SOCIAL REPORTS

The concept of social responsibility underlies the debate about social responsibility accounting. 

Accounting is a way of measuring and reporting values that enable sound decision making. The 

question of for whom, how and when social responsibility report should be prepared is yet to be 

answered.

Like its ‘parent’ social responsibility, there is little agreement as to what constitutes social 

responsibility accounting.

THE SCOPE OF CORPORATE SOCIAL RESPONSIBILITY 

Ernest identified six areas of corporate social responsibility

1. Environment

2. Energy

3. Fair business practices

4. Human resources

5. Community involvement

6. Product

Environment

This area involves the environmental aspect of production covering pollution control in the conduct of 

business operations, prevention or repair of damage to the environment resulting from processing 

resources of the national environment and conservation of the natural resources.

The main emphasis is on the negative aspects of the organisations’ activities. Thus, corporate social 

objectives are to be found in the reduction of the negative external social effect of industrial 

production and in adopting more efficient technologies to minimize the use of irreplaceable resources 

and the production of wastes.

Energy 

This area covers conservation of energy in the conduct of business operations and increasing the 

energy efficiency of the company’s product.

Fair business practices

This area is concerned with the relationship of a company to special interest groups, in particular it 

deals with employment and advancement of minorities, the use of clear English in legal terms and 

conditions to suppliers and customers and display of information on its product.

Human resources

This area is concerned with the impact of organisations’ activities on the people who contribute the 

human resources of the organisation.

These include:

Recruiting practices

a) training programmes

b) experience building (job rotation)

c) job enrichment

d) wage and salary levels

e) fringe benefit plans

f) congruence of employees and organisations goals

g) mutual trust and confidence

h) job security

i) stability of work force

j) layoffs and recall practices

k) transfer and promotion policies

l) occupational health

Community involvement

It considers the impact of organisations’ activities on individuals or groups of individuals outside the 

company. It involves solving of community problems, manpower support, health related activities, 

education and the arts and training and employment of handicapped persons.

Products 

This area concerns the qualitative areas of a product e.g. the utility, durability, safety and 

serviceability as well as the effect on pollution. Moreover, it includes customers’ satisfaction,

truthfulness in advertising, completeness and clarity in labeling and packaging.

Modes of disclosures

Descriptive approach

This approach merely lists corporate social activities and is the simplest and least informative. They 

are easy to prepare. However, most of the information discussed is of a qualitative nature rather than a 

financial nature. As such it would be subjected to value judgment about the firms’ social responses. It 

provides little scope for analysis and verifications due to the information being least informative. This 

appears to be the most prevalent form of social responsibility accounting.

Comparability of financial commitments to social activities overtime and across firms is impaired 

when firms adopt this approach.

Critical voices also have argued that many social descriptive are nothing but public relations gestures 

meant to ward off grass root attack by social activists and are adopted by companies which believe 

useful measurements of corporate social reporting cannot be developed or is difficult to develop.

Cost of outlay approach

In this approach corporate expenditure is listed on each social activity undertaken. It offers a contrast 

to the descriptive report in the sense that the descriptions of activities are quantified. It expands the 

scope of analyzing the financial commitments to social activities and verifiability of the amounts 

recorded relative to the descriptive approach. Comparability of financial commitments to social 

activities over time and across firms is enhanced but limited to expenditure incurred. The main 

disadvantage to this approach is that no mention of the resulting benefit is made. This is because 

corporate expenditure is recorded in terms of the cash outlay, which is easily determined unlike social 

benefit, which is difficult to measure.

Cost benefit approach

This is an extension of cost of outlay approach. It discloses both costs and benefits associated with 

corporate social responsibility. It is assumed that firms employing this approach make use of ‘shadow 

prices’ developed by economists in evaluating the social costs and social benefits of proposed projects 

from the point of view of all losers and all beneficiaries within a nation.

This approach is the most informative approach but suffers from difficulties which exist in the 

measurement of the benefits. Critics argue that output measures in monetary terms are contrived 

(forced) and are not meaningful because the benefits are mainly of a qualitative nature because they 

are concerned with the quality of life.

In Kenya, it appears, companies highlight their social activities in their annual reports but few do so in 

financial terms.

Problems of social accounting (disclosures)

- The concept of social responsibility accounting raises initial problems of defining not only the 

users of such information but also their objectives in receiving such information. In identifying 

users of information as having different objectives from those identified in the Corporate Report 

(1975), poses complex problems of identifying what objectives such groups will have in social 

accounting information. The problem is aggravated by the inability to establish patterns of value 

judgments about the activities reported upon, and stability in the ‘opinions’ of the individuals, 

using social information, forming a group of users. If the objective is to maximize some form of 

public utility based upon sets of value judgments, it may be impossible to achieve that objective.

- Due to the inability to develop measurements of performance which everyone will accept that 

capture data in form permissive to social disclosure and analysis presents a problem. Thus, many 

disclosures are narrative form and often reflect only personal opinion of the chief executive 

officer.

- In the present institutional environment, most social responsibility disclosures are voluntary and 

unaudited. Although disclosures may be readily available or identifiable in firm’s annual reports, 

management is free to use its own discretion in selecting information to be reported. It is possible 

for poorer performance to bias their selections in order to appear like better performers. Thus, 

social information becomes nebulous and highly subjective.

- Uncertainty to the meaning and extent of social responsibility appears to hinder agreement on the

dimensions of measurement problem as the beginning stage in search for an appropriate measure. 

In Kenya, the Companies Act (CAP 486) which governs and regulates the activities of 

corporations makes no provision for the requirement of social disclosures in the annual reports of 

corporations. Neither does the Nairobi Stock exchange require the listed companies to file with 

them reports relating to social responsibility nor has ICPAK developed any standard that deals 

with the measurement and reporting of social responsibilities assumed by individual enterprises.

Implications of social accounting

- Presentation of accounting data is subject to two major parameters: the cost of providing such 

data and the benefits that accrue to the firm as a result of providing such data. In providing 

accounting data relating to social responsiveness, corporations will incur additional costs as a 

result of such an undertaking. Costs will manifest themselves in the form of additional personnel 

employed (competent in social accounting) or the training of existing personnel to equip them 

with the necessary skills and knowledge or replacement of existing staff with new staff that is 

knowledgeable as far as social accounting is concerned. Time used in the preparation of social 

disclosures, stationery and the cost of a social audit to verify the information as being “true and 

fair” are among many costs that the corporation will incur.

- Increased costs of providing accounting information have a negative effect on the earning ability 

of the corporations. This will result in the reduction of dividends and the price of common stock. 

Thus, maximization of shareholders wealth will cease to be the primary goal rather it would be 

substituted by the objectiveness of satisfying all parties’ needs which influxes the shareholders 

payout may decrease.

- It has been argued that social involvement benefits both the enterprises and the society. 

Providing information reflecting the degree of social involvement of an organisation would provide a 

base upon which the public can evaluate the corporations social responsiveness. Where in the eyes of 

the society, a corporation is socially responsible, the corporate image of the firm would improve and 

the society would appreciate the enterprises’ existence and would support it. On the other hand, a 

corporation that is socially irresponsible would see it gradually sinking into customers and public 

disfavor.

- Investment decisions will in future be influenced by the social involvement of organisations. As 

society’s value and expectations change, so do the values of investors. Investors that are socially 

responsible would measure the performance of organisation not only in terms of the ability of the 

organisation to maximise shareholders wealth but also in terms of the degree to which the firm is 

socially responsible. Thus, measures of success will tend largely to be influenced by the extent to 

which organisations are socially responsible.

- Firms would have to ensure that in order for the objective of providing social disclosure to be 

realised, social information will be of value to the readers. Various approaches have been adopted 

by firms in making social disclosures. These includes the descriptive approach, the cost outlay 

approach and the cost benefit approach. Critics argue that output measures in monetary terms are 

contrived and are not meaningful, because the benefits are mainly of a qualitative nature for they 

are concerned with the quality of life. Thus, firms will have to strike a balance in using the 

approaches in such a manner that will ensure public understandability of social information.

- Adoption of measures that are used by economists in the measurement of social costs and social 

benefits would be an approach towards the economists’ measurements of output and the 

calculation of Gross Domestic Product. This would ensure that accounting data is compatible in 

satisfying the needs of economist in the calculation of GDP. Such a calculation would not only be 

easy but there would always exist a reference (accounting data) that can be used to confirm the 

figures resulting from the calculation by the economist.

- In an effort to encourage social involvement, the government through the income tax department 

may provide special incentives and write offs for expenditure incurred as a result of social 

activities. Tax minimization through charitable contributions is among the effects that might be 

considered. Presently, donations made to research institutes are tax allowable in Kenya.

- The government, as the custodian of society’s resources may in future forcefully require the 

disclosure of the efforts the organisation will have on the society. The Kenya government has 

shown concern in those firms that adopt technologies that not environment friendly.

All in all, businesses cannot afford to ignore the broader public demands. They must not only provide 

quantities of goods and services, but also contribute to the quality of life. In light of changing 

conditions and society expectations and despite the remoteness of some of the benefits, it is in the 

business interest as artificial citizens to recognise both economic and social obligations.

Conclusion

Social responsibility accounting stems from the concept of corporate social responsibility. It widens 

the scope for shareholders by recognizing the society at large as being important users of financial 

statements. Supporters of social accounting argue that business is part of a large society (social 

system). As the public increasingly accepts this view, it judges each social unit as a business in terms 

of its contribution to society as a whole.

ENVIRONMENTAL REPORTS

There is a debate in business and society about the limits of business accountability. Put simply, this 

concerns two profound questions: ‘for what should accounting actually account?’ and ‘to whom is a 

business accountable?’ This debate is reflected in models such as the stakeholder/stockholder 

continuum and in Gray, Owen and Adams’s seven positions on corporate responsibility. A common 

traditional belief is that businesses need only report upon those things that can be measured and that 

are required under laws, accounting standards or listing rules.

A range of other pressures has increased on businesses in recent years, however. Among these is the 

belief that business are ‘citizens’ of society in that they benefit from society and so owe duties back to 

society in the same way that individual human citizens do. Many people no longer believe that 

businesses are able to take from society without also accounting back to society (and not just to 

shareholders), on how it has behaved with regard to its environmental impacts. This article is about 

how companies account for their environmental impacts using environmental reporting.

WHAT DOES IT CONTAIN?

In recent years, then, a belief has arisen in businesses and in society that reporting has a wider role 

than that expressed in the traditional ‘stockholder/shareholder’ perspective. Importantly, one need not 

hold to the ‘deep green’ end of the argument to hold these views: there are strategic reasons why a 

wider view of accountability may be held and, accordingly, why initiatives such as environmental 

reporting may be supported.

It concerns both the environmental consequences of an organisation’s inputs and outputs. Inputs

include the measurement of key environmental resources such as energy, water, inventories 

(especially if any of these are scarce or threatened), land use, etc. Outputs include the efficiency of 

internal processes (possibly including a ‘mass balance’ or ‘yield’ calculation) and the impact of 

outputs. These might include the proportion of product recyclability, tonnes of carbon or other gases 

produced by company activities, any waste or pollution.

These measures can apply directly (narrowly) or indirectly (more broadly). A direct environmental 

accounting measures only that within the reporting entity whereas an indirect measure will also report 

on the forward and backward supply chains which the company has incurred in bringing the products 

from their origins to the market. For example, a bank can directly report on the environmental impact 

of its own company: its branches, offices, etc. But to produce a full environmental report, a bank 

would also need to include the environmental consequences of those activities it facilitates through its 

business loans. Where a company claims to report on its environmental impacts, it rarely includes 

these indirect measures because it is hard to measure environmental impacts outside the reporting 

company and there is some dispute about whether such measures should be included in the bank’s 

report (the bank may say it is for the other company to report on its own impacts).

Reporting on environmental impacts is, therefore complicated, and is often frustrated by difficulties in 

measurement. In broad terms, environmental reporting is the production of narrative and numerical 

information on an organisation’s environmental impact or ‘footprint’ for the accounting period under 

review. In most cases, narrative information can be used to convey objectives, explanations, 

aspirations, reasons for failure against previous years’ targets, management discussion, addressing 

specific stakeholder concerns, etc. Numerical disclosure can be used to report on those measures that 

can usefully and meaningfully be conveyed in that way, such as emission or pollution amounts 

(perhaps in tonnes or cubic metres), resources consumed (perhaps kWh, tonnes, litres), land use (in 

hectares, square metres, etc) and similar.

ADVANTAGES AND PURPOSES OF ENVIRONMENTAL REPORTING

Because of the complex nature of business accountability, it is difficult to reduce the motivations for 

environmental reporting down to just a few main points. Different stakeholders can benefit from a 

company’s environmental reporting, however, and it is capable of serving the information needs of a 

range of both internal and external stakeholders.

Some would argue that environmental reporting is a useful way in which reporting companies can 

help to discharge their accountabilities to society and to future generations (because the use of 

resources and the pollution of the environment can affect future generations). In addition, it may also 

serve to strengthen a company’s accountability to its shareholders. By providing more information to 

shareholders, the company is less able to conceal important information and this helps to reduce the 

agency gap between a company’s directors and its shareholders.

Academic research has shown that companies have successfully used environmental reporting to 

demonstrate their responsiveness to certain issues that may threaten the perception of their ethics, 

competence or both. Companies that are considered to have a high environmental impact, such as oil, 

gas and petrochemicals companies, are amongst the highest environmental disclosers. Several 

companies have used their environmental reporting to respond to specific challenges or concerns, and 

to inform stakeholders of how these concerns are being dealt with and addressed.

One example of this is the use of environmental reporting to gain, maintain or restore the perception 

of legitimacy. When a company commits an environmental error or is involved in a high profile 

incident, many stakeholders seek reassurance that the company has learned lessons from the incident 

and so can then resume engagement with the company. For the company, some environmental 

incidents can threaten its licence to operate or social contract. By using its environmental reporting to 

address concerns after an environmental incident, society’s perception of its legitimacy can be 

managed.

In addition to these arguments based on accountability and stakeholder responsiveness, there are also 

two specific ‘business case’ advantages. The first of these is that environmental reporting is capable 

of containing comment on a range of environmental risks. Many shareholders are concerned with the 

risks that face the companies they invest in and where environmental risks are potentially significant 

(such as travel companies, petrochemicals, etc.) a detailed environmental report is a convenient place 

to disclose about the sources of these risks and the ways that they are being managed or mitigated.

The second is that it is thought that environmental reporting is a key measure for encouraging the 

internal efficiency of operations. This is because it is necessary to establish a range of technical 

measurement systems to collect and process some of the information that comprises the 

environmental report. These systems and the knowledge they generate could then have the potential to 

save costs and increase operational efficiency, including reducing waste in a production process.

In conclusion, then, environmental reporting has grown in recent years. Although voluntary in most 

countries, some guidelines such as the GRI have helped companies to frame their environmental 

reporting. It can take place in a range of media including in ‘stand-alone’ environmental reports, and 

there are a number of motivations and purposes for it including both accountability and ‘business 

case’ motives.

CORPORATE GOVERNANCE REPORTS

Corporate governance is defined as the system by which corporations are directed, controlled and held 

to account.

The manner in which the power of [and power over] a corporation is exercised in the stewardship of 

its total portfolio of assets and resources so as to increase and sustain shareholder value while 

satisfying the needs and interests of all stakeholders.

Corporate Governance refers to the way a corporation is governed. It is the technique by which 

companies are directed and managed. It means carrying the business as per the stakeholders’ desires. 

It is actually conducted by the board of Directors and the concerned committees for the company’s 

stakeholder’s benefit. It is all about balancing individual and societal goals, as well as, economic and 

social goals.

Corporate Governance is the interaction between various participants (shareholders, board of 

directors, and company’s management) in shaping corporation’s performance and the way it is 

proceeding towards. The relationship between the owners and the managers in an organization must 

be healthy and there should be no conflict between the two. The owners must see that individual’s 

actual performance is according to the standard performance. These dimensions of corporate 

governance should not be overlooked.

Corporate Governance deals with the manner the providers of finance guarantee themselves of getting 

a fair return on their investment. Corporate Governance clearly distinguishes between the owners and 

the managers. The managers are the deciding authority. In modern corporations, the functions/ tasks 

of owners and managers should be clearly defined, rather, harmonizing.

Corporate Governance deals with determining ways to take effective strategic decisions. It gives

ultimate authority and complete responsibility to the Board of Directors. In today’s market- oriented 

economy, the need for corporate governance arises. Also, efficiency as well as globalization are 

significant factors urging corporate governance. Corporate Governance is essential to develop added 

value to the stakeholders.

Corporate Governance ensures transparency which ensures strong and balanced economic 

development. This also ensures that the interests of all shareholders (majority as well as minority

shareholders) are safeguarded. It ensures that all shareholders fully exercise their rights and that the 

organization fully recognizes their rights.

Corporate Governance has a broad scope. It includes both social and institutional aspects. Corporate 

Governance encourages a trustworthy, moral, as well as ethical environment.

Benefits of Corporate Governance

1. Good corporate governance ensures corporate success and economic growth.

2. Strong corporate governance maintains investors’ confidence, as a result of which, company can 

raise capital efficiently and effectively.

3. It lowers the capital cost.

4. There is a positive impact on the share price.

5. It provides proper inducement to the owners as well as managers to achieve objectives that are in 

interests of the shareholders and the organization.

6. Good corporate governance also minimizes wastages, corruption, risks and mismanagement.

7. It helps in brand formation and development.

8. It ensures organization in managed in a manner that fits the best interests of all.

DIRECTORS REPORTS 

The Directors' Report arose out of a general move for greater transparency in corporate governance. It 

is useful for shareholders to find out issues such as whether the company has good finances, whether 

the market has potential, and whether the business has the structural capacity to expand into new 

opportunities. In order for shareholders to make informed decisions when casting their votes at annual 

or other meetings, the Directors' Report provides part of that essential minimum standard of 

information.

SUMMARIES OF ACCOUNTING STANDARDS

INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)

IFRS 1 First-time Adoption of International Financial Reporting Standards 

The objective of this IFRS is to ensure that an entity’s first IFRS financial statements, and its interim 

financial reports for part of the period covered by those financial statements, contain high quality 

information that: 

(a) is transparent for users and comparable over all periods presented; 

(b) provides a suitable starting point for accounting under International Financial Reporting 

Standards (IFRSs); and 

(c) can be generated at a cost that does not exceed the benefits to users. 

An entity’s first IFRS financial statements are the first annual financial statements in which the entity 

adopts IFRSs, by an explicit and unreserved statement in those financial statements of compliance 

with IFRSs. 

An entity shall prepare an opening IFRS balance sheet at the date of transition to IFRSs. This is the 

starting point for its accounting under IFRSs. An entity need not present its opening IFRS balance 

sheet in its first IFRS financial statements. 

In general, the IFRS requires an entity to comply with each IFRS effective at the reporting date for its 

first IFRS financial statements. In particular, the IFRS requires an entity to do the following in the 

opening IFRS balance sheet that it prepares as a starting point for its accounting under IFRSs: 

(a) recognise all assets and liabilities whose recognition is required by IFRSs; 

(b) not recognise items as assets or liabilities if IFRSs do not permit such recognition; 

(c) reclassify items that it recognised under previous GAAP as one type of asset, liability or 

component of equity, but are a different type of asset, liability or component of equity under IFRSs; 

and 

(d) apply IFRSs in measuring all recognised assets and liabilities. 

The IFRS grants limited exemptions from these requirements in specified areas where the cost of 

complying with them would be likely to exceed the benefits to users of financial statements. The IFRS 

also prohibits retrospective application of IFRSs in some areas, particularly where retrospective 

application would require judgements by management about past conditions after the outcome of a 

particular transaction is already known. 

The IFRS requires disclosures that explain how the transition from previous GAAP to IFRSs affected 

the entity’s reported financial position, financial performance and cash flows.

Technical Summary This extract has been prepared by IASC Foundation staff and has not been 

approved by the IASB. For the requirements reference must be made to International Financial 

Reporting Standards. 

IFRS 2 Share-based Payment 

The objective of this IFRS is to specify the financial reporting by an entity when it undertakes a 

share-based payment transaction. In particular, it requires an entity to reflect in its profit or loss and 

financial position the effects of share-based payment transactions, including expenses associated with 

transactions in which share options are granted to employees. 

The IFRS requires an entity to recognise share-based payment transactions in its financial statements, 

including transactions with employees or other parties to be settled in cash, other assets, or equity 

instruments of the entity. There are no exceptions to the IFRS, other than for transactions to which 

other Standards apply. 

This also applies to transfers of equity instruments of the entity’s parent, or equity instruments of 

another entity in the same group as the entity, to parties that have supplied goods or services to the 

entity. 

The IFRS sets out measurement principles and specific requirements for three types of share-based 

payment transactions: 

(a) Equity-settled share-based payment transactions, in which the entity receives goods or services as 

consideration for equity instruments of the entity (including shares or share options); 

(b) Cash-settled share-based payment transactions, in which the entity acquires goods or services by 

incurring liabilities to the supplier of those goods or services for amounts that are based on the price 

(or value) of the entity’s shares or other equity instruments of the entity; and 

(c) Transactions in which the entity receives or acquires goods or services and the terms of the 

arrangement provide either the entity or the supplier of those goods or services with a choice of 

whether the entity settles the transaction in cash or by issuing equity instruments. 

For equity-settled share-based payment transactions, the IFRS requires an entity to measure the goods 

or services received, and the corresponding increase in equity, directly, at the fair value of the goods 

or services received, unless that fair value cannot be estimated reliably. If the entity cannot estimate 

reliably the fair value of the goods or services received, the entity is required to measure their value, 

and the corresponding increase in equity, indirectly, by reference to the fair value of the equity 

instruments granted. Furthermore: 

(a) For transactions with employees and others providing similar services, the entity is required to 

measure the fair value of the equity instruments granted, because it is typically not possible to 

estimate reliably the fair value of employee services received. The fair value of the equity instruments 

granted is measured at grant date. 

(b) For transactions with parties other than employees (and those providing similar services), there is 

a rebuttable presumption that the fair value of the goods or services received can be estimated 

reliably. That fair value is measured at the date the entity obtains the goods or the counterparty 

renders service. In rare cases, if the presumption is rebutted, the transaction is measured by reference 

to the fair value of the equity instruments granted, measured at the date the entity obtains the goods or 

the counterparty renders service. 

(c) For goods or services measured by reference to the fair value of the equity instruments granted, the 

IFRS specifies that vesting conditions, other than market conditions, are not taken into account when 

estimating the fair value of the shares or options at the relevant measurement date (as specified 

above). Instead, vesting conditions are taken into account by adjusting the number of equity 

instruments included in the measurement of the transaction amount so that, ultimately, the amount 

recognised for goods or services received as consideration for the equity instruments granted is based 

on the number of equity instruments that eventually vest. Hence, on a cumulative basis, no amount is 

recognised for goods or services received if the equity instruments granted do not vest because of 

failure to satisfy a vesting condition (other than a market condition). 

(d) The IFRS requires the fair value of equity instruments granted to be based on market prices, if 

available, and to take into account the terms and conditions upon which those equity instruments were 

granted. In the absence of market prices, fair value is estimated, using a valuation technique to 

estimate what the price of those equity instruments would have been on the measurement date in an 

arm’s length transaction between knowledgeable, willing parties. 

(e) The IFRS also sets out requirements if the terms and conditions of an option or share grant are 

modified (eg an option is repriced) or if a grant is cancelled, repurchased or replaced with another 

grant of equity instruments. For example, irrespective of any modification, cancellation or settlement 

of a grant of equity instruments to employees, the IFRS generally requires the entity to recognise, as a 

minimum, the services received measured at the grant date fair value of the equity instruments 

granted. 

For cash-settled share-based payment transactions, the IFRS requires an entity to measure the goods 

or services acquired and the liability incurred at the fair value of the liability. Until the liability is 

settled, the entity is required to remeasure the fair value of the liability at each reporting date and at 

the date of settlement, with any changes in value recognised in profit or loss for the period. 

For share-based payment transactions in which the terms of the arrangement provide either the entity 

or the supplier of goods or services with a choice of whether the entity settles the transaction in cash 

or by issuing equity instruments, the entity is required to account for that transaction, or the 

components of that transaction, as a cash-settled share-based payment transaction if, and to the extent 

that, the entity has incurred a liability to settle in cash (or other assets), or as an equity-settled share-based payment transaction if, and to the extent that, no such liability has been incurred. 

The IFRS prescribes various disclosure requirements to enable users of financial statements to 

understand: 

(a) the nature and extent of share-based payment arrangements that existed during the period; 

(b) how the fair value of the goods or services received, or the fair value of the equity instruments 

granted, during the period was determined; and 

(c) the effect of share-based payment transactions on the entity’s profit or loss for the period and on 

its financial position. 

IFRS 3 Business Combinations

The objective of this IFRS is to specify the financial reporting by an entity when it undertakes a 

business combination. 

A business combination is the bringing together of separate entities or businesses into one reporting 

entity. The result of nearly all business combinations is that one entity, the acquirer, obtains control of 

one or more other businesses, the acquiree. If an entity obtains control of one or more other entities 

that are not businesses, the bringing together of those entities is not a business combination. 

This IFRS: 

(a) requires all business combinations within its scope to be accounted for by applying the purchase 

method. 

(b) requires an acquirer to be identified for every business combination within its scope. The acquirer 

is the combining entity that obtains control of the other combining entities or businesses. 

(c) requires an acquirer to measure the cost of a business combination as the aggregate of: the fair 

values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments 

issued by the acquirer, in exchange for control of the acquiree; plus any costs directly attributable to 

the combination. 

(d) requires an acquirer to recognise separately, at the acquisition date, the acquiree’s identifiable 

assets, liabilities and contingent liabilities that satisfy the following recognition criteria at that date, 

regardless of whether they had been previously recognised in the acquiree’s financial statements: 

(i) in the case of an asset other than an intangible asset, it is probable that any associated future 

economic benefits will flow to the acquirer, and its fair value can be measured reliably; 

(ii) in the case of a liability other than a contingent liability, it is probable that an outflow of 

resources embodying economic benefits will be required to settle the obligation, and its fair 

value can be measured reliably; and

(iii) in the case of an intangible asset or a contingent liability, its fair value can be measured 

reliably. 

(e) requires the identifiable assets, liabilities and contingent liabilities that satisfy the above 

recognition criteria to be measured initially by the acquirer at their fair values at the acquisition date, 

irrespective of the extent of any minority interest. 

(f) requires goodwill acquired in a business combination to be recognised by the acquirer as an asset 

from the acquisition date, initially measured as the excess of the cost of the business combination over 

the acquirer’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and 

contingent liabilities recognised in accordance with (d) above. 

(g) prohibits the amortisation of goodwill acquired in a business combination and instead requires the 

goodwill to be tested for impairment annually, or more frequently if events or changes in 

circumstances indicate that the asset might be impaired, in accordance with IAS 36 Impairment of 

Assets. 

(h) requires the acquirer to reassess the identification and measurement of the acquiree’s identifiable 

assets, liabilities and contingent liabilities and the measurement of the cost of the business 

combination if the acquirer’s interest in the net fair value of the items recognised in accordance with 

(d) above exceeds the cost of the combination. Any excess remaining after that reassessment must be 

recognised by the acquirer immediately in profit or loss. 

(i) requires disclosure of information that enables users of an entity’s financial statements to evaluate 

the nature and financial effect of: 

(i) business combinations that were effected during the period; 

(ii) business combinations that were effected after the balance sheet date but before the 

financial statements are authorised for issue; and 

(iii) some business combinations that were effected in previous periods. 

(j) requires disclosure of information that enables users of an entity’s financial statements to evaluate 

changes in the carrying amount of goodwill during the period. 

A business combination may involve more than one exchange transaction, for example when it occurs 

in stages by successive share purchases. If so, each exchange transaction shall be treated separately by 

the acquirer, using the cost of the transaction and fair value information at the date of each exchange 

transaction, to determine the amount of any goodwill associated with that transaction. This results in a 

step-by-step comparison of the cost of the individual investments with the acquirer’s interest in the 

fair values of the acquiree’s identifiable assets, liabilities and contingent liabilities at each step. 

If the initial accounting for a business combination can be determined only provisionally by the end of 

the period in which the combination is effected because either the fair values to be assigned to the 

acquiree’s identifiable assets, liabilities or contingent liabilities or the cost of the combination can be 

determined only provisionally, the acquirer shall account for the combination using those provisional 

values. The acquirer shall recognise any adjustments to those provisional values as a result of 

completing the initial accounting: 

(a) within twelve months of the acquisition date; and 

(b) from the acquisition date.

IFRS 4 Insurance Contracts

The objective of this IFRS is to specify the financial reporting for insurance contracts by any entity 

that issues such contracts (described in this IFRS as an insurer) until the Board completes the second 

phase of its project on insurance contracts. In particular, this IFRS requires: 

(a) limited improvements to accounting by insurers for insurance contracts. 

(b) disclosure that identifies and explains the amounts in an insurer’s financial statements arising from 

insurance contracts and helps users of those financial statements understand the amount, timing and 

uncertainty of future cash flows from insurance contracts. 

An insurance contract is a contract under which one party (the insurer) accepts significant insurance 

risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified 

uncertain future event (the insured event) adversely affects the policyholder. 

The IFRS applies to all insurance contracts (including reinsurance contracts) that an entity issues and 

to reinsurance contracts that it holds, except for specified contracts covered by other IFRSs. It does 

not apply to other assets and liabilities of an insurer, such as financial assets and financial liabilities 

within the scope of IAS 39 Financial Instruments: Recognition and Measurement. Furthermore, it 

does not address accounting by policyholders. 

The IFRS exempts an insurer temporarily from some requirements of other IFRSs, including the 

requirement to consider the Framework in selecting accounting policies for insurance contracts. 

However, the IFRS: 

(a) prohibits provisions for possible claims under contracts that are not in existence at the reporting 

date (such as catastrophe and equalisation provisions). 

(b) requires a test for the adequacy of recognised insurance liabilities and an impairment test for 

reinsurance assets. 

(c) requires an insurer to keep insurance liabilities in its balance sheet until they are discharged or 

cancelled, or expire, and to present insurance liabilities without offsetting them against related 

reinsurance assets. 

The IFRS permits an insurer to change its accounting policies for insurance contracts only if, as a 

result, its financial statements present information that is more relevant and no less reliable, or more 

reliable and no less relevant. In particular, an insurer cannot introduce any of the following practices, 

although it may continue using accounting policies that involve them: 

(a) measuring insurance liabilities on an undiscounted basis. 

(b) measuring contractual rights to future investment management fees at an amount that exceeds their 

fair value as implied by a comparison with current fees charged by other market participants for 

similar services. 

(c) using non-uniform accounting policies for the insurance liabilities of subsidiaries. 

The IFRS permits the introduction of an accounting policy that involves remeasuring designated 

insurance liabilities consistently in each period to reflect current market interest rates (and, if the 

insurer so elects, other current estimates and assumptions). Without this permission, an insurer would 

have been required to apply the change in accounting policies consistently to all similar liabilities. 

The IFRS requires disclosure to help users understand: 

(a) the amounts in the insurer’s financial statements that arise from insurance contracts. 

(b) the amount, timing and uncertainty of future cash flows from insurance contracts. 

IFRS 5 Non-current Assets Held for Sale and Discontinued Operations

The objective of this IFRS is to specify the accounting for assets held for sale, and the presentation 

and disclosure of discontinued operations. In particular, the IFRS requires: 

(a) assets that meet the criteria to be classified as held for sale to be measured at the lower of carrying 

amount and fair value less costs to sell, and depreciation on such assets to cease; and 

(b) assets that meet the criteria to be classified as held for sale to be presented separately on the face 

of the balance sheet and the results of discontinued operations to be presented separately in the 

income statement. 

The IFRS: 

(a) adopts the classification ‘held for sale’. 

(b) introduces the concept of a disposal group, being a group of assets to be disposed of, by sale or 

otherwise, together as a group in a single transaction, and liabilities directly associated with those 

assets that will be transferred in the transaction. 

(c) classifies an operation as discontinued at the date the operation meets the criteria to be classified 

as held for sale or when the entity has disposed of the operation. 

An entity shall classify a non-current asset (or disposal group) as held for sale if its carrying amount 

will be recovered principally through a sale transaction rather than through continuing use. 

For this to be the case, the asset (or disposal group) must be available for immediate sale in its present 

condition subject only to terms that are usual and customary for sales of such assets (or disposal 

groups) and its sale must be highly probable. 

For the sale to be highly probable, the appropriate level of management must be committed to a plan 

to sell the asset (or disposal group), and an active programme to locate a buyer and complete the plan 

must have been initiated. Further, the asset (or disposal group) must be actively marketed for sale at a 

price that is reasonable in relation to its current fair value. In addition, the sale should be expected to 

qualify for recognition as a completed sale within one year from the date of classification, except as 

permitted by paragraph 9, and actions required to complete the plan should indicate that it is unlikely 

that significant changes to the plan will be made or that the plan will be withdrawn. 

A discontinued operation is a component of an entity that either has been disposed of, or is classified 

as held for sale, and 

(a) represents a separate major line of business or geographical area of operations, 

(b) is part of a single co-ordinated plan to dispose of a separate major line of business or geographical 

area of operations or 

(c) is a subsidiary acquired exclusively with a view to resale. 

A component of an entity comprises operations and cash flows that can be clearly distinguished, 

operationally and for financial reporting purposes, from the rest of the entity. In other words, a 

component of an entity will have been a cash-generating unit or a group of cash-generating units 

while being held for use. 

An entity shall not classify as held for sale a non-current asset (or disposal group) that is to be 

abandoned. This is because its carrying amount will be recovered principally through continuing use.

IFRS 6 Explorations for and Evaluation of Mineral Resources

The objective of this IFRS is to specify the financial reporting for the exploration for and evaluation 

of mineral resources. 

Exploration and evaluation expenditures are expenditures incurred by an entity in connection with the 

exploration for and evaluation of mineral resources before the technical feasibility and commercial 

viability of extracting a mineral resource are demonstrable. Exploration for and evaluation of mineral 

resources is the search for mineral resources, including minerals, oil, natural gas and similar non-regenerative resources after the entity has obtained legal rights to explore in a specific area, as well as 

the determination of the technical feasibility and commercial viability of extracting the mineral 

resource. 

Exploration and evaluation assets are exploration and evaluation expenditures recognised as assets in 

accordance with the entity’s accounting policy. 

The IFRS: 

(a) permits an entity to develop an accounting policy for exploration and evaluation assets without 

specifically considering the requirements of paragraphs 11 and 12 of IAS 8. Thus, an entity adopting 

IFRS 6 may continue to use the accounting policies applied immediately before adopting the IFRS. 

This includes continuing to use recognition and measurement practices that are part of those 

accounting policies. 

(b) requires entities recognising exploration and evaluation assets to perform an impairment test on 

those assets when facts and circumstances suggest that the carrying amount of the assets may exceed 

their recoverable amount. 

(c) varies the recognition of impairment from that in IAS 36 but measures the impairment in 

accordance with that Standard once the impairment is identified. 

An entity shall determine an accounting policy for allocating exploration and evaluation assets to 

cash-generating units or groups of cash-generating units for the purpose of assessing such assets for 

impairment. Each cash-generating unit or group of units to which an exploration and evaluation asset 

is allocated shall not be larger than an operating segment determined in accordance with IFRS 8 

Operating Segments. 

Exploration and evaluation assets shall be assessed for impairment when facts and circumstances 

suggest that the carrying amount of an exploration and evaluation asset may exceed its recoverable 

amount. When facts and circumstances suggest that the carrying amount exceeds the recoverable 

amount, an entity shall measure, present and disclose any resulting impairment loss in accordance 

with IAS 36. 

One or more of the following facts and circumstances indicate that an entity should test exploration 

and evaluation assets for impairment (the list is not exhaustive): 

(a) the period for which the entity has the right to explore in the specific area has expired during the 

period or will expire in the near future, and is not expected to be renewed. 

(b) substantive expenditure on further exploration for and evaluation of mineral resources in the 

specific area is neither budgeted nor planned. 

(c) exploration for and evaluation of mineral resources in the specific area have not led to the 

discovery of commercially viable quantities of mineral resources and the entity has decided to 

discontinue such activities in the specific area. 

(d) sufficient data exist to indicate that, although a development in the specific area is likely to 

proceed, the carrying amount of the exploration and evaluation asset is unlikely to be recovered in full 

from successful development or by sale. 

An entity shall disclose information that identifies and explains the amounts recognised in its financial 

statements arising from the exploration for and evaluation of mineral resources.

IFRS 7 Financial Instruments: Disclosures

The objective of this IFRS is to require entities to provide disclosures in their financial statements that 

enable users to evaluate: 

(a) the significance of financial instruments for the entity’s financial position and performance; and 

(b) the nature and extent of risks arising from financial instruments to which the entity is exposed 

during the period and at the reporting date, and how the entity manages those risks. The qualitative 

disclosures describe management’s objectives, policies and processes for managing those risks. The 

quantitative disclosures provide information about the extent to which the entity is exposed to risk, 

based on information provided internally to the entity's key management personnel. Together, these 

disclosures provide an overview of the entity's use of financial instruments and the exposures to risks 

they create. 

The IFRS applies to all entities, including entities that have few financial instruments (eg a 

manufacturer whose only financial instruments are accounts receivable and accounts payable) and 

those that have many financial instruments (eg a financial institution most of whose assets and 

liabilities are financial instruments). 

When this IFRS requires disclosures by class of financial instrument, an entity shall group financial 

instruments into classes that are appropriate to the nature of the information disclosed and that take 

into account the characteristics of those financial instruments. An entity shall provide sufficient 

information to permit reconciliation to the line items presented in the balance sheet. 

The principles in this IFRS complement the principles for recognising, measuring and presenting 

financial assets and financial liabilities in IAS 32 Financial Instruments: Presentation and IAS 39 

Financial Instruments: Recognition and Measurement.

IFRS 8 Operating Segments 

Core principle—An entity shall disclose information to enable users of its financial statements to 

evaluate the nature and financial effects of the business activities in which it engages and the 

economic environments in which it operates. 

This IFRS shall apply to: 

(a) the separate or individual financial statements of an entity: 

(i) whose debt or equity instruments are traded in a public market (a domestic or foreign stock 

exchange or an over-the-counter market, including local and regional markets), or

(ii) that files, or is in the process of filing, its financial statements with a securities commission or 

other regulatory organisation for the purpose of issuing any class of instruments in a public market; 

and 

(b) the consolidated financial statements of a group with a parent: 

(i) whose debt or equity instruments are traded in a public market (a domestic or foreign stock 

exchange or an over-the-counter market, including local and regional markets), or 

(ii) that files, or is in the process of filing, the consolidated financial statements with a securities 

commission or other regulatory organisation for the purpose of issuing any class of instruments in a 

public market. 

The IFRS specifies how an entity should report information about its operating segments in annual 

financial statements and, as a consequential amendment to IAS 34 Interim Financial Reporting, 

requires an entity to report selected information about its operating segments in interim financial 

reports. It also sets out requirements for related disclosures about products and services, geographical 

areas and major customers. 

The IFRS requires an entity to report financial and descriptive information about its reportable 

segments. Reportable segments are operating segments or aggregations of operating segments that 

meet specified criteria. Operating segments are components of an entity about which separate 

financial information is available that is evaluated regularly by the chief operating decision maker in 

deciding how to allocate resources and in assessing performance. Generally, financial information is 

required to be reported on the same basis as is used internally for evaluating operating segment 

performance and deciding how to allocate resources to operating segments. 

The IFRS requires an entity to report a measure of operating segment profit or loss and of segment 

assets. It also requires an entity to report a measure of segment liabilities and particular income and 

expense items if such measures are regularly provided to the chief operating decision maker. It 

requires reconciliations of total reportable segment revenues, total profit or loss, total assets, liabilities 

and other 

amounts disclosed for reportable segments to corresponding amounts in the entity’s financial 

statements. 

The IFRS requires an entity to report information about the revenues derived from its products or 

services (or groups of similar products and services), about the countries in which it earns revenues 

and holds assets, and about major customers, regardless of whether that information is used by 

management in making operating decisions. However, the IFRS does not require an entity to report 

information that is not prepared for internal use if the necessary information is not available and the 

cost to develop it would be excessive. 

The IFRS also requires an entity to give descriptive information about the way the operating segments 

were determined, the products and services provided by the segments, differences between the 

measurements used in reporting segment information and those used in the entity’s financial 

statements, and changes in the measurement of segment amounts from period to period.

INTERNATIONAL ACCOUNTING STANDARDS (IAS)

IAS 1 Presentation of Financial Statements

The objective of this Standard is to prescribe the basis for presentation of general purpose financial 

statements, to ensure comparability both with the entity’s financial statements of previ