IAS-1 Illustrative Example-Critical Accounting Estimates and Judgements

1. IAS-1 Illustrative Example-Critical Accounting Estimates and Judgements Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Critical accounting estimates and assumptions The company makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. (a) Estimated impairment of goodwill The company tests annually whether goodwill has suffered any impairment, in accordance with the accounting policy stated in Note --. The recoverable amounts of cash-generating units have been determined based on value-in-use calculations. These calculations require the use of estimates (Note --). If the revised estimated gross margin at 31 December 2006 had been 10% lower than management’s estimates at 31 December 2005, the company would need to reduce the carrying value of goodwill by Rs50 and property, plant and equipment by Rs350.

2. If the revised estimated pre-tax discount rate applied to the discounted cash flows had been 10% higher than management’s estimates, the company would need to reduce the carrying value of goodwill by Rs50 and property, plant and equipment by Rs250. If the actual gross margin had been higher or the pre-tax discounted rate lower than management’s estimates, the company would not be able to reverse any impairment losses that arose on goodwill. (b) Income taxes The company is subject to income taxes in numerous jurisdictions. Significant judgment is required in determining the worldwide provision for income taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. The company recognises liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made. Were the actual final outcome (on the judgement areas) to differ by 10% from management’s estimates, the company would need to: – increase the income tax liability by Rs120 and the deferred tax liability by Rs230, if unfavourable; or – decrease the income tax liability by Rs110 and the deferred tax liability by Rs215, if favourable.

3. IAS-1 Illustrative Example-Critical judgements in applying the entity’s accounting policies Revenue recognition The company has recognised revenue amounting to Rs950 for sales of goods to Leatherex & Co in Lebanon during 2005. The buyer has the right to rescind the sale if there is 5% dissatisfaction with the quality of the first 1,000 pairs of shoes sold. The profit recognised for this sale was Rs665. The company believes that, based on past experience with similar sales, the dissatisfaction rate will not exceed 3%. It is therefore appropriate to recognise revenue on this transaction during 2005. The company will suffer an estimated loss of Rs700 in its 2006 financial statements if the sale is cancelled, Rs665 being the reversal of 2005 profits and Rs35 of costs connected with returning the stock to the warehouse.

4. 1 Budgeted gross margin 2 Weighted average growth rate used to extrapolate cash flows beyond the budget period 3 Pre-tax discount rate applied to the cash flow projections These assumptions have been used for the analysis of each cash generating unit (CGU) within the business segment. Management determined budgeted gross margin based on past performance and its expectations for the market development. The weighted average growth rates used are consistent with the forecasts included in industry reports. The discount rates used are pre-tax and reflect specific risks relating to the relevant segments. The impairment charge arose in a CGU in Swaziland (included in ‘Other’ countries) following a decision to reduce the manufacturing output allocated to these operations (see also Note --). This was a result of a redefinition of the company’s allocation of manufacturing volumes across all CGUs in order to benefit from advantageous market conditions. Following this decision, the company reassessed the depreciation policies of its property, plant and equipment in this country and estimated that their useful lives will not be affected following this decision.

5. IAS 16 …contd. Choice of model-Cost or Revaluation What if company has already revalued assets but wants to adopt cost model under revised IAS? • Treat opening balance of valuations as cost (no retrospective adjustment required) • Leave surplus untouched on the balance sheet • Amortise surplus in accordance with the Companies Ordinance requirements • When asset disposed of, reverse surplus to equity

7. Loans and receivables Amortised cost Held to maturity Amortised cost Fair value through P&L Fair value*, value changes to P&L Available for sale Fair value*, value changes to equity IAS 39 Financial Instrument Recognition and Measurement 4 Categories of Financial Assets * If FV cannot be measured reliably, then use cost.

8. Situation Accounting Substantially all risks and rewards are transferred Derecognize the old asset Transferred and retained risks and rewards are both significant Control is transferred Continuing involvement approach Control is retained Substantially all risks and rewards are retained Continue to recognize the old asset IAS 39 Financial Instrument Recognition and Measurement Overview of Derecognition