IFRS Key Standards and Practical Accounting Treatment Examples

Posted on Oct 21, 2025 in Financial and Accounting Management

International Accounting Standards Board (IASB)

  • Issues IFRS (International Financial Reporting Standards).
  • Publishes Discussion Papers, Exposure Drafts, and Final Standards.
  • Objective: Provide useful financial information for investors.

IAS 37: Provisions

Recognize a provision if all three conditions are met:

  1. A present obligation exists (legal or constructive).
  2. A probable outflow of resources embodying economic benefits is required to settle the obligation.
  3. A reliable estimate of the amount of the obligation can be made.
  • If the amount is not estimable, disclose only.
  • If circumstances change, adjust the provision accordingly.

IFRS 15: Revenue from Contracts with Customers

Revenue recognition follows five steps:

  1. Identify the contract with the customer.
  2. Identify the separate performance obligations in the contract.
  3. Determine the transaction price.
  4. Allocate the transaction price to the separate performance obligations.
  5. Recognize revenue when (or as) the entity satisfies a performance obligation.

If returns are expected, the entity must recognize net revenue, a refund liability, and a corresponding return asset.

IAS 2: Inventories

  • Inventories are measured at the lower of cost or Net Realizable Value (NRV).
  • NRV is calculated as the estimated selling price less the estimated costs to complete and the estimated costs necessary to make the sale.
  • If NRV is less than cost, recognize a loss (write-down).
  • If NRV increases later, reverse the write-down (up to the original cost).

IAS 36: Impairment of Assets

  • An impairment loss is recognized if the carrying amount is greater than the recoverable amount.
  • The recoverable amount is the higher of: value in use or fair value less costs to sell.
  • Reversal of an impairment loss is allowed if conditions improve (except for impairment losses recognized on goodwill).

IAS 16: Property, Plant & Equipment (PPE)

Two measurement models are available after initial recognition:

  • The Cost Model
  • The Revaluation Model

Revaluation Model Treatment:

  • If value increases: Record the increase in Revaluation Surplus (a component of equity).
  • If value decreases: Record the decrease in Profit & Loss (P&L), unless it offsets a previously recognized surplus relating to the same asset.

Two methods for handling accumulated depreciation upon revaluation:

  1. Restatement Method: Adjust the gross carrying amount and remove accumulated depreciation proportionally.
  2. Net-off Method: Eliminate accumulated depreciation against the gross carrying amount, and set the asset to its fair value.

Anglo-Saxon vs. Continental Accounting Models

  • Anglo-Saxon Model: Typically uses IFRS, is investor-focused, and emphasizes transparency.
  • Continental Model: Is often legal-based, prioritizes creditor protection, and tends to be more conservative.

Practical Application Examples (Journal Entries)

Example 1: Litigation Claims (IAS 37 Provisions)

Year 2:
Dr. Litigation Expense 1,365,000
Cr. Provision for Litigation 1,365,000

Year 3:
Dr. Litigation Expense 1,155,000
Cr. Provision for Litigation 1,155,000

Year 4 (Payment):
Dr. Provision for Litigation 1,200,000
Cr. Cash 1,200,000

Year 4 (Adjustment):
Dr. Litigation Expense 520,000
Cr. Provision for Litigation 520,000

Example 2: Return Estimates (IFRS 15)

Initial Entry:
Dr. Accounts Receivable 1,000,000
Dr. Cost of Goods Sold 665,000
Dr. Inventory (Returns Asset) 35,000
Cr. Sales Revenue 950,000
Cr. Refund Liability 50,000
Cr. Inventory 700,000

Actual Returns:
Dr. Refund Liability 30,000
Cr. Accounts Receivable 30,000
Dr. Inventory 21,000
Cr. Inventory (Returns Asset) 21,000

Excess Adjustment:
Dr. Refund Liability 20,000
Cr. Sales Revenue 20,000
Dr. Inventory (Returns Asset) 14,000
Cr. Cost of Goods Sold 14,000

Example 4: Depreciation and Impairment (IAS 36)

Years 1-4 (Depreciation):
Dr. Depreciation Expense 100,000
Cr. Accumulated Depreciation 100,000

Year 4 (Impairment):
Dr. Impairment Loss 100,000
Cr. Equipment 100,000

Year 7 (Reversal):
Dr. Equipment 137,500
Cr. Reversal of Impairment Loss 137,500

Example 5: Revaluation Methods (IAS 16)

Method 1 (Restatement):
Dr. Accumulated Depreciation 900,000
Dr. Building 500,000
Cr. Revaluation Surplus 400,000

Method 2 (Net-off):
Dr. Accumulated Depreciation 900,000
Dr. Building 600,000
Cr. Building 1,000,000
Cr. Revaluation Surplus 400,000

Example 6: Fair Value Changes and Revaluation Surplus

Warehouse Y1 (Decrease):
Dr. Loss on Revaluation 50,000
Cr. Warehouse 50,000

Warehouse Y2 (Increase):
Dr. Warehouse 20,000
Cr. Gain on Revaluation 20,000

Vehicles Y1 (Increase):
Dr. Vehicles 10,000
Cr. Revaluation Surplus 10,000

Vehicles Y2 (Decrease):
Dr. Revaluation Surplus 10,000
Dr. Loss on Revaluation 10,000
Cr. Vehicles 20,000

Example 7: Dismantling Costs (IAS 16 & IAS 37)

  • Building Cost = 1,500,000, Dismantling Cost = 500,000
  • Machinery Cost = 3,000,000, Dismantling Cost = 150,000
  • PV factor (8%, 25 years) = 0.14602

Present Value Calculations:
PV Building Dismantling = 500,000 * 0.14602 = 73,010
PV Machinery Dismantling = 150,000 * 0.14602 = 21,903

Total Asset Cost:
Building: 1,500,000 + 73,010 = 1,573,010
Machinery: 3,000,000 + 21,903 = 3,021,903

Initial Journal Entry:
Dr. Building 1,573,010
Dr. Machinery & Equipment 3,021,903
Cr. Cash 4,500,000
Cr. Asset Retirement Obligation 94,913 (73,010 + 21,903)