leases.

Financial guarantees

IAS 39 applies to financial guarantee contracts issued. However, if an issuer of financial guarantee
contracts has previously asserted explicitly that it regards such contracts as insurance contracts and has
used accounting applicable to insurance contracts, the issuer may elect to apply either IAS 39 or IFRS
4 Insurance Contracts to such financial guarantee contracts. The issuer may make that election contract
by contract, but the election for each contract is irrevocable.

Accounting by the holder is excluded from the scope of IAS 39 and IFRS 4 (unless the contract is a
reinsurance contract). Therefore, paragraphs 10-12 of IAS 8 Accounting Policies, Changes in Accounting
Estimates and Errors apply. Those paragraphs specify criteria to use in developing an accounting policy if
no IFRS applies specifically to an item.

Loan commitments

Loan commitments are outside the scope of IAS 39 if they cannot be settled net in cash or another
financial instrument, they are not designated as financial liabilities at fair value through profit or loss,
and the entity does not have a past practice of selling the loans that resulted from the commitment
shortly after origination. An issuer of a commitment to provide a loan at a below-market interest rate is
required initially to recognise the commitment at its fair value; subsequently, the issuer will remeasure
it at the higher of (a) the amount recognised under IAS 37 and (b) the amount initially recognised less,
where appropriate, cumulative amortisation recognised in accordance with IAS 18. An issuer of loan
commitments must apply IAS 37 to other loan commitments that are not within the scope of IAS 39
(that is, those made at market or above). Loan commitments are subject to the derecognition provisions
of IAS 39. [IAS 39.4]

Contracts to buy or sell financial items

Contracts to buy or sell financial items are always within the scope of IAS 39 (unless one of the other
exceptions applies).

Contracts to buy or sell non-financial items

Contracts to buy or sell non-financial items are within the scope of IAS 39 if they can be settled net in
cash or another financial asset and are not entered into and held for the purpose of the receipt or
delivery of a non-financial item in accordance with the entity's expected purchase, sale, or usage
requirements. Contracts to buy or sell non-financial items are inside the scope if net settlement occurs.
The following situations constitute net settlement: [IAS 39.5-6]

the terms of the contract permit either counterparty to settle net

there is a past practice of net settling similar contracts

there is a past practice, for similar contracts, of taking delivery of the underlying and selling it within a
short period after delivery to generate a profit from short-term fluctuations in price, or from a dealer's
margin, or

the non-financial item is readily convertible to cash

Weather derivatives
Although contracts requiring payment based on climatic, geological, or other physical variable were
generally excluded from the original version of IAS 39, they were added to the scope of the revised
IAS 39 in December 2003 if they are not in the scope of IFRS 4. [IAS 39.AG1]

Definitions

IAS 39 incorporates the definitions of the following items from IAS 32 Financial Instruments:
Presentation: [IAS 39.8]

financial instrument

financial asset

financial liability

equity instrument.

Note: Where an entity applies IFRS 9 Financial Instruments prior to its mandatory application date (1
January 2015), definitions of the following terms are also incorporated from IFRS 9: derecognition,
derivative, fair value, financial guarantee contract. The definition of those terms outlined below (as
relevant) are those from IAS 39.

Common examples of financial instruments within the scope of IAS 39

cash

demand and time deposits

commercial paper

accounts, notes, and loans receivable and payable

debt and equity securities. These are financial instruments from the perspectives of both the holder and the issuer. This c

asset backed securities such as collateralised mortgage obligations, repurchase agreements, and securitised packages of r

derivatives, including options, rights, warrants, futures contracts, forward contracts, and swaps.

A derivative is a financial instrument:

Whose value changes in response to the change in an underlying variable such as an interest rate,
commodity or security price, or index;

That requires no initial investment, or one that is smaller than would be required for a contract with
similar response to changes in market factors; and

That is settled at a future date. [IAS 39.9]

Examples of derivatives

Forwards: Contracts to purchase or sell a specific quantity of a financial instrument, a commodity, or a foreign currency at
Settlement is at maturity by actual delivery of the item specified in the contract, or by a net cash settlement.

Interest rate swaps and forward rate agreements: Contracts to exchange cash flows as of a specified date or a series of sp

Futures: Contracts similar to forwards but with the following differences: futures are generic exchange-traded, whereas f
whereas forwards are generally settled by delivery of the underlying item or cash settlement.

Options: Contracts that give the purchaser the right, but not the obligation, to buy (call option) or sell (put option) a speci
(strike price), during or at a specified period of time. These can be individually written or exchange-traded. The purchaser
risk of payments under the option.

Caps and floors: These are contracts sometimes referred to as interest rate options. An interest rate cap will compensate
interest rate floor will compensate the purchaser if rates fall below a predetermined rate.

Embedded derivatives
Some contracts that themselves are not financial instruments may nonetheless have financial
instruments embedded in them. For example, a contract to purchase a commodity at a fixed price for
delivery at a future date has embedded in it a derivative that is indexed to the price of the commodity.

An embedded derivative is a feature within a contract, such that the cash flows associated with that
feature behave in a similar fashion to a stand-alone derivative. In the same way that derivatives must be
accounted for at fair value on the balance sheet with changes recognised in the income statement, so
must some embedded derivatives. IAS 39 requires that an embedded derivative be separated from its
host contract and accounted for as a derivative when: [IAS 39.11]

the economic risks and characteristics of the embedded derivative are not closely related to those of the
host contract

a separate instrument with the same terms as the embedded derivative would meet the definition of a
derivative, and

the entire instrument is not measured at fair value with changes in fair value recognised in the income
statement

If an embedded derivative is separated, the host contract is accounted for under the appropriate
standard (for instance, under IAS 39 if the host is a financial instrument). Appendix A to IAS 39 provides
examples of embedded derivatives that are closely related to their hosts, and of those that are not.

Examples of embedded derivatives that are not closely related to their hosts (and therefore must be
separately accounted for) include:

the equity conversion option in debt convertible to ordinary shares (from the perspective of the holder
only) [IAS 39.AG30(f)]

commodity indexed interest or principal payments in host debt contracts[IAS 39.AG30(e)]

cap and floor options in host debt contracts that are in-the-money when the instrument was issued
[IAS 39.AG33(b)]

leveraged inflation adjustments to lease payments [IAS 39.AG33(f)]

currency derivatives in purchase or sale contracts for non-financial items where the foreign currency is
not that of either counterparty to the contract, is not the currency in which the related good or service
is routinely denominated in commercial transactions around the world, and is not the currency that is
commonly used in such contracts in the economic environment in which the transaction takes place.
[IAS 39.AG33(d)]

If IAS 39 requires that an embedded derivative be separated from its host contract, but the entity is
unable to measure the embedded derivative separately, the entire combined contract must be
designated as a financial asset as at fair value through profit or loss). [IAS 39.12]

Classification as liability or equity

Since IAS 39 does not address accounting for equity instruments issued by the reporting enterprise but it
does deal with accounting for financial liabilities, classification of an instrument as liability or as equity is
critical. IAS 32 Financial Instruments: Presentation addresses the classification question.

Classification of financial assets

IAS 39 requires financial assets to be classified in one of the following categories: [IAS 39.45]

Financial assets at fair value through profit or loss

Available-for-sale financial assets

Loans and receivables

Held-to-maturity investments

Those categories are used to determine how a particular financial asset is recognised and measured in
the financial statements.

Financial assets at fair value through profit or loss. This category has two subcategories:

Designated. The first includes any financial asset that is designated on initial recognition as one to be
measured at fair value with fair value changes in profit or loss.

Held for trading. The second category includes financial assets that are held for trading. All derivatives
(except those designated hedging instruments) and financial assets acquired or held for the purpose of
selling in the short term or for which there is a recent pattern of short-term profit taking are held for
trading. [IAS 39.9]
Available-for-sale financial assets (AFS) are any non-derivative financial assets designated on initial
recognition as available for sale or any other instruments that are not classified as as (a) loans and
receivables, (b) held-to-maturity investments or (c) financial assets at fair value through profit or loss.
[IAS 39.9] AFS assets are measured at fair value in the balance sheet. Fair value changes on AFS assets
are recognised directly in equity, through the statement of changes in equity, except for interest on AFS
assets (which is recognised in income on an effective yield basis), impairment losses and (for interest-
bearing AFS debt instruments) foreign exchange gains or losses. The cumulative gain or loss that was
recognised in equity is recognised in profit or loss when an available-for-sale financial asset is
derecognised. [IAS 39.55(b)]

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are
not quoted in an active market, other than held for trading or designated on initial recognition as assets
at fair value through profit or loss or as available-for-sale. Loans and receivables for which the holder
may not recover substantially all of its initial investment, other than because of credit deterioration,
should be classified as available-for-sale.[IAS 39.9] Loans and receivables are measured at amortised
cost. [IAS 39.46(a)]

Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments
that an entity intends and is able to hold to maturity and that do not meet the definition of loans and
receivables and are not designated on initial recognition as assets at fair value through profit or loss or
as available for sale. Held-to-maturity investments are measured at amortised cost. If an entity sells a
held-to-maturity investment other than in insignificant amounts or as a consequence of a non-recurring,
isolated event beyond its control that could not be reasonably anticipated, all of its other held-to-
maturity investments must be reclassified as available-for-sale for the current and next two financial
reporting years. [IAS 39.9] Held-to-maturity investments are measured at amortised cost. [IAS 39.46(b)]

Classification of financial liabilities

IAS 39 recognises two classes of financial liabilities: [IAS 39.47]

Financial liabilities at fair value through profit or loss

Other financial liabilities measured at amortised cost using the effective interest method

The category of financial liability at fair value through profit or loss has two subcategories:

Designated. a financial liability that is designated by the entity as a liability at fair value through profit or
loss upon initial recognition

Held for trading. a financial liability classified as held for trading, such as an obligation for securities
borrowed in a short sale, which have to be returned in the future
Initial recognition

IAS 39 requires recognition of a financial asset or a financial liability when, and only when, the entity
becomes a party to the contractual provisions of the instrument, subject to the following provisions in
respect of regular way purchases. [IAS 39.14]

Regular way purchases or sales of a financial asset. A regular way purchase or sale of financial assets is
recognised and derecognised using either trade date or settlement date accounting. [IAS 39.38] The
method used is to be applied consistently for all purchases and sales of financial assets that belong to
the same category of financial asset as defined in IAS 39 (note that for this purpose assets held for
trading form a different category from assets designated at fair value through profit or loss). The choice
of method is an accounting policy. [IAS 39.38]

IAS 39 requires that all financial assets and all financial liabilities be recognised on the balance sheet.
That includes all derivatives. Historically, in many parts of the world, derivatives have not been
recognised on company balance sheets. The argument has been that at the time the derivative contract
was entered into, there was no amount of cash or other assets paid. Zero cost justified non-recognition,
notwithstanding that as time passes and the value of the underlying variable (rate, price, or index)
changes, the derivative has a positive (asset) or negative (liability) value.

Initial measurement

Initially, financial assets and liabilities should be measured at fair value (including transaction costs, for
assets and liabilities not measured at fair value through profit or loss). [IAS 39.43]

Measurement subsequent to initial recognition

Subsequently, financial assets and liabilities (including derivatives) should be measured at fair value,
with the following exceptions: [IAS 39.46-47]

Loans and receivables, held-to-maturity investments, and non-derivative financial liabilities should be
measured at amortised cost using the effective interest method.

Investments in equity instruments with no reliable fair value measurement (and derivatives indexed to
such equity instruments) should be measured at cost.

Financial assets and liabilities that are designated as a hedged item or hedging instrument are subject to
measurement under the hedge accounting requirements of the IAS 39.
Financial liabilities that arise when a transfer of a financial asset does not qualify for derecognition, or
that are accounted for using the continuing-involvement method, are subject to particular
measurement requirements.

Fair value is the amount for which an asset could be exchanged, or a liability settled, between
knowledgeable, willing parties in an arm's length transaction. [IAS 39.9] IAS 39 provides a hierarchy to
be used in determining the fair value for a financial instrument: [IAS 39 Appendix A, paragraphs AG69-
82]

Quoted market prices in an active market are the best evidence of fair value and should be used, where
they exist, to measure the financial instrument.

If a market for a financial instrument is not active, an entity establishes fair value by using a valuation
technique that makes maximum use of market inputs and includes recent arm's length market
transactions, reference to the current fair value of another instrument that is substantially the same,
discounted cash flow analysis, and option pricing models. An acceptable valuation technique
incorporates all factors that market participants would consider in setting a price and is consistent with
accepted economic methodologies for pricing financial instruments.

If there is no active market for an equity instrument and the range of reasonable fair values is significant
and these estimates cannot be made reliably, then an entity must measure the equity instrument at cost
less impairment.

Amortised cost is calculated using the effective interest method. The effective interest rate is the rate
that exactly discounts estimated future cash payments or receipts through the expected life of the
financial instrument to the net carrying amount of the financial asset or liability. Financial assets that are
not carried at fair value though profit and loss are subject to an impairment test. If expected life cannot
be determined reliably, then the contractual life is used.

IAS 39 fair value option

IAS 39 permits entities to designate, at the time of acquisition or issuance, any financial asset or financial
liability to be measured at fair value, with value changes recognised in profit or loss. This option is
available even if the financial asset or financial liability would ordinarily, by its nature, be measured at
amortised cost – but only if fair value can be reliably measured.

In June 2005 the IASB issued its amendment to IAS 39 to restrict the use of the option to designate any
financial asset or any financial liability to be measured at fair value through profit and loss (the fair value
option). The revisions limit the use of the option to those financial instruments that meet certain
conditions: [IAS 39.9]
the fair value option designation eliminates or significantly reduces an accounting mismatch, or

a group of financial assets, financial liabilities or both is managed and its performance is evaluated on a
fair value basis by entity's management.

Once an instrument is put in the fair-value-through-profit-and-loss category, it cannot be reclassified out

with some exceptions. [IAS 39.50] In October 2008, the IASB issued amendments to IAS 39. The
amendments permit reclassification of some financial instruments out of the fair-value-through-profit-
or-loss category (FVTPL) and out of the available-for-sale category – for more detail see IAS 39.50(c). In
the event of reclassification, additional disclosures are required under IFRS 7 Financial Instruments:
Disclosures. In March 2009 the IASB clarified that reclassifications of financial assets under the October
2008 amendments (see above): on reclassification of a financial asset out of the 'fair value through
profit or loss' category, all embedded derivatives have to be (re)assessed and, if necessary, separately
accounted for in financial statements.

IAS 39 available for sale option for loans and receivables

IAS 39 permits entities to designate, at the time of acquisition, any loan or receivable as available for
sale, in which case it is measured at fair value with changes in fair value recognised in equity.

Impairment

A financial asset or group of assets is impaired, and impairment losses are recognised, only if there is
objective evidence as a result of one or more events that occurred after the initial recognition of the
asset. An entity is required to assess at each balance sheet date whether there is any objective evidence
of impairment. If any such evidence exists, the entity is required to do a detailed impairment calculation
to determine whether an impairment loss should be recognised. [IAS 39.58] The amount of the loss is
measured as the difference between the asset's carrying amount and the present value of estimated
cash flows discounted at the financial asset's original effective interest rate. [IAS 39.63]

Assets that are individually assessed and for which no impairment exists are grouped with financial
assets with similar credit risk statistics and collectively assessed for impairment. [IAS 39.64]

If, in a subsequent period, the amount of the impairment loss relating to a financial asset carried at
amortised cost or a debt instrument carried as available-for-sale decreases due to an event occurring
after the impairment was originally recognised, the previously recognised impairment loss is reversed
through profit or loss. Impairments relating to investments in available-for-sale equity instruments are
not reversed through profit or loss. [IAS 39.65]

Financial guarantees
A financial guarantee contract is a contract that requires the issuer to make specified payments to
reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due.
[IAS 39.9]

Under IAS 39 as amended, financial guarantee contracts are recognised:

initially at fair value. If the financial guarantee contract was issued in a stand-alone arm's length
transaction to an unrelated party, its fair value at inception is likely to equal the consideration received,
unless there is evidence to the contrary.

subsequently at the higher of (i) the amount determined in accordance with IAS 37 Provisions,
Contingent Liabilities and Contingent Assets and (ii) the amount initially recognised less, when
appropriate, cumulative amortisation recognised in accordance with IAS 18 Revenue. (If specified
criteria are met, the issuer may use the fair value option in IAS 39. Furthermore, different requirements
continue to apply in the specialised context of a 'failed' derecognition transaction.)

Some credit-related guarantees do not, as a precondition for payment, require that the holder is
exposed to, and has incurred a loss on, the failure of the debtor to make payments on the guaranteed
asset when due. An example of such a guarantee is a credit derivative that requires payments in
response to changes in a specified credit rating or credit index. These are derivatives and they must be
measured at fair value under IAS 39.

Derecognition of a financial asset

The basic premise for the derecognition model in IAS 39 is to determine whether the asset under
consideration for derecognition is: [IAS 39.16]

an asset in its entirety or

specifically identified cash flows from an asset or

a fully proportionate share of the cash flows from an asset or

a fully proportionate share of specifically identified cash flows from a financial asset

Once the asset under consideration for derecognition has been determined, an assessment is made as
to whether the asset has been transferred, and if so, whether the transfer of that asset is subsequently
eligible for derecognition.
An asset is transferred if either the entity has transferred the contractual rights to receive the cash
flows, or the entity has retained the contractual rights to receive the cash flows from the asset, but has
assumed a contractual obligation to pass those cash flows on under an arrangement that meets the
following three conditions: [IAS 39.17-19]

the entity has no obligation to pay amounts to the eventual recipient unless it collects equivalent
amounts on the original asset

the entity is prohibited from selling or pledging the original asset (other than as security to the eventual
recipient),

the entity has an obligation to remit those cash flows without material delay

Once an entity has determined that the asset has been transferred, it then determines whether or not it
has transferred substantially all of the risks and rewards of ownership of the asset. If substantially all the
risks and rewards have been transferred, the asset is derecognised. If substantially all the risks and
rewards have been retained, derecognition of the asset is precluded. [IAS 39.20]

If the entity has neither retained nor transferred substantially all of the risks and rewards of the asset,
then the entity must assess whether it has relinquished control of the asset or not. If the entity does not
control the asset then derecognition is appropriate; however if the entity has retained control of the
asset, then the entity continues to recognise the asset to the extent to which it has a continuing
involvement in the asset. [IAS 39.30]

These various derecognition steps are summarised in the decision tree in AG36.

Derecognition of a financial liability

A financial liability should be removed from the balance sheet when, and only when, it is extinguished,
that is, when the obligation specified in the contract is either discharged or cancelled or expires.
[IAS 39.39] Where there has been an exchange between an existing borrower and lender of debt
instruments with substantially different terms, or there has been a substantial modification of the terms
of an existing financial liability, this transaction is accounted for as an extinguishment of the original
financial liability and the recognition of a new financial liability. A gain or loss from extinguishment of
the original financial liability is recognised in profit or loss. [IAS 39.40-41]

Hedge accounting

IAS 39 permits hedge accounting under certain circumstances provided that the hedging relationship is:
[IAS 39.88]
formally designated and documented, including the entity's risk management objective and strategy for
undertaking the hedge, identification of the hedging instrument, the hedged item, the nature of the risk
being hedged, and how the entity will assess the hedging instrument's effectiveness and

expected to be highly effective in achieving offsetting changes in fair value or cash flows attributable to
the hedged risk as designated and documented, and effectiveness can be reliably measured and

assessed on an ongoing basis and determined to have been highly effective

Hedging instruments

Hedging instrument is an instrument whose fair value or cash flows are expected to offset changes in
the fair value or cash flows of a designated hedged item. [IAS 39.9]

All derivative contracts with an external counterparty may be designated as hedging instruments except
for some written options. A non-derivative financial asset or liability may not be designated as a hedging
instrument except as a hedge of foreign currency risk. [IAS 39.72]

For hedge accounting purposes, only instruments that involve a party external to the reporting entity
can be designated as a hedging instrument. This applies to intragroup transactions as well (with the
exception of certain foreign currency hedges of forecast intragroup transactions – see below). However,
they may qualify for hedge accounting in individual financial statements. [IAS 39.73]

Hedged items

Hedged item is an item that exposes the entity to risk of changes in fair value or future cash flows and is
designated as being hedged. [IAS 39.9]

A hedged item can be: [IAS 39.78-82]

a single recognised asset or liability, firm commitment, highly probable transaction or a net investment
in a foreign operation

a group of assets, liabilities, firm commitments, highly probable forecast transactions or net investments
in foreign operations with similar risk characteristics

a held-to-maturity investment for foreign currency or credit risk (but not for interest risk or prepayment
risk)
a portion of the cash flows or fair value of a financial asset or financial liability or

a non-financial item for foreign currency risk only for all risks of the entire item

in a portfolio hedge of interest rate risk (Macro Hedge) only, a portion of the portfolio of financial assets
or financial liabilities that share the risk being hedged

In April 2005, the IASB amended IAS 39 to permit the foreign currency risk of a highly probable
intragroup forecast transaction to qualify as the hedged item in a cash flow hedge in consolidated
financial statements – provided that the transaction is denominated in a currency other than the
functional currency of the entity entering into that transaction and the foreign currency risk will affect
consolidated financial statements. [IAS 39.80]

In 30 July 2008, the IASB amended IAS 39 to clarify two hedge accounting issues:

inflation in a financial hedged item

a one-sided risk in a hedged item.

Effectiveness

IAS 39 requires hedge effectiveness to be assessed both prospectively and retrospectively. To qualify for
hedge accounting at the inception of a hedge and, at a minimum, at each reporting date, the changes in
the fair value or cash flows of the hedged item attributable to the hedged risk must be expected to be
highly effective in offsetting the changes in the fair value or cash flows of the hedging instrument on a
prospective basis, and on a retrospective basis where actual results are within a range of 80% to 125%.

All hedge ineffectiveness is recognised immediately in profit or loss (including ineffectiveness within the
80% to 125% window).

Categories of hedges

A fair value hedge is a hedge of the exposure to changes in fair value of a recognised asset or liability or
a previously unrecognised firm commitment or an identified portion of such an asset, liability or firm
commitment, that is attributable to a particular risk and could affect profit or loss. [IAS 39.86(a)] The
gain or loss from the change in fair value of the hedging instrument is recognised immediately in profit
or loss. At the same time the carrying amount of the hedged item is adjusted for the corresponding gain
or loss with respect to the hedged risk, which is also recognised immediately in net profit or loss.
[IAS 39.89]
A cash flow hedge is a hedge of the exposure to variability in cash flows that (i) is attributable to a
particular risk associated with a recognised asset or liability (such as all or some future interest
payments on variable rate debt) or a highly probable forecast transaction and (ii) could affect profit or
loss. [IAS 39.86(b)] The portion of the gain or loss on the hedging instrument that is determined to be an
effective hedge is recognised in other comprehensive income. [IAS 39.95]

If a hedge of a forecast transaction subsequently results in the recognition of a financial asset or a

financial liability, any gain or loss on the hedging instrument that was previously recognised directly in
equity is 'recycled' into profit or loss in the same period(s) in which the financial asset or liability affects
profit or loss. [IAS 39.97]

If a hedge of a forecast transaction subsequently results in the recognition of a non-financial asset or

non-financial liability, then the entity has an accounting policy option that must be applied to all such
hedges of forecast transactions: [IAS 39.98]

Same accounting as for recognition of a financial asset or financial liability – any gain or loss on the
hedging instrument that was previously recognised in other comprehensive income is 'recycled' into
profit or loss in the same period(s) in which the non-financial asset or liability affects profit or loss.

'Basis adjustment' of the acquired non-financial asset or liability – the gain or loss on the hedging
instrument that was previously recognised in other comprehensive income is removed from equity and
is included in the initial cost or other carrying amount of the acquired non-financial asset or liability.

A hedge of a net investment in a foreign operation as defined in IAS 21 The Effects of Changes in Foreign
Exchange Rates is accounted for similarly to a cash flow hedge. [IAS 39.102]

A hedge of the foreign currency risk of a firm commitment may be accounted for as a fair value hedge or
as a cash flow hedge.

Discontinuation of hedge accounting

Hedge accounting must be discontinued prospectively if: [IAS 39.91 and 39.101]

the hedging instrument expires or is sold, terminated, or exercised

the hedge no longer meets the hedge accounting criteria – for example it is no longer effective

for cash flow hedges the forecast transaction is no longer expected to occur, or
the entity revokes the hedge designation

In June 2013, the IASB amended IAS 39 to make it clear that there is no need to discontinue hedge
accounting if a hedging derivative is novated, provided certain criteria are met. [IAS 39.91 and IAS
39.101]

For the purpose of measuring the carrying amount of the hedged item when fair value hedge accounting
ceases, a revised effective interest rate is calculated. [IAS 39.BC35A]

If hedge accounting ceases for a cash flow hedge relationship because the forecast transaction is no
longer expected to occur, gains and losses deferred in other comprehensive income must be taken to
profit or loss immediately. If the transaction is still expected to occur and the hedge relationship ceases,
the amounts accumulated in equity will be retained in equity until the hedged item affects profit or loss.
[IAS 39.101(c)]

If a hedged financial instrument that is measured at amortised cost has been adjusted for the gain or
loss attributable to the hedged risk in a fair value hedge, this adjustment is amortised to profit or loss
based on a recalculated effective interest rate on this date such that the adjustment is fully amortised by
the maturity of the instrument. Amortisation may begin as soon as an adjustment exists and must begin
no later than when the hedged item ceases to be adjusted for changes in its fair value attributable to the
risks being hedged.

Summary of IAS 38

Objective

The objective of IAS 38 is to prescribe the accounting treatment for intangible assets that are not dealt
with specifically in another IFRS. The Standard requires an entity to recognise an intangible asset if, and
only if, certain criteria are met. The Standard also specifies how to measure the carrying amount of
intangible assets and requires certain disclosures regarding intangible assets. [IAS 38.1]

Scope

IAS 38 applies to all intangible assets other than: [IAS 38.2-3]

financial assets (see IAS 32 Financial Instruments: Presentation)

exploration and evaluation assets (see IFRS 6 Exploration for and Evaluation of Mineral Resources)

expenditure on the development and extraction of minerals, oil, natural gas, and similar resources
intangible assets arising from insurance contracts issued by insurance companies

intangible assets covered by another IFRS, such as intangibles held for sale (IFRS 5 Non-current Assets
Held for Sale and Discontinued Operations), deferred tax assets (IAS 12 Income Taxes), lease assets
(IAS 17 Leases), assets arising from employee benefits (IAS 19 Employee Benefits (2011)), and goodwill
(IFRS 3 Business Combinations).

Key definitions

Intangible asset: an identifiable non-monetary asset without physical substance. An asset is a resource
that is controlled by the entity as a result of past events (for example, purchase or self-creation) and
from which future economic benefits (inflows of cash or other assets) are expected. [IAS 38.8] Thus, the
three critical attributes of an intangible asset are:

identifiability

control (power to obtain benefits from the asset)

future economic benefits (such as revenues or reduced future costs)

Identifiability: an intangible asset is identifiable when it: [IAS 38.12]

is separable (capable of being separated and sold, transferred, licensed, rented, or exchanged, either
individually or together with a related contract) or

arises from contractual or other legal rights, regardless of whether those rights are transferable or
separable from the entity or from other rights and obligations.

Examples of intangible assets

patented technology, computer software, databases and trade secrets

trademarks, trade dress, newspaper mastheads, internet domains

video and audiovisual material (e.g. motion pictures, television programmes)

customer lists

mortgage servicing rights

licensing, royalty and standstill agreements

import quotas

franchise agreements

customer and supplier relationships (including customer lists)

marketing rights

Intangibles can be acquired:

by separate purchase

as part of a business combination

by a government grant

by exchange of assets

by self-creation (internal generation)

Recognition
Recognition criteria. IAS 38 requires an entity to recognise an intangible asset, whether purchased or
self-created (at cost) if, and only if: [IAS 38.21]

it is probable that the future economic benefits that are attributable to the asset will flow to the entity;
and

the cost of the asset can be measured reliably.

This requirement applies whether an intangible asset is acquired externally or generated internally. IAS
38 includes additional recognition criteria for internally generated intangible assets (see below).

The probability of future economic benefits must be based on reasonable and supportable assumptions
about conditions that will exist over the life of the asset. [IAS 38.22] The probability recognition criterion
is always considered to be satisfied for intangible assets that are acquired separately or in a business
combination. [IAS 38.33]

If recognition criteria not met. If an intangible item does not meet both the definition of and the criteria
for recognition as an intangible asset, IAS 38 requires the expenditure on this item to be recognised as
an expense when it is incurred. [IAS 38.68]

Business combinations. There is a presumption that the fair value (and therefore the cost) of an
intangible asset acquired in a business combination can be measured reliably. [IAS 38.35] An
expenditure (included in the cost of acquisition) on an intangible item that does not meet both the
definition of and recognition criteria for an intangible asset should form part of the amount attributed to
the goodwill recognised at the acquisition date.

Reinstatement. The Standard also prohibits an entity from subsequently reinstating as an intangible
asset, at a later date, an expenditure that was originally charged to expense. [IAS 38.71]

Initial recognition: research and development costs

Charge all research cost to expense. [IAS 38.54]

Development costs are capitalised only after technical and commercial feasibility of the asset for sale or
use have been established. This means that the entity must intend and be able to complete the
intangible asset and either use it or sell it and be able to demonstrate how the asset will generate future
economic benefits. [IAS 38.57]

If an entity cannot distinguish the research phase of an internal project to create an intangible asset
from the development phase, the entity treats the expenditure for that project as if it were incurred in
the research phase only.

Initial recognition: in-process research and development acquired in a business combination

A research and development project acquired in a business combination is recognised as an asset at
cost, even if a component is research. Subsequent expenditure on that project is accounted for as any
other research and development cost (expensed except to the extent that the expenditure satisfies the
criteria in IAS 38 for recognising such expenditure as an intangible asset). [IAS 38.34]

Initial recognition: internally generated brands, mastheads, titles, lists

Brands, mastheads, publishing titles, customer lists and items similar in substance that are internally
generated should not be recognised as assets. [IAS 38.63]

Initial recognition: computer software

Purchased: capitalise

Operating system for hardware: include in hardware cost

Internally developed (whether for use or sale): charge to expense until technological feasibility, probable
future benefits, intent and ability to use or sell the software, resources to complete the software, and
ability to measure cost.

Amortisation: over useful life, based on pattern of benefits (straight-line is the default).

Initial recognition: certain other defined types of costs

The following items must be charged to expense when incurred:

internally generated goodwill [IAS 38.48]

start-up, pre-opening, and pre-operating costs [IAS 38.69]

training cost [IAS 38.69]

advertising and promotional cost, including mail order catalogues [IAS 38.69]

relocation costs [IAS 38.69]

For this purpose, 'when incurred' means when the entity receives the related goods or services. If the
entity has made a prepayment for the above items, that prepayment is recognised as an asset until the
entity receives the related goods or services. [IAS 38.70]

Initial measurement

Intangible assets are initially measured at cost. [IAS 38.24]

Measurement subsequent to acquisition: cost model and revaluation models allowed

An entity must choose either the cost model or the revaluation model for each class of intangible asset.
[IAS 38.72]

Cost model. After initial recognition intangible assets should be carried at cost less accumulated
amortisation and impairment losses. [IAS 38.74]

Revaluation model. Intangible assets may be carried at a revalued amount (based on fair value) less any
subsequent amortisation and impairment losses only if fair value can be determined by reference to an
active market. [IAS 38.75] Such active markets are expected to be uncommon for intangible assets. [IAS
38.78] Examples where they might exist:

production quotas

fishing licences

taxi licences

Under the revaluation model, revaluation increases are recognised in other comprehensive income and
accumulated in the "revaluation surplus" within equity except to the extent that they reverse a
revaluation decrease previously recognised in profit and loss. If the revalued intangible has a finite life
and is, therefore, being amortised (see below) the revalued amount is amortised. [IAS 38.85]

Classification of intangible assets based on useful life

Intangible assets are classified as: [IAS 38.88]

Indefinite life: no foreseeable limit to the period over which the asset is expected to generate net cash
inflows for the entity.

Finite life: a limited period of benefit to the entity.

Measurement subsequent to acquisition: intangible assets with finite lives

The cost less residual value of an intangible asset with a finite useful life should be amortised on a
systematic basis over that life: [IAS 38.97]

The amortisation method should reflect the pattern of benefits.

If the pattern cannot be determined reliably, amortise by the straight-line method.

The amortisation charge is recognised in profit or loss unless another IFRS requires that it be included in
the cost of another asset.

The amortisation period should be reviewed at least annually. [IAS 38.104]

Expected future reductions in selling prices could be indicative of a higher rate of consumption of the
future economic benefits embodied in an asset. [IAS 18.92]

The standard contains a rebuttable presumption that a revenue-based amortisation method for
intangible assets is inappropriate. However, there are limited circumstances when the presumption can
be overcome:

The intangible asset is expressed as a measure of revenue; and

it can be demonstrated that revenue and the consumption of economic benefits of the intangible asset
are highly correlated. [IAS 38.98A]

Note: The guidance on expected future reductions in selling prices and the clarification regarding the
revenue-based depreciation method were introduced by Clarification of Acceptable Methods of
Depreciation and Amortisation, which applies to annual periods beginning on or after 1 January 2016.

Examples where revenue based amortisation may be appropriate

IAS 38 notes that in the circumstance in which the predominant limiting factor that is inherent in an
intangible asset is the achievement of a revenue threshold, the revenue to be generated can be an
appropriate basis for amortisation of the asset. The standard provides the following examples where
revenue to be generated might be an appropriate basis for amortisation: [IAS 38.98C]

A concession to explore and extract gold from a gold mine which is limited to a fixed amount of revenue
generated from the extraction of gold

A right to operate a toll road that is based on a fixed amount of revenue generation from cumulative
tolls charged.

The asset should also be assessed for impairment in accordance with IAS 36. [IAS 38.111]

Measurement subsequent to acquisition: intangible assets with indefinite useful lives

An intangible asset with an indefinite useful life should not be amortised. [IAS 38.107]

Its useful life should be reviewed each reporting period to determine whether events and circumstances
continue to support an indefinite useful life assessment for that asset. If they do not, the change in the
useful life assessment from indefinite to finite should be accounted for as a change in an accounting
estimate. [IAS 38.109]

The asset should also be assessed for impairment in accordance with IAS 36. [IAS 38.111]

Subsequent expenditure

Due to the nature of intangible assets, subsequent expenditure will only rarely meet the criteria for
being recognised in the carrying amount of an asset. [IAS 38.20] Subsequent expenditure on brands,
mastheads, publishing titles, customer lists and similar items must always be recognised in profit or loss
as incurred. [IAS 38.63]

Disclosure

For each class of intangible asset, disclose: [IAS 38.118 and 38.122]

useful life or amortisation rate

amortisation method

gross carrying amount

accumulated amortisation and impairment losses

line items in the income statement in which amortisation is included

reconciliation of the carrying amount at the beginning and the end of the period showing:

additions (business combinations separately)

assets held for sale

retirements and other disposals

revaluations

impairments

reversals of impairments

amortisation

foreign exchange differences

other changes

basis for determining that an intangible has an indefinite life

description and carrying amount of individually material intangible assets

certain special disclosures about intangible assets acquired by way of government grants
information about intangible assets whose title is restricted

contractual commitments to acquire intangible assets

Additional disclosures are required about:

intangible assets carried at revalued amounts [IAS 38.124]

the amount of research and development expenditure recognised as an expense in the current period
[IAS 38.126]