IFRS Case Studies Handout PDF

Executive IFRS Workshop for

Regulators
Monday 3 June 2013
Vienna, Austria
Case Study: judgHments when there is no specific

IFRS requirement
Michael Wells
Director, IFRS Education Initiative
IASB
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Amalgam case study
Michael J C Wells, Director, IFRS Education Initiative, IASB
This case study is currently ‘work in process’. It will be revised following comments from people
attending a series of workshops on the Framework-based approach to teaching International
Financial Reporting Standards (IFRS) organised by the IFRS Foundation and others (including the
European Accounting Association (EAA) and the Southern African Accounting Association (SAAA)
and the International Association for Accounting Education and Research (IAAER)). After revisions,
the material will be available as an educational resource on the IFRS website.
Background
Amalgam1 has been listed on the Afriganistan Stock Exchange for more than a decade.
It was founded by Mrs Conglomerate (Mrs C) and Mrs C holds the controlling equity interest.
Amalgam’s functional currency is the US dollar ($).
For many years Mr Judgement (Mr J) has led the financial reporting team at Amalgam.
Last year, when preparing Amalgam’s first IFRS financial statements, Mr J found that he
needed to make many more judgements and estimates to apply IFRS, compared with
applying the previous financial reporting requirements, which were mostly tax-based.
In the current reporting period (20X2) Amalgam entered into a number of transactions for
which Mr J cannot find specific IFRS requirements. Mr J wonders how, in the absence of
explicit IFRS requirements, he should account for and report those transactions in
Amalgam’s financial statements for the year ended 31 December 20X2. Consequently, he
seeks your expert opinion on how to account for the following transactions in accordance
with IFRS.
Gold acquired and held as a ‘store of wealth’
On 30 June 20X2 Amalgam acquires 1,000,000 ounces of gold at $1,000 per ounce and stores
it in a secure vault at the local branch of an international bank. Amalgam neither trades in
gold and nor does it have any use for the gold, other than as a ‘store of wealth’. Amalgam’s
‘risk management’ team expect to hold the gold for the foreseeable future and the cash used
to pay for the gold is surplus to its foreseeable cash flow needs.
At 31 December 20X2 (end of the annual reporting period) gold is trading at $1,500 per
ounce and Amalgam continues to hold 1,000,000 ounces of gold as a store of wealth.
1
The names of individuals, entities and places in this case study are fictitious. Any resemblance to actual
people, entities or places is purely coincidental.
Artwork collection
In September 20X2 Amalgam begins collecting artworks for the first time. It acquires
10 paintings at auctions in London, Hong Kong and New York at a total cost of $1 billion.
Amalgam does not trade in paintings and nor does intend to do so in the future. However, in
managing the art collection, it is envisaged that some artworks might need to be sold to fund
the acquisition of other, more desirable, pieces.
The artwork collection is stored in a purpose-built underground vault at Amalgam’s

head office building. It is envisaged that, on occasion, Amalgam might invite its most
important customers and other special guests to view the collection at no charge.
Amalgam’s ‘risk management’ team expect to hold the art indefinitely and the cash used to
pay for the collection is surplus to its foreseeable cash flow needs.
In October 20X2 Mrs Artlover (Mrs A) died. In her will she bequeathed $2 billion to
Amalgam on the condition that Amalgam uses the cash exclusively to expand its artwork
collection before the end of 20X4. This bequest was received as cash in November 20X2.
Any bequeathed cash not invested in artworks at the end of 20X4 will revert to the estate for
distribution to Mrs A’s children. By 31 December 20X2 Amalgam had already invested
$0.5 billion of the cash received in artworks.
Reorganisation
On 31 December 20X2 Amalgam acquires all of the equity of Ation from Conglomerate, in
exchange for $20 billion. Mrs C owns all of the equity of Conglomerate and controls both
Conglomerate and Amalgam.
Summary financial information for Amalgam and Ation on 31 December 20X2 (immediately
before the transaction above) is as follows:
Amalgam Ation
Carrying Carrying
amount Fair value amount Fair value
$’billions $’billions $’billions $’billions
Identifiable assets 300 600 35 50
Liabilities 200 190 32 30
Contingent liabilities – 10 – 2
100 400 3 18
Some IFRS issues for class discussion
In the absence of an IFRS that specifically applies to a transaction, how does an entity develop
an accounting policy for that transaction?
How would you advise Mr J when he is developing an accounting policy for the acquisition of
Ation in Amalgam’s consolidated financial statements?
How would you advise Mr J when he is developing an accounting policy for Amalgam to
account for the gold held as a store of wealth?
How would you advise Mr J when he is developing an accounting policy for Amalgam to
account for the artworks held as a store of wealth?
How would you advise Mr J when he is developing an accounting policy for the $2 billion
received from Mrs A’s estate?
Regulators
Monday 3 June 2013
Vienna, Austria
Case Study: non-financial assets (NFAs)
Michael Wells
IASB
IFRS Foundation: Framework-based IFRS Teaching Material
Extracts from
the Open Safari case study
Disclaimer: The IFRS Foundation, the authors and the publishers do not accept any responsibility for any loss caused to any person and/or
entity that acted or refrained from acting in reliance on the material in this publication, whether such loss is caused by negligence or
otherwise. Any names of individuals, companies and/or places used in this publication are fictitious and any resemblance to real people,
Right of use
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Printed Use.
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The Open Country Safari Company Case Study
Michael J C Wells, Director, IFRS Education Initiative, IFRS Foundation

Ann Tarca, former Academic Fellow, IFRS Education Initiative, IFRS Foundation and
Professor of Accounting, Business School, University of Western Australia.
This material has benefited greatly from the feedback and comments from people attending a series of
workshops on the Framework-based approach to teaching International Financial Reporting
Standards (IFRS) organised by the IFRS Foundation and others and from peer review by a number of
anonymous reviewers.
Background
Makeit PLC is a company listed on the London Stock Exchange. The company has operated
successfully in the manufacturing sector for more than twenty years and for many years has
prepared its financial statements in accordance with International Financial Reporting
Standards (IFRS). Although Makeit presents its financial statements in British Pounds (£), its
functional currency is the Euro (€).
In 20X0 Makeit’s board of directors decide to expand Makeit’s operations into new types of
business and into a geographical location in which it currently does not operate—
Sub-Saharan Africa. Accordingly, management selects a number of activities in Southern
Africa to be carried out as part of a ten-year diversification plan. The company appoints
James and Judith Bilkersen to manage its African operations, under the brand name The
Open Country Safari Company (Open Safari). The Bilkersens have over fifteen years’
experience in the hospitality industry in Africa and they share a passion for conserving
wildlife and natural habitats. Makeit intends to operate a safari lodge and other African
operations indefinitely.
Open Safari prepares financial statements in compliance with IFRS.
An IFRS issue for class discussion

Which currency is Open Safari’s presentation currency?
Which currency is Open Safari’s functional currency? Note: you will need to read all of the
information in this case study to form an opinion on this, which is one of the most difficult issues
in this case study.
Events in 20X0–20X2
On 2 January 20X0, Makeit incorporates a wholly-owned separate legal entity, Open Safari,
in the Republic of Africania (Africania) by contributing £10,000,000 to form Open Safari’s
permanent capital.
On 3 January 20X0, Open Safari obtains an £8,000,000 loan facility from a British bank.
The loan is denominated in British pounds (£). The loan agreement obligates the bank to
transfer £8,000,000 to Open Safari on 3 January 20X0 and Open Safari to transfer to the bank
ten years later £13,031,157 on 2 January 20Y0 (in full and final settlement of the loan).
Makeit guarantees all payments to the bank in the event that Open Safari defaults.
Acquisition of land
On 1 February 20X0, Open Safari purchases 1,000 hectares of undeveloped natural land
called Freelands, an area of land in central Africania, for $10,000,000,1 with the aim of
establishing an ecotourism business. The property is not fenced and adjoins a national park
on all its boundaries except the western boundary, where Freelands adjoins privately owned
undeveloped land that is currently unused. A wide range of indigenous plants and wild
animals (including significant numbers of buffalo, crocodile, giraffe, hippopotamus, leopard,
lion, zebra and a wide variety of antelope) inhabit Freelands and the surrounding lands. Law
in Africania specifies that wild animals are the property of the owner of the land that they
occupy. Neither elephant nor rhinoceros frequent Freelands because both species are no
longer present in Africania because of heavy poaching during the civil war that plagued the
country approximately a decade ago.
Design of infrastructure
The Bilkersens are inspired by the potential of the property to attract international tourists
because visitors would be able to view native animals at close range in their natural habitat.
Consequently, in February 20X0, the couple contract a leading Italian architect to design a
luxury safari lodge. The construction phase is expected to take about three years to complete.
The managers plan for the buildings to blend in with their setting and to have minimal impact
on the environment. They therefore prefer to use local materials and building techniques,
including thatch-grass roofing harvested from Freelands, for the lodge and staff
accommodation buildings.
Lodge construction
On 1 May 20X0, the architect billed Open Safari AFZ2,000,0002 for design work performed
from February to April 20X0….
1
Dollar ($) is the currency of the United States of America.
2
The Africanian Zollar (AFZ) is the currency of Africania.
Acquisition of helicopter and hot air balloons
On 10 December 20X2, Open Safari purchases a helicopter for $3,000,000 and two hot air
balloons for €20,000 each.
The helicopter is to be used to transfer clients between the nearest airport and Freelands
(a distance of nearly 100 kilometres) and for operating aerial safaris on Freelands. Open
Safari expects the helicopter engine to last five years and the helicopter airframe to last ten
years. At the time of purchase, the helicopter had passed the mandatory air safety inspection
(a legal condition of the helicopter licence) at a cost of $100,000. The next safety inspection
must be completed before 30 September 20X4.
The hot air balloons are to be used for aerial safaris on Freelands. Open Safari expects the
balloons and basket to last for five years and the firing equipment to last for ten years.
Acquisition of customer list
On 20 December 20X2, Open Safari pays €200,000 for a database of names and contacts
from an upmarket German-based adventure-tour operator. The Bilkersens expect the
customer list will be effective in identifying potential customers for a maximum of five years,
after which the database will be too old to be effective. By that time they expect that Open
Safari will have established itself as a leading brand in the ecotourism industry and direct
mailing will no longer be necessary.
Staff training
In December 20X2, the Bilkersens begin the intensive training of the staff recruited from
nearby communities. The staff are trained in all aspects of running an exclusive ecotourism
lodge.
Because of the lack of an established network of roads on Freelands, safaris are undertaken in
three ways:
 game tracking on foot;

 game viewing by helicopter; and
 game viewing by hot air balloon.
The Bilkersens ensure that the most knowledgeable local game trackers are hired to lead the
walking safaris.
 Is the acquisition of Freelands a business combination?

 Are the wild animals on Freelands assets of Open Safari?
 Are the trained staff assets of Open Safari? (Note: Open Safari has incurred significant
staff training costs and some staff possess specialised skills that are essential for
Open Safari’s operations.)
 Which Standards apply when accounting for the acquisition of Freelands and the assets
constructed thereon?
 What judgements and estimates are made to measure the cost of the property, plant and
equipment (PPE)—staff housing, lodge, balloons, helicopter—at initial recognition?
 …
20X3
On 31 January 20X3 Open Safari’s website goes live, with a development cost of £100,000.
The website is Open Safari’s main link to its customers. The website provides much
information about the lodge and its ecotourism activities and allows customers to book safaris
directly.
In February and March 20X3 Open Safari runs an extensive advertising campaign in a range
of leading international ecotourism and natural interest publications ($50,000), promoting its
exclusive ecotourism operations in Africania. The Bilkersens also promote the lodge at trade
fairs in Germany, France, the Netherlands (€30,000) and the United Kingdom (£10,000) and
by mailing the contacts on the purchased customer list. In accordance with their ecotourism
development support programme, the Africanian government contributes a grant of
AFZ100,000 to meet particular costs associated with the Bilkersens’ promotional activity of
the lodge at the European trade fairs.
In April 20X3 the lodge opens for business and welcomes its first customers. In 20X3 the
lodge incurs a small operating loss. However, the loss is significantly smaller than the loss
forecast by Makeit for Open Safari’s first year of operations.
Eradication of lantana
On 30 October 20X3 Open Safari receives a grant of AFZ200,000 from the Africanian
government to partly fund the purchase of the equipment and chemicals necessary for use in
the eradication of lantana (an invasive alien plant) from about 15 acres of Open Safari’s land.
The grant is conditional upon the lantana being substantially eradicated from Open Safari’s
land by 31 December 20X4. In November and December 20X3 Open Safari spends $40,000
on chemicals and AFZ200,000 on chemical spraying equipment and machetes for use in its
lantana eradication efforts.
 Is the website an asset of Open Safari?
 Do the expenditures on advertising and promotion activities (for example, attending the
trade fair) generate an asset as defined for Open Safari (ignore recognition requirements)?
 Are the unused chemicals, chemical spraying equipment and machetes assets of
Open Safari?
 At 31 December 20X3 does Open Safari have a present obligation with regard to the
government grants received?
 Is the initial operating loss an asset of Open Safari?
 Which Standards apply when accounting for the elements (for example, assets) identified
from the information provided for Open Safari in 20X3?
 Which, if any, of the assets identified in 20X3 does IFRS prohibit Open Safari from
recognising as an asset (and why)?
 What is the ‘unit of account’ for the assets recognised by Open Safari for the first time in
20X3?
 What judgements and estimates are made to measure the cost of the website at initial
recognition?
 Which assets would Open Safari depreciate/amortise for the first time in 20X3? When
would depreciation/amortisation start?
 Other depreciation/amortisation issues (discuss judgements and estimates to be made in
respect of each item of PPE even if depreciation of the item will start only in 20X3):
o How to determine whether components of that item must be depreciated separately?
o How to determine which depreciation method must be used?
o How to determine the residual value?
o How to determine the useful life?
o Recognition of government grants?
20X4
By September 20X4, all the lantana has been eradicated from Freelands to the satisfaction of
the inspector from Africania’s Ministry of Tourism.
The Africanian operations are generating a profit significantly in excess of the Bilkersens’
expectations and Makeit’s forecast. Consequently, the Bilkersens decide to expand
Open Safari’s African operations further. The introduction of elephant-back safaris in March
20X4 allows Open Safari to significantly increase the price of its Africanian safaris in
response to unexpectedly high demand for that service.
Acquisition of WoXy Safari’s assets and businesses
On 2 January 20X4 Open Safari acquires all of the assets and businesses of WoXy Safaris at
public auction for ZAR30 million.3 Open Safari also retained all of WoXy Safari’s staff.
The founding owner-manager and sole shareholder of WoXy Safaris (Mr Lucky) disposed of
WoXy Safaris to fund his retirement. WoXy Safaris operates in the ecotourism and
agribusiness sectors on land it owns in South Africa. That land, which is securely fenced, is
the sole remaining habitat of the endemic quagga (Equus quagga quagga). The quagga is a
subspecies of the common zebra (Equus quagga) and was, until its rediscovery by Mr Lucky
about a decade ago, thought to be extinct.
WoXy Safari’s profitable ecotourism business allows tourists to observe the world’s only
quaggas in their natural habitat in a one-hour elephant-back safari. The elephant-back safaris
are marketed under the registered ‘WoXy’ brand name.
WoXy Safari’s profitable agribusinesses comprise a premium badger-friendly honey

production business and sustainable exotic pine plantations.
The main reasons for Open Safari acquiring WoXy Safaris is to obtain its herd of quaggas
and its ten safari-trained elephant bulls. Following the acquisition, the elephants are
immediately relocated to Freelands using a military helicopter provided at no cost to Open
Safari by the government of Africania. The relocation assistance is provided in accordance
with that government’s ecotourism development support programme.
Prior to the auction, the Bilkersens estimate the fair values of WoXy Safari’s tangible assets
as follows:
ZAR
Land and all plants (including pine trees) growing on it 20,000,000
Quaggas (herd: 30 mature + 10 immature) 4,000,000
Elephants (‘herd’: 10 mature bulls) 2,500,000
500 active beehives 500,000
Total tangible assets 27,000,000
Open Safari also continues to operate WoXy Safari’s South African agribusinesses.
In February 20X4, Open Safari relaunches the modified South African ecotourism business
using the WoXy brand—offering horseback quagga safaris using a herd of 20 horses that it
acquired at a cost of ZAR200,000 in a separate acquisition from an independent third party.
3
Rand is the currency of South Africa (ZAR).
 Is the acquisition of WoXy Safari’s assets and businesses a business combination?
 Identify the assets acquired by Open Safari at the date of acquisition of WoXy Safaris?
 Assuming that goodwill arises in the accounting for the acquisition of WoXy Safari: is the
goodwill an asset of Open Safari?
 Is the trained staff (assembled workforce of WoXy Safaris) an asset of Open Safari?
Note: some staff possess specialised skills that are essential for Open Safari’s
agribusiness (for example, beekeepers and horticulturalists) and ecotourism business (for
example, elephant keepers).
 Are the horses that are acquired in a separate acquisition assets of Open Safari?
 …
 Which Standards apply when accounting for the elements (for example, assets) identified
from the information provided for Open Safari in 20X4?
 Which, if any, of the assets identified in 20X4 does IFRS prohibit Open Safari from
recognising as an asset (and why)?
 What is the ‘unit of account’ for the assets recognised by Open Safari for the first time in
20X4?
 What judgements and estimates are made when measuring the identifiable assets
acquired, the liabilities assumed and any non-controlling interest in WoXy Safari (and the
associated goodwill) at initial recognition?
 What judgements and estimates would Open Safari make in accounting for the biological
assets related to agricultural activity?
 How would Open Safari account for the helicopter provided by the Africanian
government to relocate the elephants from South Africa to Freelands?
 Which assets would Open Safari depreciate/amortise for the first time in 20X4? When
would depreciation/amortisation start?
 Other depreciation/amortisation issues (discuss judgements and estimates to be made in
respect of each item of PPE even if the depreciation of the item will start only in 20X4):
o How to determine whether components of that item must be depreciated separately?
o How to determine which depreciation method must be used?
o How to determine the residual value?
o How to determine the useful life?
20X5 to 20X8
After living in Africania for about five years, the Bilkersens are further inspired by its
potential as a showcase for wildlife. On 2 January 20X5, Open Safari acquires a second
property (Sealands) in Africania for $2,000,000. Sealands is a mix of undeveloped grassland
and bushveld. Except for the portion of the property that adjoins the Indian Ocean, the
perimeter of this property is securely fenced. Despite its being securely fenced, there are no
animals of significant value on Sealands at the time of acquisition.
The main purposes of acquiring Sealands are to obtain land on which to breed rare native
animals (for example, African wild dog, brown hyena and rhino) for release into the wild on
Freelands and to broaden the range of activities that Open Safari can engage in, including:
 breeding Tuberculosis-free (TB-free) African buffalo and a range of antelope, zebra,

giraffe and warthog for sale to other parties;
 operating land-based photographic safaris;
 licencing land-based self-drive photographic safaris;
 operating aquatic safaris (snorkelling, diving and whale watching) from the coast
bordering Sealands; and
 developing a beach holiday facility and casino.
All these activities take place on, or adjacent to, Sealands. However, before they can be
undertaken, Open Safari must first construct a network of roads on Sealands.
Road infrastructure development
The road development plans include the construction of several gravel roads and bridges over
the three-year period ending 31 December 20X7 to allow access to the property from the
national road that runs past the property’s western boundary. The roads and bridges will also
make possible photographic safaris on the property. The two main bridges crossing the river
will be constructed by an Italian construction company under a €1,000,000 two-year
fixed-price construction contract.
Payment to the external contractor for the construction of the bridges in accordance with the
contract is made as follows:
 20X6: €500,000 on 1 June, when construction started;

 €280,000 on 1 December 20X6 for the first bridge (ie €250,000 progress payment plus
€30,000 early completion incentive); and
 €210,000 on 30 June 20X8 for the second bridge (ie €250,000 progress payment less
€40,000 late completion penalty).
Open Safari decides to self-construct the gravel roads and minor bridges (and thereafter to
maintain them). Consequently, on 10 January 20X5, Open Safari obtains, from a local heavy
equipment distributor, the exclusive right to use the following equipment for a ten-year
period under a single non-cancellable lease: a grader, a tractor with a front-end loader, a rock
crusher, a roller, two tip-up trucks and 1,000 sticks of dynamite. The terms of the lease
oblige Open Safari to pay to the distributor $100,000 per year on 30 December of each year
of the lease, starting 30 December 20X5. Upon making the final lease payment, the
ownership of the equipment automatically transfers to Open Safari.
If Open Safari had purchased the individual items of heavy equipment for cash on 10 January
20X5 it would have paid the distributor’s list prices, as follows:
 grader: $250,000;
 tractor with a front-end loader: $200,000;
 rock crusher: $150,000;
 roller: $100,000;
 tip-up trucks: $45,000 each; and
 a box of 1,000 sticks of dynamite: $10,000. (Note: individual sticks can be purchased for
$20 each. In accordance with Africanian law, dynamite not used within two years of
purchase must be destroyed.)
However, Open Safari would have obtained a $100,000 bulk order discount from the
distributor’s list prices if it had purchased all of the items together for cash. That bulk
discount is reflected in the lease payments amounts agreed with the distributor.
In January 20X5, an independent surveyor designs the road to the management’s

specifications at a cost of $30,000. First the road is plotted using stakes put into the ground at
10-metre intervals, then the tractor clears the bush along the route of the road before the
grader scrapes the debris and remaining plant matter to reveal and smooth the earth.
Next, crushed stone is layered over the graded ground and compacted by the roller to form
the surface of the road. The process is very time-consuming and only 10 kilometres of road
is completed in 20X5.
Most (980 sticks) of the dynamite is used in 20X5 to blast a track through the only
unavoidable rocky outcrop in the entire 200-kilometre planned road construction route.
After blasting, the loose stone is excavated by the tractor and delivered to the nearby stone
crusher using one of the tip-up trucks. After the stone is crushed, it is delivered by the other
tip-up truck to the freshly graded sand road, where it is compacted by the roller.
Management expect that the remaining 20 sticks of dynamite will expire unused. If so, it will
likely cost $2,000 to dispose of the unused dynamite in 20X7.
Management initially expected that the stone crusher would need to be replaced only when it
had crushed sufficient stone to surface 100 kilometres of road. However, on 30 November
20X5, after crushing enough stone for surfacing only 15 kilometres of road, the crusher burns
out and is scrapped at a cost of AFZ200,000 (these are mandatory recycling costs). After
consulting with the supplier it is agreed that the loss is not covered by the manufacturer’s
warranty because the use to which Open Safari put the machine was significantly beyond the
terms of use covered by the warranty. On 1 December 20X5 a bigger and more robust
crusher (fit for the purpose to which Open Safari will put it) was purchased for $210,000
using a one-year interest-free credit facility. The list price of the machine for a cash sale is
$200,000. Management expect that the new crusher will crush enough stone to surface about
200 kilometres of road, at which time it will be scrapped.
Provided day-to-day maintenance is performed, the economic life of the grader is most
sensitive to the type and amount of work to which it is put. When used in road construction
on undeveloped land in the type of terrain on which Open Safari intends to use it, the tyres
and the blade will need replacing about every 5 and 10 kilometres respectively.
When maintaining existing roads, the tyres and the blade will need replacing only after about
100 kilometres and 200 kilometres respectively. The economic life of the other equipment is
unaffected by whether the road is being developed or maintained.
The roller is the most robust of the heavy machinery. Provided it is well maintained it should
easily complete the construction phase of the roads and could be used to maintain the roads
for another twenty years or so.
The tractor could be used to construct about 400 kilometres of road, except that it will
probably consume about a quarter of its total service capacity by excavating the road through
the rocky outcrop. Consequently, management expect that that machine will complete the
construction phase of the road and they plan to use it for about another ten years of road
maintenance. Because of their metal content, disused tractors are commonly sold for scrap
metal.
The construction of the entire road network is completed in October 20X7 (a few months
ahead of schedule).
Management expect that the extent of the use of the equipment in maintaining the road after
its construction will not vary greatly from one year to the next.
Beach holiday resort development
In 20X5 Open Safari successfully applies for a portion of Sealand’s beachfront land to be
rezoned for residential development (200 acres) and casino resort development (50 acres).
On 1 February 20X5 the government of Africania grants Open Safari a licence to operate a
casino on Sealands for 60 years in accordance with its ecotourism development support
programme. The licence is granted free of charge. The grant is conditional on the casino
being constructed within five years. Thereafter, the licence is automatically revoked if the
casino is dormant for a period of greater than two months in any year of the licence period.
In the same year, Open Safari appoints external contractors to construct, over the next three
years, 200 luxury beachfront holiday homes, with each set in one acre of land. The general
public can buy a beachfront home either off the plan (on the basis of a limited range of plans
and specifications pre-determined by Open Safari) or after the home is constructed.
By 31 December 20X8 all 200 plots are sold and construction of only 10 beachfront homes is
outstanding.
In 20X5, before starting construction work on the casino, Open Safari contracts a European
casino resort operator to operate the casino for 20 years. The terms of the agreement require
Open Safari to construct a fully equipped and fitted casino hotel on Sealands to the
specifications stipulated by the casino operator. The construction, fitting and finishing
contractor must be chosen by the casino operator in accordance with a $200 million fixed-
price construction contract that will be negotiated by the casino operator. The casino
operator will actively manage the project of constructing the casino hotel.
The casino operator is contractually obliged to pay Open Safari:
 €40 million on signing the contract in 20X5;

 €100 million over the construction phase of the casino hotel (when payments are required
to be made to the construction contractor); and
 €20 million per year over the twenty years following the completion of construction.
Other than the payments specified above, Open Safari does not share in the revenue and
expenses of the casino operation over the 20-year period that it is operated by the
international casino operator. The Bilkersens are undecided about how Open Safari will
benefit from the casino assets after the agreement with the current operator expires. Options
include continuing to contract an external party to operate the casino or Open Safari actively
managing the casino operations.
The construction of the casino hotel is completed in December 20X8. The economic life of
the casino hotel building is estimated at 60 years with no residual value. The economic life
of all equipment and fittings and furniture in the casino hotel is 20 years or less.
Relocating game to Sealands
In 20X5, in anticipation of operating photographic safaris on Sealands and breeding animals

to sell to others, Open Safari pays game capture experts ZAR3,000,000 to capture small
numbers of zebra, giraffe, warthog and a wide range of antelope on Freelands and to relocate
and release those animals on Sealands. The relocated animals adapt well to their new
environment and in the absence of their natural predators their numbers increase steadily in
the years following their relocation.
Animal husbandry facilities
In 20X6 Open Safari constructs breeding dens in smaller, securely fenced enclosures to house
wild dogs and brown hyena (cost AFZ270,000). Open Safari also ‘rhino proofs’ the
perimeter fence of Sealands by reinforcing it with a thick steel cable, which is secured one
foot above ground level (cost AFZ400,000).
In late 20X6 Open Safari purchases the following animals at a reputable game auction in
South Africa. The table also shows the prices paid at auction for animals in 20X7 and 20X8.
(All amounts shown in Price paid by Price paid by others Price paid by others
this table are Open Safari at at auction in 20X7 at auction in 20X8
per animal) auction in 20X6
ZAR ZAR ZAR
4 wild dogs 1,500 1,600 1,100

4 brown hyena 1,300 1,800 1,700
5 white rhinoceros 150,000 180,000 200,000
5 black rhinoceros 120,000 130,000 150,000
10 TB-free Cape 100,000 160,000 140,000
buffalo
The costs of food, supplies, keepers’ wages and veterinarian services that are incurred in
caring for the animals is about AFZ1,000,000 per year.
The table below documents the success of Open Safari’s captive breeding programme on
Sealands:
Wild dog Brown White Black Buffalo

hyena rhinoceros rhinoceros
Purchased at auction 4 4 5 5 10
Died in relocation (1)
31/12/20X6 3 4 5 5 10
Born 5 1 3
Poached (1)
31/12/20X7 8 4 6 4 13
Born 3 2 2 1 5
31/12/20X8 11 6 8 5 18
Born 2 2 1 8
Died (1)
Released on Freelands (6) (4)
Sold at auction (5)
31/12/20X9 5 8 6 6 20
Bespoke safari vehicles
On 30 June 20X8 Open Safari purchases three vehicles (cost $200,000 each) and arranges for
the vehicles to be equipped for photographic safaris, including reinforcing the chassis and
strengthening the suspension before fitting bespoke seating structures with a canvas roof on
the back of the vehicles, painting the vehicle and including the logo of the Open Country
Safari Company. The modifications cost $15,000 per vehicle. Each vehicle is expected to be
used for three years or until it has travelled 200,000 kilometres (whichever is reached first).
Operations
Under the careful and enthusiastic management of the Bilkersens, Open Safari prospers in
20X5 to 20X8. Customers at Freelands come mainly from the Eurozone countries with
smaller numbers from Canada, China, Japan, the UK and the USA. An insignificant number
of customers come from Africania and South Africa. Payments for the holidays are made at
least six weeks in advance of the visit and are billed and received in US dollars only.

 Is the acquisition of Sealands a business combination or the separate acquisition of an asset
(or a collection of assets)?
 Identify the assets acquired by Open Safari when acquiring Sealands.
 Are the fish, whales etc in the sea adjacent to Sealands assets of Open Safari?
 What are the main judgements and estimates that Open Safari would make in accounting for
the development of the road infrastructure on Sealands?
 What are the main issues in accounting for the casino resort development (pay particular
attention to judgements and estimates)?
 What are the main issues in accounting for the residential development (pay particular
attention to judgements and estimates)?
 What are the main issues in accounting for the capture and release of the wild animals
relocated from Freelands to Sealands in 20X5?
 How would Open Safari account for the rhino-proofing of the perimeter fence at Sealands?
 What are the main issues in accounting for the initial recognition of animals purchased at
auction and relocated to Sealands (pay particular attention to judgements and estimates)?
 What are the main issues in accounting for the animals relocated to Sealands after initial
recognition (pay particular attention to judgements and estimates)?
 What are the main issues in accounting for the animals bred in Sealands after initial
recognition (pay particular attention to judgements and estimates)?
 What judgements and estimates would Open Safari make in accounting for the bespoke safari
vehicles?
20X9
Release of Elephants on Freelands
In January 20X9, following an elephant culling operation in a country bordering on

Africania, the Bilkersens rescued 20 orphaned teenage elephant calves and brought them to
Freelands at a total cost to Open Safari of $400,000. To rehabilitate the young herd on
Freelands, the herd was first kept in a specially constructed fenced camp. To provide
leadership and discipline to the teenage herd, one of Open Safari’s prize elephant bulls was
retired from elephant-backed safari work and placed into the camp with the young herd. By
March 20X9 the Bilkersens were satisfied that the herd was established and ready for life in
the wild. On 1 April 20X9 the teenage herd and their mature leader were released into the
wild on Freelands in a grand ceremony sponsored by a cash grant from the Africanian
Tourism Development Agency provided specifically for this event. The event attracted much
attention from the international news media and led to a serialised weekly documentary about
Open Safari’s contribution to conservation, which was broadcast in 40 countries throughout
20X9. These events greatly increased the value of the Open Safari brand.

 Is the acquisition of the orphaned elephants a separate acquisition or a business combination?
 Do the orphaned elephants acquired satisfy the definition of an asset of Open Safari?
 Which Standard applies when accounting for the orphaned elephants rescued by Open Safari?
 When released on Freelands, must Open Safari derecognise the released elephants (mature
bull and rescued orphans)?
 How would Open Safari present the released elephants in its statement of financial position at
31 December 20X9?
 Does the sponsorship of the release ceremony by the government of Africania satisfy the
definition of income of Open Safari?
 Do the expenditures on promotion result in an asset of Open Safari (as defined)?
 Which Standards apply when accounting for the grand ceremony sponsored by the Africanian
Tourism Development Agency?
 How would Open Safari present the income and expenditure for the grand ceremony
sponsored by the Africanian Tourism Development Agency?
Safaris commence at Sealands
On 1 January 20X9, Open Safari takes delivery of two bespoke, luxury motorised yachts for
its aquatic safari (snorkelling, diving and whale watching) business. The yachts each cost
£3 million. The aquatic safaris immediately prove popular with many of Open Safari’s
guests, who extend their vacations from Freelands to include aquatic safaris at Sealands or
book separate vacations at Sealands.
In 20X9 photographic safaris at Sealands become increasingly popular with the guests of the
casino resort and those staying at the 200 homes on Sealands.

 What judgements and estimates would Open Safari make in accounting for the two bespoke
yachts acquired?
Medical research facility
The Bilkersens are concerned about the tragic plight of animals with incurable diseases. To
attempt to stop the spread of pandemic diseases and to save the lives of infected animals,
Open Safari enters into an arrangement with a leading South African university to set up and
operate a research facility. Open Safari specifies the sole and unalterable aims of the research
facility—find a cure for bovine tuberculosis (bovine TB) and feline acquired immune
deficiency syndrome (feline AIDS).
Open Safari donates ZAR3,000,000 to the university to completely fund the construction of a
purpose-built laboratory on property located within the university campus. Construction is
completed in 20X9. Each year, subject to the Bilkersens’ approval of the centre’s budget,
Open Safari provides ZAR1,000,000 to fund the operations of the research centre that is
staffed by the university’s foremost researchers. In accordance with the agreement with the
university, Open Safari has the exclusive right to patent any cures discovered or developed
(or both) at the research institute.

 From Open Safari’s perspective, what is the economic substance of the expenditure on the
research centre—a donation to the university or the construction and operation of a
research centre?
 Does the research centre (building and equipment) satisfy the definition of an asset of
Open Safari?
 What are the main judgements and estimates that Open Safari would make when
accounting for the PPE of the research centre?
 Is the in-process research of the centre an asset of Open Safari?
 Does IAS 38 Intangible Assets prohibit Open Safari from recognising in-process research
and development as an asset (and, if so, why)?
Release of captive-bred animals
In July 20X9, following an intensive habituation programme, a pack of six wild dogs from
the captive breeding programme on Sealands is released into the wild on Freelands.

 How must Open Safari account for the release of the pack of six wild dogs into the wild on
Freelands?
Other auction activities
In late 20X9, at a reputable game auction in South Africa, Open Safari successfully bid
ZAR630,000 and ZAR450,000 for five white rhinoceros and three black rhinoceros
respectively.
The black rhinoceros were purchases for another party (Mr Z). In accordance with the
agreement that was entered into before the auction, Mr Z paid Open Safari a premium of
ZAR20,000 over the auction price for each animal. Mr Z acquired the animals in this way
because he believed that many potential bidders who would probably bid against him for a
variety of reasons were unlikely to bid against Open Safari.
Even though Open Safari does not have a purchaser for the white rhinoceros when it acquires
them at auction, they are acquired with the intention of finding a buyer for them within a few
days of the auction. Immediately after the auction, Open Safari contacts a number of private
collectors seeking a buyer. Within a week of the action, the entity sells three of the animals
to a private collector in the United States for ZAR400,000 and the remaining two rhinoceros
to a State zoo in the Eurozone for ZAR260,000.

 How must Open Safari account for its successful bid at auction for three black rhinoceroses?
 How must Open Safari account for its successful bid at auction for five white rhinoceroses?
20Y0–20Y4
Space tourism
On 31 December 20Y0 Open Safari acquires a spacecraft to provide recreational space travel.
The spacecraft cost €100 million (excluding inspection costs).
The government body that regulates international space travel requires, as a condition of
operating the spacecraft, that the spacecraft must pass an inspection (performed by regulatory
agents) before starting commercial space travel. Further inspections must be passed at
two-year intervals thereafter, irrespective of the number of flights made by the spacecraft.
On 31 December 20Y0 the first inspection was performed at a cost to the entity of
€20 million.
Although Open Safari is not obliged to do so, it intends to replace the soft furnishings in the
spacecraft after 50 flights have been made by the spacecraft. The cost attributable to the
soft furnishings is about €100,000. Open Safari does not expect to replace any other
components of the spacecraft.
Open Safari intends to use the spacecraft for its entire economic life. The spacecraft is
designed with the capacity to make 150 flights into outer space. However, aviation
regulations require that the spacecraft must be decommissioned at the earlier of completing
100 flights into outer space or 5 years from the date of its construction.
Although Open Safari expects that it could sell the spacecraft for about €10 million at the end
of its economic life, to prevent its competitors from gaining access to the unique technology
embodied in the spacecraft, it intends instead to destroy the spacecraft. Management estimate
the costs of destroying the spacecraft at about €1 million.
Management expects that income per voyage will decline significantly each year as the
novelty of recreational space travel declines. The premium paid by earlier travellers is so
significant that total revenue is forecast to halve each year.
Management forecasts that the spacecraft will make 5 voyages in 20Y1, 15 in 20Y2, 20 in
20Y3 and 60 in 20Y4 and will be decommissioned on 31 December 20Y4.

 Is the residual value of the spacecraft nil?
 Must any components of the spacecraft be depreciated separately?
 Which depreciation method(s) must Open Safari use to depreciate the spacecraft?
 What is the useful life of the spacecraft?
Regulators
Tuesday 4 June 2013
Vienna, Austria
Case Study: liabilities
Amaro Gomes
Member
IASB
Michael Wells
IASB
Disclaimer: The IFRS Foundation, the authors and the publishers do not accept any responsibility for any loss caused to any person and/or entity
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names of individuals, companies and/or places used in this publication are fictitious and any resemblance to real people, entities or places is
purely coincidental.
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and deliberation. Page 1
Obligit Case Study
Guillermo Braunbeck, Project Manager, IFRS Education Initiative, IASB
Elizabeth Buckley, Project Manager, IFRS Education Initiative, IASB
This case study is a ‘work in process’. It will be revised following feedback and comments from people
attending a series of workshops on the Framework-based approach to teaching International Financial
Reporting Standards (IFRS) organised by the IFRS Foundation and others. After revisions, the material
will be available as an educational resource on the IFRS website.
Background
Obligit Limited1 is a company listed on the Latrican Stock Exchange. The company has
operated successfully in the manufacturing, retail and agricultural sectors for more than
twenty years and for many years the company has prepared its financial statements in
accordance with International Financial Reporting Standards (IFRS). Obligit’s functional
currency is the Latrican dollar (L$).
Chipem
Chipem2 is listed on the Afriganistan Stock Exchange. All entities listed on the Afriganistan
Stock Exchange are required to prepare and file their consolidated annual financial statements in
accordance with IFRS. Chipem manufactures paper from woodchips in an energy intensive
process. Its functional currency is the Afriganistan dollar (A$).
In December 20X0 Obligit acquired 25 per cent of the equity and voting rights in Chipem.3
On 1 January 20X1 Chipem enters into a forward contract to buy a tonne of pine wood chips of a
particular quality, three years after the contracting date (31 December 20X3), at a fixed price
(A$100 per tonne).
On 31 December 20X1, because the price of that specification of pine wood chips declined
significantly in 20X1, an otherwise identical forward contract (but entered into on
31 December 20X1 with a two-year time frame) has a significantly lower fixed price (A$40).
In other words, the market now expects that the forward contract will result in Chipem settling at
significantly higher than market price. In other words the forward contract is ‘deeply out of the
money’.
1
The names of individuals, entities and places in this case study are fictitious. Any resemblance to people, entities
or places is purely coincidental.
2
The names of individuals, entities and places in this case study are fictitious. Any resemblance to actual people,
3
Through its voting rights, Obligit exerts significant influence (but not control) over Chipem.
Some IFRS issues for group discussion
What is the economics/finance of a forward contract? Your answer should include an
indication of how forward contracts are priced.
Before maturity, do forward contracts give rise to assets/liabilities as defined in the
Conceptual Framework?
For each scenario presented, does IFRS require Chipem to recognise a liability in respect of
the woodchip forward contract?
Scenario 1: the forward contract must be settled net in cash.
Scenario 2: the forward cannot be settled net in cash and is entered into and continues
to be held in accordance with the entity’s expected purchase requirements.
Scenario 3: the forward contract can be settled net in cash or by physical delivery (ie
gross settlement).
Scenario 4: the facts are the same as in Scenario 1, except that Chipem entered into the
forward contract to hedge the cash flow risk of a highly probable forecast transaction for
to purchase pine wood chips.
What judgements and estimates would be made in determining whether the executory
contracts in the Chipem case study have become onerous?
Growem
Growem is also listed on the Afriganistan Stock Exchange. It grows pine trees for harvesting
sawn pine logs. In accordance with IAS 41 Agriculture Growem measures its standing timber at
fair value (applying market-based prices) less costs to sell. It holds on average inventory of sawn
logs for only one week’s supply. In accordance with IAS 2 Inventories, it measures its sawn
logs inventory at the lower of cost and net realisable value.
In December 20X4 Obligit acquired 25 per cent of the equity and voting rights in Growem.4
On 1 January 20X5 Growem enters into a contract to sell, on 31 December 20X9, 1,000 tonnes
of sawn pine logs of the type grown by Growem at A$100 per tonne (fixed price).
On 31 December 20X5, because the price of that specification of sawn pine log increased
significantly in 20X5, an otherwise identical forward contract (but entered into on
31 December 20X5 with a four-year time frame) has a significantly higher fixed price (A$150).
In other words, the market now expects that the forward contract will result in Growem
receiving significantly lower than market price (ie the forward contract is ‘deeply out of the
money’).
4
Through its voting rights, Obligit exerts significant influence (but not control) over Growem.
How, if at all, should Growem account for the sawn log forward contract? Would your
answer to this question change if:
 at 31/12/20X5 an identical forward contract except entered into on 31/12/20X5 with a
four-year time frame would have a significantly lower fixed price (say A$50)?
 Growem, in accordance with well-established practice, measured its sawn log inventory at
net realisable value with changes in that value recognised in profit or loss in the period of
the change?
Flymecheaply
In 20X0 Ms En Trepreneur founded Flymecheaply—a domestic commercial budget airline in

Latrica. The company’s meteoric rise is well documented as one of the great successes of the
Latrica’s recent economic reforms.
Early in 20X6 Obligit acquired 25 per cent of the equity and voting rights in Flymecheaply.
In accordance with the rights its shareholding confers Obligit appointed Mr Big Shot to the
Flymecheaply’s Management Board.5
Aircraft fleet
Throughout 20X6 Flymecheaply’s fleet consists of twenty jet aircraft:
 seven aircraft leased under the following terms: 10 year lease commenced in 20X0; fixed
monthly lease payments; legal title passes to Flymecheaply at the end of the lease);
 ten aircraft purchased in 20X4; and
 three aircraft leased under the following terms: lease term of 14 years and 11 months starting
1 June 20X5; monthly lease payments are mainly fixed but in part varying in proportion to
air miles flown by the aircraft; Flymecheaply has option at the end of the lease to purchase
the aircraft for a fixed amount6).7 If Flymecheaply does not exercise that option, it must
before returning the aircraft to the lessor remove its branding from the aircraft (eg paint the
outer-casing of the aircraft white).
The estimated economic life of the type of jet aircraft used by Flymecheaply is 20 years. All of
the leases are non-cancellable, that is, they cannot be terminated early.
5
Through its voting rights and the appointment of Mr Big Shot, Obligit exerts significant influence (but not control)
over Flymecheaply.
6
At the inception of the lease, the fixed amount represents the expected fair value of the aircraft at the end of the
14 year and 11 months lease term (ie measured from the inception of the lease).
7
In the accounting policies section of Flymecheaply’s 20X5 financial statements, in accordance with paragraph 122
of IAS 1 Presentation of Financial Statements, management disclosed that its judgement in determining operating
lease classification for this lease had a most significant effect on the amounts recognised in its financial statements.
Commitments to acquire new aircraft
In February 20X6 Flymecheaply signed a contract with a leading aircraft manufacturer for the
purchase of two new aircraft. The fixed price is denominated in US$8 payable on delivery—one
aircraft on 30 June 20X7 and the other on 30 June 20X9.
Contracts with customers
Passengers purchase fixed price flight tickets from Flymecheaply up to twelve months in
advance of travel. Passengers are required to pay in full for the flight ticket at the time of
booking it. Flymecheaply sells two types of tickets—fully flexible ticket (subject to availability,
the passenger holds an option to change the date of travel upon making a small ticket change
fee) inflexible ticket (a passenger cannot change the time of travel). Neither type of tickets is
refundable (ie passengers forfeit all unused tickets). Ticket sales are priced in Latrican dollars.
Flymecheaply operates a customer loyalty plan. In accordance with the plan registered
customers earn 1 loyalty point for each air mile flown with Flymecheaply. Plan members
redeem 20,000 points plus a cash payment for airport taxes in exchange for a return
Flymecheaply flight. Unused loyalty points expire after three years. Plan members can
purchase a limited number of loyalty points for cash from Flymecheaply. Points redemption is
accounted for using a first-in first-out (FIFO) formula.
Pilot retention scheme
To encourage its pilots to remain employment by Flymecheaply (and thus to avoid recruitment
and training costs), Flymecheaply promises its pilots a lump-sum benefit equal to 1 per cent of
final salary for each year of service they remain employed by the entity until their 40th birthday
provided they remain in the employ of the entity until they are 40, after which no further
lumpsum payment accres to the pilots.
Employee A’s 35th birthday is on 1 January 20X1. Her salary for the year ended 31 December
20X1 is CU100,000.
At 31 December 20X1 management made the following judgements (actuarial assumptions):

 Employee A’s salary will increase by 5 per cent (compound) each year.
 There is a 20 per cent probability that Employee A’s employment with the entity will
terminate before 1 January 20X6.
 The appropriate discount rate is 10 per cent per year.
Employee A’s salary for 20X2 is CU105,000.

At 31 December 20X2 the entity revised its actuarial assumptions as follows:
 Employee A’s salary will increase by 15 per cent (compound) each year.
 There is a 10 per cent probability that Employee A’s employment with the entity will
terminate before reaching her 40th birthday.
 The appropriate discount rate remains 10 per cent per year.
Flymecheaply does not fund its obligation to pay lump-sum benefits.
8
In this case study US$ is the currency of the United States of America.
Pension scheme
Flymecheaply employees are all members of its unfunded ‘final’ salary defined benefit pension
scheme. The terms of the Flymecheaply pension scheme are summarised below:
 for each 10 years of continuous service provided to Flymecheaply an employee is

entitled to an annual pension from age 65 until death of 10 per cent of pensionable
salary—the lower of the employee’s annual salary from Flymecheaply in the year of the
employee’s 65th birthday or the year in which the employee left the employment of
Flymecheaply;
 if a member of the pension scheme dies before his/her 65th birthday: Flymecheaply, in
lieu of a pension, pays to the deceased employee’s estate a lumpsum. (The lumpsum
equals the present value of the amounts that the employee would have received from the
pension scheme under the following assumptions: period of service = actual service;
salary at the time of death = pensionable salary; pension period = average expected
longevity of a citizen of Latrica less 65 years);
 if a member of the pension scheme dies after their 65th birthday and the employee’s
spouse outlives the member of the pension scheme: Flymecheaply pays the surviving
spouse, until the death of the surviving spouse, a monthly pension equal to 50 per cent of
the pension that, but for their death, the member of the pension scheme would have been
paid from the pension scheme.
Emission trading scheme
On 31 December 20X6 the government of Latrica, in accordance with its first cap-and-trade
carbon emissions scheme, issued to Flymecheaply certificates to emit a specified quantity9 of
carbon over the ensuing three years. Because of the large disparities in the cost and ease with
which carbon emissions can be reduced in different industries, the certificates are expected to
trade actively on the Latrican emissions exchange.
Because its operations are expanding and it will take many years to replace its existing fleet with
aircraft that omit less carbon, Flymecheaply expects to omit more carbon over the three year
period than the certificates it received permit. Management believe that the fair value of the
emission certificates will increase greatly over the three year scheme period. Consequently, on
31 December 20X6, Flymecheaply purchased additional certificates on the exchange to cover its
entire expected carbon output for the next three years.
9
The scheme is designed to reduce carbon emissions in Latrica during 20X7–20X9 by 70 per cent of 20X6
emission levels. The scheme is widely anticipated to be one of the most effective schemes to be introduced in the
world.
Aircraft fleet
 What present obligations, if any, arise from Flymecheaply leasing aircraft?

 How would Flymecheaply account for the leases that it has entered into as lessee in
accordance with IAS 17 Leases?
 If the proposals set out in the 2013 Exposure Draft Leases were to become
IFRS requirements how would that accounting provide potential and existing investors,
lenders and other creditors with information that is more useful for making decisions about
proving resources to Flymecheaply?
 How would Flymecheaply account for the requirement to remove its branding from the
aircraft (eg paint the outer-casing of the aircraft white) before returning the aircraft to the
lessor?
 What present obligations, if any, arise from Flymecheaply’s commitments to purchase
aircraft?
 In 20X6 how would Flymecheaply’s account for its commitments to purchase aircraft in
accordance with IFRS?
Contracts with customers
 What present obligations, if any, arise from Flymecheaply selling flight tickets to
customers?
 How would Flymecheaply’s account for ticket sales using IAS 18 Revenue Recognition
and IFRIC 13 Customer Loyalty Programmes?
Employee benefits
 What present obligations, if any, arise from Flymecheaply pilot retention award scheme?
 How would Flymecheaply’s account for its promise to pay Employee A a lumpsum in
accordance with its Pilot retention scheme at 31 December 20X2?
 What judgements and estimates (eg actuarial assumptions) would Flymecheaply’s make in
accounting for its final salary defined benefit plan?
Emission trading scheme

 Explain the economics/finance of the emission trading scheme and explain what
information about Flymecheaply participation in that scheme would be relevant to
Flymecheaply’s existing and potential investors, lenders and other creditors.
 What elements (eg asset, liability, income) as set out in the Conceptual Framework arise
from Flymecheaply participation in that scheme?
 In accordance with IFRS, how would Flymecheaply account for its rights and obligations
arising from participating in that scheme?
Regulators
Wednesday 5 June 2013
Vienna, Austria
Case Study: classifying financial instruments in

accordance with IAS 32
Philippe Danjou
Member
IASB
International Accounting Standards Board (IASB). The teaching material is designed as guidance only for those teaching IFRS.
For more information about the IFRS education initiative please visit
www.ifrs.org/Use+around+the+world/Education/Education.htm.
Disclaimer: The IFRS Foundation, the authors and the publishers do not accept any responsibility for any loss caused to any person
and/or entity that acted or refrained from acting in reliance on the material in this publication, whether such loss is caused by
negligence or otherwise. Any names of individuals, companies and/or places used in this publication are fictitious and any
resemblance to real people, entities or places is purely coincidental.
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The views expressed in this article are those of the authors and are not necessarily those of the
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only after extensive due process and deliberation.
Page 1
Buildityourself Case Study
This case study is a ‘work in process’. It will be revised following feedback and comments from
people attending a series of workshops on the Framework-based approach to teaching
International Financial Reporting Standards (IFRS) organised by the IFRS Foundation and
others. After revisions, the material will be available as an educational resource on the IFRS
website.
Background
operated successfully in the manufacturing, retail and agricultural sectors for more than
twenty years and for many years the company has prepared its financial statements in
accordance with IFRS. Obligit’s functional currency is the Latrican dollar (L$).
Buildityourself
On 1 January 20W9, Obligit purchased 30 per cent of the issued ordinary shares in
Buildityourself (a web-based home improvement retailer) which is listed on the Latrican
Stock Exchange. Buildityourself has only one class of shares. Each share carries equal
voting rights. Dividends are declared to the ordinary shareholders periodically at the
sole discretion of the company. In the event of liquidation, the holders of those ordinary
shares have the only interest in the residual assets of the company.
Buildityourself operates out of a single warehouse in Capitol (the capital city of

Latrica). To expand its operations to other major Latrican cities, management is
planning to acquire five new warehouses, one located in each of five targeted cities.
Management are considering how to raise the L$20 million needed to finance the
acquisition of the five new warehouses. They have identified the following alternatives
available to the company.
1
The names of individuals, entities and places in this case study are fictitious. Any resemblance to
people, entities or places is purely coincidental.
Page 2
Alternative 1: fresh issue of ordinary shares
On 1 January 20X0 Buildityourself would receive L$20 million in exchange for issuing
about 2 million new ordinary shares of the same class that its existing shareholders
currently hold.
Alternative 2: mandatorily redeemable fixed-term variable-rate debentures
On 1 January 20X0 Buildityourself receives L$20 million in exchange for 1 million

L$20 debentures that collectively contractually oblige Buildityourself to pay:
 variable ‘interest’ cash flows calculated as follows: L$20 million × (a specified

observable variable interest rate + 1.5 per cent) on 31 December each year for
10 consecutive years; and
 a final payment of L$20 million in full and final settlement of the obligation to the
debenture holders (ie fixed redemption at par) on 31 December 20X9.
On 1 January 20X0 the specified observable variable interest rate was paying
2.5 per cent. Consequently, at that time, Buildityourself incurred interest at 4 per cent
(ie 2.5 per cent observed + 1.5 premium).2
Alternative 3: mandatorily redeemable fixed-term fixed-rate debentures
On 1 January 20X0 Buildityourself would receive L$20 million in exchange for

1 million L$20 debentures that collectively contractually oblige Buildityourself to pay:
 L$1 million (ie 5 per cent fixed interest) on 31 December each year for
debenture holders (ie fixed redemption at par) on 31 December 20X9.
Alternative 4: mandatorily redeemable debentures with holder-held early redemption

feature
The facts are the same as Alternative 3, except in this case (Alternative 4) interest
payments are L$900,000 (ie 4.5 per cent) per year. In addition, the debenture holders
2
For ease of calculation, the features in this instrument and those in the other financing alternatives
presented in this case study have not been priced accurately. Nevertheless, the authors believe that the
inaccurate pricing adjustments indicate whether a premium or a discount would apply to the finance
charges of the instrument as a whole as a result of including such features.
Page 3
can, at their sole discretion, require redemption of the debentures after 1 January 20X3
but before maturity (ie any time after 1 January 20X3 the debenture holders can require
Buildityourself to pay to the debenture holders L$20 million (the capital amount) plus
interest accrued at 4.5 per cent to the early redemption date).
Alternative 5: mandatorily redeemable debentures with issuer-held early redemption

feature
The facts are the same as Alternative 3, except in this case (Alternative 5) interest
payments are L$1.2 million (ie 6 per cent) per year and Buildityourself can after
1 January 20X3 but before maturity, at its sole discretion, redeem the debentures by
paying to the debenture holders L$20 million (the capital amount) plus interest accrued
at 6 per cent to the early redemption date.
Alternative 6: mandatorily redeemable fixed term preference shares
On 1 January 20X0 Buildityourself would receive L$20 million in exchange for the
contractual obligation to pay:
 L$1.15 million (ie 5.75 per cent fixed dividend) on 31 December each year for
preference-shareholders (ie fixed redemption at par) on 31 December 20X9.
On liquidation only the ordinary shareholders’ claims are more subordinate than the
claims of the non-voting preference shares against Buildityourself’s net assets.
Alternative 7: convertible debentures—exercisable only at maturity
The facts are the same as Alternative 3 except, in Alternative 7 interest payments are
L$700,000 (ie 3.5 per cent) per year and the debenture holders may at 31 December
20X9, at their sole discretion, in lieu of receiving L$20 for each debenture held, require
Buildityourself to convert each debenture into one Buildityourself ordinary share.
Any debentures not converted into ordinary shares by 31 December 20X9 must be
redeemed at their par value (ie L$20).
Alternative 8: convertible debentures—exercisable during the 6 years before maturity
Page 4
The facts are the same as Alternative 3 except, in Alternative 8 interest payments are
L$600,000 (ie 3 per cent) per year and the debenture holders may any time after
1 January 20X4 but before maturity, at their sole discretion, require Buildityourself to
convert each debenture held into one Buildityourself ordinary share. Any debentures
not converted into ordinary shares by 31 December 20X9 must be redeemed at their par
value (ie L$20).
Alternative 9: mandatorily redeemable debentures with conditional early redemption

feature
The facts are the same as Alternative 3, except in Alternative 9 interest payments are
L$1.1 million (ie 5.5 per cent) per year and Buildityourself can (at its sole discretion)
any time after 1 January 20X7 before maturity redeem all of the outstanding debentures
maturity at par (L$20) plus interest accrued since the most recent interest payment date
but provided that (ie conditional upon) the market price of Buildityourself ordinary
shares exceeding L$26 for longer than seven consecutive working days.
Alternative 10: convertible debentures with conditional early redemption feature
These debentures combine the features of the debentures in Alternatives 8 and 9 (ie both
Buildityourself and the debenture holders have early exercise options), except in
Alternative 10 ‘interest’ cash flows are L$700,000 (ie 3.5 per cent) per year.

Explain the economics/finance of each of the instruments being considered by management to
raise finance for Buildityourself (eg explain why the contractual cash flows differ for each of the
instruments being considered).
Which elements (eg asset, liability, equity), as set out in the Conceptual Framework, would
arise from Buildityourself contracting with the counterparties in each of the financing
alternatives management are considering to finance the acquisition of the new warehouses?
For each of the financing alternatives being considered by management how, in accordance
with IFRS, would the contracts be accounted for by Buildityourself when first recognised?
For each of the financing alternatives being considered by management how, in accordance with
IFRS, would the contracts be accounted for by Buildityourself on after initial recognition?
For each instance in which the classification (ie asset, liability or equity, or a combination
thereof) in accordance with IFRS differs from that which would flow from the Conceptual
Framework definitions of elements, discuss the reasons why the IASB deviated from definitions.
Page 5
Regulators
Wednesday 5 June 2013
Vienna, Austria
Case Study: hedge accounting in accordance with

IAS 39 and IFRS 9
Darrel Scott
Member
IASB
Disclaimer: The IFRS Foundation, the authors and the publishers do not accept any responsibility for any loss caused to any person and/or entity
that acted or refrained from acting in reliance on the material in this publication, whether such loss is caused by negligence or otherwise. Any
names of individuals, companies and/or places used in this publication are fictitious and any resemblance to real people, entities or places is
purely coincidental.
Right of use
Although the IFRS Foundation encourages you to use this teaching material for educational teaching purposes, you must do so in accordance
with the terms of use below. For details on using our standards please visit www.ifrs.org/IFRSs/Pages/IFRS.aspx
Terms of Use
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contact us as you will need a written licence which we may or may not grant.
Printed Use.
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all or part of the teaching material to incorporate into your own documentation.
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Please see www.ifrs.org/Pages/Terms-and-Conditions.aspx for details of how you can link to our website
 if you intend to include any part of this teaching material on your website free of charge or in a slide pack for an educational course
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reproduce, any trademarks that appear on or in the teaching material

Trade Marks
The IFRS Foundation logo, the IASB logo, the IFRS for SMEs logo, the ‘Hexagon Device’, ‘IFRS Foundation’, ‘eIFRS’, ‘IAS’, ‘IASB’, ‘IASC
Foundation’, ‘IASCF’, ‘IFRS for SMEs’, ‘IASs’, ‘IFRS’, ‘IFRSs’, ‘International Accounting Standards’ and ‘International Financial Reporting
Standards’ are Trade Marks of the IFRS Foundation.
Flymecheaply (jet fuel hedging) Case Study
Elizabeth Buckley, Project Manager, IFRS Education Initiative, IASB
This case study is a ‘work in process’. It will be revised following feedback and comments from people
attending a series of workshops on the Framework-based approach to teaching International Financial
Reporting Standards (IFRSs) organised by the IFRS Foundation and others. After revisions, the material
will be available as an educational resource on the IFRS website.
Background
operated successfully in the manufacturing, retail and agricultural sectors for more than twenty
years and for many years the company has prepared its financial statements in accordance with
IFRS.
Flymecheaply
In 20X0 Ms En Trepreneur founded Flymecheaply—a domestic commercial budget airline in

Latrica. The company’s meteoric rise is well documented as one of the great successes of the
Latrica’s recent economic reforms.
Early in 20X6 Obligit2 acquired 25 per cent of the equity and voting rights in Flymecheaply.
In accordance with the rights its shareholding confers Obligit appointed Mr Big Shot to the
Flymecheaply’s Management Board.3
Jet fuel
Jet fuel is a significant and volatile cost of operating the airline. From 1 January 20X1 to
31 December 20X5 jet fuel as a proportion of total operating expenses fluctuated between 20–
40 per cent—during the five year period jet fuel fluctuated between US$50.4 and US$159.6 per
barrel with fluctuations for a 30 day period being as high as 31 per cent.
Before 20X6 Flymecheaply did not hedge its exposure to jet fuel volatility. En Trepreneur
believes that hedging cannot save the entity any money in the long-run because “when you
1
The names of individuals, entities and places in this case study are fictitious. Any resemblance to people, entities
or places is purely coincidental.
2
The names of individuals, companies and places in this case study are fictitious. Any resemblance to people or
entities is purely coincidental.
3
Through its voting rights and the appointment of Mr Big Shot, Obligit exerts significant influence (but not control)
over Flymecheaply.
hedge all you do is bet against the experts of the oil market and pay the middle man”4.
However, Mr Big Shot takes a different view—using a dynamic jet fuel price hedging strategy
results in more stable cash flows and that would impact positively on Flymecheaply’s share
price.
After much discussion, in late 20X6, management was persuaded by Mr Big Shot’s arguments
and Flymecheaply adopted a hedging strategy to mitigate its exposure to increases in the US$
price of jet fuel using the following derivative financial instruments:
 twelve-month (or shorter) over-the-counter options5 to purchase fixed quantities of jet fuel at
a fixed price on a fixed date;
 twelve-month (or shorter) over-the-counter fixed price forward contracts to purchase a
specified quantity of jet fuel at a specified date;
 twelve-month (or shorter) over-the-counter forward contracts to purchase a specified
quantity of jet fuel at a specified date at the lower of the prevailing price for jet fuel on the
date of delivery and a fixed price specified in the contract (a “collar”); and
 twenty-four month (or shorter) crude oil futures traded on the New York Mercantile
Exchange.
Some jet fuel forward contracts must be settled net in cash. The rest must result in
Flymecheaply accepting delivery of jet fuel (ie physical delivery) and cannot be settled net in
cash—Flymecheaply must receive the fuel and pay the fixed price. The options for jet fuel can
be settled net in cash whereas the forward contracts incorporating the collar must be settled with
physical delivery.
The objective is to hedge approximately:
 50 per cent of expected fuel requirements six months in advance;

 30 per cent from 7 to 12 months in advance; and
 20 per cent from 13 to 24 months in advance.
In 20X6, for the first time, Flymecheaply also used derivatives to mitigate the currency risk in
expected fuel usage requirements over the next 24 months. It plans to use a range of derivatives,
but initially purchases forward contracts to buy US$ and sell L$.
Unfortunately for Flymecheaply, since adopting a policy of hedging the US$ cash flow price risk
and the currency risk in its expected jet fuel consumption:
 the spot price of jet fuel has fallen sharply mainly in response to falling demand for crude
oil resulting from dire economic woes in distant lands. Consequently, at 31 December
4
This argument has been put forward by some in the airline industry, eg see AFX News article, BA says fuel
requirement 45% hedging in current year, May 17 ,2004 (as cited by Cobbs and Wolf, Jet Fuel Hedging Strategies:
Options Available for Airlines and a Survey of Industry Practice, Finance – Spring 2004, p6)
5
The options are financial instruments that give Flymecheaply the right (but not the obligation) to purchase a
specified quantity of jet fuel at a specified fixed price on a specified date.
20X6, the fair value of each of the derivatives entered into by Flymecheaply is deeply out
of the money; and
 the L$ has strengthened significantly against the US$.
Flymecheaply’s main competitors do not hedge against the effects of the volatility in the jet fuel
price and they also do not hedge currency cash flow price risks. Consequently, in response to
falling fuel costs, its competitors have significantly reduced the price at which they profitably
sell flights and greatly increased their operating margins. To maintain customer loyalty
Flymecheaply is forced similarly to steeply ‘discount’ the price of its flight services.
The combination of reduced income and relatively high fuel costs results in Flymecheaply
recognising, for the year ended 31 December 20X6, its first annual loss in its more than two
decades of operations.
For this purpose we will look at one of Flymecheaply’s jet fuel forward contracts and one of its
West Texas Intermediate (WTI) crude oil futures.
On 1 September 20X6 Flymecheaply contracted to buy 100,000 barrels of jet oil for delivery on
1 March 20X7 at US$128.6 per barrel. Therefore, if the contract were to be physically settled,
on 1 March 20X7 Flymecheaply would pay US$ 12,860,000 and receive 100,000 barrels of jet
oil. However, this contract must be settled net in cash. Flymecheaply did not pay anything to
enter into the forward contract; it was entered into at market prices.
On 1 September 20X6 Flymecheaply also purchased a cash-settled futures contract for 100,000
barrels of WTI crude oil. The closing date of the futures contract is 1 October 20X7 and the
price in the contract is US$106.6 per barrel. Therefore, if the futures contract were physically
settled, on 1 October 20X7 Flymecheaply would pay US$ 10,660,000 and receive 100,000
barrels of WTI crude oil. However, the contract must be settled net in cash. Flymecheaply paid
US$ 1,460,000 to purchase the futures contract on 1 September.
Assume the following facts:
Rate specified in Quantity Fair value of Fair value of

contract specified in contract on contract at
contract 01/09/20X6 31/12/20X6
Jet fuel US$ 128.6 per 100,000 barrels zero (US$ 5,300,000)
barrel
WTI crude oil US$ 106.6 per 100,000 barrels US$ 1,460,000 (US$ 4,960,000)
barrel
At 31 December 20X6:
 the jet fuel forward was assessed as highly effective as a hedge of the price of jet fuel
(with US$176,400 of the change in fair value being regarded as ineffective and the
balance effective);
 the crude oil future was assessed as highly effective as a hedge of the crude oil
component in the price of jet fuel (with US$379,750 of the change in fair value being
regarded as ineffective and the balance effective). However, the crude oil future was
assessed as not being highly effective as a hedge of the price of jet fuel.
General questions
 At 31 December 20X6 does the jet-fuel forward contract or crude oil future, or both, result
in obligations for Flymecheaply that satisfy the definition of a liability (as set out in the
Conceptual Framework)?
 Do you think that Flymecheaply has achieved economic hedging?
 What is the accounting if Flymecheaply does not use hedge accounting?
IAS 39
 Do you think that Flymecheaply can hedge account under IAS 39? If so, what kind of
hedge does Flymecheaply have? How might you test for effectiveness?
IFRS 9
 How might the accounting be different under IFRS 9?
International Standards Group
Case Studies:
Fair Value
Measurement

Regulators
Diplomatic Academy of Vienna, 4 June 2013
KPMG International Standards Group
Case study 1: Restriction on sale of financial asset
Restriction on sale of equity instrument (financial asset)

Quoted price in active market for shares that is not subject to
restriction is available
■ Fact pattern:
– Entity A enters into a borrowing arrangement.
– In accordance with the arrangement, an equity security that A holds as
an investment is pledged as a collateral.
– A is restricted from selling the security pledged during the period the
borrowing is outstanding.
Question:
Should the restriction be considered when measuring the fair value of the
security?
© 2013 KPMG IFRG Limited, a UK registered company limited by guarantee.

Case Study: Fair Value Measurement 1
All rights reserved. Internal use only.
© 2013 KPMG IFRG Limited, a UK registered company limited by guarantee. 1

Case study 1 solution: Restriction on sale of financial asset
Is the restriction a characteristic of the financial asset (IFRS 13.11)?

■ transferability
■ imposed on holder by regulations
■ part of contractual terms of financial asset
■ attached to financial asset through purchase contract or other commitment?
Yes No
Adjustment for restriction required Adjustment for restriction prohibited
Level 1 input for financial asset without Holder of restricted financial asset
restriction is not level 1 input for financial considered to have access to principal
asset with restriction market at measurement date
Solution:
The restriction is entity-specific and should not be considered in measuring
the fair value of the security

Case study 2: Day 1 gain
Bank B enters into an interest rate swap (IRS) contract with a corporate
client for no initial cash consideration.
B has access to the wholesale market which is the principal market for this
instrument.
B estimates the fair value of the IRS in the wholesale market at the
transaction date using a valuation technique. The fair value using the
valuation technique is CU 10 (an asset).
Scenario 1:
■ All the inputs used in the valuation technique are observable
Scenario 2:
■ The valuation technique uses inputs that are not observable
Question:
What is the fair value of the IRS? Should Bank B recognise a “day 1” gain?


Case study 2 solution: Day 1 gain (1/2)
May indicate that

Transaction is between related parties transaction price and
fair value are different
(IFRS 13.B4).
IFRS 13 does not
Transaction is forced prescribe rules for
recognition of gains
Unit of account represented by the transaction is or losses at initial
different from unit of account used for measuring recognition – look to
fair value IFRS that
permits/requires the
The market in which transaction takes place is fair value
different from the market in which the entity measurement (e.g.
would sell the asset or transfer the liability IAS 39/IFRS 9)

Case study 2 solution: Day 1 gain (2/2)
Scenario 1:
■ The fair value is CU 10 (based on the valuation technique)
■ Bank B recognises day 1 gain of CU 10
Scenario 2:
■ The fair value is CU 10 (based on the valuation technique)
■ Bank B does not recognise a day 1 gain (the carrying amount of the IRS
on initial recognition is adjusted to defer the difference between the fair
value measurement and the transaction price)
Fair value represents the price in the principal market. However, under
IAS 39/IFRS 9, if the fair value at initial recognition differs from the
transaction price but is not evidenced by a valuation technique that
uses only data from observable markets, any “day 1” gain is deferred
(IAS 39.AG76, IFRS 9.B5.1.2A)


Case study 3: Low interest loan
■ Entity G makes an interest-free loan of CU 100 to a related party at

1/1/X3
■ The loan is repayable after 3 years at CU 100
■ Entity G estimates that the annual interest rate that the related party
would have been required to pay to an unrelated party (e.g. a bank) for a
loan with similar terms is 5%. However, this estimate is not based solely
on observable market data.
Question:
What is the fair value of loan at 1/1/X3? Should G recognise a “day 1” loss?

Case study 3 solution: Low interest loan
The fair value/transaction price of the loan is CU 86 (100/1.05³). G

expenses the remainder of 14.
Fair value at initial recognition usually = transaction price = fair value of
consideration given. But if part of the consideration relates to something
other than the financial instrument, measure the FV of the financial
instrument.
The fair value of a loan that carries no interest can be measured as the
present value of all future cash flow receipts discounted using the prevailing
market rate of interest for a similar instrument with a similar credit rating.
Any additional amount lent is an expense or a reduction in income unless it
qualifies for recognition as some other type of asset (IAS 39.AG64).


Case study 4: Principal and most advantageous markets
Entity D owns an asset. It has access to two different active markets

to sell the asset
Market A Market B
Price 99 96
Transaction costs 6 2
Net amount received 93 94
Scenario 1:
■ Market A is the principal market as it is the market with the greatest
volume and level of activity for the asset
Scenario 2:
■ There is no principal market
Question:
What is the fair value of the asset in each scenario?

Case study 4 solution: Principal and most advantageous

markets
Scenario 1:
■ The fair value is 99 (the price in market A which is the principal market)
Scenario 2:
■ The most advantageous market is market B
■ The fair value is 96 (the price in market B)
In measuring fair value, the price is not adjusted for transaction costs
(IFRS 13.25). However, transaction costs are taken into account in
determining the most advantageous market (IFRS 13.A)


Case study 5: The most representative price within a bid-

ask spread
Entity L holds 2 securities; X and Y which have bid and ask prices as
follow:
Security Bid Price Ask price Mid-market

price
X 99.9 100.1 100

Y 90 110 100
Question:
Can L use mid-market prices for measuring the fair values of the securities?

Case study 5 solution: The most representative price within

a bid-ask spread
■ The entity uses the price within the bid-ask spread that is most
representative of fair value in the circumstances (IFRS 13.70).
■ IFRS 13 does not preclude the use of mid-market pricing or other pricing
conventions that are used by market participants as a practical expedient
for fair value measurement within a bid-ask spread (IFRS 13.71).
For security X, the mid-market price of 100 may be used as it seems to

provide a reasonable approximation of the exit price
For security Y, due to the wide bid-ask spread, the mid-market price of
100 may not provide a reasonable approximation of the exit price and
therefore would not be used


Case study 6: Premiums and discounts
■ Entity M holds:
– 5% of the shares of entity Z; and
– 80% of the shares of entity W which give M control over W.
■ Z and W shares do not have a quoted price. Fair values for these shares
are initially estimated using multiples for comparable public companies.
Questions:
1. Should the fair value of Z shares be adjusted for the effect of lack of
liquidity?
2. Should the fair value of the investment in W be adjusted to include a
control premium?

Case study 6 solution: Premiums and discounts
■ The fair value of Z shares should be adjusted for the effect of lack of
liquidity if market participants would take this into account when
measuring the fair value (IFRS 13.69)
– May be required if initial estimate of fair value is based on
comparables for public companies (ie. quoted/liquid shares).
■ The fair value of W should be adjusted for a control premium if:
– it is not inconsistent with the asset’s unit of account (IFRS 13.14, 69);
and
– market participants would include such a premium when measuring
the fair value (IFRS 13.69).
The issue of how to determine the unit of account

is currently under discussion by the IASB


Case study 7: Large holding
Fact pattern:
■ Entity B holds 8% (i.e. 1.5 million shares) of the share capital in Entity Q.
■ Daily trading volume is 1% of outstanding shares.
■ The quoted price for one share in Q is CU 10 at the measurement date.
■ B assumes that it would be able to sell its 8% stake in one transaction for
CU 13.5 million at the measurement date.
Question:
What is the fair value of B’s 8% interest in Q at the measurement date if Q’s
shares are traded in an active market?

Case study 7 solution: Large holding
CU
The FV of A’s 8% interest in Q is CU 15 million 15 million
■ Unit of valuation and unit of account is individual share in
accordance with IFRS 13.14 and IAS 39/IFRS 9.
■ If Level 1 input available, it should be used for FV measurement (IFRS
13.69, 77, 80): 1.5 million shares × CU 10 = CU 15 million.
■ Discount of CU 1.5 million is a blockage factor that is:
– a characteristic of the entity’s holding;
– inconsistent with the unit of account;
– not a characteristic of the individual share; and
– conceptually similar to transaction costs.
Follow up question:
Would the answer be different if the market for Q’s shares was not active?

Case study 8: Fair value measurement of a portfolio of

assets and liabilities
■ Bank C has a long position of 100 individual financial assets and a short
position of 95 individual financial liabilities in a particular market risk.
■ The financial instruments within the portfolio are identical.
■ Bid price is CU 99; mid price is CU 100; ask price is CU 101.
■ C uses bid prices to measure asset positions and ask prices to measure
liability positions.
■ The individual financial instruments are not categorised within level 1 of
the fair value hierarchy.
■ Assume there is no discount/premium that results from the size of the net
risk exposure.
Question:
What is the sum of the fair values of the assets and liabilities assuming:
A. Bank C applies the portfolio exception; or
B. Bank C does not apply the portfolio exception.
Case study 8 solution: Fair value measurement of a

portfolio of assets and liabilities (1/2)
If C applies the portfolio exception, the sum of the fair values is CU

495 and can be measured as follows:
Quantity held Price Fair value
95 100 9,500
Financial assets
5 99 495
Financial (95) 100 (9,500)

liabilities
Net long position 5 99 495


Case study 8 solution: Fair value measurement of a

portfolio of assets and liabilities (2/2)
Without the application of the portfolio exception, the sum of the fair
values is CU 305 and is measured as follows:
Quantity held Price Fair value
Financial assets 100 99 9,900
Financial (95) 101 (9,595)

liabilities
Net long position 5 305

Case study 9: Adjustment for DVA
■ Entity H entered into an interest rate swap (IRS) contract with a bank in
2011.
■ Under IAS 39, H has not adjusted the fair value of the IRS for its own
credit risk (DVA adjustment).
■ H applies IFRS 13 from 1 January 2013.
■ The value of the IRS on 1 January 2013, excluding DVA, is CU 100 (an
asset)
■ H believes that an adjustment to the fair value for its own credit risk is not
required under IFRS 13 because:
– it would be misleading since H intends to settle the IRS with the bank; and
– the IRS is currently classified as an asset, so the effect of H’s own credit risk is not
relevant for the valuation.
Question:
Should the fair value of the IRS be adjusted for H’s own credit risk?

Case study 9 solution: Adjustment for DVA
H’s own credit risk should be considered when measuring the fair
value of the IRS if market participants would do so when valuing the
instrument
■ Under IFRS 13, the fair value of a liability reflects the effect of ‘non
performance risk’ which includes an entity’s own credit risk (IFRS 13.42).
■ Since fair value under IFRS 13 is an ‘exit price’, H’s intention to settle
should not affect the measurement (IFRS 13.9).
■ The effect of the entity’s own credit risk may be relevant for measuring
the fair value of an instrument that might change from being an asset to a
liability (even when the current position of the instrument is an asset) –
since a market participant may consider this risk and the potential credit
exposure to H that might arise when determining the price of the asset.
[Similarly, counterparty credit risk may be relevant to measuring a liability
that might change to being an asset.]

Case study 10: Decrease in volume or level of activity (1/2)
■ Entity C holds 4% of the share capital in Entity F.

■ Quoted price on stock exchange is CU 200 at measurement date
(31/12/20X2).
■ During Q2-20X2, trading was suspended for 8 weeks and during 20X2
the government took several steps to support the market.
■ Due to financial and political instability, the share price and trading
activity have declined sharply since Q2-20X2, with historical lows in Q4-
20X2.
■ Trading volume on measurement date is similar to the average quarterly
trading volume.


Case study 10: Decrease in volume or level of activity (2/2)
Question:
Is C allowed to use a price, other than the quoted price, to measure the FV
of a share in F at the measurement date?

Case study 10 solution: Decrease in volume or level of

activity
■ Is market active (i.e. is the quoted price a Level 1 input (IFRS 13.76))?
■ In an active market, transactions for the asset or liability take place with
sufficient frequency and volume to provide pricing
information on an ongoing basis (IFRS 13.A).
■ There may be a significant decrease in volume or
level of activity for the shares in F (IFRS 13.B37).
■ Significant decrease in volume or level of activity ≠ inactive market
■ Based on fact pattern presented  sufficient evidence to consider the
market active.
■ Even if market is inactive, quoted price may still
represent best evidence of FV as the transactions can still be orderly
(IFRS 13.B43).


Case study 11: Not using the transaction price when

measuring fair value (1/2)
■ Entity K holds a debt security for which there has been a significant
decrease in the level of activity in the market such that there were only a
few transactions in recent months.
■ K concludes that the market for the security is no longer an active
market.
■ The last transaction in the market took place at 23/12/X3 at a price of CU
60. The debt security’s principal amount is CU 100.
■ K states that:
– due to the lack of activity and the illiquidity of the market, the price in
the market does not represent fair value;
– the current low market price results from irrational trends caused by
wider economic concerns that are not specific to the security;
– it will hold the security until the market price increases or until maturity.

Case study 11: Not using the transaction price when

measuring fair value (2/2)
■ Accordingly, K values the security at 31/12/X3 at CU 90 using an income

approach that is based on its analysis of expected cash flows and what it
considers a reasonable rate of return of 6%.
Question:
Can K ignore the last transaction price of CU 60 and use its own valuation
technique when measuring the fair value of the security?


Case study 11 solution: Not using the transaction price

when measuring fair value (1/2)
FV represents price of an orderly transaction. It is not appropriate to

conclude that all transactions in the market are not orderly – need to
evaluate the circumstances of transactions (IFRS 13.B44):
■ if evidence indicates orderly – take transaction price into account
■ if insufficient evidence – also take into account but less weight
■ if evidence indicates not orderly – little, if any, weight

Case study 11 solution: Not using the transaction price

when measuring fair value (2/2)
FV should reflect market participants’ (not K’s) assumptions about expected

cash flows and discount rates, including the risk premium a market
participant would demand. Therefore, K’s intention to hold the asset is not
relevant (IFRS 13.22).
Multiple valuation techniques may be appropriate – but weighting should
reflect objective of determining the point that is most representative of
current market conditions (IFRS 13.63).
Need to consider time between last transaction and measurement date
(IFRS 13.B44(b)).
Based on the information presented, K cannot ignore the transaction

price of CU 60. Also, K’s alternative valuation technique is not
calibrated to a market participant perspective.


Questions and feedback

Please send your feedback on today’s
session to:
Chris Spall
Seconded Partner in KPMG’s
chris.spall@kpmgifrg.com
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Regional IFRS Workshop for Regulators, 3-7 June, 2013, Vienna

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Executive IFRS Workshop for

Case Study: judgHments when there is no specific

Please address publication and copyright matters to:

Michael J C Wells, Director, IFRS Education Initiative, IASB

Gold acquired and held as a ‘store of wealth’

The artwork collection is stored in a purpose-built underground vault at Amalgam’s

Case Study: non-financial assets (NFAs)

the Open Safari case study

Please address publication and copyright matters to:

Michael J C Wells, Director, IFRS Education Initiative, IFRS Foundation

Open Safari prepares financial statements in compliance with IFRS.

An IFRS issue for class discussion

Acquisition of customer list

 game tracking on foot;

 Is the acquisition of Freelands a business combination?

WoXy Safari’s profitable agribusinesses comprise a premium badger-friendly honey

Total tangible assets 27,000,000

 breeding Tuberculosis-free (TB-free) African buffalo and a range of antelope, zebra,

Road infrastructure development

 20X6: €500,000 on 1 June, when construction started;

In January 20X5, an independent surveyor designs the road to the management’s

Beach holiday resort development

The casino operator is contractually obliged to pay Open Safari:

 €40 million on signing the contract in 20X5;

Relocating game to Sealands

In 20X5, in anticipation of operating photographic safaris on Sealands and breeding animals

Animal husbandry facilities

4 wild dogs 1,500 1,600 1,100

Wild dog Brown White Black Buffalo

Bespoke safari vehicles

Some IFRS issues for class discussion

Release of Elephants on Freelands

In January 20X9, following an elephant culling operation in a country bordering on

Some IFRS issues for class discussion

Safaris commence at Sealands

Some IFRS issues for class discussion

Medical research facility

Some IFRS issues for class discussion

Some IFRS issues for class discussion

Other auction activities

Some IFRS issues for class discussion

Some IFRS issues for class discussion

Case Study: liabilities

Please address publication and copyright matters to:

Some IFRS issues for group discussion

In 20X0 Ms En Trepreneur founded Flymecheaply—a domestic commercial budget airline in

Throughout 20X6 Flymecheaply’s fleet consists of twenty jet aircraft:

Contracts with customers

Pilot retention scheme

At 31 December 20X1 management made the following judgements (actuarial assumptions):

Employee A’s salary for 20X2 is CU105,000.

 for each 10 years of continuous service provided to Flymecheaply an employee is

Emission trading scheme

 What present obligations, if any, arise from Flymecheaply leasing aircraft?

Emission trading scheme

Case Study: classifying financial instruments in

Please address publication and copyright matters to:

Buildityourself operates out of a single warehouse in Capitol (the capital city of

Alternative 2: mandatorily redeemable fixed-term variable-rate debentures

On 1 January 20X0 Buildityourself receives L$20 million in exchange for 1 million

 variable ‘interest’ cash flows calculated as follows: L$20 million × (a specified

Alternative 3: mandatorily redeemable fixed-term fixed-rate debentures

On 1 January 20X0 Buildityourself would receive L$20 million in exchange for