Advanced Financial Accounting Under IFRS

Advanced financial accounting under IFRS
-lecture notes-
Introduction to advanced issues in financial accounting

Course objective: to introduce advanced concepts and techniques in financial accounting
Major issues in financial accounting (course outline):
1. Conceptual issues developing a converged conceptual framework
2. Measurement issues fair value measurement versus historical cost, and the treatment
of unrealized gains and losses:
2.1. Accounting for employee benefits;
2.2. Share based payments;
2.2. Accounting for financial instruments;
3. Advanced issues in business combinations
The context of improvements in IAS/IFRS/reshaping major accounting issues
International accounting harmonization
UE -European directives
IASB IFRS
- Both initially aimed at harmonizing accounting practices within the European Union
(EU directives) or internationally (IAS/IFRS)
International accounting convergence
IASB FASB Norwalk agreement - convergence project aimed at eliminating
differences between accounting systems
Major FASB-IASB convergence plans:
a)
b)
Financial statements;
Business combinations;
c)
Conceptual framework;
d)
Revenue recognition.
Other convergence issues leases, reporting earnings per share, income taxes etc.
CHAPTER 1 Conceptual issues in financial accounting towards

a new internationally converged conceptual
framework
IASB-FASB agreed to work together in order to revisit the conceptual bases of accounting
standards an issue a new internationally converged conceptual framework operational in both
the American and international accounting systems.
In 2010, the Boards deferred further work on the joint project until after other more urgent
convergence projects were finalized.
In September 2012, IASB decided to reactivate the Conceptual Framework project as an
IASB-only comprehensive project.
Before being suspended, the joint IASB-FASB Conceptual Framework project was being
conducted in a number of phases:
Phase
Phase A: Objectives
and qualitative
characteristics
Phase B: Elements
and recognition
Phase C:
Measurement
Status
Completed, Conceptual Framework
for Financial Reporting 2010 issued on 28 September 2010
To be further considered as part of the IASB-only comprehensive project
To be further considered as part of the IASB-only comprehensive project
Exposure Draft ED/2010/2 Conceptual Framework for Financial

Reporting: The Reporting Entity published on 11 March 2010. To be
further considered as part of the IASB-only comprehensive project
To be further considered as part of the IASB-only comprehensive
Phase E: Presentation project. However, this will not be extended to other areas within the
and disclosure
original scope of phase E, such as preliminary announcements and press
releases
Work on this phase is to be discontinued as the project is being
continued as an IASB-only project. One of the objectives of this phase
Phase F: Purpose and
was to reach a converged IASB-FASB view on the secondary purpose of
status
the framework to assist preparers in preparing financial statements
(which is not present in US GAAP)
Phase G: Application
Work on this phase will be discontinued as the current focus of the IASB
to not-for-profit
is on business entities in the private sector
entities
This phase will not needed as the remaining topics to be considered as
Phase H: Remaining
part of the IASB-only project are intended to be developed and issued
issues
together
Phase D: Reporting
entity
Phase A Objectives and qualitative characteristics

Finalized with the issue of the Conceptual Framework for Financial Reporting in 2010
The New Conceptual Framework addresses:
the objective of financial reporting (new version)

the qualitative characteristics of useful financial information (new version)
(the reporting entity) (under discussion old version)
(the definition, recognition and measurement of the elements from which financial
statements are constructed) (under discussion old version)
(concepts of capital and capital maintenance) (under discussion old version)
Chapter 1: The Objective of general purpose financial reporting as redefined

The objective of general purpose financial reporting is to provide financial information about
the reporting entity that is useful to existing and potential investors, lenders and other
creditors in making decisions about providing resources to the entity. Those decisions involve
buying, selling or holding equity and debt instruments, and providing or settling loans and
other forms of credit.
Financial statements present information about a reporting entity's
- economic resources, claims, and
- changes in resources and claims.
Economic resources and claims
Information about the nature and amounts of a reporting entity's economic resources and
claims assists users to assess that entity's financial strengths and weaknesses; to assess
liquidity and solvency, and its need and ability to obtain financing. Information about the
claims and payment requirements assists users to predict how future cash flows will be
distributed among those with a claim on the reporting entity. [F OB13]
A reporting entity's economic resources and claims are reported in the statement of financial
position (a new title for balance-sheet). [See IAS 1.54-80A]
Changes in economic resources and claims
Changes in a reporting entity's economic resources and claims result:
-
from that entity's performance; and

from other events or transactions such as issuing debt or equity instruments.
Users need to be able to distinguish between both of these changes. [F OB15]
Financial performance reflected by accrual accounting- the changes in an entity's economic

resources and claims resulting from the entity performance - is presented in the statement of
comprehensive income. [See IAS 1.81-105]
Comprehensive income: Accounting profit focuses on actual transactions, but the wealth
of the company may as well be generated by unrealized changes in the value of the companys
assets and liabilities. For instance, the value of the companys patens and brand names may
increase or decrease, as well as the value of the companys buildings, equipments or
securities, depending on the supply and demand operating on the market. These kind of
unrealized changes are recognized in the companys reserves rather than taken into account
when the profit is computed. Accordingly companies report a comprehensive income which
takes into account all their gains and losses, that is: both the profit for the year and the
unrealized changes in the value of their assets and liabilities, the latter items being called
other comprehensive income.
Example 1. On January 2, 2008, a company purchased 2000 square feet of land
amounting to 300,000 lei. At the end of the year, the value of the land increased to 400,000
lei. The unrealized change in the value of the land (100,000 lei = 400,000 lei 300,000 lei)
is recorded as a revaluation reserve in owners equity, although no transaction occurred. The
profit for the year was 2,000,000 lei. Accordingly, the comprehensive income for the year
2008 amounts to: 2,100,000 lei = 2,000,000 lei (profit for the year) + 100,000 lei (other
comprehensive income).
In order to offer investors a better perspective on their performance, companies publish

information about their comprehensive income either as:
a single financial statement: statement of comprehensive income, which disclose
both revenues and expenses for the year and items of other comprehensive
income; or
two financial statements: an income statement (disclosing the revenues and
expense for the year) and a statement of comprehensive income (starting with
the profit for the year and further disclosing the items of other comprehensive
income).
Statement of
comprehensive
income
A single financial
statement
Two financial
statements
Revenues
Expenses
= Net profit or loss for the year
Other comprehensive income
= Total comprehensive income
Income
statement
Statement of
comprehensive
income
Financial performance reflected by past cash flows

Information about a reporting entity's cash flows during the reporting period also assists users
to assess the entity's ability to generate future net cash inflows. This information indicates
how the entity obtains and spends cash, including information about its borrowing and
repayment of debt, cash dividends to shareholders, etc. [F OB20]
The changes in the entity's cash flows are presented in the statement of cash flows. [See IAS
7]
5
Changes in economic resources and claims not resulting from financial performance
Information about changes in an entity's economic resources and claims resulting from events
and transactions other than financial performance, such as the issue of equity instruments or
distributions of cash or other assets to shareholders is necessary to complete the picture of the
total change in the entity's economic resources and claims. [F OB21]
The changes in an entity's economic resources and claims not resulting from financial
performance is presented in the statement of changes in equity. [See IAS 1.106-110]
Chapter 2: The Reporting entity
The chapter on the Reporting Entity will be inserted once the IASB has completed its redeliberations following the Exposure Draft ED/2010/2 issued in March 2010.
Chapter 3: Qualitative characteristics of useful financial information (as redefined)
The qualitative characteristics of useful financial reporting identify the types of information
are likely to be most useful to users in making decisions about the reporting entity on the basis
of information in its financial report. The qualitative characteristics apply equally to financial
information in general purpose financial reports as well as to financial information provided
in other ways. [F QC1, QC3]
Financial information is useful when it is relevant and represents faithfully what it purports to
represent. The usefulness of financial information is enhanced if it is comparable, verifiable,
timely and understandable. [F QC4]
Fundamental qualitative characteristics
Relevance and faithful representation are the fundamental qualitative characteristics of useful
financial information. [F QC5]
Relevance
Relevant financial information is capable of making a difference in the decisions made by
users. Financial information is capable of making a difference in decisions if it has predictive
value, confirmatory value, or both. The predictive value and confirmatory value of financial
information are interrelated. [F QC6-QC10]
Materiality is an entity-specific aspect of relevance based on the nature or magnitude (or both)
of the items to which the information relates in the context of an individual entity's financial
report. [F QC11]
Faithful representation
General purpose financial reports represent economic phenomena in words and numbers, to
be useful, financial information must not only be relevant, it must also represent faithfully the
phenomena it purports to represent. This fundamental characteristic seeks to maximize the
underlying characteristics of completeness, neutrality and freedom from error. [F QC12]
Information must be both relevant and faithfully represented if it is to be useful. [F QC17]
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Enhancing qualitative characteristics

Comparability, verifiability, timeliness and understandability are qualitative characteristics
that enhance the usefulness of information that is relevant and faithfully represented. [F
QC19]
Comparability
Information about a reporting entity is more useful if it can be compared with similar
information about other entities and with similar information about the same entity for another
period or another date. Comparability enables users to identify and understand similarities in,
and differences among, items. [F QC20-QC21]
Verifiability
Verifiability helps to assure users that information represents faithfully the economic
phenomena it purports to represent. Verifiability means that different knowledgeable and
independent observers could reach consensus, although not necessarily complete agreement,
that a particular depiction is a faithful representation. [F QC26]
Timeliness
Timeliness means that information is available to decision-makers in time to be capable of
influencing their decisions. [F QC29]
Understandability
Classifying, characterizing and presenting information clearly and concisely make it
understandable. While some phenomena are inherently complex and cannot be made easy to
understand, to exclude such information would make financial reports incomplete and
potentially misleading. Financial reports are prepared for users who have a reasonable
knowledge of business and economic activities and who review and analyze the information
with diligence. [F QC30-QC32]
The cost constraint on useful financial reporting
Cost is a pervasive constraint on the information that can be provided by general purpose
financial reporting. Reporting such information imposes costs and those costs should be
justified by the benefits of reporting that information. The IASB assesses costs and benefits in
relation to financial reporting generally, and not solely in relation to individual reporting
entities. The IASB will consider whether different sizes of entities and other factors justify
different reporting requirements in certain situations. [F QC35-QC39]
Chapter 4: The Framework: the remaining text
Chapter 4 contains the remaining text of the Framework approved in 1989. As the project to
revise the Framework progresses, relevant paragraphs in Chapter 4 will be deleted and
replaced by new Chapters in the IFRS Framework. Until it is replaced, a paragraph in Chapter
4 has the same level of authority within IFRSs as those in Chapters 1-3.
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PHASE B: Objectives Elements and Recognition Phase

(for information only not required for the exam)
The objectives of the Elements and Recognition phase are to refine and converge the Boards
frameworks as follows:
Revise and clarify the definitions of asset and liability.

Resolve differences regarding other elements and their definitions.
Revise the recognition criteria concepts to eliminate differences and provide a basis
for resolving issues such as derecognition and unit of account.
Decisions Reached at the Last Meeting

IASB Update October 2008
FASB Action AlertOctober 20, 2008 joint meeting
Summary of Decisions Reached to Date (As of October 2008)
Asset Definition
The Boards agreed that the current frameworks existing asset definitions have the following
shortcomings:
Some users misinterpret the terms expected (IASB definition) and probable
(FASB definition) to mean that there must be a high likelihood of future economic
benefits for the definition to be met; this excludes asset items with a low likelihood of
future economic benefits.
The definitions place too much emphasis on identifying the future flow of economic
benefits, instead of focusing on the item that presently exists, an economic resource.
Some users misinterpret the term control and use it in the same sense as that used
for purposes of consolidation accounting. The term should focus on whether the entity
has some rights or privileged access to the economic resource.
The definitions place undue emphasis on identifying the past transactions or events
that gave rise to the asset, instead of focusing on whether the entity had access to the
economic resource at the balance sheet date.
The Boards have tentatively adopted the following working definition of an asset:
An asset of an entity is a present economic resource to which the entity has a right or
other access that others do not have. Accompanying text will amplify the asset
definition by describing present, economic resource, and right or other access that
others do not have:
Present means that on the date of the financial statements both the economic resource
exists and the entity has the right or other access that others do not have.
An economic resource is something that is scarce and capable of producing cash
inflows or reducing cash outflows, directly or indirectly, alone or together with other
economic resources. Economic resources that arise from contracts and other binding
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arrangements are unconditional promises and other abilities to require provision of

economic resources, including through risk protection.
A right or other access that others do not have enables the entity to use the economic
resource and its use by others can be precluded or limited. A right or other access that
others do not have is enforceable by legal or equivalent means.
Liability Definition
The Boards agreed that the current frameworks existing liability definitions have the
following shortcomings:
Some users misinterpret the terms expected (IASB definition) and probable
(FASB definition) to mean that there must be a high likelihood of future outflow of
economic benefits for the definition to be met; this excludes liability items with a low
likelihood of a future outflow of economic benefits.
The definitions place too much emphasis on identifying the future outflow of
economic benefits, instead of focusing on the item that presently exists, an economic
obligation.
The definitions place undue emphasis on identifying the past transactions or events
that gave rise to the liability, instead of focusing on whether the entity has an
economic obligation at the balance sheet date.
It is unclear how the definition applies to contractual obligations.
The Boards have tentatively adopted the following working definition of a liability:
A liability of an entity is a present economic obligation for which the entity is the
obligor.
Accompanying text will amplify the liability definition by describing present, economic
obligation, and obligor:
Present means that on the date of the financial statements both the economic
obligation exists and the entity is the obligor.
An economic obligation is an unconditional promise or other requirement to provide
or forgo economic resources, including through risk protection.
An entity is the obligor if the entity is required to bear the economic obligation and its
requirement to bear the economic obligation is enforceable by legal or equivalent
means.
CHAPTER 2. Measurement issues fair value measurement

versus historical cost, and the
treatment of unrealized gains
and losses
2.1. Accounting for employee benefits IAS 19
Objective of IAS 19
The Standard prescribes the accounting and disclosure by employers for employee
benefits
This standard does not apply to benefits which needs to cover under the IFRS2 sharebased payment
This Standard does not deal with reporting by employee benefit plans (covered under
IAS 26) e.g. accounting and reporting by trust plans
Scope
IAS 19 applies to (among other kinds of employee benefits):
wages and salaries

compensated absences (paid vacation and sick leave)
profit sharing plans
bonuses
medical and life insurance benefits during employment
housing benefits
free or subsidized goods or services given to employees
pension benefits
post-employment medical and life insurance benefits
long-service or sabbatical leave
'jubilee' benefits
deferred compensation programs
termination benefits.
Basic principle of IAS 19

The cost of providing employee benefits should be recognized in the period in which the
benefit is earned by the employee, rather than when it is paid or payable.
Four categories of employee benefits to be covered

Short term employee benefits
Post-employment benefits
Other long term employee benefits
Termination benefits
Will cover formal plans, state plans, constructive obligation (informal practices)
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1. Short-term employee benefits

For short-term employee benefits (those payable within 12 months after service is rendered,
such as:
- wages,
- paid vacation and sick leave,
- bonuses, and
- non-monetary benefits such as medical care and housing
Accounting treatment: the undiscounted amount of the benefits expected to be paid in respect
of service rendered by employees in a period should be recognised in that period as a liability
or as an expense, except for capitalization provisions (such as in the cases of finished goods or
tangible fixed assets produced accounted for in compliance with IAS 2 or IAS 16 in dualist
accounting systems (e.g. Romanian, French etc) an expense is recorded first, which is
afterwards matched with a revenue (e.g. 711 Variation in inventory)
No actuarial valuation is required and hence there would no possibility of any actuarial
loss or (gain)
Obligation is measured on undiscounted basis
Example:
1) Wages and social security contributions:
Ex1. On December 3, N, advanced payments are made to employees in amount to 300
lei. On December 31, wages payable are computed amounting to 800 lei.
Employee benefits are expensed when incurred and not when paid.
a) Advance payments
Advance payments made to employees = Cash at bank 300 lei
b) Recognizing benefits payable for the services received during the year
Wages expenses = Wages payable
800 lei
2) Short-term compensated absences

The expected cost of short-term compensated absences should be recognized as the
employees render service that increases their entitlement or, in the case of non-accumulating
absences, when the absences occur.
-
Accumulating absences (did not occur in the current period, but the rights can be used
in the next accounting period);
Non- accumulating absences (cannot be benefited from in the next accounting period
if not used in the current accounting period)
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Non-accumulating absences:
Accounting treatment: expenses for the year in the current period (when the
employees earn the rights to such benefits and take advantage of them)
Ex.2. Employee X can benefit form 10 days sick leave per year compensated for
300 lei, that can only be used in the current accounting period. During the year
N, the employee X took 5 days time off due to temporary illness.
1 day sick leave compensated for 300 lei/10 days = 30 lei/day
Expenses related to employee benefits = Employee benefits payable 150 lei
Accumulating absences
Accounting treatment: the cost is recorded when incurred (when employees render
services, increasing their rights to such leaves).
Ex. 3. A company has 100 employees with rights to 3 paid days leave of absence per
year, which can be taken in the next accounting period compensated with 10
lei/day. At the end of the year N, only 100 days have been used (1 day per
employee). Based on previous years experience, it is reasonably certain that
80% of the employees will benefit from the remaining days in the next
accounting period.
Total accumulating absences = 300 days, of which used = 100 days
a) Accounting for accumulating absences used = 100 days
Expenses related to employee
= Employee benefits
1.0 lei
benefits
payable
b) Accounting for accumulating absences not used in the current year = 200 days
Expenses related to provisions for
risks and charges
= Provisions for
employee benefits
[10 x 200 x 80%]

1.600 lei
3). Profit-sharing and bonus payments

The entity should recognize the expected cost of profit-sharing and bonus payments when,
and only when
1) it has a legal or constructive obligation to make such payments as a result of past
events; and
2) a reliable estimate of the expected cost can be made.
Ex. 4 In the last 10 years, the company ABC Inc. distributes around 5% of the
companies profits in a profit-sharing program for its employees. The entitys
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net profit before distribution is Euro 700,000. The cost of profit sharing is tax
deductible and the income tax rate is 16%.
Regardless of the fact that the computations needed for the profit-sharing program are based
on the companys net profit, the profit sharing should not be recorded as profit/dividends
distributions to shareholders. Employees are not owners, and all benefits owed to them have
to be recorded as expenses.
Net profit before profit sharing = 700.000 euro
Profit sharing = Net profit after profit sharing x 5%
Net profit after profit-sharing = 700.000 Net profit after sharing x 5% x 84%
Net profit after profit-sharing = 700.000/(1+0,05x0,84) = 671.785 lei
Profit sharing = 671.785 x 5% = 33.590 lei
As the companys profit sharing program has a record of 10 years, it is reasonably to expected
such benefits to be paid to employees, and the cost of these benefits can be reliably estimated.
Expenses related to provisions for risks
and charges
= Provisions for employee

benefits
33.590
lei
2. Post-employment benefit plans

The accounting treatment for a post-employment benefit plans will be determined according
to whether the plan is a defined contribution or a defined benefit plan:
Under a defined contribution plan, the entity pays fixed contributions into a fund but
has no legal or constructive obligation to make further payments if the fund does not
have sufficient assets to pay all of the employees' entitlements to post-employment
benefits.
A defined benefit plan is a post-employment benefit plan other than a defined
contribution plan. These would include both formal plans and those informal practices
that create a constructive obligation to the entity's employees. It entails the companys
obligation to pay a defined benefit at the employment termination.
Defined contribution plans

The legal obligation of the company is limited to the agreed contribution to the plan. The
value of the post-employment benefits received by employees is determined by the value of
the contributions paid by the company to a post-employment fund, or to an investment fund,
together with the yield of these contributions.
However, in the case of such plans, the employees bear the actuarial risk (that is, the benefits
could be lower than expected), but also the investment risk (the assets invested in the plan are
insufficient to cover for the expected benefits).
13
Accounting for defined contributions plans

For defined contribution plans, the cost to be recognized in the period is the contribution
payable in exchange for service rendered by employees during the period.
If contributions to a defined contribution plan do not fall due within 12 months after the end
of the period in which the employee renders the service, they should be discounted to their
present value. [IAS 19.45]
The entity has no further obligation after paying the contribution to plan or insurance
company.
Ex.5 An entity offers to its 100 employees a defined contributions plan for private pensions,
promising to pay to an investment fund 2% p.a. for each employee out of his/her net salary for
the year. For the year N, the total net salaries were 1.000.000 Euro.
Expenses related to Companys
contribution to pension funds
= Companys contribution to
pension funds payable
20.000
Euro
Defined benefit plans

In the case of these plans, the companys obligation is not limited to the contribution paid to a
fund, but it is the amount of benefits promised to employees, that are reasonably expected to
be paid. Thus, it the case of such plans, it is the company that bears both the actuarial and the
investment risk, as, at a future date, it will be required to pay a determined amount of benefits.
In order to be able to make such payments, entities usually invest in plan assets that can only
be used for such a purpose. Plan assets cannot be used for making different kind of payments,
except for cases in which a plan is terminated and the assets invested or generated by the plan
(their yield) exceed the amount of post-employment benefits paid.
For defined benefit plans, the amount recognized in the balance sheet should be:
-
the present value of the defined benefit obligation (that is, the present value of
expected future payments required to settle the obligation resulting from employee
service in the current and prior periods), as adjusted for unrecognized actuarial gains
and losses and unrecognized past service cost, and reduced by the fair value of plan
assets at the balance sheet date.
The present value of the defined benefit obligation should be determined using the Projected
Unit Credit Method, which is an actuarial method that sees each period of service as giving
rise to an additional unit of benefit owed to employees, each unit (measured separately) being
used to build up the total liability.
Accounting by an entity for defined benefit plans involves the following steps:
(a) Using actuarial techniques to make a reliable estimate of the amount of benefit that
employees have earned in return for their service in the current and prior periods. This
14
(b)
(c)
(d)
(e)
(f)
requires an entity to determine how much benefit is attributable to the current and
prior periods and to make estimates (actuarial assumptions) about demographic
variables (such as employee turnover and mortality) and financial variables (such as
future increases in salaries and medical costs) that will influence the cost of the
benefit;
discounting that benefit using the Projected Unit Credit Method in order to determine
the present value of the defined benefit obligation and the current service cost;
determining the fair value of any plan assets;
determining the total amount of actuarial gains and losses;
where a plan has been introduced or changed, determining the resulting past service
cost; and
where a plan has been curtailed or settled, determining the resulting gain or loss.
Accounting treatment of actuarial gains/losses

On an ongoing basis, actuarial gains and losses arise that comprise experience adjustments
(the effects of differences between the previous actuarial assumptions and what has actually
occurred) and the effects of changes in actuarial assumptions.
Recognition method: Comprehensive income method
In December 2004, the IASB issued amendments to IAS 19 to allow the option of recognizing
actuarial gains and losses in full in the period in which they occur, outside profit or loss, in a
statement of comprehensive income. Over the life of the plan, changes in benefits under the
plan will result in increases or decreases in the entity's obligation.
Valuations should be carried out with sufficient regularity such that the amounts recognized in
the financial statements do not differ materially from those that would be determined at the
balance sheet date. [IAS 19.56] The assumptions used for the purposes of such valuations
should be unbiased and mutually compatible. [IAS 19.72] The rate used to discount estimated
cash flows should be determined by reference to market yields at the balance sheet date on
high quality corporate bonds. [IAS 19.78]
Ex6. A company has a defined benefit plan started in N-1, according to which employees
receive when they retire 0.5% of their annual salary per each year of service. The annual
salaries amounted to 20.000 lei in the year N-2, and they were expected to increase with 4%
per year. The pension plan ends within 5 years. The discount rate used was 10%, based on
market yields at the balance sheet date on high quality corporate bonds. In the year N-1, new
information was available for the market yields of corporate bonds, which led to a decrease in
the discount rate with 2%.
Companys liability related to the defined benefits plan is computed as follows:
Last year salary
= 20.000 lei x (1,04)4 =
Amount owed for each year of service
= 23.397 lei x 0,5% =
Years (n)
23.397 lei
117 lei
(N-2)
(N-1)
(N)
(N+1)
(N+2)
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Present value of Plan Obligation at the beginning of

the year (PV(PO01.01))
80
176
291
426
Cost of finance/Interest expense (i = 10%)
18
29
43
Cost of service/Expenses related to post-employment

benefits
80
88
97
106
117
Present value of Plan Obligation at the end of the year

(PV(PO31.12))
80
176
291
426
586
Where,
Cost of finance = i x PV(PO01.01)
Cost of servicen = 117/(1+i)1-n
PV(PO31.12)= PV(PO01.01)+ Cost of finance+Cost of service
Journal entry for plan obligations in N-2, according to the initial hypothesis:
N-2
80 lei
% = Plan
obligations
Interest expense
Expenses related to post-employment
benefits/defined benefits plan
0 lei
80 lei
In the year N-1, new information were available for the market yield of corporate bonds,
which led to a decrease in the discount rate to 8%. This new information led to a variation
in the present value of the plan obligation at the end of the year, which generated an
actuarial loss of 3 lei:
Years (n)
(N-2)
(N-1)
(N)
(N+1)
(N+2)

80
176
291
426
18
29
43

benefits (i=10%)
80
88
97
106
117

(PV(PO31.12)) Expected value
80
176

291
426
586
179
Valuations based on i=8%:


benefits
(PV(PO31.12) (dr: 8%) Actual value
93
80
179
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Actuarial Gains/Losses for the year
The company recognizes all actuarial gains/losses as other comprehensive income in the
year in which they occur, accordingly a reserve amounting to 3 lei should be recorded in
N-1.
N-1
% = Plan
obligations
Interest expense
Expenses related to post-employment
benefits/defined benefits plan
Reserves related to actuarial gains/losses
99 lei
8 lei
88 lei
3 lei
Past service cost is the term used to describe the change in the obligation for employee service
in prior periods, arising as a result of changes to plan arrangements in the current period. Past
service cost may be either positive (where benefits are introduced or improved) or negative
(where existing benefits are reduced). Past service cost should be recognised immediately to
the extent that it relates to former employees or to active employees already vested.
Otherwise, it should be amortised on a straight-line basis over the average period until the
amended benefits become vested. [IAS 19.96]
Plan curtailments or settlements: Gains or losses resulting from curtailments or settlements of
a plan are recognised when the curtailment or settlement occurs. Curtailments are reductions
in scope of employees covered or in benefits.
If the calculation of the balance sheet amount as set out above results in an asset, the amount
recognised should be limited to the net total of unrecognised actuarial losses and past service
cost, plus the present value of available refunds and reductions in future contributions to the
plan. [IAS 19.58]
The IASB issued the final 'asset ceiling' amendment to IAS 19 in May 2002. The amendment
prevents the recognition of gains solely as a result of deferral of actuarial losses or past
service cost, and prohibits the recognition of losses solely as a result of deferral of actuarial
gains. [IAS 19.58A]
The charge to income recognised in a period in respect of a defined benefit plan will be made
up of the following components: [IAS 19.61]
current service cost (the actuarial estimate of benefits earned by employee service in
the period)
interest cost (the increase in the present value of the obligation as a result of moving
one period closer to settlement)
expected return on plan assets*
actuarial gains and losses, to the extent recognised
past service cost, to the extent recognised
the effect of any plan curtailments or settlements
17
*The return on plan assets is interest, dividends and other revenue derived from the plan
assets, together with realised and unrealised gains or losses on the plan assets, less any costs
of administering the plan (other than those included in the actuarial assumptions used to
measure the defined benefit obligation) and less any tax payable by the plan itself. [IAS 19.7]
IAS 19 contains detailed disclosure requirements for defined benefit plans. [IAS 19.120-125]
IAS 19 also provides guidance on allocating the cost in:
a multi-employer plan to the individual entities-employers [IAS 19.29-33]

a group defined benefit plan to the entities in the group [IAS 19.34-34B]
a state plan to participating entities [IAS 19.36-38].
Other long-term benefits

IAS 19 requires a simplified application of the model described above for other long-term
employee benefits. This method differs from the accounting required for post-employment
benefits in that: [IAS 19.128-129]
actuarial gains and losses are recognised immediately and no 'corridor' (as discussed
above for post-employment benefits) is applied; and
all past service costs are recognised immediately.
Termination benefits
For termination benefits, IAS 19 specifies that amounts payable should be recognised when,
and only when, the entity is demonstrably committed to either: [IAS 19.133]
terminate the employment of an employee or group of employees before the normal

retirement date; or
provide termination benefits as a result of an offer made in order to encourage

voluntary redundancy.
The entity will be demonstrably committed to a termination when, and only when, it has a
detailed formal plan for the termination and is without realistic possibility of withdrawal.
[IAS 19.134] Where termination benefits fall due after more than 12 months after the balance
sheet date, they should be discounted. [IAS 19.139]
18
2.2. Accounting for share-based payments IFRS 2

IFRS 2 Share-based Payment requires an entity to recognize share-based payment
transactions (such as granted shares, share options, or share appreciation rights) in its financial
statements, including transactions with employees or other parties to be settled
- in cash;
- other assets; or,
- equity instruments of the entity.
Specific requirements are included for:
- equity-settled share-based payment transactions;
- cash-settled share-based payment transactions, as well as
- those where the entity or supplier has a choice of cash or equity instruments.
Common share-based payment arrangements between employers and employees
-
Call options that give employees the right to purchase an entitys shares in exchange
for their services;
Share appreciation rights that entitle employees to cash payments calculated by

reference to increases in the market price of an entitys shares;
Share ownership plans where employees receive an entitys shares in exchange for
their services.
Common share-based payment arrangements that are not between employers and employees
-
An external consultant (not an employee) may provide services in return for shares in
the entity;
A supplier may provide goods in return for shares in the entity;
A shareholder (rather than an employer) may grant shares to an employee.
Example
An individual with a 40% shareholding in entity A has awarded 2% of his shareholding to a
director of entity A. The shareholder of entity A has transferred equity instruments of entity A
to a party that has supplied services to the entity (the director). Unless it is clear that the
transaction is a result of some other relationship between the shareholder and the director that
is unrelated to his employment, the award will be reflected as a share-based payment in entity
As financial statements.
An award is within the scope of IFRS 2 where either the entity or its shareholder issues equity
instruments in any group entity in return for goods or services provided to the entity.
A transaction with an employee is not within the scope of IFRS 2 if:
-
It is not related to the receipt of goods or services; or
The amount paid to the employee is not based on the market price of that entitys
equity instruments.
19
Examples
Share-based payments that are not related to employee services
An entity makes a rights issue of shares to all shareholders, including employees who are
shareholders. The transaction is an arrangement with employees in their capacity as owners
of equity instruments, not in their capacity as employees. Therefore, the transaction is not
within the scope of IFRS 2.
Note: If the entity issued shares to the shareholders who are employees at a discounted price,
the arrangement would be within the scope of IFRS 2. The favourable terms indicate that the
entity is dealing with these shareholders as employees, rather than in their capacity as equity
holders.
Cash payments that are not based on the market price of equity instruments
An entity makes a cash payment to an employee that is based on a fixed multiple of the
entitys earnings, such as earnings before interest, tax, depreciation and amortisation
(EBITDA).
The cash payment is not based on the entitys share price, so it is not within the scope of
IFRS 2. The cash payment is an employee benefit, which is accounted for under IAS 19,
Employee benefits.
Definition of share-based payment

A share-based payment is a transaction in which the entity receives or acquires goods or
services either as consideration for its equity instruments or by incurring liabilities for
amounts based on the price of the entity's shares or other equity instruments of the entity. The
accounting requirements for the share-based payment depend on how the transaction will be
settled, that is, by the issuance of (a) equity, (b) cash, or (c) equity or cash.
There are two exemptions to the general scope principle.
First, the issuance of shares in a business combination should be accounted for under
IFRS 3 Business Combinations. However, care should be taken to distinguish sharebased payments related to the acquisition from those related to employee services.
Second, IFRS 2 does not address share-based payments within the scope of paragraphs
8-10 of IAS 32 Financial Instruments: Disclosure and Presentation, or paragraphs 5-7
of IAS 39 Financial Instruments: Recognition and Measurement. Therefore, IAS 32
and 39 should be applied for commodity-based derivative contracts that may be settled
in shares or rights to shares.
IFRS 2 does not apply to share-based payment transactions other than for the acquisition of
goods and services. Share dividends, the purchase of treasury shares, and the issuance of
additional shares are therefore outside its scope.
There are three types of share-based payment arrangements:
1) Equity-settled share-based payments transactions in which the entity (a) receives
goods or services as consideration for its own equity instruments (including shares or
20
share options); or (b) receives goods or services but has no obligation to settle the
transaction with the supplier.
2) Cash-settled share-based payments transactions in which the entity acquires goods or
services by incurring a liability to transfer cash or other assets to the supplier of those
goods or services for amounts that are based on the price (or value) of equity
instruments (including shares or share options) of the entity or another group entity.
3) Choice of settlement transactions in which the entity receives or acquires goods or
services, and the terms of the arrangement provide either the entity or the supplier of
those goods or services with a choice of whether the entity settles the transaction in
cash (or other assets) or by issuing equity instruments.
Examples
Equity-settled share-based payment
The issue to employees of options that give them the right to purchase the
entitys shares at a discounted price in exchange for their services.
A cash-settled share-based payment
Share appreciation rights that entitle employees to cash payments based on the
increase in the employer entitys share price.
Recognition and measurement

Management must determine the fair value of a share-based payment at the grant date, the
period over which this fair value should be recognised (the vesting period), and the charge
that should be recognised in each reporting period.
Management needs to understand the conditions of the share-based payments with employees
and other parties to properly apply this guidance. This may prove challenging in practice
because almost no two share-based payment arrangements are the same.
The goods or services received or acquired in a share-based payment are recognised when the
goods are obtained or as the services are received. A corresponding increase in equity is
recognised if the goods or services are received in an equity-settled transaction. A liability is
recognised if the goods or services are acquired in a cash-settled transaction.
Example: Recognition of employee share option grant
Company grants a total of 100 share options to 10 members of its executive management team
(10 options each) on July 1, N. These options vest at the end of a three-year period. The
company has determined that each option has a fair value at the date of grant equal to 15. The
company expects that all 100 options will vest and therefore records the following entry at 31
of December N+1:
Employee benefits
expenses/Share based
payments
Other equity items/Share

options
250
21
[(100 15) 3 periods] 2 = 250

Equity-settled share-based payments
Measurement guidance
Depending on the type of share-based payment, fair value may be determined by the value of
the shares or rights to shares given up, or by the value of the goods or services received:
General fair value measurement principle. In principle, transactions in which goods or

services are received as consideration for equity instruments of the entity should be
measured at the fair value of the goods or services received. Only if the fair value of
the goods or services cannot be measured reliably would the fair value of the equity
instruments granted be used.
Measuring employee share options. For transactions with employees and others
providing similar services, the entity is required to measure the fair value of the equity
instruments granted, because it is typically not possible to estimate reliably the fair
value of employee services received.
When to measure fair value - options. For transactions measured at the fair value of
the equity instruments granted (such as transactions with employees), fair value should
be estimated at grant date.
When to measure fair value - goods and services. For transactions measured at the fair
value of the goods or services received, fair value should be estimated at the date of
receipt of those goods or services.
Measurement guidance. For goods or services measured by reference to the fair value
of the equity instruments granted, IFRS 2 specifies that, in general, vesting conditions
are not taken into account when estimating the fair value of the shares or options at the
relevant measurement date (as specified above). Instead, vesting conditions are taken
into account by adjusting the number of equity instruments included in the
measurement of the transaction amount so that, ultimately, the amount recognised for
goods or services received as consideration for the equity instruments granted is based
on the number of equity instruments that eventually vest.
More measurement guidance. IFRS 2 requires the fair value of equity instruments
granted to be based on market prices, if available, and to take into account the terms
and conditions upon which those equity instruments were granted. In the absence of
market prices, fair value is estimated using a valuation technique to estimate what the
price of those equity instruments would have been on the measurement date in an
arm's length transaction between knowledgeable, willing parties. The standard does
not specify which particular model should be used.
If fair value cannot be reliably measured. IFRS 2 requires the share-based payment
transaction to be measured at fair value for both listed and unlisted entities. IFRS 2
permits the use of intrinsic value (that is, fair value of the shares less exercise price) in
those "rare cases" in which the fair value of the equity instruments cannot be reliably
measured. However this is not simply measured at the date of grant. An entity would
have to remeasure intrinsic value at each reporting date until final settlement.
Performance conditions. IFRS 2 makes a distinction between the handling of market
based performance features from non-market features. Market conditions are those
related to the market price of an entity's equity, such as achieving a specified share
price or a specified target based on a comparison of the entity's share price with an
index of share prices of other entities. Market based performance features should be
22
included in the grant-date fair value measurement. However, the fair value of the
equity instruments should not be reduced to take into consideration non-market based
performance features or other vesting features.
The issuance of shares or rights to shares requires an increase in a component of equity. IFRS
2 requires the offsetting debit entry to be expensed when the payment for goods or services
does not represent an asset. The expense should be recognised as the goods or services are
consumed. For example, the issuance of shares or rights to shares to purchase inventory
would be presented as an increase in inventory and would be expensed only once the
inventory is sold or impaired.
The issuance of fully vested shares, or rights to shares, is presumed to relate to past service,
requiring the full amount of the grant-date fair value to be expensed immediately. The
issuance of shares to employees with, say, a three-year vesting period is considered to relate to
services over the vesting period. Therefore, the fair value of the share-based payment,
determined at the grant date, should be expensed over the vesting period.
As a general principle, the total expense related to equity-settled share-based payments will
equal the multiple of the total instruments that vest and the grant-date fair value of those
instruments. In short, there is truing up to reflect what happens during the vesting period.
However, if the equity-settled share-based payment has a market related performance feature,
the expense would still be recognised if all other vesting features are met.
Measurement based on the fair value of the goods and services received
Ex. Raw materials were purchased from suppliers in amount of 13.000 lei. The liability is
settled with 1.000 treasury stock (own shares), previously redeemed for 12 lei/share.
The difference between the fair value of the goods received and the carrying amount of
treasury stock is recognized in Owner Equity, as transactions with owners (who act in this
capacity) do not generate profit or loss. And once the supplier receives companys shares, it
acts like an owner; it is a transaction with owners similar to any owners investments in the
company, as the supplier delivers goods for shares instead of being compensated in cash.
The increase in owner equity is equal to the fair value of the goods received:
Fair value of goods received
Carrying amount of treasury stock
= Gain on share-based payments
= 1.000 shares x 12 lei/share =
Suppliers = %
Own shares/Treasury
stock
Reserves related to own
shares
13.000 lei
12.000 lei
1.000 lei
13.000 lei
12.000 lei
1.000 lei
Measurement based on the fair value of the equity instruments granted, as it is not possible to
estimate reliably the fair value of goods/services received
23
Ex. According to the long term motivation plan, Company A distributed 200 treasury shares to
executive officers. The market price of the companys shares on that date is 13 lei/share, and
the shares were previously acquired for 11 lei/share.
According to IFRS 2, the increase in owners equity has to be valued at the fair value of
goods/services received. However, if the entity cannot reliably estimate the fair value of
goods/services received, the fair value of the equity instruments granted should be used.
In this case, treasury stock are granted in addition to the managers compensation for their
current services, as the program aims at motivating managers to generate additional future
economic benefits for the company. Such services are very difficult to measure, and IFRS 2
allows the use of fair value of the equity instruments granted. Accordingly, the services
received from managers (the total increase in owners equity) are valued at the fair value of
the shares, that is 13 lei/share.
As granting the shares is not contingent on future conditions, the employee benefits are
immediately recorded in profit or loss together with the increase in owners equity.
The difference between the fair value of the services received (measured by means of the fair
value of shares granted) and the carrying amount of treasury stock is recognized in Owner
Equity, as transactions with owners (who act in this capacity) do not generate profit or loss.
(On the one hand, the manager acts like an employee of the company providing administrative
services recognizing expensing allowed; on the other, the manager acts like an owner, being
compensated in shares for his/her services).
Fair value of own shares
Carrying amount of treasury stock
= Gain on share-based payment
= 200 shares x 13 lei/share =

= 200 shares x 11 lei/share =
Employee benefits = %
payments
Own shares/Treasury
stock
Reserves related to own
shares
2.600 lei
2.200 lei
400 lei
2.600 lei
(200 Shares x 13 lei/share)
2.200 lei
(200 shares x 11 lei/share)
400 lei
(200 share x (13-11) lei/share )
Rights dependent on conditions

1). Rights dependent on employees expected turnover
As the shares will not be obtained until the end of a certain period, the numbers of
shares/options will be adjusted each year based on employees expected turnover:
Ex. At the beginning of the year N, an entity signs a contract with 200 of its employees,
promising to grant each of them 10 shares at the end of the year N+2, if they are still
employees of the company at that date. When the contract was signed, the market value of the
companies shares was 250 lei/share. At the beginning of the year N, 90% of the employees
are expected to work in the company at the end of the year N+2. At the end of the year N, the
24
percentage decreases to 80%, And at the end of the year N+2, there are 156 employees still
working within the company. At that date, the market value of the companies shares is 260
lei/share. The shares were purchased in N+1 for 255lei/share.
N:
Employee benefits = Other equity items/Shares
to be issued
payments
1/3(200x10x250x80%)
133.333 lei
N+1:
expenses/Share based payments
to be issued
2/3(200x10x250x75%)-133.333
116.667 lei

to be issued
(156x10x250)-133.333-116.667
116.667 lei
% = Own shares
(1.560x255)
Other equity items/Shares to be
issued
(133.333+116.667+140.000)
Reserves related to own shares
397.800 lei
N+2:
390.000 lei
7.800
2) Rights non-dependent on market conditions

-uncertainty related to the conditions realization
Ex. At the beginning of the year N, an entity agrees to grant 1000 shares (par value: 100 lei)
to its CEO, if the operating profit is increased with 30% compared to its N-1 level. The
market value of the companies shares at the beginning of the year N is 250 lei/share. At that
date, the level of performance is expected to be achieved within three years. During the year
N, the operating profit increased with only 5%, and the company revised its expectations, that
is, the level of performance is expected to be achieved within four years. At the end of the
year N+1, the operating profit increased with 25%, and the entity expects the level of
performance to be achieved in the next year. At the end of the year N+2, the operating profit is
with 37% higher than its level from N-1. The entity purchases 1000 shares for 320.000 lei and
grants the shares to its CEO.
N:
to be issued
payments
1/4(1.000x250)
62.500 lei
25
N+1
to be issued
2/3(1.000x250))-62.599
104.167 lei

to be issued
(1.000x250) 62.500-104.167)
83.333 lei
N+2:
Own shares = Cash at bank
% = Own shares
(1.560x255)
Other equity items/Shares to be
issued
Reserves related to own shares
320.000 lei
320.000 lei
250.000 lei
70.000 lei
-uncertainty related to the number of shares to be issued

Ex. At the beginning of the year N, the remuneration committee accepts to grant stock options
to the CEO. Each option gives the right to purchase 1 share for 150 lei. The options can be
exercise within two years, starting January 1, N+3. The number of the stock options granted
depends on the average value of the return on equity during the years N - (N+2). The CEO
receives:
- 5.000 stock-options, if ROE<=8%;
- 8.000 stock-options, if 8% < ROE < 12%;
- 10.000 stock-options, if ROE>=12%;
At the beginning of the year N, the entity expects ROE to be 10% for the next 3 years. At that
date the stock options are valued at 20 lei each. For the year N, ROE was 11%, and the
entity expects this level of performance for the next two years. At the end of the year N, the
fair value of the stock options is 25 lei/option. For the years N and N+1, the average value
of ROE was 15%, and the entity expects this value to decrease to 13% for the years N
(N+2). At the end of the year N+1, the fair value of the stock options is 25 lei/option. At
the end of the year N+2, the actual average value of ROE for the years N- N+2 was 13%,
and the options value is 30 lei/per unit.
N:
Employee benefits = Other equity items/Share
options
payments
1/3(8.000x20)
53.333 lei
N+1:
options
2/3(10.000x20))-53.333
80.000 lei
26
N+2:
options
(10.000x20) 53.333-80.000)
83.333 lei
3) Rights dependent on market conditions

Ex. At the beginning of the year N, an entity grants 10.000 stock options to ten executive
directors. Each option gives the right to purchase 1 share for 180 lei. The options can only be
exercised provided that two conditions are met:
- The market value of the companies shares exceeds 200 lei;
- The managers are with the company at that date.
On January 1, N, the market value of the shares is 130 lei, and the fair value of the stock
options is 3 lei. At the end of the year N+1, the market value of the shares is 130 lei, and
the fair value of the stock options is 2 lei. At that date the company expects that: the market
value of the shares will not reach 200 lei before the end of N+4, and that 2 executive
managers will terminate their employment by then. At the end of the year N+1, market
value of the shares is 170 lei, and the fair value of the stock options is 9 lei. At that date the
company expects that: the market value of the shares will reach 200 lei at the end of N+3,
and that 1 executive manager will terminate its employment by then. At the end of the year
N+2, the market value of the shares is 210 lei, and all executive managers are still
employees of the company.
Assume that one of the executive directors do not exercise his/hers options during the
respective 5 years (starting January 1, N+3).
N:
options
payments
1/5(80.000x2)
32.000 lei
N+1:
options
2/5(90.000x2)-32.000
40.000 lei

options
(10.000x20) 32.000 40.000)
128.000 lei
N+2:
N+7:
Other equity items/Share = Reserves
options
[10.000x2]
20.000 lei
27
Cash-settled share-based payment transactions

Measurement guidance
For cash-settled share-based payment transactions, the entity shall measure the goods or services
acquired and the liability incurred at the fair value of the liability. Until the liability is settled, the
entity shall remeasure the fair value of the liability at the end of each reporting period and at the
date of settlement, with any changes in fair value recognised in profit or loss for the period.
For example, an entity might grant share appreciation rights to employees as part of their
remuneration package, whereby the employees will become entitled to a future cash payment (rather
than an equity instrument), based on the increase in the entitys share price from a specified level over
a specified period of time. Or an entity might grant to its employees a right to receive a future cash
payment by granting to them a right to shares (including shares to be issued upon the exercise of share
options) that are redeemable, either mandatorily (eg upon cessation of employment) or at the
employees option.
The entity shall recognise the services received, and a liability to pay for those services, as
the employees render service. For example, some share appreciation rights vest immediately, and
the employees are therefore not required to complete a specified period of service to become
entitled to the cash payment. In the absence of evidence to the contrary, the entity shall presume
that the services rendered by the employees in exchange for the share appreciation rights have been
received. Thus, the entity shall recognise immediately the services received and a liability to pay
for them. If the share appreciation rights do not vest until the employees have completed a
specified period of service, the entity shall recognise the services received, and a liability to pay for
them, as the employees render service during that period.
The liability shall be measured, initially and at the end of each reporting period until settled, at
the fair value of the share appreciation rights, by applying an option pricing model, taking into
account the terms and conditions on which the share appreciation rights were granted, and the
extent to which the employees have rendered service to date.
Example: Company A acquired 1,000 units of raw materials from Supplier B with a market
value of 10 lei/unit. The settlement of the acquisition shall consist in paying the value of
1,000 shares of Company A at their market value of those shares at the settlement date.
Market value of the shares at the acquisition date 12 lei/share.
Raw materials = Suppliers/Share-based payments1,000 x12 = 12,000 lei
31.12.N
Market value is 13 lei/share
Expenses related to fair value measurements = Suppliers/Share-based payments1,000 x(1312) =1,000
02.01.N+1
Market value is 11 lei/share
Suppliers/Share-based payments = %
Cash at bank 1,000 x 11 = 11,000
Other financial revenues
1,000x(13-11)
= 2,000
Ex. At the beginning of the year N, an entity enters a long term motivation plan, promising to
grant to 1000 of its employees, during the years N+2 and N+3, the right to receive an amount
28
equal to 10 times the increase in the market value of the companies shares starting with
January 1, N+2. The plan targets employees remaining within the company until the end of
the year N+1. At the beginning of the year N, the market value of the shares is 100 lei, and
5% of the employees are expected to leave the company by the end of N+1. The fair value of
the option right is estimated at 230 lei.
At the end of the year N, the market value of the shares is 120 lei and fair value of the option
right is estimated at 260 lei. 20 employees have terminated their employment and 950 are
expected to still work in the company at the end of the year N+1.
At the end of the year N+1, 960 employees are working within the company, the shares
market value is 130 and the value of the rights is 350.
In N+2, 500 employees exercise their rights, the average market value of the companies
shares is 140. In N+3, 460 employees exercise their rights, the average market value of the
companies shares is 125 lei.
N:
= Employee benefits payable/
Expenses related to Shares based payments
employee benefits/Shares
based payments
1/2(950x260)
123.500 lei
N+1:
Expenses related to = Employee benefits payable
employee
benefits/Shares based
payments
(960x350) -123.500
212.500 lei
N+2:
% = Cash at bank
(500x10x(140-100))
Employee benefits payable
(500x350)
Expenses related to shares
based payments
200.000 lei
175.000 lei
25.000 lei
N+3:Employee benefits payable = %

161.000 lei
Cash at bank
115.000 lei
Revenues related to share based payments 46.000 lei
(460x10x(125-100))
Share-based payment transactions with cash alternatives

29
For share-based payment transactions in which the terms of the arrangement provide either the
entity or the counterparty with the choice of whether the entity settles the transaction in cash (or
other assets) or by issuing equity instruments, the entity shall account for that transaction, or the
components of that transaction, as a cash-settled share-based payment transaction if, and to the
extent that, the entity has incurred a liability to settle in cash or other assets, or as an equity-settled
share-based payment transaction if, and to the extent that, no such liability has been incurred.
Share-based payment transactions in which the terms of the arrangement provide the
counterparty with a choice of settlement
If an entity has granted the counterparty the right to choose whether a share-based payment
transaction is settled in cash4 or by issuing equity instruments, the entity has granted a compound
financial instrument, which includes a debt component (ie the counterpartys right to demand
payment in cash) and an equity component (ie the counterpartys right to demand settlement in
equity instruments rather than in cash). For transactions with parties other than employees, in
which the fair valueof the goods or services received is measured directly, the entity shall
measure the equity component of the compound financial instrument as the difference between
the fair value of the goods or services received and the fair value of the debt component, at the
date when the goods or services are received.
For other transactions, including transactions with employees, the entity shall measure the fair
value of the compound financial instrument at the measurement date, taking into account the
terms and conditions on which the rights to cash or equity instruments were granted.
To apply paragraph 36, the entity shall first measure the fair value of the debt component, and
then measure the fair value of the equity componenttaking into account that the counterparty
must forfeit the right to receive cash in order to receive the equity instrument. The fair value of
the compound financial instrument is the sum of the fair values of the two components.
However, share-based payment transactions in which the counterparty has the choice of
settlement are often structured so that the fair value of one settlement alternative is the same as
the other. For example, the counterparty might have the choice of receiving share options or
cash-settled share appreciation rights. In such cases, the fair value of the equity component is
zero, and hence the fair value of the compound financial instrument is the same as the fair value
of the debt component. Conversely, if the fair values of the settlement alternatives differ, the
fair value of the equity component usually will be greater than zero, in which case the fair value
of the compound financial instrument will be greater than the fair value of the debt component.
Share-based payment transactions in which the terms of the arrangement provide the
entity with a choice of settlement
41For a share-based payment transaction in which the terms of the arrangement provide an entity
with the choice of whether to settle in cash or by issuing equity instruments, the entity shall
determine whether it has a present obligation to settle in cash and account for the share-based
payment transaction accordingly. The entity has a present obligation to settle in cash if the
choice of settlement in equity instruments has no commercial substance (eg because the entity is
legally prohibited from issuing shares), or the entity has a past practice or a stated policy of
settling in cash, or generally settles in cash whenever the counterparty asks for cash settlement.
42If the entity has a present obligation to settle in cash, it shall account for the transaction in
accordance with the requirements applying to cash-settled share-based payment transactions,
in paragraphs 3033.
43If no such obligation exists, the entity shall account for the transaction in accordance with the requirements
to equity-settled share-based payment transactions, in paragraphs 1029. Upon settlement:
30
(a)if the entity elects to settle in cash, the cash payment shall be accounted for as the
repurchase of an equity interest, ie as a deduction from equity, except as noted in (c) below.
(b)if the entity elects to settle by issuing equity instruments, no further accounting is required
(other than a transfer from one component of equity to another, if necessary), except as
noted in (c) below.
(c)if the entity elects the settlement alternative with the higher fair value, as at the date of
settlement, the entity shall recognise an additional expense for the excess value given, ie the
difference between the cash paid and the fair value of the equity instruments that would
otherwise have been issued, or the difference between the fair value of the equity
instruments issued and the amount of cash that would otherwise have been paid, whichever
is applicable.
Payments dependent on the market value of the companys shares
Ex. At the beginning of the year N, an entity enters a long term motivation plan, promising to
grant to 1000 of its employees, during the years N+2 and N+3, the right to receive an amount
equal to 10 times the increase in the market value of the companies shares starting with
January 1, N. The plan targets employees remaining within the company until the end of the
year N+1. At the beginning of the year N, the market value of the shares is 100 lei, and 5% of
the employees are expected to leave the company by the end of N+1. The fair value of the
option right is estimated at 230 lei. At the end of the year N, the market value of the shares is
120 lei and fair value of the option right is estimated at 260 lei. 20 employees have terminated
their employment and 960 are expected to still work in the company at the end of the year
N+1. At the end of the year N+1, 960 employees are working within the company, the shares
market value is 130 and the value of the rights is 350. In N+2, 500 employees exercise their
rights, the average market value of the companies shares is 140. . In N+3, 460 employees
exercise their rights, the average market value of the companies shares is 125 lei.
N:
Employee benefits = Employee benefits
expenses/Shares based
payable
payments
1/2(950x260)
123.500 lei
Employee benefits = Employee benefits

expenses/Shares based
payable
payments
(960x350) -123.500
212.500 lei
N+1
N+2:
%
(500x350)
based payments
= Cash at bank
(500x10x(140-100))
200.000 lei
175.000 lei
25.000 lei
31
N+3:
%
= Cash at bank
(460x10x(125-100))

(460x350)
based payments
161.000 lei
115.000 lei
46.000 lei
Modifications, cancellations, and settlements

The determination of whether a change in terms and conditions has an effect on the amount
recognised depends on whether the fair value of the new instruments is greater than the fair
value of the original instruments (both determined at the modification date).
Modification of the terms on which equity instruments were granted may have an effect on
the expense that will be recorded. IFRS 2 clarifies that the guidance on modifications also
applies to instruments modified after their vesting date. If the fair value of the new
instruments is more than the fair value of the old instruments (e.g. by reduction of the exercise
price or issuance of additional instruments), the incremental amount is recognised over the
remaining vesting period in a manner similar to the original amount. If the modification
occurs after the vesting period, the incremental amount is recognised immediately. If the fair
value of the new instruments is less than the fair value of the old instruments, the original fair
value of the equity instruments granted should be expensed as if the modification never
occurred.
The cancellation or settlement of equity instruments is accounted for as an acceleration of the
vesting period and therefore any amount unrecognized that would otherwise have been
charged should be recognized immediately. Any payments made with the cancellation or
settlement (up to the fair value of the equity instruments) should be accounted for as the
repurchase of an equity interest. Any payment in excess of the fair value of the equity
instruments granted is recognized as an expense
New equity instruments granted may be identified as a replacement of cancelled equity
instruments. In those cases, the replacement equity instruments should be accounted for as a
modification. The fair value of the replacement equity instruments is determined at grant date,
while the fair value of the cancelled instruments is determined at the date of cancellation, less
any cash payments on cancellation that is accounted for as a deduction from equity.
Disclosure
Required disclosures include:
the nature and extent of share-based payment arrangements that existed during the
period;
how the fair value of the goods or services received, or the fair value of the equity
instruments granted, during the period was determined; and
the effect of share-based payment transactions on the entity's profit or loss for the
period and on its financial position.
32
2.3. Accounting for financial instruments IAS 32, IAS 39, IFRS
7, IFRS 9
Definitions
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".
A financial asset is "any asset that is:
(a) cash;
(b) an equity instrument of another entity;
(c) a contractual right to receive cash or another financial asset from another entity".
A financial liability is "any liability that is a contractual obligation to deliver cash or another
financial asset to another entity".
An equity instrument is "any contract that evidences a residual interest in the assets of an
entity after deducting all of its liabilities". Ordinary shares are the most common instance of
an equity instrument.
Examples:
(a) a company makes an issue of loan stock
(b) a company sells goods to a customer on credit
(c) a company buys goods from a supplier on credit
(d) a company deposits money into its bank account
(e) a company overdraws its bank account
(f) a company makes an issue of ordinary shares
(g) a company invests in newly-issued ordinary shares of another company.
(a) The issue of loan stock creates a contractual obligation on the part of the company to repay
the loan at some time in the future. The contract between the company and the lenders is a
financial instrument because:
- the lenders now have the right to be repaid (a financial asset)
- the company is now under an obligation to repay the loan (a financial liability)
(b) A sale on credit creates a contractual obligation on the part of the customer to pay for the
goods. The contract with the customer is a financial instrument because:
- the company now has a trade receivable (a financial asset)
- the customer now has a trade payable (a financial liability).
(c) A purchase on credit creates a contractual obligation on the part of the company to pay for
the goods. The contract with the supplier is a financial instrument because:
- the supplier now has a trade receivable (a financial asset)
- the company now has a trade payable (a financial liability).
(d) In effect, a bank deposit is a loan to the bank and the bank is contractually obliged to
repay this money. The contract with the bank is a financial instrument because:
- the company now has the right to withdraw its cash (a financial asset)
33
- the bank is now under an obligation to repay the cash (a financial liability).
(e) A bank overdraft is a form of bank loan and the company is contractually obliged to repay
this loan. The contract with the bank is a financial instrument because:
- the bank now has the right to be repaid (a financial asset)
- the company is now under an obligation to repay the overdraft (a financial liability).
(f) Ordinary shares are an equity instrument. The issue of ordinary shares creates a contract
between the company and its shareholders. This contract is a financial instrument because:
- the shareholders now own the shares (a financial asset)
- the company now has extra share capital (an equity instrument).
(g) This purchase of ordinary shares creates a contract between the investing company and the
issuing company. This contract is a financial instrument because:
- the investing company now owns the shares (a financial asset)
- the issuing company now has extra share capital (an equity instrument).
Accounting for financial assets

There are four chategories of financial assets with associated measurement:
(a) Financial assets at fair value through profit or loss. These are usually financial assets that
are held for trading. This means that the assets have been acquired with the intention of reselling them at a profit in the fairly near future. However, on initial recognition, an entity may
designate any financial asset as being "at fair value through profit or loss" if doing so would
result in more relevant information.
After initial recognition, financial assets which fall into this category should be measured at
their fair value. Gains or losses arising from fluctuations in fair value are recognised in the
income statement.
(b) Held-to-maturity investments. These are financial assets with fixed or determinable
payments and fixed maturity dates that the entity intends to hold until maturity and has the
ability to do so.
After initial recognition, held-to-maturity investments should be measured at their amortised
cost using the effective interest method (see below).
(c) Loans and receivables. These are financial assets with fixed or determinable payments that
are not quoted in an active market.
After initial recognition, loans and receivables should usually be measured at their amortised
cost using the effective interest method. This method involves discounting the amounts
expected to be received when the loan or the receivable is settled. But short-term receivables
(e.g. most trade receivables) may be measured at the original invoice amount if the effect of
discounting is not material.
(d) Available-for-sale financial assets. These are financial assets which do not fall into any of
the other three categories. An example of an available-for-sale financial asset is a long-term
investment in ordinary shares.
34
After initial recognition, available-for-sale financial assets should generally be measured at

their fair value. Gains or losses arising from fluctuations in fair value are recognised in other
comprehensive income.
Note that it may sometimes be impossible to measure the fair value of unquoted ordinary
shares reliably. In this case, such shares (which usually fall into category (d) above) should be
measured at cost.
Valuation rules
Financial assets at
Fair Value through
Profit or loss
Initial
recognition
Subsequent
measurement
Gain/losses
from
subsequent
measurement
Fair value
Fair value
Held to maturity
investments
Loans and
receivables
Financial
assets held for
sale
Fair value + transactions costs
Amortized cost based on the

effective interest method
Profit or loss
Fair value
or
Cost
Other
comprehensive
income
or
Profit or loss
for impairment
According to IFRS 9 2014 amendments (applicable starting in 2018) an entity shall

classify financial assets as:
-
subsequently measured at amortised cost;

fair value through other comprehensive income, or
fair value through profit or loss
on the basis of both:

(a) the entitys business model for managing the financial assets and
(b) the contractual cash flow characteristics of the financial asset.
35
A financial asset shall be measured at amortised cost if both of the following conditions are
met:
(a) the financial asset is held within a business model whose objective is to hold financial
assets in order to collect contractual cash flows, and
(b) the contractual terms of the financial asset give rise on specified dates to cash flows that
are solely payments of principal and interest on the principal amount outstanding.
A financial asset shall be measured at fair value through other comprehensive income if both
of the following conditions are met:
(a) the financial asset is held within a business model whose objective is achieved by both
collecting contractual cash flows and selling financial assets and
(b) the contractual terms of the financial asset give rise on specified dates to cash flows that
are solely payments of principal and interest on the principal amount outstanding.
Principal is the fair value of the financial asset at initial recognition and interest consists of
consideration for the time value of money, for the credit risk associated with the principal
amount outstanding during a particular period of time and for other basic lending risks and
costs, as well as a profit margin.
A financial asset shall be measured at fair value through profit or loss unless it is measured at
amortised cost, or at fair value through other comprehensive income.
Ex. Financial assets at fair value through profit/loss or other comprehensive

income
On 04.06. N-1, 100 shares of MAC Inc were purchased for 20 USD/share. The fee paid to the
broker was 1% of the value of the transaction. At the end of the year N, a MAC inc share was
valued at 24 USD/share. Spot exchange rate on 04.06.N-1 was 2 lei/USD and on 31.12.N-1
was 2,5 lei/USD. On 04.03.N, the company sold all shares aquired on 04.06.N-1 for 25
USD/aciune. The spot exchange rate on that date was 2,6 lei. The fee paid to the broker was
1% of the transaction value. Unrealized gains are taxed when they are realized (income tax
16%). Required: Journalize all transactions assuming that:
a) The shares are classified as available for sale (at fair value through other
comprehensive income);
b) The shares are classified as measured at fair value through profit or loss
Case a)
On 04.06.N-1 the company classifies purchased securities as financial assets available for
sale. The initial recognition of a financial asset available for sale is at fair value (in this case,
the market value or purchase price) plus transaction costs that are directly attributable to asset
acquisition. Since this is a transaction in foreign currency (USD), it will be recorded in the
functional currency of the company (lei) at the exchange spot rate at the transaction date (IAS
21)
36
04.06.N-1
Fair value
Transaction cost
Shares value in USD
Shares value in lei
= 100 shares x 20 USD/share =

= 2.000 USD x 1% =
2.000
20
2.020
4.040
= 2.020 USD x 2 lei/USD =
Shares available for sale
Cash at bank
USD
USD
USD
Lei
4.040 lei
At the end of the year, any gain or loss generated by re-measuring financial assets available
for sale are recognized directly in comprehensive equity, as described above. Since the
original transaction was carried out in foreign currencies, gains or losses may appear on
foreign exchange differences between the transaction date and the end of the year. But
according to IAS 21 such gains or losses are recognized as other comprehensive income.
31.12.N-1
Fair value
Shares value in USD
Shares value in lei
Gain on
remeasuring
available for sale
financial assets
2.400 USD
2.400 USD
6.000 Lei
= 2.400 USD x 2,5 lei/USD =
= Amount in lei
as of 31.12.N-1
Amount in lei
as of 04.04.N-1
Fair value reserves
6.000 4.040 = 1.960 lei
1.960 lei
As the gain will be taxed when realized, a deferred income tax will be recognized (in other
comprehensive income, as it is related to an item recorded in other comprehensive income):
Fair value reserves
Deferred income tax liability
314 lei
On 04.03.N the company recognizes the gain from selling the shares acquired on the 04.06.N1 in profit or loss :
04.03. N
Fair value
Transaction cost
Shares value in lei
Gain on sale
Cash at bank =
= 100 shares x 25 USD/share x 2,6 lei/USD =

= 6.500 lei x 1% =
= 4.040 lei + 1.960 lei =
= 6.500 lei 65 lei 6.000 lei =
%
Gain on the sale of available for sale
financial assets
6.500 lei
(65) lei
(6.000)lei
435 lei
6.435 lei
6.000 lei
435 lei
As financial assets are derecognized, the unrealized gains recorded as other comprehensive
income (1.960 lei) shall be recognized in profit or loss:
Fair value reserves
Revenues from fair value measurements of
1.960 lei
37
available for sale financial assets
At the same time, the deferred income tax needs to be derecognized:

Deferred
liability
income
tax =
Fair value reserves
314 lei
Case b)
On 04.06.N-1 the company classifies purchased securities as financial assets at fair value
through profit or loss. The initial recognition for such financial assets is made at fair value (in
this case, the market value or purchase price) Since this is a transaction in foreign currency
(USD), it will be recorded in the functional currency of the company (lei) at the exchange spot
rate at the transaction date (IAS 21)
04.06.N-1
Fair value
Shares value in USD
Shares value in lei
2.000 USD
2.000 USD
4.000 Lei
= 2.000 USD x 2 lei/USD =
Marketable securities
Cash at bank
4.000 lei
Transaction costs (e.g. the broker fee) are expensed instead of being capitalized:
Commissions expenses
Cash at bank
40 lei
At the end of the year, any gain or loss generated by re-measuring these financial assets are
recognized in profit or loss, as described above.
31.12.N-1
Fair value
Shares value in USD
Shares value in lei
Gain on
remeasuring
available for sale
financial assets
2.400 USD
2.400 USD
6.000 Lei
= 2.400 USD x 2,5 lei/USD =
= Amount in lei
as of 31.12.N-1
Amount in lei
as of 04.04.N-1
6.000 4.000 = 2.000 lei
Gain on re-measuring
financial assets at fair value
through profit or loss
2.000 lei
As the gain will be taxed when realized, a deferred income tax will be recognized (in profit or
loss, as it is related to an item recorded in profit or loss):
Deferred
expense
income
tax =
Deferred income tax liability
320 lei
38
On 04.03.N the company recognizes the gain from selling the shares acquired on the 04.06.N1 in profit or loss :
04.03. N
Fair value
Broker fee
Shares value in lei
Gain on sale
= 100 shares x 25 USD/share x 2,6 lei/USD =

= 6.500 lei x 1% =
= 4.000 lei + 2.000 lei =
= 6.500 lei 65 lei 6.000 lei =
Cash at bank =
%
Gain on the sale of financial assets at
fair value through profit or loss
6.500 lei
65 lei
6.000 lei
435 lei
6.435 lei
6.000 lei
435 lei
At the same time, the deferred income tax needs to be derecognized:

Deferred
liability
income
tax =
Deferred income tax revenues
320 lei
Ex. Financial assets at amortized cost

On January 1, N an entity acquires 100 bonds for 110 lei/bond. The par value of the bonds is
100 lei/bond, and they bear a 10% cupoun p.a. payable at the end of each year. The bonds
shall be redeemed after 4 years for 105 lei/bond. The bonds are classified as held to maturity
investments.
On 01.01.N bonds are recorded at fair value (there are no transaction costs):
Bonds/Held to maturity investments
Cash at bank
11.000
Effective interest is determined by equating the fair value of the assets with discounted future
cash flows:
4
11.000
t 1
1.000 10.500
(1 i ) t (1 i ) 4
where,
i = effectuve interest rate;
t = years.
i = 8,08342 %.
Date
(1)
N
N+1
N+2
N+3
Amortized cost
as of January 31
(2)
11.000
10.890
10.770
10.640
Cash
receipts
(3)
1.000
1.000
1.000
11.500
Interest
(4) =(2) x 8,08342 %
890
880
870
860
Amortized cost as of
December 31
(5) = (2) - [(3) - (4)]
10.890
10.770
10.640
0
39
On 31.12.N the company recognized the effective interest as a revenue and the rest of the cash
received is considered principal reimbursement.
Cash at bank
%
Interest revenue
Bonds/Held to maturity
investments
1.000
890
110
Accounting for financial liabilities

There are two categories of financial liabilities with associated measurement rules:
a) Finacial liabilities at amortized cost - after initial recognition, financial liabilities should
usually be measured at amortised cost using the effective interest method. This is precisely the
same method as is used for certain types of financial asset (see above).
b) Financial liabilities at fair value through profit or loss. This category of financial liabilities
is similar to the equivalent category of financial assets and consists mainly of financial
liabilities that are held for trading. However, as with financial assets, an entity may designate
any financial liability as being "at fair value through profit or loss" if doing so would result in
more relevant information. After initial recognition, financial liabilities which fall into this
category should be measured at fair value. Gains or losses arising from fluctuations in fair
value should be recognised in the income statement.
c) Trade payables. Short-term payables (e.g. most trade payables) may be measured at the
original invoice amount if the effect of discounting is not material.
Financial liabilities at
Fair Value through
Profit or loss
Initial
recognition
Subsequent
measurement
Gain/losses
from
subsequent
measurement
Fair value
Fair value
Financial liabilities at amortised cost using the
Fair value + transactions costs
Amortized cost based on the

Profit or loss
According to IFRS 9 2014 amendments (applicable starting in 2018) an entity shall

classify all financial liabilities as subsequently measured at amortised cost, except for:
40
(a) financial liabilities at fair value through profit or loss. Such liabilities, including
derivatives that are liabilities, shall be subsequently measured at fair value.
(b) financial liabilities that arise when a transfer of a financial asset does not qualify for
derecognition or when the continuing involvement approach applies.
(c) financial guarantee contracts.
(d) commitments to provide a loan at a below-market interest rate.
(e) contingent consideration recognised by an acquirer in a business combination to which
IFRS 3 applies.
Financial liabilities at amortized cost (based on the effective interest method)

Example. On January1, N, a company purchased a piece of land for lei 2,000,000 on credit. Payments
are made as follows: 10% down-payment, 20% at the end of the year N, 30% at the end of the year
N+1 and 40% at the end of the year N+2.
Solution:
Since the value of future payments and settlement dates are known and the company is committed to
comply with all the contract provisions, the liability towards the supplier of the land is classified as a
financial liability at amortized cost using the effective interest method. Therefore, on the acquisition
date, the liability is measured at fair value plus transaction costs (which are non-existent in this
example):
There are two methods for determining the fair value of the liability:
Method 1: Determining the fair value of the liability by reference to the fair value of the land
We assume that if the value of the land would have been paid in full at the acquisition date, the total
amount paid would be 1,800,000 lei. Therefore, at the acquisition date, the fair value of the liability is
estimated at 1,800,000 lei:
Land
Supplier of non-current assets
1.800.000 lei
At the same time the down-payment is made amounting to 10% x 2.000.000 lei:
Cash at bank
200.000 lei
41
The effective interest rate is computed by means of equating the fair value of the liability with the
value of the discounted future payments:
1.800.000 2.000.000 x10%
2.000.000 x 20% 2.000.000 x 30% 2.000.000 x 40%
(1 i )1
(1 i ) 2
(1 i ) 3
where,
i = the effective interest rate;
i = 5,4852%.
Years
(1)
N
N+1
N+2
Amortized cost at
01.01
(2)
1.600.000
1.287.763
758.400
Payments
Interest
(3)
400.000
600.000
800.000
(4) =(2) x 5,4852%

87.763
70.637
41.600
Principal
Amortized
reimbursement
cost at 31.12
(5) = (3)-(4)
312.237
529.363
758.400
(6) = (2) - (5)

1.287.763
758.400
0
At the end of each year, the company recognizes the effective interest expense in the profit or loss, the
remaining amount paid being considered capital reimbursment, so that the liability is presented in the
balance-sheet at amortized cost:
% =
Interest expense
Suppliers of non-current
assets
Cash at bank
% =
Interest expense
assets
Cash at bank
% =
Interest expense
assets
Cash at bank
December 31, N
400.000
87.763
312.237
December 31, N+1
600.000
70.637
529.363
December 31,N+2
800.000
41.600
758.400
Method 2: Determining the fair value of the liability by means of discounted future payments using
the market interest rate for a similar loan.
42
We assume that a similar credit may be obtained for an interest rate of 10%. Therefore, at the
acquisition date the fair value of the liability is estimated by discounting the future payments:
FV 2.000.000 x10%
2.000.000 x 20% 2.000.000 x 30% 2.000.000 x 40%
1.660.556
(1 0,1)1
(1 0,1) 2
(1 0,1) 3
Fair value of the liability = 1.660.556 lei
Land
1.660.556 lei lei
At the same time the down-payment is made amounting to 10% x 2.000.000 lei:
Years

Amortized cost at Payments
Cash at bank
Interest
01.01
200.000 lei
Principal
Amortized
reimbursement
(1)
(2)
(3)
(4) =(2) x 5,4852%
(5) = (3)-(4)
01.01.N
N
N+1
N+2
1.660.556
1.460.556
1.206.612
727.273
200.000
400.000
600.000
800.000
0
146.056
120.661
72.727
200.000
253.944
479.339
727.273
cost at
31.12
(6) = (2) (5)
1.460.556
1.206.612
727.273
0
At the end of each year, the company recognizes the effective interest expense in the profit or loss, the
remaining amount paid being considered capital reimbursment, so that the liability is presented in the
balance-sheet at amortized cost:
% =
Interest expense
Cash at bank
December 31, N
400.000
146.056
253.944
assets
% =
Interest expense
Cash at bank
December 31, N+1

600.000
120.661
479.339
assets
43
% =
Interest expense
Cash at bank
December 31, N+2

800.000
72.727
727.273
assets
Financial liabilities at fair value through profit or loss

Ex. On 25.12.N, anticipating a decrease in the market value of shares B, a company sold short
100 shares for 15 lei/share. At the end of the year N, the market value of the shares was 16
lei/share.
25.12.N:
Cash at bank
Sundry creditors/Short position
1.500 lei
Expenses related to fair value

measurements
Sundry creditors/Short position
100 lei
100x(16-15)
31.12.N
Financial liabilities vs equity instruments

As in the international financial reporting operates the proprietary theory, according to which the
entity is construed as the property of investors, there should be a distinction between equity and debt .
In some cases, the distinction is difficult to make , as the legal form of the contracts takes the form of
either an equity instrument or of a financial liability , but the substance of the transaction is different.
In addition, there are some cases where the same contract has both a the characteristics of an equity
instrument and of a financial liability.
Treatment of preference shares

These are shares which either:
- offer the possibility of a preferential dividend regardless of the entity performance;
- provides enhanced rights in the General Meeting of the Shareholders, or
- provide for mandatory repayment of the share capital at a future date, or
44
- give the shareholders the right to require repayment of the share capital on or after a
particular date, for a fixed or determinable amount.
Example: Company A issued 100 preference shares granting the right to a double dividend
and two voting rights in the General Assembly of Shareholders.
Solution:
Since the company has no obligation to pay cash in the future or to deliver other financial
assets, preferred stock will be recorded as equity instruments and will appear on the balance
sheet in owners equity. Since the preferential dividend payment is discretionary, respectively,
it is paid only if the company decides to make profits distributions, preferential dividends are
recorded as a distribution of profit and not expensed in the profit or loss for the year.
Example: On January 1, a company issues 100 preference shares for an issue price of 15
lei/share the shares are redeemed in full after 4 years, and grant the right of a preference
dividend of 0,5 lei/share payable at the end of each year, regardless of the companys
performance.
Solution:
In these circumstances, it is clear that the issuing company has a contractual obligation to
deliver cash. Therefore redeemable preference shares must be classified as liabilities rather
than equity, despite their legal form. Furthermore, IAS32 requires that interest and dividends
relating to financial liabilities should be recognized as an expense in the income statement, so
that dividends paid to the holders of redeemable preference shares must be treated as an
expense. Any accrued dividends unpaid at the end of an accounting period should be treated
in the same way as accrued interest. Dividends which are classified as an expense may be
presented in the income statement either with interest on other liabilities or as a separate item.
As of January 1, N, the liability is recorded at fair value in amount of 1,500 lei (100 shares x 5
lei/share):
Cash at bank
Liabilities related to
1,500 lei
preference shares
45
Since the value of future payments and settlement dates are known and the company is committed to
comply with all the contract provisions, the liability is classified as a financial liability at amortized
cost using the effective interest method.
1.500
t 1
0,5 x100 1.500
(1 i ) t
(1 i ) 4
where,
i = effective interest rate;
i = 3,3334%.
Years
(1)
N
N+1
N+2
N+3
Amortized cost at
01.01
(2)
1.500
1.500
1.500
1500
Payments
Interest
(3)
50
50
50
1550
(4) =(2) x 3,3334%

50
50
50
50
% =
Interest expense/Preference dividends
Liabilities related to preference
Principal
Amortized
reimbursement
cost at 31.12
(5) = (3)-(4)
0
0
0
1.500
(6) = (2) (5)

1.500
1.500
1.500
0
Cash at bank
Decembrie 31, N
50
50
0
shares
Decembrie 31, N+1

% =
Liabilities related to preference shares
Cash at bank
50
50
0
Decembrie 31, N+2

% =
Interest expense/Preference
Cash at bank
1.550
50
dividends
1.500
shares
46
47
Compound financial instruments

Some financial instruments (known as "compound financial instruments") contain both
-
a liability component and

an equity component.
For example, loan stock that is convertible to ordinary shares at the option of the lender is a
compound financial instrument. IAS32 requires that compound financial instruments should
be separated into their two components and that each of these components should then be
recognised separately, one as a financial liability and the other as equity.
The separation of a compound financial instrument into its two components is achieved as
follows:
i)The fair value of the liability component is determined first. This is equal to the fair value of
a similar instrument without an associated equity component. The measurement rules of
IAS39 indicate that this amount should be calculated by discounting the cash flows that the
financial instrument generates, using a market rate of interest.
ii) The fair value of the equity component is then determined by deducting the fair value of
the liability component from the fair value of the whole instrument. IAS39 states that the fair
value of the whole instrument is normally equal to the amount of the consideration which was
given or received when the instrument was issued.
Example: Non-redeemable preference shares with compulsory preference dividend
On January 1, N a company issues 100 preference shares for 15 lei/share. The shares offer for
4 years 4 voting rights and the right to a preference dividend of 0,5 lei/share payable at the
end of each month, regardless of the company performance.
Solution:
In these circumstances, it is clear that the issuing company has a contractual obligation to
deliver cash, but this only refers to the preference dividends. Therefore, the preference shares
are a compound financial instrument, with a component of equity and one of a financial
liability.
48
In order to determine the two components:

1) The fair value of the financial liability is computed. We assume the market interest rate for a
similar loan is 10%. The fair value of the liability is:
4
0,5 x100
(1 0,1)
t 1
158lei
2) The value of the equity component is determined:

The fair value of the financial instrument
The fair value of the financial liability
The fair value of the equity component
=
=
=
100 shares x 15 lei/share
1.500 lei
(158 lei)
1.342 lei
January 1, N
Cash at bank
%
Equity component of preference shares
1.500 lei
150 lei
1.342 lei
The financial liability is classified as at amortized cost as future payments and settlement dates are
known:
Years
(1)
N
N+1
N+2
N+3
Amortized cost at
01.01
(2)
158
124
86
45
Payments
Interest
(3)
50
50
50
50
(4) =(2) x 10%

16
12
9
5
Principal
Amortized
reimbursement
cost at 31.12
(5) = (3)-(4)
34
38
41
45
(6) = (2) (5)

124
86
45
0
December 31, N
% =
dividends
Cash at bank
50
16
34
49
December 31, N+1

% =
Cash at bank
50
12
38
December 31, N+2

% =
Cash at bank
50
9
dividends
41
shares
December 31, N+3

% =
Cash at bank
50
5
dividends
45
shares
Example: Automatically convertible debenture loan providing annual coupon until conversion
On January 1, N, an entity issues 300 bonds with a face value of 10 lei/bond and a coupon rate of 8%,
payable at the end of each year. The bonds ar automatically converted at the end of N+3 in ordinary
shares. The coupon rate for similar bonds with no associated conversion rights is 12%/year.
Solution:
The entity has the contractual obligation to make payments in cash ( the coupon rate). As the bonds are
converted automatically in ordinary shares, the debeture loan is a compund financial instrument.
1) Fair value of the liability component:
50
t 1
0,8 x10 x 300

729
(1 0,12) t
2) Fair value of the equity component:

Fair value of financial instrument
Fair value of financial liability
Fair value of equity components
Cash at bank
=
=
=
300 bonds x 10 lei/bonds
%
Debenture loans
Equity components of debenture loans
3.000 lei
(729 lei)
2.271 lei
3.000 lei
729 lei
2.271 lei
Financial liability is valued at amortized cost.
Years
(1)
N
N+1
N+2
N+3
Amortized cost at
01.01
(2)
729
576
406
214
Payments
Interest
(3)
240
240
240
240
(4) =(2) x 12%

87
69
49
26
Principal
Amortized
reimbursement
cost at 31.12
(5) = (3)-(4)
153
171
191
214
(6) = (2) (5)

576
406
214
0
31 12 N
% =
Interest expense
Debenture loans
Cash at bank
240
87
153
31 12 N+1
% =
Interest expense
Debenture loans
Cash at bank
240
69
171
51
31 12 N+2
% =
Interest expense
Cash at bank
240
49
Debenture loans
191
31 12 N+3
% =
Interest expense
Cash at bank
240
26
Debenture loans
214
At the end of the year N+3, the bonds are converted into ordinary shares with a par value of 1
leu/share, the conversion ratio being 5 shares for 1 bond:
Equity component of debenture
2.271 lei
Share capital
Conversion premium
1.500 lei
771 lei
loans
Example: Bonds converted in ordinary shares on request.
On 1 January 2008, a company issues 200,000 of 7% loan stock at par. Interest on this loan
stock is payable on 31 December each year. The stock is due for redemption at par on 31
December 2011 but may be converted into ordinary shares on that date instead. Assuming that
the market rate of interest to be used in discounted cash flow calculations is 9% p.a., calculate
the liability component and the equity component of this loan stock.
Solution
Ignoring the conversion option, the company will pay interest of 14,000 on 31 December
2008, 2009, 2010 and 2011 and will then make a 200,000 repayment of the loan stock on 31
December 2011. Using a discounting rate of 9%, the present value of these cash flows may be
calculated as follows:
Payment due 31 December 2008 14,000/1.09 = 12,844
Payment due 31 December 2009 14,000/(1.09)2 =11,784
Payment due 31 December 2010 14,000/(1.09)3 = 10,811
Payment due 31 December 2011 214,000/(1.09)4 = 151,603
52
Total present value 187,042

This calculation shows that the fair value on 1 January 2008 of the right to receive 14,000 on
31 December for each of the next three years, followed by 214,000 at the end of the
fourth year is 187,042.
This is the fair value of the liability component of the loan stock.
The lenders are paying 200,000 to buy this stock and this exceeds the fair value of the
liability component by 12,958. The extra 12,958 must be the price that the lenders are
paying for the option to convert and this is the value of the equity component.
53
Derivatives within IAS 39

Definition
IAS 39 defines a derivative as a financial instrument or other contract with all three of the
following characteristics:
its value changes in response to the change in a specified interest rate, financial
instrument price, commodity price, foreign exchange rate, index of prices or rates,
credit rating or credit index, or other variable (the "underlying"). In the case of a nonfinancial variable, that variable must not be specific to one party to the contract.
it requires no initial net investment or an initial net investment that is smaller than
would be required for other types of contracts that would be expected to have a similar
response to changes in market factors, and
it is settled at a future date.
Examples of derivatives
Example 1
A company buys an option, the underlying subject matter of which is 10 ounces of gold. The
strike price is 260/ounce, and the option is exercisable in three months' time. It can only be
cash settled. The company pays a premium of 20 for the option.
Because the option can be settled net in cash, it is within the scope of IAS 39, and since
there is no possibility of gold being delivered it is unnecessary to consider whether the
company wants gold for its normal trade purposes. The value of the option changes as gold
prices changed, and it is settled at a future date. (This will be the case even if the option is out
of the money, and expires without being exercised this is a form of settlement).
The company must make an initial net investment of 20 in order to acquire the option.
However, this is less than would have to be paid for a contract that responded similarly to
changes in gold price, such as a contract to physically acquire 10 ounces of gold. The option
therefore passes all three tests to be a derivative.
54
Example 2
X Ltd makes a 5-year fixed rate loan of 10 million to Y Ltd. Y Ltd makes a 10 million loan
for 5 years to X Ltd, at a variable rate of interest.
This arrangement functions in the same way as an interest rate swap. The value of the
arrangement depends on interest rates, and there is settlement at future dates, when each
exchange of interest payments is made. There is no initial net investment, since the loans are
self-cancelling.
This arrangement would be treated as a derivative under IAS 39. Non-derivative transactions
may be aggregated and considered together where they are entered into at the same time and
in contemplation of each other, have the same counterparty and the same risk, and there is no
apparent business purpose to having separate transactions.
Example 3
A company enters into a 50 million 2-year interest rate swap, under which it receives fixed
rate payments and pays variable rate payments. However, it prepays its obligation under the
swap by making, at the inception of the contract, a lump sum payment representing the value
of the stream of variable rate payments at current market rates. It continues to receive the
fixed rate payments over the life of the contract.
Although this may be described as a swap, it is not treated as a derivative. The company has,
in essence, paid a capital sum for a fixed annuity. The amount it would have to pay for such
an annuity contract varies with interest rates; but the company has made an initial investment
equal to the full price. The swap therefore fails the second of the three tests conditions.
Measurement of Derivatives depends on the purpose of the derivative:
-
not for hedging derivatives:
All derivatives that are within the scope of IAS 39, except ones which are designated and
effective hedging instruments, are measured at fair value, with changes in fair value
recognised in the income statement.
Examples most common derivatives:
55
1. Options
A financial derivative that represents a contract sold by one party (option writer) to another
party (option holder). The contract offers the buyer the right, but not the obligation, to buy
(call) or sell (put) a security or other financial asset at an agreed-upon price (the strike price)
during a certain period of time or on a specific date (exercise date).
Call options give the option to buy at certain price, so the buyer would want the stock to go
up.
Put options give the option to sell at a certain price, so the buyer would want the stock to go
down.
The option is either a financial asset or a financial liability initial recognition fair value.
The fair value of the options is their market value, usually the price paid/received, which is
called Prime.
If the options are not quoted on an active market, the fair value can be measured by means of
a model (such as Black and Scholes model).
Source: http://www.investopedia.com/university/options-pricing/black-scholes-model.asp
Ex. On July 15, N, an entity acquired 1.000 call options on shares Y for $10/unit. The strike
price is $150.
Call options
= Cash at bank
$ 10.000
At the end of the year N, the the market value of the options is $9/option:
56
Expenses related to call options
Call options
$ 1.000 [10.000-9.000]
The option can be settled either by:

-
reselling it;
exercising it; or
letting it expire.
Assume that:
Case #1 the options are resold on January 20, N for $7.500:
%
Cash at bank
Expenses related
to call options
= Call options
9.000
7.500
1.500
Case #2 the market price of the shares Y exeeds the strike price, and the options are
exercised on June 15, N+1:
Shares Y
= %
Cash at bank
Call options
159.000
150.000
9.000
Case #3 the expiry date is reached and the market price of the shares Y has not exeeded the
strike price:
Expenses related
to call options
= Call options
9.000
2. Forward/ Futures contracts

A forward contract is an agreement between two parties to buy or sell an asset (which can be
of any kind) at a pre-agreed future point in time at a pre-agreed price. A futures contract is a
standardized contract, traded on a futures exchange, to buy or sell a certain underlying
instrument at a certain date in the future, at a specified price. So while the date and price are
decided in advance in forward contract, a futures contract is more unpredictable. They also
differ in the forms that a futures contract is standardized while a forward contract is made to
the customer's need.
Ex. On November 1, N, an entity entered into a forward contract, promising to sell 100.000
USD after 3 months for EUR 1,10.
On January 1, N the fair value of the contract is 0.
At the end of the year N, $1= 1,05 Euro
57
Forward contracts on = Revenues related to forward

foreign currencies
contracts
5.000 [100.000x(1,1-1,05)]
On January 1, N+1, $1= 1,07 Euro

% = Forward contracts on foreign
currencies
Cash at bank
Expenses related to call
options
3. Swaps contracts
5.000
3.000
2.000
A swap is an agreement between two parties to exchange sequences of cash flows for a set
period of time. Usually, at the time the contract is initiated, at least one of these series of cash
flows is determined by a random or uncertain variable, such as an interest rate, foreign
exchange rate, equity price or commodity price.
Ex. Anticipating a decrease in the interest rate, an entity enters a swap agreement on April 1,
N. The company exchanges for a year a fixed interest rate of 7% based on a nominal value of
1.000.000 lei for a variable one.
At the end of the year N, the market interest rate is 7,2%
Expenses related to
swaps on interest rate
= Swaps on interest rate
2.000 [ 1.000.000x(7,2-7)%]
On April 1, N+1, the market interest rate is 6,5%

%
= Expenses related to
swaps on interest rate
Swaps on interest rate

Cash at bank
7.000
2.000
5.000
Hedging derivatives
Categories of hedges
A. 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)]
Examples:
Ex.1 Change of variable interest rates with fixed ones to protect against the variation in the
value of a fixed rate loan;
58
A company borrows 10 million at a fixed interest rate of 8%. Its cash flows will not change,
however interest rates move it will pay a fixed 800,000 interest a year but the fair value of
its liability will change as interest rates move. The liability will become more onerous if
interest rates fall. It can hedge its exposure to fair value changes by entering into an interest
rate swap, under which it receives fixed rate payments and pays floating rate.
Ex.2 Forward sale of a quantity of inventory that a company has in stock.
A chocolate manufacturer enters into a contract to buy 5,000 tonnes of cocoa beans in six
months' time, at a fixed price. The company knows what its future cash flow will be. But the
fair value of this firm commitment will change as the price of cocoa beans changes (even
though the commitment won't be shown on the company's balance sheet). The company might
hedge the changes in fair value by entering into a futures contract over cocoa beans.
Under IAS 39, it is necessary to be clear about the particular risk you are hedging. Suppose
that, in the second example, the company (which accounts in sterling) had a contract to pay
for the cocoa beans in US dollars. In addition to the commodity price risk, the company is
exposed to foreign currency risk. Any hedge of the currency risk would need to be considered
separately. (Fluctuations in exchange rates will affect both the fair value of the firm
commitment, and the actual sterling amount the company must pay so a hedge of the foreign
currency risk could be accounted for either as a fair value hedge or a cash flow hedge).
Ex.3. Buying put options to cover for the risk related to the decrease in the market price of the
shares that the company is holding;
Accounting treatment:
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]
Ex.4 ABC Inc. has 1.000 shares of entity B Inc. The shares are valued at their fair value of
800 lei. In order to protect itself against a decrease in the price of the shares, the entity
acquires 1.000 options to sell the shares B for a strike price of 780 lei. At the end of
the year, the market price of the shares B is 780 lei.
On December 31, N, Market price of the shares: 750 lei
- recognizing the loss on the hedged item
Expenses related to fair value
=
Shares B
measurements
- recognizing the gain on the hedging instrument
Hedging instruments/Put
options
Revenues
related to
hedging
instruments
50.000 lei [800.000-750.000]
30.000 lei [780.000-750.000]
59
The net loss = 50.000 30.000 = 20.000 represents the risk not covered (the hedge
ineffectiveness)
B. 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)]
Examples
Ex.1. A company borrows 10 million at LIBOR plus 2%. Changes in LIBOR will clearly
affect the company's future cash flows. It might hedge this risk by entering into an
interest rate swap.
Ex. 2. A chocolate manufacturer assesses it as highly probable that it will buy 5,000 tonnes of
cocoa in six months' time, paying the spot rate at the time it places the order. Changes
in cocoa prices will affect its future cash flows; it may use cocoa bean futures to hedge
the exposure.
Accounting treatment:
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]
The ineffective portion of the gain or loss on the hedging instrument shall be recognised in
profit or loss.
Assessing hedge effectiveness
A hedge is regarded as highly effective only if both of the following conditions are met:
(a) At the inception of the hedge and in subsequent periods, the hedge is expected to be
highly effective in achieving offsetting changes in fair value or cash flows
attributable to the hedged risk during the period for which the hedge is designated.
(b) The actual results of the hedge are within a range of 80125 per cent. For example,
if actual results are such that the loss on the hedging instrument is CU120 and the
gain on the cash instrument is CU100, offset can be measured by 120/100, which is
120 per cent, or by 100/120, which is 83 per cent. In this example, assuming the
hedge meets the condition in (a), the entity would conclude that the hedge has been
highly effective.
Effectiveness is assessed, at a minimum, at the time an entity prepares its annual or
60
interim financial statements.

Ex.3 On September 15, N-1, the company signed a contract with a british client promising to
produce and deliver an industrial equipment on May 5, N+1 for 700.000 . To protect against
the variation in the exchange rate, the entity entered a futures contract to sell 700.000 at 5,5
lei/. At the end of the year N, the exhage rate was 5,3 lei/.
On September 15, N-1, the company delivers the equipment and the transaction futures
contact is settled. The exchange rate at that date is 5,4 lei/.
Gain on Hedging
instruments
= 700.000 x (5,5 lei/ - 5,3 lei lei/) =
140.000 lei
According to IAS 39 (para. 95 (a)) the gain has to be recognized as other comprehensive
income as of 31.12.N:
Hedging
instruments/Futures
contracts
-
Hedging reserves
140.000 lei
Assume that gains and losses on hedging instrument are taxed when they are
realised. Accordingly, 22.400 lei (140.000 lei x 16%) is a deferred income tax, which
has to be ecognized in other comprehensive income as well (IAS 12):
Hedging reserves
= Differed income tax liability
On May 15, N+1 recording the sale of the equipment:
22.400 i
Customers
= Revenues from the sale of finished

goods
3.780.000 lei
(700.000 x 5,4 lei/)
Cash at bank
= Customers
3.780.000 lei
At the same time, the settlement of the futures contract is recorded at 5,5 lei/, resulting a
loss compared to the value of the hedging instrument at the end of the year of 70.000 lei
(700.000 x (5,4 lei/ - 5,3 lei/)).
= Hedging
140.000 lei
instruments/
Futures contracts
Cash at bank
70.000 lei
[700.000 x (5,5 lei/ - 5,4 lei/)]
Expenses related to
70.000 lei
foreign
exchange
[700.000 x (5,4 lei/ - 5,3 lei/)]
losses
If a hedge of a forecast transaction subsequently results in the recognition of a financial
asset or a financial liability, the associated gains or losses that were recognised in other
comprehensive income shall be reclassified from equity to profit or loss as a
reclassification adjustment in the same period or periods during which the hedged forecast
cash flows affect profit or loss (such as in the periods that interest income or interest
expense is recognised).
61
Hedging reserves
= Revenues related to foreign

exchange gains
Differed income tax = Hedging reserves

liability
140.000 lei
22.401 lei
Impairment and uncollectibility of financial assets measured at amortised cost

An entity shall assess at the end of each reporting period whether there is any objective
evidence that a financial asset or group of financial assets measured at amortised cost is
impaired.
If there is objective evidence that an impairment loss on financial assets measured at
amortised cost has been incurred, the amount of the loss is measured as the difference
between:
- the assets carrying amount and;
- the present value of estimated future cash flows (excluding future credit losses that have
not been incurred) discounted at the financial assets original effective interest rate (ie the
effective interest rate computed at initial recognition).
The carrying amount of the asset shall be reduced either directly or through use of an
allowance account. The amount of the loss shall be recognized in profit or loss.
Example: Entity X Inc. has 1.000 bonds of company E acquired on January 1, N. The bonds
were issued at 93 euro and have a par value of 100 euro and a coupon rate 6%. They are
redeemed at par after 10 years (effective interest rate is 6,7%). At the end of the year N+6,
due to financial difficulties of company E, it is reasonable to expect no interest payments
and only 80% of the redemption price.
Present value of expected future cash flows:
0/(1,067) + 0/(1,067)2 + 80.000/(1,067)3 = 65.856 Euros instead of
98.130 Euros
Impairment = 98.130 Euros - 65.856 Euros = 32.274 Euros
Expenses related to = Bonds/Company E
impairment
of
financial assets
22.402 lei
Expenses related to = Impairment of bonds

impairment
of
financial assets
22.403 lei
Or
62
Chapter 3. Advanced issues in business combinations

1.
IASB-FASB convergence project on business combinations
The project aimed at generalizing the application of the purchase method for all business
combinations. The project also aimed at improving and simplifying group accounting and
issuing a high quality standard for business combination that could be employed both
nationally and internationally.
FASB has finalized the project in december 2007, by issuig FAS 141 (as revised in 2007)
Business Combinations and FAS 160 Noncontrolling Interests in Consolidated Financial
Statements.
IASB has also finalized the project in January 10, 2008, by issuing a revised version of IFRS
3 Business Combinations. IASB has further issued IFRS 10 Consolidated Financial
Statements in 2011, replacing IAS 27, which beared the same name.
2.
Accounting for business combinations under IFRS 3
2.1. Scope:
According to para.2, IFRS 3 applies to all business combinations, except:
a) the formation of a joint venture;
b) the acquisition of an asset or a group of assets that does not constitute a business. The
cost of the group shall be allocated to the individual identifiable assets and liabilities
on the basis of their relative fair values at the date of purchase. Such a transaction or
event does not give rise to goodwill;
c) a combination of entities or businesses under common control
A business combination is transaction or event by means of which the acquirer gains control
over an entity or a group of entities.
Ex 1. An entity decides to abandon its drugs producing activities, and sells one of its
subsidiaries operating in Hawaii.
The sale of the subsidiary is a business combination accoriding to IFRS 3.
Ex. 2. Entity X acquires all the hardware and telecommunication system of Company Y under
liquidation.
Such a transaction does not fall within the scope of IFRS 3, since the hardware and
telecommunication system is not a business in itself as it cannot generate economic benefits
by itself. Therefore, the acquisition will be accounted for as any acquisition of assets.
Ex. 3. Entities A and B are two branches of Company M. For taxation reasons, Company M
decides to reorganize its group structure, therefore, company A acquires company B. This
operation will not fall within the scope of IFRS 3, as companies A and B were under common
63
control before and after the acquisition date. Therefore, acquiring the assets and liabilities of
company B can recorded at their book value, although IFRS 3 may be applied, if desired.
2.2. Acquisition method
According to IFRS 3, all business combination are recorded based on the acquisition method,
which involves the following steps:
1. Identifying the acquirer;
2. Determining the acquisition date;
3. Recognizing and measuring the identifiable assets acquired, the liabilities assumed, and the
non-controlling interests;
4. Recognizing and measuring the goodwill or the gain form a bargain purchase (badwill).
2.2.1. Identifying the acquirer
For all business combinations, one of the parties involved in the transaction will be identified
as the acquirer. The acquirer is the entity that gains control over the other entity or other
entities involved. An entity acquires control in the case it acquires the power to determine the
financial and operating policies of an entity in order to obtain future economic benefits.
Clues to identify the buyer:
- entity whose fair value is greater;
- entity that issues shares or cash;
- entity whose managerial team is administrating the resulting entity.
Ex.1 Company X, that has a fair value of 80 million Euro and a share capital divided into
80,000 shares, wants to be listed on the stock exchange. In order to accomplish this, it is
purchased by Company Y, which is listed and has a market capitalization of 8 million Euro
and 80,000 shares outstanding.
Value per share X: 80.000.000/80.000 = 1.000 euro
Value per share Y: 8.000.000/80.000 = 100 euro
Therefore, the rate Shares X: Shares Y is 1 to 10 (1 share X for 10 shares Y). Consequently,
company Y, the formal buyer, issues 10 shares Y for each share X.
Company Y resulting from the business combination will have the following shareholder
structure:
Old shareholders (old shares Y): 80.000 shares
New shareholders/shareholders of Company X (new issued shares Y): 80.000 old shares X *
10 shares Y = 800.000 shares
Total= 880.000 shares
Therefore, the shareholders of Company X will hold 90.9% (800.000/880.000) of the voting
rights of the new Company Y (resulting from the business combination) and are, thus, able to
uphold the managerial team of Company X, which gains the power to determine the financial
and operating policy of the new entity.
64
In conclusion, although the Company Y is formally the buyer, the actual buyer is Company X,
which acquired control of the company resulted from the business combination.
2.2.2. Determining the acquisition date
The buyer will identify the acquisition date which is the date at which it obtains control over
the acquired company.
The date at which the buyer obtains control of the other entity(entities) is generally the date
on which the purchaser legally transfers the consideration, acquires the assets and assumes the
liabilities of the acquired company- the date of the transaction. However, the buyer can gain
control at another time, sooner or later than transaction date. Determining the acquisition date
is important because the valuation of the assets, liabilities and non-controlling interests shall
be made at this date.
2.2.3. Consideration transferred (cost of investment)
The consideration transferred in a business combination shall be calculated as the sum of the
fair value of the assets transferred to and liabilities assumed towards the former owners and
equity instruments issued by the buyer at the acquisition date. Examples of consideration
transferred include cash, other assets, a subsidiary of the buyer, contingent consideration
ordinary or preference shares, options, warrants, etc.
The consideration transferred may include assets or liabilities of the purchaser with book
values different from their fair value measured at the acquisition date (i.e. monetary assets, or
a subsidiary of the purchaser). In these circumstances the buyer will re-measure the assets and
liabilities transferred at their fair value at the acquisition date, recording gains or losses in
profit or loss. However, in some cases, assets and liabilities are transferred to the entity
resulting from the business combination and not the former owners, so that the buyer
continues to have control over them. In these circumstances, the buyer will evaluate the assets
and liabilities transferred at their carrying amount without recognizing any gains or losses.
The consideration transferred, generally, includes:
- An amount of cash or cash equivalents, and
- The fair value of other considerations given.
Any costs directly attributable to the acquisition are recognized in profit or loss.
Ex.: On 01.01.N, company A acquires company B, unlisted, in the following conditions: it
acquired 6,000 shares of company B (representing 70% of the total number of shares) for the
amount of 20 lei/share from an investment fund, which is the majority shareholder, the
nominal value of the shares being 10 lei/share. The investment fund required in addition a
piece of land that the Company A has with a book value of 50,000 lei and a fair value of
60,000 lei at the acquisition date. Company A pays a fee of 2,000 lei to a company that
arranges the transaction.
The fair value of Company B (consideration transferred) is:
65
6.000 shares x 20 lei/share + 60.000 lei = 180.000 lei (the fair value of the shares B is 30
lei/share = 180.000/6.000, and not 10 lei/share)
The increase in the value of the land of 10.000 lei (60.000 lei 50.000 lei) is recognize as a
gain in profit or loss.
The fee paid to the broker is recognized as an expense in profit or loss.
Journal entries in individual accounts of Company A:
01.01.N:
shares acquisition:
Shares B = %
Cash at bank
Land
Gains on the sale of
fixed assets
180.000 lei
120.000 lei
50.000 lei
10.000 lei
(6.000 shares x 20 lei/share)

(Carrying amount)
(60.000 50.000 lei)
180.000 lei
120.000 lei
60.000 lei
(6.000 aciuni x 30 lei/share)

(6.000 shares x 20 lei/share)
(Fair value)
(Or 1. Recognition of the revenue

Shares B = %
Cash at bank
Revenues related to
the sale of fixed
assets
2. Matching the expense to the revenue (asse derecognition)

Expenses related to = Land
the sale of fixed
assets
50.000 lei
(Fair value)
Payment of the fee:
Fees related expenses
= Cash at bank
2.000 lei
Deferred considerations
In this case, the acquisition cost includes the present value of the consideration given
including premiums or discounts recorded at settlement (not the nominal value).
Ex. The company M acquired company F on January 1, N, for 400,000 USD, paid as follows:
100,000 USD down payment, 100.000 USD paid at the end of the year N, and 200.000 USD
settled at the end of year N +1. Company Ms cost of capital is 10%.
Present value of the deferred consideration on the acquisition date (01.01.N) = 100.000/
(1+0.1) + 200.000/(1+0.1)2 = 90.910 + 165.289 = 256.199 USD
Considerration transferred at 01.01.N = down payment + deferred payment =
66
= 100.000 + 256.199 = 356.199 USD

In individual accounts of Company A:
01.01.N:
Shares acquisition
Shares F =
31.12.N:
%
Cash at bank
Sundry creditors/Deferred considerations
356.199 USD
100.000 USD
256.199 USD
Payment of 100.000 USD comprised of:

Interest for the year N = 256.199 x 10% = 25.620 USD, and
Reimbursement of the principal = 100.000 25.620 = 74.380 USD
% = Cash at bank
Interest expense
Sundry creditors/Deferred
considerations
100.000 USD
25.620 USD
74.380 USD
Deferred consideration at 31.12.N = 256.199 74.380 = 181.819 USD
31.12.N+1:
Payment of 200.000 USD comprised of:

Interest for the year N+1= 181.819 USD x 10% = 18.182 USD, i
Reimbursement of the principal = 200.000 18.182 = 181.818 USD
% = Cash at bank
Interest expense
Sundry creditors/Deferred
considerations
200.000 USD
18.182 USD
181.818 USD
Contingent consideration
Contingent considerations are payments dependent on the occurrence of future events. The
buyer will recognize the fair value of the contingent amount as part of the consideration
transferred at the acquisition date. The obligation to pay contingent considerations is
classified as debt or equity depending on settlement conditions.
Ex. Company M acquires 80% of Company F for $ 100,000 USD. The contract provides that
if the average operating profitability of Company F for the next 2 years increases with more
than 20%, the price of the shares also increases with 10%. At the acquisition date it is
reasonable certain that the performance objective will be achieved. Company Ms cost of
capital is 10%.
Contingent consideration = 10% x 100.000 USD = 10.000 USD
Fair value (present value) of the contingent considerations = 10.000/(1+0.1)^2 = 8.264 USD
Consideration transferred = 100.000 + 8.264 = 108.264 USD
67
2.2.4. Recognizing and measuring the goodwill or the gain form a bargain purchase
(badwill)
Identifiable assets and liabilities
Assets and liabilities are recognized in accordance with the definitions and recognition
criteria of conceptual framework.
Other assets and liabilities can be identified at the acquisition date, such as trademarks,
patents, manufacturing licenses, customer lists, etc., and are taken into account in
determining the goodwill; however, they will only be recognized in consolidated financial
statements. All costs associated with the acquiree's restructuring plans will not be
recognized, as provisions for restructuring will be treated as post-acquisition costs
(because they are not liabilities of the acquiree and should not be included in the
calculation of goodwill).
Assets and liabilities acquired in a business combination are measured at fair value at the
acquisition date, with some exceptions. Below are some general principles for the
valuation of assets and liabilities:
Marketable securities fair values;

Other titles discounted future cash flows;
Receivables discounted future cash inflows, adjusted for bed debts.
Inventories Finished goods selling price minus costs necessary to make the sale.
Work in progress - selling price minus costs necessary to finalize the goods and make
the sale. Raw materials replacement cost or a computation based on their
contribution to the value of finished goods.
Land and buildings fair values;
Plant and equipment markets values or replacement cost minus accumulated
depreciation.
Intangible assets market values, or, in case of a lack of active markets, replacement
cost.
Suppliers and other trade liabilities - discounted future cash outflows, adjusted for
amounts unlikely to be paid.
Other identifiable liabilities - discounted future cash outflows.
Deferred income taxes in compliance with IAS 12.
Non-controlling interests
IFRS 3 allows for non-controlling interests to be valued at fair value (full goodwill
method). Also, the buyer can evaluate non-controlling interests based on the fair value of
acquiree's net identifiable assets.
Ex. Company M paid 800 euro to acquire 80% of Company F. The fair value of the net
identifiable assets of Company F is 600 euro.
68
Non-controlling interests are

Either 20% x 600 = 120
Or 200 (1000 (100%) 800 (80%))
2.2.5. Recognizing and measuring the goodwill or the gain form a bargain purchase (badwill).
Goodwill represents, in general, the difference between the fair value of an entity (E) and the
fair value (Fv) of the net identifiable assets of the same entity (NIA).
GW = Fv(E) Fv(NIA)
Normally, a buyer is willing to pay more than the fair value of identifiable net assets, the
difference being due to the fact that the entity has, for example, a strong management team, a
favorable reputation on the market, or other identifiable assets. In this case, goodwill is
recognized as an asset in the consolidated financial statements as a lump sum of all
identifiable net assets acquired.
If the entity is 100% acquired, the fair value of the entity coincides with the consideration
transferred (CT):
Goodwill
FV (ASSETS)Owners Equity=
FV(NET ASSETS)FV
(LIABILITIES)
Fv
(Net assets)
Consideration
transferred
Control
100%
GW = CT Vj(ANI)
If the resulting amount is a negative one, it means that a gain has been generated from a
bargain purchase, which is recognized in profit or loss in consolidated financial statements.
69
FV(NET ASSETS)FV
(LIABILITIES)
Goodwill negativ
FV
(Net assets)
Consideration
transferred
Control
100%
If an entity is not fully acquired, in order to determine the fair value of the entity, the value of
the non-controlling interests has to be added to the value of the consideration transferred so
that goodwill is measured as the difference between:
The sum of
1. The fair value of the consideration transferred (CT) measured at the acquisition date;
and
2. . the value of non-controlling interests (NCI), and
The value of Net identifiable assets measured at acquisition date (net identifiable assets NIA).
GW = CT +NCI FV(NIA)
As NCI can be measured either at their fair value or as a procentage of the net identifiable
assets, there are two methods for goodwill computation:
Method 1: Based on NIA (partial goodwill) is based on valuating NCI as a procentage of
the FV(NIA) which leads to a partial recognition of the goodwill:
GW = CT +NCI FV(NIA) = CT + n% FV(NIA) FV(NIA) = CT (100 n) x FV(NIA)
70
Goodwill
FV(NET ASSETS)FV
(LIABILITIES)
80%
Consideration
transferred
80%
Control
FV (Net assests)
20%
NCI
FV (Net assests)
20%
NCI
Method 2 Full goodwill is based on valuing NCI at faor value, and allows for a full
recognition of the goodwill.
Goodwill
FV(NET ASSETS)FV
(LIABILITIES)
80%
Consideration
transferred
80%
Control
FV (Net assets)
20%
NCI
20%
NCI
FV (Net assets)
FULL GOODWILL method
71
Ex. On 01.01.N, Company A acquires 80% of Company B for 12.000 lei.

Assets and liabilities of Company B:
Land and equipment

Shares of Company C (100
shares)
Merchandise
Customers
Liabilities, of which
Bank loan
Total
Carrying
amount
6.000
1.000
Fair value at the

acquisition date
5.500
1.500
2.000
1.000
(1.000)
(600)
9.000
4.000
800
955
555
10.845
3.000 + 2.500
100 x 15
5.000 1.000
1.000 200
[600+3x 600 x 10%]/(1,12)3
The following information is available at the acquisition date:

1.
2.
3.
4.
5.
The fair value of land is 3.000, and that of equipment is 2.500;

Market price of shares C is 15 lei/shares;
The merchandise can be sold for 5.000 lei, distribution cost 1.000 lei.
It is probable that 200 lei form the receivable from customers can not be realized.
From total liabilities there is a bank loan amounting to 600 lei that is payable at the
end of N+2 together with a 10% interest p.a., that can be refinanced. The market
interest rate is 12%.
6. Trademarks amounting to 500 lei have been identified.
7. Income tax rate is 16%.
Fair value of NA (net assets)= 10.845
+ Trademarks identified at the acquisition date = 500
- Deferred income tax = [(10.845 + 500) 9.000] x 16% = 375
= Fair value of NIA (net identifiable assets) = 10.845 + 500 375 = 10.970 lei
1. Method I Partial goodwill (based on NIA)
NCI: 20% x 10.970 = 2.194 lei
Goodwill = 12.000 + 2.194 10.970 = 3.224 lei
2. Method II - Full goodwill (based on FV)
NCI: 12.000 x 20/80 = 3.000 lei
Goodwill = 12.000 + 3.000 10.970 = 4.030 lei
Case b) Assume that entity A pays 3.000 lei for 80% of Company B
1. Method I Partial goodwill (based on NIA)
NCI: 20% x 10.970 = 2.194 lei
72
Goodwill = 3.000 + 2.194 10.970 = 5.776 lei (Badwill/Gain = 5.776 lei)

2. Method II - Full goodwill (based on FV)
NCI: 12.000 x 20/80 = 3.000 lei
Goodwill = 3.000 + 3.000 10.970 = 4.970 lei
2.3. The impact of IFRS 3 on consolidated financial statements

In order to prepare consolidated financial statements, 4 steps have to be followed:
1. Adding up individual financial statements
2. Eliminating investments in consolidated companies (apply IFRS 3 for resulting
Goodwill)
3. Determining the part of the profit or loss of the subsidiary that belongs to NCI.
4. Determining the part of the NA that belong to NCI. The part of the NA that belongs to
NCI is comprised of:
a) The amount determined at the acquisition date according to IFRS 3; and
b) The part belonging to NCI that is generated by the variation in the Owners
equity after the acquisition date.
Example. At the end of the year N, Company M holds 60% of the shares and voting rights of
Company F. At this date, the financial statements of the two companies are as follows:
Balance sheet as of December 31, N:
Fixed assets
Land
Constructions
Accumulated depreciation
Net value
Industrial equipment
Accumulated depreciation
Net value
Shares F
Long term receivables
Current assets
Inventories
Customers
Cash at bank and in hand
Total assets
Liabilities
Suppliers
Deferred income tax
Bank loans
M
1.600
200
920
(500)
420
800
(300)
500
280
200
2.100
500
1.520
80
3.700
1.700
1.000
200
500
-th. EuroF
690
60
800
(450)
350
400
(120)
280
610
160
400
50
1.300
580
280
100
200
73
Owners Equity
Share capital
Reserves
Profit for the year
2.000
500
1.200
300
720
100
500
120
Company M acquired control over Company F at the end of the year N-3 for 280 th. euro, at
that date the NA of Company F being:
Capital
100
Reserves
200
300
Constructions
700
Other assets
100
Liabilities
(500)
Total NA
300
At the acquisition date the fair value of constructions was 820 th. euro, and the residual useful
life was 12 years.
Required:
a) Show the impact of the business combination in the consolidated balance sheet at the
end of N-3 assuming that the company acquired 100% of the shares of Company F for
440,32 th. euro.
b) Show the impact of the business combination in the consolidated balance sheet at the
end of N-3.
c) Draw-up the consolidated balance-sheet at the end of the year N.
a) Solution:
31.12.N-3
Explanations
Construcions
Other assets
Total assets
Liabilities
NA
Defered income tax
Carrying amount
700
100
800
(500)
300
-
NIA
Fair value
820
100
920
(500)
420
(19,2)
[(420-300)*16%]
400,8
GW = 440,32 400,8 = 39,5

In the individual accounts of Company M:
Acquisition of shares F:
Shares F = Cash at bank
440,32
In consolidated accounts:
1). Adding the assets, liabilities and owners equity of company F:
74
800
700
100
% = %
Construction F
Liabilities F
Other assets F
Owners Equity F
Reserves F
800
500
100
200
2). Eliminating investments in Company F together with the part that belongs to Company M
(100%) from the owners equity of Company F..
% = Shares F
Owners Equity F
Reserves F
300
100
200
3). Recording the differences arisen at the acquisition date from the NA of Company F
together with eliminating the remaining value of the investments in company F (consideration
transferred):
159,52
120
39,52
% = %
Constructions F
Deferred income tax
Goodwill
Shares F
159,52
19,2
140,32
4). Consolidated balance-sheet as of 31.12.N-3

Assets
Assets M
- Investments (shares F)
Assets F (carrying amount)
+ Increase in their values
Goodwill
Amounts
X
(440,32)
800
120
39,52
Total assets
X + 519,2
Owners Equity and Liabilities

Owners Equity M
Liabilities M
Amounts
X-Y
Y
Liabilities F
Deferred income tax
Total owners equity and
liabilities
500
19,2
X + 519,2
b) Solution:
31.12.N-3
Explanations
Construcions
Other assets
Total assets
Liabilities
NA
Defered income tax
NIA
Carrying amount
700
100
800
(500)
300
-
Fair value
820
100
920
(500)
420
(19,2)
[(420-120)*16%]
400,8
GW = 440,32 400,8 = 39,5
75

Acquistion of shares F:
280
800
700
100
% = %
Construction F
Liabilities F
Other assets F
Owners Equity F
Reserves F
800
500
100
200
2). Parting the owners equity of Company F between Company M and NCI:
Explanations
Share capital F
Reserves F
300
100
200
Part belonging
to Company M
(60%)
60
120
NCI
(40%)
Total
(100%)
40
80
120
100
200
300
% = %
Share capital F
Reserves F
Share capital FM
Reserves F M
NCI
300
60
120
120
(60%) from the owners equity of Company F.
% = Shares F
Share capital F M
Reserves F M
180
60
120
4). Recording the differences arisen at the acquisition date from the NA of Company A,
transferred):
The increase in the value of the constructions is 40% ascribed to NCI:
Net value increase (after Income tax)= 120 120x16% = 100,8
The part that belongs to NCI = 40% x 100,8 = 40,32
159,52
120
39,52
% = %
Constructions F
Deferred income tax
Goodwill
Shares F
NCI
159,52
19,2
100
40,32
76

Assets
Amounts
Assets M
X
(280)
Assets F (carrying
amount)
Goodwill
39,52
Total assets
X + 679,52
800
120
Owners equity and liabilities

Share capital M
Reserves M
Amounts
X-Y
160,32
[40,32+40+80
]
NCI
Liabilities M
Liabilities F
Deferred income tax
liabilities
500
19,2
X + 679,52
c) Solution:
31.12.N
1.870
60
800
400
160
400
50
% =
Land F
Constructions F
Industrial Equipmnets F
Inventories F
Customers F
Cash at bank and in hand F
%
Suppliers F
Deferred income tax F
Bank loans F
Share capital F
Reserves F
Profit for the year F
Constructions depreciation F
Equipment depreciation F
1.870
280
100
200
100
500
120
450
120
Explanations
Share capital F
Reserves F
720
100
500
120
Part belonging
to Company M
(60%)
60
300
72
NCI
(40%)
Total
(100%)
40
200
48
288
100
500
120
720
% = %
Share capital F
Share capital FM
Reserves F
Reserves FM
Profit for the year FM
NCI
720
60
300
72
288
77
% = Shares F
Ownerss EquityM
Reserves FM
180
60
120
transferred):
159,52
120
39,52
% = %
Constructions F
Deferred income tax
Goodwill
Shares F
NCI
159,52
19,2
100
40,32
5). Depreciating the increase in the value of constructions in consolidated financial

statements.
The increase in the value of constructions amounting to 120 lei was only recorded in group
accounts, accordingly related depreciation has nit yet been taken into account in consolidated
accounts. That is why the depreciation of the increase in the value of construction has to be
recorded in group accounts:
Annual depreciation = 120/12 = 10 lei/year
For the period N-3 N a total of 30 lei has to be recorded, of which 10 lei in the profit for the
year N, and the rest in reserves:
Accumulated
depreciation on
constructions
Depreciation expenses
Reserves F
10
20
6). Parting the additional values recorded in the owners equity of Company F between
Company M and NCI:
Explanations
Depreciation related to years
N-2 and N-1
Depreciation related to year N
30
12
Part belonging
to Company M
(60%)
NCI
(40%)
Total
(100%)
12
20
4
12
10
30
% = %
Reserves F
Reserves FM
30
20
78
6
12
Profit for the year FM

NCI
10
Eliminating the deferred income tax related to the recorded depreciation (for 3 years aut of
12):
4,8 (19,2 x 3/12)
Income tax liability = %

Reserves FM
Profit for the year
FM
NCI
4,8
1,92 (12x16%)
0,96 (6x16%)
1,92 (12x16%)
7). Consolidated Balance-sheet as of 31.12.N

Fixed assets
Goodwill
Land
Constructions
Accumulatd depreciation
Net value
Industrial equipment
Accumulatd depreciation
Net value
Shares F
Long term receivables
Current assets
Inventories
Customers
Cash at bank and in hand
Total assets
Liabilities
Suppliers
Deferred income tax
Bank loans
J. Owners equity
Share capital
Consolidated reserves
Profit for the year
Share capital M
NCI
2.139,52
39,52
260
1.840
(980)
860
1.200
(420)
780
0
200
2.710
660
1.920
130
4.849,52
2.275,20
1.280
295,2
700
2.579,12
500
1.393,92
366,96
2.260,88
318,24
39,52
920+800+120
(500+450+30)
280-180-100
300-4,8
1.200+300120 +12+1,92
300+72-6+0,96
288-12+1,92+40,32
79
Accounting for a negative goodwill

A negative goodwill may arise from:
- Errors in determining the fair value of the assets and liabilities of the acquired
company;
- Omissions of identifiable liabilities at the acquisition date; or
- A bargain purchase.
As a negative goodwill ca be triggered by errors in the valuation and recognition process,
IFRS 3 requires that whenever a badwill is computed, additional checking has to be
performed.
A negative goodwill/badwill is recorded as a gain in the profit or loss for the year in which the
acquisition took place.
Example. Assume that, in the initial example, the company pays 200 th euro for 60% of the
shares and voting rights of Company F.
GW = 200 60% x 400,8 = -40,48
Acquistion of shares F:
200
1) Adding the assets, liabilities and owners equity of company F:
800
700
100
% = %
Construction F
Liabilities F
Other assets F
Owners Equity F
Reserves F
800
500
100
200
Explanations
Owners equity F
Reserves F
300
100
200
Part belonging
to Company M
(60%)
60
120
NCI
(40%)
Total
(100%)
40
80
120
100
200
300
% = %
Owners equity F
Reserves F
Owners equity FM
Reserves F M
NCI
300
60
120
120
80
% = Shares F
Owners Equity F M
Reserves F M
180
60
120
transferred):
120
Constructions F = %
Deferred income tax
Shares F
NCI
Gains from the acquisition
of negative goodwill
159,52
19,2
100
40,32
40,48

Assets
Sume
Assets M
X
(200)
Assets F (carrying
amount)
800
120
Total assets
X + 720
Owners equity and liabilities

Share capital M
Reserves M
Consolidated profit
NCI
Liabilities M
Liabilities F
Deferred income tax
liabilities
Sume
X-Y
40,48
160,32
[40,32+40+80
]
Y
500
19,2
X + 720
81
Impairment of goodwil-ului
As a consequence of the convergence process, IASB amended the accounting treatment of
goodwill after recognition, forbidding goodwill amortization, and allowing for impairment
write downs, following impairment tests that are to be performed at least annually (according
to IAS 36 "Impairment of Assets").
Ex. At the end of the year N, the acquired goodwill-ul initially valued at 9.500 Euro has a
recoverable value of 8.000 Euro.
Carying amount = 9.500
Recoverable amount = 8.000
Impairment = 1.500
Impairment losses on = Impairment of goodwill
goodwill
1.500
Provisional accounting for goodwill

According to IFRS 3 (par 45), if the initial accounting for a business combination is
incomplete by the end of the reporting period in which the combination occurs, the acquirer
shall report in its financial statements provisional amounts for the items for which the
accounting is incomplete.
During the measurement period, the acquirer shall retrospectively adjust the provisional
amounts recognised at the acquisition date to reflect new information obtained about facts and
circumstances that existed as of the acquisition date and, if known, would have affected the
measurement of the amounts recognised as of that date. During the measurement period, the
acquirer shall also recognise additional assets or liabilities if new information is obtained
about facts and circumstances that existed as of the acquisition date and, if known, would
have resulted in the recognition of those assets and liabilities as of that date.
The measurement period ends as soon as the acquirer receives the information it was seeking
about facts and circumstances that existed as of the acquisition date or learns that more
information is not obtainable. However, the measurement period shall not exceed one year
from the acquisition date.
Ex. Company M acquired control of the subsidiary F on 15.08.N for 500 thousand Euros, net
assets of the company F at that date being (in thousand Euros):
Capital
Reserves
Land
Other assets
Liabilities
200
100
300
600
200
(500)
82
Total net assets
300
At the acquisition date the fair value of the land was provisionally estimated at 720 thousand
Euros. At the end of N, the recoverable amount of goodwill was valued at 200,000 Euros.
And on 18.05.N 1, it was established that the value of land was actually with 200 thousand
Euros higher than initially recognized. The recoverable amount of the land at the end of N +1
was
Solution:
15.08.N
Explanations
Land
Other assets
Total assets
Liabilities
Net Assets
Deferred income tax
Carrying amount
600
200
800
(500)
300
-
NIA
Fair value
720
200
920
(500)
420
(19,2)
[(420-300)*16%]
400,8
GW = 500 60% x 400,8 = 259,52

In the individual financial statements of the parent compnay (M):
Acquisition of shares F:
500
1) Adding the assets, liabilities and owners equity of company F:
800
600
200
% = %
Land F
Liabilities F
Other assets F
Share capital F
Reserves F
800
500
200
100
2). Parting the owners equity of Company F between Company M and NCI
Explanations
Share capital F
Reserves F
300
100
200
The part of the

parent M
(60%)
120
60
NCI
(40%)
Total
(100%)
80
40
120
200
100
300
% = %
Share capital F
Share capital FM
Reserves F
Reserves FM
300
120
60
83
NCI
120
% = Shares F
Share capital FM
Reserves FM
180
120
60
4). Recording the differences arisen at the acquisition date from the NA of Company F,
transferred):
159,52
% = %
120
Land
259,52
Goodwill
159,52
Deferred income tax

liability
Shares F
NCI
19,2
320
40,32
31.12.N
Impairment of goodwill:
Carrying amount = 259,52
Recoverable amount = 200
Impairment = 59,52
Impairment lossed on = Impairment of goodwill
goodwill
59,52
Balance sheet net value for Goodwill-ului as of 31.12.N = 59,52 29,52 = 30 (recoverable
amount)
18.05.N+1
Since it's been a year from the acquisition date, provisional assessments made in 15.08.N can
be
adjusted.
Explanations
Carrying amount
Fair value
84
Land
Other assets
Total assets
Liabilities
Net Assets
Deferred income tax
600
200
800
(500)
300
-
920
200
1.120
(500)
620
(51,2)
[(620-300)*16%]
568,8
NIA
GW = 500 60% x 568,8 = 158,72
1. Cancellation of goodwill impairment form retained earnings:

Impairment of = Retained earnings
goodwill
59,52
2. The initial recordings have to be adjusted (the differences related to the values of the
Companys F assets and liabilities)
Accounting for adjustments:
Either:
a) reverse initial journal entry, and make a new one:
-
Reverse journal entry:

(159,52)
(120)
(259,52)
% = %
Land F
Goodwill
Deferred income tax

Shares F
NCI
(159,52)
(19,2)
(320)
(40,32)
New journal entry based on new data:

478,72
320
158,72
% = %
Land F
Goodwill
478,72
Deferred income tax

Shares F
NCI
51,2
320
107,52
b) Make an adjusting journal entry, in order to correct initial amounts:

99,2
[320-120]
[158,72-259,52]
200
(100,8
)
% = %
Land F
Goodwill
Deferred income tax

NCI
99,2
32
[51,2-19,2]
67,2
[107,52-40,32]
85
86
Petrochimia de la Petrom, mega-afacere pentru Oltchim

Sursa http://www.bursa.ro/piata-de-capital/petrochimia-de-la-petrom-mega-afacere-pentru-oltchim86962&articol=86962&editie_precedenta=2010-06-14.html
"SMH Smith Hodgkinson" a reevaluat activele cumprate de combinat de la "Petrom" la

89,5 milioane de euro
Acionarii "Oltchim" au motive de bucurie dup doar ase luni de la preluarea diviziei de
petrochimie "Arpechim" de la "Petrom", cci
societatea "SHM Smith Hodkinson" a
reevaluat activele achiziionate la 89,5
milioane de euro, de cel puin apte ori mai
mult fa de preul pe care "Oltchim" l-a pltit
n decembrie 2009.
Atunci "Oltchim" a cumprat divizia de
petrochimie a "Arpechim", potrivit oficialilor
combinatului vlcean, cu 13 milioane de euro.
n aceti bani aflm c s-a achiziionat nu
doar segmentul de petrochimie, ci i stocurile
de hidrocarburi, dar i investiiile efectuate de
"Petrom".
Acionarii "Oltchim" au aprobat rezultatele reevalurii n Adunarea General, de
sptmna trecut, urmnd ca valoarea de aproape 90 de milioane de euro s fie nregistrat n
contabilitatea companiei.
Ceea ce d acum posibilitatea "Oltchim" s se mprumute mai mult. De altfel, n baza
reevalurii, conducerea "Oltchim" a ipotecat, deja, o parte dintre activele cumprate de la
"Petrom" i vrea s le pun gaj i pe celelalte ca s fac rost de capital de lucru.
Alexandru Buc, directorul general adjunct "Oltchim", a explicat, pentru ziarul BURSA,
cum s-a ajuns la aceast reevaluare: "SMH Smith Hodgkinson are cea mai mare experien
din Romnia pe evaluarea de astfel de active (rafinrii, petrochimie), fiind evaluatorii celor
mai importante active de la Petrom/OMV, Rompetrol, Rafo, etc. Trebuie s nelegei c una
este s faci o evaluare a unui activ care va fi valorificat ca fier vechi i alta este cnd evaluezi
nite instalaii din perspectiva de business integrat aa cum este situaia Oltchim. Cei de la
SMH au fcut evaluarea tiind c noi vrem s folosim activele imediat n procesul de
producie, nu s le inem n paragin ... De asemenea, tiau c vrem s mai investim nc 1014 milioane de euro n revizia instalaiilor... Au avut n vedere i strategia managementul
Oltchim de funcionare integrat la capacitate optim".
Rezultatele reevalurii petrochimiei au fost agreate de auditorul financiar al combinatului
vlcean, KPMG, care a recomandat clientului s recunoasc diferena dintre suma pltit i
reevaluarea activelor n contul de profit i pierderi al companiei, la categoria venituri.
Reevaluarea a fost acceptat de alte dou bnci comerciale, CEC i BRD, care au oferit
87
"Oltchim" finanri pe baza ipotecilor asupra activelor de la "Arpechim", potrivit unor surse
din pia.
Alexandru Buc ne-a mai spus: "Am cerut opinia auditorului nostru KPMG privind
reevaluarea activelor i acesta ne-a recomandat s nregistrm diferenele dintre suma pe care
am pltit-o pentru petrochimia de la Arpechim i rezultatul reevalurii direct n contul de
profit si pierderi, ca profit. Auditorul Oltchim, n baza standardelor IFRS, a ncadrat aceast
tranzacie ca o afacere, i nu doar ca o simpl achiziie de active, Oltchim avnd nevoie s
funcioneze integrat cu divizia de petrochimie de la Arpechim ca s devin profitabil".
88
Bibliografie
Bonham M.
et al.
(2004)
International GAAP 2005 : Generally Accepted Accounting

Practice under International Financial Reporting Standards,
LexisNexis, London
Deloitte IFRS Global Office, Business Combinations and Changes in Ownership Interests: A
Guide to the Revised IFRS 3 and IAS 27, disponibil on-line la
http://www.iasplus.com/dttpubs/0807ifrs3guide.pdf
IASB (2009). IFRS 3 Business combinations, eIFRS 2005, www.iasb.org
Ionacu, M., Ionacu I., (2009). Convergena contabil internaional: IFRS-US GAAP,
Editura Tribuna Economic, n curs de apariie.
*** IFRS 3 Goodwill session 21, ACCA Global, 2008
Obert R.
(2004)
Pratique des normes IAS/IFRS, 2e dition, Dunod, Paris
Raffournier B. (2006). Les normes comptables internationales (IFRS/IAS), 3e edition,

Economica, Paris.
89

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Advanced Financial Accounting Under IFRS - Lecture Notes - Final

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Introduction to advanced issues in financial accounting

CHAPTER 1 Conceptual issues in financial accounting towards

Exposure Draft ED/2010/2 Conceptual Framework for Financial

Phase A Objectives and qualitative characteristics

the objective of financial reporting (new version)

Chapter 1: The Objective of general purpose financial reporting as redefined

from that entity's performance; and

Financial performance reflected by accrual accounting- the changes in an entity's economic

In order to offer investors a better perspective on their performance, companies publish

Financial performance reflected by past cash flows

Enhancing qualitative characteristics

PHASE B: Objectives Elements and Recognition Phase

Revise and clarify the definitions of asset and liability.

Decisions Reached at the Last Meeting

arrangements are unconditional promises and other abilities to require provision of

CHAPTER 2. Measurement issues fair value measurement

wages and salaries

Basic principle of IAS 19

Four categories of employee benefits to be covered

1. Short-term employee benefits

2) Short-term compensated absences

[10 x 200 x 80%]

3). Profit-sharing and bonus payments

= Provisions for employee

2. Post-employment benefit plans

Defined contribution plans

Accounting for defined contributions plans

Defined benefit plans

Accounting treatment of actuarial gains/losses

= 20.000 lei x (1,04)4 =

Amount owed for each year of service

= 23.397 lei x 0,5% =

Present value of Plan Obligation at the beginning of

Cost of finance/Interest expense (i = 10%)

Cost of service/Expenses related to post-employment

Present value of Plan Obligation at the end of the year

Present value of Plan Obligation at the beginning of

Cost of finance/Interest expense (i = 10%)

Cost of service/Expenses related to post-employment

Present value of Plan Obligation at the end of the year

Present value of Plan Obligation at the beginning of

Valuations based on i=8%:

Cost of service/Expenses related to post-employment

Actuarial Gains/Losses for the year

a multi-employer plan to the individual entities-employers [IAS 19.29-33]

Other long-term benefits

terminate the employment of an employee or group of employees before the normal

provide termination benefits as a result of an offer made in order to encourage

2.2. Accounting for share-based payments IFRS 2

Share appreciation rights that entitle employees to cash payments calculated by

It is not related to the receipt of goods or services; or

Definition of share-based payment

Recognition and measurement

Other equity items/Share

[(100 15) 3 periods] 2 = 250

General fair value measurement principle. In principle, transactions in which goods or

= 1.000 shares x 12 lei/share =

= 200 shares x 13 lei/share =

(200 Shares x 13 lei/share)

(200 shares x 11 lei/share)

(200 share x (13-11) lei/share )