Comprehensive Financial Reporting Notes: IAS 23, IFRS 9, IAS 21, and Reporting Disclosures

Accounting for Borrowing Costs (IAS 23 / BAS 23)

Core Concepts and Benchmark vs. Allowed Alternative Treatment
- BAS 23 / IAS 23 Borrowing Costs prescribes the accounting treatment and criteria for determining whether borrowing costs can be capitalized as part of the cost of acquiring, constructing, or producing a qualifying asset.
- The Standard prescribes two alternative treatments for recognizing borrowing costs:
  - Allowed Alternative Treatment: Capitalization of borrowing costs directly into the carrying amount of a qualifying asset.
  - Benchmark Treatment: Expensing borrowing costs immediately in profit or loss in the period in which they are incurred.
Definition and Components of Borrowing Costs
- Borrowing costs are broadly defined as interest and other costs incurred by an enterprise in connection with the borrowing of funds.
- Borrowing costs encompass more than simple interest on short-term borrowings (e.g., bank overdrafts, notes payable) or long-term borrowings (e.g., term loans, real estate mortgages).
- Borrowing costs explicitly include:
  - Interest expenses calculated using the effective interest rate method as described in IFRS 9 Financial Instruments (or IAS 39 Financial Instruments: Recognition and Measurement for entities that have not yet adopted IFRS 9).
  - Amortization of discounts or premiums relating to borrowings.
  - Amortization of ancillary costs incurred in connection with the arrangement of borrowings.
  - Exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs.
  - Finance charges in respect of finance leases recognized in accordance with IAS 17 Leases (for entities that have not yet adopted IFRS 16 Leases), or interest in respect of lease liabilities recognized in accordance with IFRS 16 Leases.

Qualifying Assets
- Definition: According to IAS 23.5, a qualifying asset is "an asset that necessarily takes a substantial period of time to get ready for its intended use or sale."
- Substantial Period of Time: IAS 23 does not explicitly define the precise duration of a "substantial period of time." Determination requires professional judgment based on the entity's particular circumstances. In general, a period of more than $1$ year would be considered a substantial period of time. Capitalization applies if the borrowing costs under consideration are material.
- Examples of Qualifying Assets:
  - A toll bridge that takes a couple of years to construct before it is ready for use and opened to the public.
  - A power plant that takes a substantial period of time to get ready for its intended use.
  - A hydroelectric dam servicing the needs of a village that takes a considerable period of time to construct.
  - Inventories that require a substantial period of time to bring to a salable condition.
- Items That Are NOT Qualifying Assets:
  - Assets that are ready for their intended use or sale when acquired.
  - Financial assets.
  - Inventories that are routinely manufactured or otherwise produced on a repetitive basis over a short period of time.

Borrowings Eligible for Capitalization
- Specific Borrowings: When funds are borrowed specifically for the purpose of obtaining a particular qualifying asset, the borrowing costs directly related to that asset are readily identifiable.
- Investment Income Deduction: When funds borrowed specifically are not utilized immediately and idle funds are temporarily invested, the borrowing costs eligible for capitalization must be reduced by any investment income earned from those temporary investments.
- General / Centralized Borrowings: If funds are borrowed centrally (e.g., within a corporate group) and used for multiple purposes, a weighted-average capitalization rate is applied to the expenditures incurred on the qualifying asset.
- Capitalization Ceiling: The total borrowing costs capitalized during a given period cannot exceed the actual borrowing costs incurred by the entity during that period.
Timing of Capitalization: Commencement, Suspension, and Cessation
- Commencement of Capitalization: Capitalization shall commence when all three of the following conditions are satisfied:
  1. Expenditures for the asset are being incurred;
  2. Borrowing costs are being incurred; and
  3. Activities necessary to prepare the asset for its intended use or sale are actively in progress.
- Suspension of Capitalization:
  - Capitalization shall be suspended during extended periods in which active development is interrupted, unless that interruption is a necessary part of the process for producing the asset.
  - Example of Suspension: Interruption of bridge construction during very high water levels, where high water levels are common to the construction location and form a necessary part of the production process, does not require suspension.
  - Capitalization should not be suspended during temporary delays caused by expected and anticipated events essential for getting the asset ready for its intended use.
- Cessation of Capitalization:
  - Capitalization shall cease when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete.
  - An asset is considered substantially complete if only minor modifications remain, such as decoration or routine administrative work.
  - When an asset is completed in stages (e.g., a business park or extensive development), capitalization ceases on each individual part as soon as that specific part becomes ready for use.
Recognition Criteria and Impairment Requirements
- Borrowing costs are capitalized only when:
  1. It is probable that they will result in future economic benefits to the enterprise; and
  2. The costs can be measured reliably.
- If capitalization of borrowing costs causes the asset's carrying amount to exceed its recoverable amount, the impairment requirements under IAS 36 Impairment of Assets apply. The capitalized borrowing costs form an integral part of the asset's carrying amount used during impairment testing.

General Recognition and Measurement Criteria

Disclosure Requirements (IAS 23.26)
- An entity shall disclose:
  - The amount of borrowing costs capitalized during the period; and
  - The capitalization rate used to determine the amount of borrowing costs eligible for capitalization.

Accounting for Financial Instruments (IAS 32, IFRS 9, IAS 39, IFRS 7)

Standard Framework and Architecture
- IAS 32: Governs definitions, distinction between liabilities and equity, presentation of related interest, dividends, gains and losses, and offsetting of financial assets and liabilities.
- IFRS 9: Governs definitions related to financial instruments, initial recognition, classification, measurement, impairment of financial assets, and derecognition.
- IFRS 7: Governs comprehensive disclosures regarding statement of financial position, income/expenses/gains/losses, accounting policies, and credit risk.

Financial Instruments Standards Overview Part 1

Financial Instruments Standards Overview Part 2

Key Definitions (IAS 32)
- Financial Instrument: Any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.
- Financial Asset: Any asset that is:
  - Cash (e.g., a bank deposit);
  - An equity instrument of another entity (e.g., investment in shares);
  - A contractual right to receive cash (e.g., debtors, trade receivables, loans receivable) or another financial asset from another entity; or
  - A contract that will or may be settled in the entity's own equity instruments.
  - Note: Physical assets (inventories) and intangible assets (patents) are NOT financial assets.
- Financial Liability: Any liability that is a contractual obligation to:
  - Deliver cash (e.g., creditors, trade payables, loans repayable) or another financial asset to another entity;
  - Exchange financial instruments with another entity under conditions that are potentially unfavorable; or
  - A contract that will or may be settled in the entity's own equity instruments.
- Equity Instrument: Any contract that evidences a residual claim or interest in the assets of an entity after deducting all of its liabilities (proportionate claim against capital and reserves).
- Traditional Types of Financial Instruments:
  - Bond / Debenture: Certificate of debt issued by a government or company carrying a fixed interest rate, repayable with or without security at a specified future maturity date.
  - Loan: Temporary grant of money on condition that the principal amount is repaid with interest, potentially requiring security.
  - Ordinary Share: Equity share entitled to dividends after preference share dividends are settled.
  - Preference Share: Share receiving dividends prior to ordinary share dividend distributions.
  - Clearing House: Exchange entity providing clearing and settlement facilities to market participants.
- Derivative Financial Instruments:
  - Contracts allowing entities to speculate on or hedge against future market changes at relatively low or zero initial cost. Includes:
    - Purchased Call Option: Right, but not obligation, to buy a financial asset at a fixed price at a future date.
    - Purchased Put Option: Right, but not obligation, to sell a financial asset at a fixed price at a future date.
    - Forward Contract: Contract to purchase or sell a financial asset at a fixed price at a future date.
    - Interest Rate Swap: Agreement to exchange floating interest rate payments for fixed interest rate payments on a specified notional amount.
Initial Measurement and Transaction Costs
- Financial instruments are initially measured at fair value.
- Transaction Costs Accounting:
  - Financial assets or liabilities measured at Fair Value Through Profit or Loss (FVTPL): Transaction costs are expensed immediately in profit or loss.
  - Financial assets at Fair Value Through Other Comprehensive Income (FVOCI): Initial fair value plus transaction costs.
  - Financial assets at Amortised Cost: Initial fair value plus transaction costs.
  - Financial liabilities at Amortised Cost: Initial fair value minus transaction costs.

Practical Examples and Journal Entries for Initial Measurement
- Long-Term Loan Receivable: Recognized at present value of cash receivable (principal and interest).
- Short-Term Credit Goods Sale: Recognized at undiscounted invoice price.
- Two-Year Interest-Free Credit Sale: Recognized at current cash sale price or estimated present value discounted using prevailing market interest rates for similar receivables.
- Purchase of Listed Ordinary Shares (FVTPL):
  - Entity incurs $CU10$ broker fees to buy $50$ non-puttable ordinary shares in a listed company for $CU500$ cash.
  - Journal Entry:
    - Debit: Investment in equity instruments (Financial Asset) $CU500$
    - Debit: Profit or loss (Transaction costs) $CU10$
    - Credit: Cash (Financial Asset) $CU510$
- Purchase of Unlisted Shares (Cost Less Impairment):
  - Entity incurs $CU10$ broker fees to buy $50$ non-puttable ordinary shares in an unlisted company for $CU500$ cash (fair value not reliably measurable).
  - Journal Entry:
    - Debit: Investment in equity instruments (Financial Asset) $CU510$
    - Credit: Cash (Financial Asset) $CU510$
- Bank Loan Received: Payable recognized at present value of cash payable.
- Purchase of Inventory on Short-Term Credit:
  - Goods purchased for $CU400$ with $120$ days' interest-free credit (normal industry terms).
  - Journal Entry:
    - Debit: Inventories (Asset) $CU400$
    - Credit: Trade payable (Financial Liability) $CU400$
- Office Rental Accrual:
  - Renting office for $CU1,000$ /month starting November 1, 20X1. Unpaid at December 31, 20X1 ( $2$ months accrued = $CU2,000$ ).
  - Journal Entry:
    - Debit: Profit or loss (Rental expense) $CU2,000$
    - Credit: Rental payable (Financial Liability) $CU2,000$
Subsequent Measurement Categories under IFRS 9
- Amortised Cost:
  - Applies to financial assets where the asset is held within a business model to collect contractual cash flows, and cash flows meet the Solely Payments of Principal and Interest (SPPI) test.
  - Amortised Cost Formula: Cost adjusted to achieve a constant effective interest rate over the life of the instrument.
  - Calculation Example: Investment in debt instrument at start of 20X4 is $CU100,000$ with effective interest rate of 12\null\%. Amortised cost at end of 20X4 is: $100,000 + (12\% \times 100,000) = CU112,000$
- Fair Value Through Other Comprehensive Income (FVOCI):
  - Debt Instruments: Asset held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets, AND passes the SPPI test.
    - Interest income calculated via effective interest rate recognized in profit or loss.
    - Foreign exchange gains/losses recognized in profit or loss.
    - Credit impairment losses/reversals recognized in profit or loss.
    - Other fair value adjustments recognized in OCI.
    - On derecognition, cumulative fair value gain/loss in OCI is recycled to profit or loss.
  - Equity Instruments: Irrevocable election made at initial recognition for non-trading equity investments. All fair value changes recognized in OCI. No recycling to profit or loss upon derecognition.
- Fair Value Through Profit or Loss (FVTPL):
  - Residual category under IFRS 9.
  - Includes held-for-trading financial assets, debt instruments failing SPPI or business model tests, equity instruments without FVOCI election, derivatives not in hedge relationships, convertible notes, contingent consideration receivables.
  - All realized and unrealized gains/losses recorded directly in profit or loss.
Factoring of Receivables
- Definition: Financial transaction in which a business sells its accounts receivable (invoices) to a third party (factor) at a discount to raise immediate cash.

*   **Factoring Without Recourse**:
    *   The factor assumes all risks (including bad debt/credit risk) and rewards. The entity completely derecognizes the receivables.
    *   *Example*: Tradex transfers trade receivables of  $CU300,000$  for 90\null\% of nominal value ( $CU270,000$ ). Factor has no recourse rights.
    *   *Journal Entry*:
        *   Debit: Bank account (300,000 \times 90\%$) CU270,000\n            *   Debit: Profit or loss - finance expenses CU30,000\n            *   Credit: Receivables CU300,000\n        *   *Note*: Finance expenses represent interest/fees. If material, interest is accrued over the financing period.\n    *   **Factoring With Recourse**:\n        *   The entity retains credit risk because the factor has full right to return uncollectible receivables. Derecognition criteria are NOT met; receivables remain on the balance sheet and cash received is recorded as a liability.\n        *   *Example*: Tradex transfers trade receivables of CU300,000 $for$ 96

ull $\% of nominal value ($ CU288,000) with recourse.\n * *Initial Journal Entry*:\n * Debit: Bank account (300,000 \times 96\%$) $CU288,000$ * Debit: Profit or loss - finance expenses $CU12,000$ * Credit: Refund liability $CU300,000$ * Subsequent Entry - Customer Defaults and Factor Applies Recourse ( $CU10,000$ ): * Debit: Refund liability $CU10,000$ * Credit: Bank account $CU10,000$ * Subsequent Entry - Customers Pay Factor ( $CU50,000$ collected): * Debit: Refund liability $CU50,000$ * Credit: Receivables $CU50,000$

Financial Instrument Disclosures (IFRS 7 / IAS 32)
- Must disclose carrying amounts for each classification category on the face of the balance sheet or in notes.
- Must disclose net gains/losses and total interest income/expense for each financial instrument category.

Accounting for Foreign Currency Transactions (IAS 21)

Scope and Objectives of IAS 21
- IAS 21 The Effects of Changes in Foreign Exchange Rates outlines accounting for foreign currency transactions, foreign operations, and translation of financial statements into a presentation currency.
- Key focus areas: applicable exchange rates and reporting foreign exchange gain/loss effects in financial statements.
Key Definitions
- Functional Currency: The currency of the primary economic environment in which the entity operates.
- Foreign Currency: A currency other than the functional currency of the entity.
- Presentation Currency: The currency in which the financial statements are presented.
- Foreign Operation: A subsidiary, associate, joint venture, or branch whose activities are based or conducted in a country or currency other than those of the reporting entity.
- Spot Rate: The exchange rate for immediate delivery.
- Closing Rate: The spot exchange rate at the balance sheet date.
- Exchange Difference: The difference resulting from translating a given number of units of one currency into another currency at different exchange rates.
- Monetary Items: Money held and assets and liabilities to be received or paid in fixed or determinable amounts of money.
  - Examples: Cash, accounts and notes receivable, trade payables, loans, cash-settled provisions, cash dividends, employee benefits in cash.
- Non-Monetary Items: The absence of a right to receive, or an obligation to deliver, a fixed or determinable number of units of currency.
  - Examples: Property, plant, and equipment (PPE), intangibles, goodwill, inventories, prepaid expenses (e.g., prepaid insurance), provisions settled via non-monetary assets.
Determining Functional Currency
- An entity considers primary and secondary factors to identify its functional currency:
- Primary Factors:
  1. The currency that mainly influences sales prices for goods and services (often denomination currency for sales).
  2. The currency of the country whose competitive forces and regulations mainly determine sales prices.
  3. The currency that mainly influences labor, material, and other operational costs.
- Secondary Factors:
  1. The currency in which funds from financing activities (debt/equity) are generated.
  2. The currency in which receipts from operating activities are retained.
Translation to Presentation Currency
- Where presentation currency differs from functional currency, translation rules apply:
  - Assets and Liabilities: Translated at the closing rate at the reporting date.
  - Income and Expenses: Translated at exchange rates on transaction dates (an average rate for the period may be used if rates do not fluctuate significantly).
  - Equity Items: Translated at historical exchange rates (the rate applying when shares were issued).
  - Exchange Differences: Recognized in Other Comprehensive Income (OCI) and accumulated in a separate component of equity (foreign exchange reserve).
- Foreign Operations: Financial statements of a foreign operation (subsidiary, associate, branch) are translated into the reporting entity's presentation currency using these rules.
Recognition of Foreign Exchange Differences
- Monetary Items: Exchange differences arising on settlement or translation of monetary items are reported in profit or loss in the period.
  - Exception (Net Investment in Foreign Operation): Exchange differences arising on monetary items forming part of a reporting entity's net investment in a foreign operation are recognized in OCI / equity in group consolidated financial statements, and recycled to profit or loss upon disposal. In the entity's separate financial statements, they are recognized in profit or loss.
- Non-Monetary Items: If a gain or loss on a non-monetary item is recognized in equity/OCI (e.g., PPE revaluation under IAS 16), any exchange component of that gain/loss is also recognized in equity/OCI.
Disclosure Requirements (IAS 21)
- Amount of exchange differences recognized in profit or loss (excluding financial instruments at FVTPL under IAS 39 / IFRS 9).
- Net exchange differences in a separate equity component, with a complete opening-to-closing reconciliation.
- Fact and reason if presentation currency differs from functional currency.
- Any change in functional currency of the reporting entity or significant foreign operation, along with reasons.

Financial Statement Disclosures and Reporting Requirements

Meaning, Purpose, and Importance of Disclosure
- Definition: Timely release of all material information about a company that may influence an investor's decision.
- Purpose: Disclose relevant facts, figures, dates, procedures, and operational details to enable investors to make informed investment choices.
- Importance:
  - Ensures financial transparency.
  - Helps prevent financial and economic crises.
  - Eliminates insider trading and window dressing.
  - Reduces market uncertainties.
- Limitations: Highly regulated information boundaries.
IAS 1 Presentation of Financial Statements Disclosure Requirements
- Notes must disclose: accounting policies and measurement bases; management judgments; key assumptions and estimation uncertainties; capital management evaluation details; proposed/declared dividends; entity legal form, domicile, country of incorporation, registered office address, and parent/ultimate parent entities.
Impact of IFRS 18 (Replacing IAS 1)
- IFRS 18 replaces IAS 1 and introduces:
  1. Specified categories and defined subtotals in the statement of profit or loss.
  2. Mandatory disclosures on Management-defined Performance Measures (MPMs) in notes.
  3. Enhanced aggregation and disaggregation guidelines.
- Consequential Standard Amendments: IAS 8 title changed to Basis of Preparation of Financial Statements; minor updates to IAS 7, IAS 33, and IAS 34.

Statement of Financial Performance under IFRS 18

Illustrative Statement of Financial Performance (IFRS 18 Format)
- Revenue from the sale of goods: 2023 = $CU22,132,991.00$ ; 2022 = $CU16,381,185.00$
- Cost of goods sold: 2023 = $CU(15,447,701.00)$ ; 2022 = $CU(11,298,542.00)$
- Gross profit: 2023 = $CU6,685,290.00$ ; 2022 = $CU5,082,644.00$
- Other income: 2023 = $CU265,245.00$ ; 2022 = $CU102,756.00$
- Selling expenses: 2023 = $CU(1,701,360.00)$ ; 2022 = $CU(1,192,527.00)$
- General and administrative expenses: 2023 = $CU(2,554,044.00)$ ; 2022 = $CU(2,208,843.00)$
- Other operating expenses: 2023 = $CU(444,009.00)$ ; 2022 = $CU(401,108.00)$
- Operating profit: 2023 = $CU2,251,122.00$ ; 2022 = $CU1,382,922.00$
- Investment income: 2023 = $CU145,000.00$ ; 2022 = $CU99,000.00$
- Investment costs: 2023 = $CU(9,000.00)$ ; 2022 = $CU(6,000.00)$
- Profit before financing and income tax: 2023 = $CU2,387,122.00$ ; 2022 = $CU1,475,922.00$
- Finance income: 2023 = $CU0.00$ ; 2022 = $CU0.00$
- Finance costs: 2023 = $CU(8,058.00)$ ; 2022 = $CU(2,882.00)$
- Profit before tax: 2023 = $CU2,379,064.00$ ; 2022 = $CU1,473,041.00$
- Income tax expense: 2023 = $CU128,469.00$ ; 2022 = $CU154,669.00$
- Profit for the year from continuing operations: 2023 = $CU2,250,595.00$ ; 2022 = $CU1,318,372.00$
- Loss for the year from continuing operations: 2023 = $CU0.00$ ; 2022 = $CU0.00$
- Profit for the year: 2023 = $CU2,250,595.00$ ; 2022 = $CU1,318,372.00$
IAS 24 Related Party Disclosures
- Objective: Draw attention to potential impacts of related party relationships, transactions, balances, and commitments on financial position and profit/loss.
- Related Party Person: Has control, joint control, significant influence, or is key management personnel (or close family member thereof).
- Related Party Entity: Parent, subsidiary, fellow subsidiary, associate, joint venture, or entity controlled/influenced by a related person.
IAS 33 Earnings Per Share (EPS) Disclosures
- Disclose basic and diluted EPS numerators, with reconciliation to profit or loss attributable to parent entity showing individual instrument class effects.
- Disclose weighted average ordinary shares (denominators) for basic and diluted EPS, with reconciliation between denominators.
- Disclose antidilutive instruments excluded from diluted EPS.
- Describe post-reporting date share transactions that would significantly alter share counts.
- Disclose basis of numerator determination (before/after tax).
IFRS 8 Operating Segments Disclosures
- Factors identifying reportable segments (products/services, geography, regulatory environment).
- Management judgments regarding segment aggregation criteria.
- Types of products and services generating revenues for each segment.
IFRS 5 Discontinued Operations and Non-Current Assets Held for Sale
- Discontinued Operations: Single amount on Statement of Comprehensive Income comprising post-tax profit/loss of discontinued operations plus post-tax fair value less costs to sell gain/loss. Notes must analyze this into revenue, expenses, pre-tax profit/loss, disposal gain/loss, and income tax expense.
- Held for Sale Assets: Disclose description, sales facts/timing, impairment losses/reversals, and segment classification under IFRS 8.
IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors
- Requires disclosures for initial application/early adoption of standards, voluntary policy changes, unissued/unadopted standards, and correction of prior period material errors.
IAS 34 Interim Financial Reporting
- Minimum Content: Condensed balance sheet, condensed statement of comprehensive income, condensed statement of changes in equity, condensed statement of cash flows, and selected explanatory notes.
- Significant Events Disclosures: Inventory write-downs, impairment losses/reversals, restructuring provision reversals, PPE acquisitions/commitments, litigation settlements, prior period error corrections, fair value hierarchy transfers, loan defaults, and contingent liability changes.