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Cash generating unit

The value in use calculation may be impossible on a single asset because the individual asset does not
generate distinguishable cash flows.

In this case, the impairment calculation should be based on a CGU.

The impairment is calculated by:

 assuming the cash generating unit is one asset

 comparing the carrying amount of the CGU to the recoverable amount of the CGU.

Deal with any specifically impaired assets first, then impair the CGU. IAS 36 requires that an impairment
loss attributable to a CGU should be allocated to write down the assets in the following order:

1 Purchased goodwill

2 The other assets (including other intangible assets) in the CGU on a pro rata basis based on the
carrying amount of each asset in the CGU.

No individual asset should be written down below its recoverable amount. This means that, unless
specifically impaired, current assets are unlikely to be impaired as part of a CGU, as they are already
likely to be carried at their recoverable amounts. Inventory, as noted above, is outside the scope of IAS
36.

Example:

Financial Assets and Financial liabilities:

A financial instrument is any contract that gives rise to a financial asset of one entity and a financial
liability or equity instrument of another entity.

IAS 32 deals with the classification of financial instruments and their presentation in financial
statements.

IFRS 9 deals with how financial instruments are measured and when they should be recognised in
financial statements.

IFRS 7 deals with the disclosure of financial instruments in financial statements.(notes to the accounts)

Financial assets:
A financial asset is any asset that is:

 'cash'

 'a contractual right to receive cash or another financial asset from another entity'

 'a contractual right to exchange financial assets or liabilities with another entity under conditions that
are potentially favourable'

 'an equity instrument of another entity'

Initial recognition of a financial asset:

Allowed to only when, the entity becomes party to the contractual provisions of the instrument'

Measured at Fair value: - usually the consideration that the entity paid to acquire the asset

Subsequent treatment – depends upon what you have:

Equity instrument:

-FV through P/L: Revalue to fair value – gain/loss P/L (transaction cost in order to acquire the assert- will
also be expensed)

-FV through OCI : (only for long term instrument ) – transaction cost be capitalized

Revalue your asset at the end of each year to fair value- gain/ loss to OCI

WHEN YOU CAN USE FVOCI

 the equity instrument cannot be held for trading, and

 there must be an irrevocable choice for this designation upon initial recognition

Debt instruments:

fair value through profit or loss

 amortised cost

 fair value through other comprehensive income

The default category is again fair value through profit or loss (FVPL).

The other two categories depend on the instrument passing two tests:

 business model test: considers the entity's purpose in holding the investment.

 contractual cash flow characteristics test: looks at the cash that will be received as a result of holding
the investment, and considers what it comprises.

Amortised cost:

Business model : intend to hold the instrument till maturity

Contractual cashhflow: principal plus interest

How will you do the amortization?

Balance b/f add (interest) less: payment receive balance c/f

5000 600 (500) 5100

5100 612 (500) 5212

5212 625 (500) 5837

P/L(income)

Year 1 600

Year 2 612

Year 3 625

Statement of financial position:

Year 1 ( NCA) 5100

YEAR 2 (CA) 5212

YEAR 3 ( 0)

Fair value through OCI :

business model test: entity must intend to hold the investment to maturity but may sell the asset if the
possibility of buying another asset with a higher return arises

 contractual cash flow characteristics test: contractual terms of the financial asset must give rise to cash
flows that are solely of principal and interest, as for amortised cost.

If a debt instrument is held at FVOCI

 asset is initially recognised at fair value plus transaction costs

 interest income is calculated using the effective rate of interest, in the same way as the amounts that
would have been recognised in profit or loss if using amortised cost

 asset will be revalued to fair value at the reporting date with the gain or loss recognised in other
comprehensive

Balance b/f add: interest income less: payment received balance c/f revalue to FV (gain,
loss OCI)

9144 1006 (600) 9550 11000 1450 (GAIN OCI)

11000 1050 (600) 11450 10400 1050 (LOSS)

10400 1100 (600) 10900 10500 400 (LOSS)

Note that the amounts recognised in profit or loss as interest income must be the same as if the asset
was simply held at amortised cost, so the interest income figures are the same as in part (a). Take great
care when calculating the interest income. In the year ended 31 December 20X5 a revaluation gain of
$1,450 will be recognised in other comprehensive income. The asset will be held at $11,000 on the
statement of financial position.

DERECOGNITION OF FINANCIAL ASSETS:

when, and only when, the contractual rights to the cash flows from the financial asset expire'

Find the difference between carrying amount and the amount received ( it will be charged to the P/L for
that period)

Financial liabilities:
A financial liability is any liability that is a contractual obligation:

 'to deliver cash or another financial asset to another entity', or

 'to exchange financial assets or liabilities with another entity under conditions that are potentially
unfavourable', or

 'that will or may be settled in the entity’s own equity instruments.'

Initially recognized at Fair value, (net proceeds received – cost of issuing the liability)

Subsequently measured at Amortized cost

Initial value + effective interest – interest paid

year Op balance Int expense payment Closing balance

Preference shares: fixed dividend

Redeemable: shareholder can redeem the shares anytime (financial liability)

Irredeemable: cannot redeemable (no liability)

 dividends on instruments classified as a liability are treated as a finance cost in the statement of profit
or loss.

 equity dividends declared are reported directly in equity

A compound instrument is a financial instrument that has characteristics of both equity and liabilities,
such as a convertible loan. A convertible loan has the following characteristics:

 repayable, at the lender's option, in shares of the issuing company instead of cash

 number of shares to be issued fixed at the inception of the loan

 lender will accept a rate of interest below the market rate for non-convertible instruments

As the lender is allowing the company a discounted rate in return for the potential issue of equity, these
convertible instruments are accounted for using split accounting, recognising both their equity and
liability components:

 liability or debt element, as the issuer has the potential obligation to deliver cash

 equity element, as the investors may choose to convert the loan into shares instead.

The accounting for a convertible loan falls into two stages, initial and subsequent measurement.

Initial recognition

The liability is measured at its fair value. The fair value is the present value of the future cash flows
(interest and capital) discounted using the market rate of interest for non-convertible debt instruments.

The equity element is equal to the loan proceeds less the calculated liability element.

Subsequent measurement

The liability is measured at amortised cost: Initial value + market-rate interest – interest paid

The equity is not re-measured and remains at the same value on the statement of financial position until
the debt is redeemed

Present value of liability

year df amount PV
1 0.926 100 93
2 0.857 100 86
3 0.794 (5000+100)=5100 4049
4228

LIABILITY COMPONENT IS 4228

OUT OF TOTAL 5000

REMAINING IS THE EQUITY COMPONENT 772

DERECOGNITION OF LIABILITY: when, and only when, the obligation specified in the contract is
discharged or cancelled or expires'

How do you derecognize: compare the carrying amount with amount repaid ( FV) any loss or gain goes
into the P/L

Offsetting financial assets and financial liabilities:

The net amount may only be presented in the statement of financial position when the entity:

 has a legally enforceable right to set off the amounts, and

 intends either to settle on a net basis or to realise the asset and settle the liability simultaneously

Disclosure:

IFRS 7 provides the disclosure requirements for financial instruments. The major elements of disclosures
required are:

 carrying amount of each class of financial instrument should be recorded either on the face of the
statement of financial position or within the notes

 items of income, expense, gains and losses for each class of financial instrument either in the
statement of profit or loss and other comprehensive income or within the notes

 the nature and extent of risks faced by the entity. This must cover the entity's exposure to risk,
management's objectives and policies for managing those risks and any changes in the year.

FACTORING OF DEBTS:

Factoring of receivables is where a company transfers its receivables balances to another organisation (a
factor) for management and collection, and receives an advance on the value of those receivables in
return.
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ACCOUNTING:

A sale of receivables with recourse means that the factor can return any unpaid debts to the business,
meaning the business retains the risk of irrecoverable debts. In this situation the transaction is treated
as a secure loan against the receivables, rather than a sale

A sale of receivables without recourse means the factor bears the risk of irrecoverable debts. In this
case, this is usually treated as a sale and the receivables are removed from the entity’s financial
statements.