Specialised measurement and disclosure issues (revenue, leases, deferred tax, provisions, impairment, foreign currency)
Core rules
- IFRS 15: five steps - contract, performance obligations, transaction price, allocation, recognition. Variable consideration is estimated and constrained; revenue is recognised over time only if a criterion is met, otherwise at a point in time. Principal versus agent determines gross versus net presentation.
- IFRS 16 lessee: recognise a right-of-use (ROU) asset and lease liability at the present value of lease payments, using the implicit rate or incremental borrowing rate. Exemptions: short-term and low-value leases. Remeasure for index changes, residual guarantees and options reasonably certain to be exercised.
- IAS 12: recognise deferred tax on temporary differences; a deferred tax asset only if probable taxable profit; the initial recognition exemption is narrow and does not apply to leases and decommissioning obligations.
- IAS 37: present obligation, probable outflow, reliable estimate; best estimate; onerous contracts; no provision for future operating losses.
- IAS 36: recoverable amount is the higher of fair value less costs of disposal and value in use; allocate impairment to goodwill first, then pro rata.
- IAS 21: functional currency; foreign operation assets and liabilities at closing rate, income and expenses at transaction-date rates (average permitted), differences in OCI.
Worked example
Lease payments are 10,000 per year in arrears for five years; incremental borrowing rate 5%; annuity factor 4.3295. Liability = 43,295. Initial direct costs of 2,000 are added to the ROU asset, giving 45,295. Year 1 interest = 43,295 × 5% = 2,165; depreciation = 45,295 ÷ 5 = 9,059.
Traps
- Discounting lease payments at the wrong rate or using undiscounted amounts.
- Adding initial direct costs to the liability instead of the ROU asset.
- Recognising revenue before a performance obligation is satisfied.
- Translating monetary items at the historical rate rather than the closing rate.