EVALUATION CRITERIA OF IAS/IFRS

Possible questions:

Tangible assets (IAS 16, IAS 40 + cenni IAS 36 impairment, IAS 23 borrowing
costs, IAS 20 grants)
Leasing (IAS 17)
Intangible assets (IAS 38)

PROPERTY, PLANT, EQUIPMENT (IAS 16)

Property, plant and equipment are tangible items that are explained by IAS 16 and
has two characteristics:
- They are held by the entity to be used in the production or supply of goods or
services, for rental to others or for administrative purposes
AND
- They are expected to be used for more than one period.
We have to consider in a different way another kind of tangible items that are called
Investment property and are explained in detail by IAS 40. An investment property
is a land or a building or part of them or both, held by the owner, or by the lessee in
case of financial leasing, to earn rentals or to gain some money from the capital
appreciation (or both of them).
INVESTMENT PROPERTY (IAS 40)
Investment property are different from property, plant and equipment directly
connected to productive or administrative purposes that are debated in detail in IAS
16.
Pay attention to the fact that in some cases we cannot consider items like Investment
property, such as:
Property held by a lessee based on an operating lease contract (because these
properties have to be recognized in the way explained by IAS 17)
Property used in the production or supply of goods or services or for
administrative purposes (because they comply with IAS 16)
Property intended to sale in the ordinary course of business (they comply with
IAS 2)
The cost of an item belonging to one of these two different kinds of properties (either
property, plants and equipment or investment property) are to be recognized as an
asset if:
- It is probable that future economic benefits associated with the item will flow to
the entity
AND
- The cost of the item can be measured reliably.
If these two conditions are respected, the item qualifies for recognition as an asset and
it has to be measured at its cost:
Acquisition cost if bought from other subjects
Production cost if built on its own.
After initial recognition (rilevazione) an item of Property, plant and equipment shall be
measured (valutato) using:

The Cost Model (benchmark treatment): the item shall be carried at its cost of
purchase or production (charges related to it included) LESS any accumulated
depreciation and any accumulated impairment losses.
The Revaluation Model (allowed alternative treatment): when the items fair
value (the amount for which an asset could be exchanged or a liability settled
between knowledgeable, willing parties, in a transaction without conflict of
interest) can be measured reliably its possible to use the revaluation model; it
consists in revaluating (adding or subtracting an amount) the items value to
ensure that the carrying amount doesnt differ from the fair value of the date of
revaluation LESS any accumulated depreciation (it can be restated
proportionately with the change in the carrying amount of the asset or
eliminated against the gross carrying amount of the asset and the net amount
restated to the revaluated amount of the asset) and impairment losses (amount
by which the carrying amount of an asset exceeds its recoverable amount that
is the higher between its fair value less costs to sell and its value in use). The
revaluation shall be made with sufficient regularity to ensure the accordance of
the values.
If an assets carrying amount is increased as a result of a revaluation, the
increase shall be recognized in Other Comprehensive Income and accumulated
in Equity under the heading of Revaluation Surplus. If a decrease happens, it
has to be recognized in P&L.
When a decrease/increase happened before, the increase/decrease reverses it
and it has to be recognized in P&L. When a decrease takes place, remember to
reduce also the amount accumulated in equity under Revaluation Surplus.
N.B. when the asset is derecognized (because retired or disposed), the
Revaluation Surplus may be transferred directly to Retained Earnings not
through P&L. Some of the surplus may be transferred for an amount of the
difference between depreciation based on the revalued carrying amount and
the depreciation based on the assets original cost.
The impairment loss (IAS 36) has to be assessed at the end of each period
and the entity shall estimate the recoverable amount of the asset. The
reduction that takes place when the recoverable amount is less than the
carrying amount is the impairment loss.
The impairment loss on a non-revaluated asset is recognized in P&L while on a
revaluated asset is recognized in Other Comprehensive Income (only if the
impairment loss doesnt exceed the amount in revaluation surplus).

After recognition as an asset, an item of Investment Property shall be measured

initially at its cost (included transaction costs). Afterwards the entity is allowed to
choose between two methods to measure it:
-

The Cost Model (allowed alternative treatment): it is specified in IAS 16; the
item shall be carried at its cost of purchase or production (charges related to it
are included) LESS any depreciation and impairment loss. An entity that
chooses the cost model discloses the fair value of its investment property.
The Revaluation Model (benchmark treatment): it consists in revaluating (adding
or subtracting an amount) the items value to ensure that the carrying amount
doesnt differ from the fair value of the date of revaluation. The revaluation shall
be made with sufficient regularity to ensure the accordance of the values. The
changes are recognized in P&L for the period in which it arises.

N.B. an investment property shall be derecognized on disposal or withdrawn

from use and no future economic benefits are expected from its disposal.
Speaking about Property, plant and equipment depreciation or amortization we can
say that each part of an item of property, plant and equipment with a significant cost
in relation to the total cost of the item, shall be depreciated separately (f.e. airframe
and engines of an aircraft) because they can have a useful life and a depreciation
method that arent the same.
IMPAIRMENT OF ASSETS (IAS 36)
The objective of this standard is to ensure that the assets are carried at no more than
their recoverable amount (amount recoverable through use or sale of the asset itself).
If an asset is carried at more than its recoverable amount the asset is described as
impaired and it is required to proceed with an impairment loss.
When?
An entity shall assess at the end of each reporting period whether there is any
indication that an asset may be impaired. If yes, the entity shall estimate the
recoverable amount of the asset. If it isnt identifiable, the entity shall estimate the
recoverable amount of the cash-generating unit to which the asset belongs (it is the
smallest identifiable group of assets that generates cash inflows in an independent
way from other assets or groups of assets). The recoverable amount is the higher
between its fair value less costs of disposal and its value in use (the present value of
the future cash flows expected to be derived from the asset or cash-generating unit).
What to do?
Only if the recoverable amount is less than the carrying amount, the last one shall be
reduced to its recoverable amount this reduction is an impairment loss.
The impairment loss shall be recognized immediately in P&L (N.B. if the impairment
loss is done because of Revaluation Model, it has to be treated in accordance with the
specific Standard that explains what to do with this specific revaluated asset).
If the causes no longer exist?
At the end of each reporting period the entity shall assess if there is any indication
that an impairment loss recognized in previous periods may no longer exist or may
have decreased. If so, the entity shall estimate the recoverable amount of the asset. A
reversal of an impairment loss shall be recognized immediately in P&L (unless for ex.
revaluation model treat as revaluation increase in accordance to its specific
Standard).
BORROWING COSTS (IAS 23)
Keep in mind that entities usually borrow some money to buy or produce the
aforementioned items, so whats happening to borrowing costs?
First thing first we address to IAS 23 that explains that we consider borrowing costs as
interests and other costs that an entity bears to obtain some funds from other
subjects, for example:
- Interests on bank overdrafts, short or long term borrowings
- Borrowing costs connected to financial leasing, etc
To capitalize borrowing costs (it means they form part of the cost of that asset and
therefore should be capitalized) three conditions have to be complied with:
1) They have to be directly attributable to the acquisition, construction or
production of a qualifying asset (IAS 23 defines as qualifying asset an asset that
necessarily takes a substantial period of time to get ready for its intended use

or sale; assets that are ready for their intended use or sale, when they are
acquired, arent qualifying assets for the purpose of IAS 23. This idea is
important for the capitalization of borrowing costs. So qualifying asset could be
for example property, plant and equipment and investment property during the
construction period, intangible assets during the development period, or madeto-order inventories.)
2) It is probable that future economic benefits associated to the item will flow to
the entity
3) The borrowing costs can be measured reliably .
Other borrowing costs that dont comply with the aforementioned conditions are
recognized as an expense.
GOVERNMENT GRANTS (IAS 20)
Government grants are assistance by government in the form of transfers of
resources to an entity in return for past or future compliance with certain conditions
relating to the operating activities of the entity.
Government assistance is action by government designed to provide an economic
benefit specific to an entity or range of entities qualifying under certain criteria. This
doesnt include benefits provided only indirectly through action affecting general
trading conditions, such as the provision of infrastructure in development areas or the
imposition of trading constraints on competitors.
Government grants can be of different kind:
Grants related to assets have as primary condition the purchase, construction or
acquirement of a long-term asset. There could be also subsidiary conditions
linked to past or future compliance with certain conditions relating to the
operating activities of the entity.
Grants related to income are government grants different from those related to
assets.
Forgivable loans are loans given by a special lender that is Government. The
lender will ask the money back only under certain prescribed conditions.
Grants (including non-monetary ones) shall not be recognized until there is the
reasonable assurance that:
1) The entity will comply with the conditions attaching to them
2) The grants will be received.
How to present them in financial statement?
- Grants related to assets shall be presented in the Statement of Financial
Position in two different ways: either setting up the grant as deferred income
(the deferred income is recognized in the Income Statement or Statement of
Profit and Loss on a systematic basis over the useful life of the asset) or
deducting the grant in calculating the carrying amount of the asset (so when
the depreciation takes place, it takes place on an amount that is reduced, so we
have a sort of reduced depreciation expense).
- Grants related to income can be presented either in the Statement of
Comprehensive Income as a positive economic element (revenue) or separately
or under a general heading named Other income or they are deducted directly
from the related expense (voce di costo) giving also information about the grant
and its effects on the Financial Statement.
If a grant becomes repayable it has to be treated as a change in estimate (see IAS 8):

in related to assets case the repayment should be treated as reducing the

deferred income or as increasing the carrying amount of the asset; keep in mind
that the additional depreciation that would have been charged without the
grants, has to be recognized immediately as an expense in P&L.
in related to income ones the repayment should be applied against any related
deferred credit recognized in respect of the grant; if the repayment exceeds the
deferred credit (or the credit doesnt exist) the repayment shall be recognized
immediately as an expense in Profit and Loss Statement.
LEASING (IAS 17)

A lease is an agreement where the lessor gives the lessee the right to use an asset for
an agreed period of time in return for a payment or a series of payments.
There are two types of leases:
- a finance lease in which substantially all the risks (losses connected to not use,
technological obsolescence of the asset, variation in return because of changing
economic conditions) and rewards (like revenues that the entity can obtain
through the sale of the outputs or the sale of the asset or the gain from the
appreciation in value of the asset) connected to ownership are transferred to
the lessee.
This operation can be interpreted like an asset sale with financing.
- An operating lease doesnt transfer all the risks and benefits connected to
ownership so its like a rental of an asset.
Whether a lease is a finance or operating one it depends on the substance of the
transaction rather than the form of the contract.
The conditions of the contract, so the type of contract, is decided at the inception of
the lease. If agreements between the lessor and the lessee change, the revised
agreement is seen like a new agreement, while changes in estimates or circumstances
do not give rise to a new classification of the lease.
IAS 17 gives some examples of leases being classified as finance leases:
The lease transfers the ownership of the asset by the end of the contract
The lessee has the option to purchase the asset at a price sufficiently lower than
the fair value at the date of the option exercise (so the exercise of the option is
almost certain)
The lease lasts for the major part of the economic life of the asset
The present value of the lease payments are almost the same as the fair value
of the leased asset
The leased asset is of such nature that only the lessee can use it without major
modifications
The lessee can continue the contract for a secondary period for a rent that is
substantially lower than the market rent
How is the lease recognized in the financial statement?
- In the financial statement of the LESSEE (locatario):
Finance lease: the lessee shall recognize an asset and a liability in his Statement
of Financial Position because he holds the economic benefits relating to the
leased asset utilization.
The amount accounted is equal to the fair value of the leased property or the
present value of the minimum lease payments if lower than the fair value. The
discount rate used in calculating the present value of the minimum lease
payments is the interest rate implicit in the lease, but if there isnt one, the
incremental borrowing rate is to be used.

The initial costs of the lease are added to the amount recognized as an asset.
The leasing fees must be divided in two different parts:
1) payment of financial interests (minimum lease payments-loan) it will be
represented in the Income Statement.
2) repayment of the loan it will be represented as reduction of the loan (so
the payable decreases).
The good leased has to be amortized and the amortization is represented as a
cost in the Income Statement. It reduces the value of the asset to obtain its net
value.
Operating lease: lease payments are recognized as expenses on a straight-line
basis over the lease term unless another systematic basis is more
representative of the users benefits.
In the financial statement of the LESSOR (locatore):

Finance lease: the asset held under a finance lease has to be presented in
the Statement of Financial Position of the lessor as a receivable (so an asset) at
an amount equal to the net investment of the lease (it means the value of the
minimum lease payments) actualized at the interest rate implicit in the lease.
The leasing fees must be accounted, for a part, as a repayment of the loan (so
the receivable decreases) and, for another part, a financial revenue on the
investment that is accounted in the Income Statement.

Operating lease: the lessor shall present the asset subject to operating
lease in his Statement of Financial Position according to the nature of the asset.
Lease incomes shall be recognized on a straight-line basis over the lease term
unless another systematic basis is more representative. Costs, including
depreciation, are recognized as expenses. Initial costs incurred by the lessor to
negotiate and arrange the contract shall be added to the carrying amount of the
leased asset and recognized as an expense over the lease term on the same
basis as the lease income. To determine whether to impair the leased asset, the
entity applies IAS 36.

INTANGIBLE ASSETS (IAS 38)

This Standard requires an entity to recognize an intangible asset only if specific criteria
are met.
An intangible asset is an identifiable non-monetary asset without physical substance.
The definition of intangible asset requires that:
a)
b)
c)
d)
e)

The item is controlled by the entity as a result of past events

Future economic benefits are expected to flow to the entity
The asset is identifiable
The asset is without physical substance
The asset is non-monetary (it means )

An intangible asset shall be recognized only if:

-

It is probable that the expected future economic benefits attributable to the

asset will flow to the entity (even if there is uncertainty about the timing and
the amount of the inflow)
The cost of the asset can be measured reliably.

Because normally the price an entity pays to acquire separately an intangible asset
will reflect expectations about the probable future economic benefits that the asset
embodies, we always consider the first criterion satisfied when we consider separately

acquired intangible assets for which the cost of acquisition comprises: 1) its purchase
price (included import duties and non-refundable taxes and deducted discounts and
rebates) 2) any directly attributable cost of preparation of the asset in order to use it.
Its difficult to assess whether an internally generated intangible asset meets the
criteria for recognition because of difficulties in the identification of whether it would
be a future economic benefit directly flowing from this specific intangible asset and
the determination of the cost of the asset itself (sometimes its difficult to distinguish
costs borne to generate an intangible asset and costs borne to maintain and/or
improve the goodwill (not bought).
To evaluate whether an intangible asset meets the conditions to recognition, the entity
shall identify two different phases in the process of generation of the asset:
1) A research phase (no intangible asset arising only from the research phase shall
be recognized. Expenditures on research are to be considered as expenses in
the moment they are borne. In this phase, even if its the research phase of an
internal project, an entity cannot demonstrate that an intangible asset exists
and that it will generate future economic benefits)
2) A development phase (an intangible asset arising from the development phase
(even if it is of an internal project) shall be recognized only if an entity can
demonstrate:
a) The technical feasibility of the intangible asset so that it will be available for
use or sale
b) The entitys intention to complete the intangible asset to use it or sell it
c) The entitys ability to use it or sell it
d) In which way the intangible asset will generate probable future economic
benefits (for ex. the existence of a market for the output of the intangible
asset or the intangible asset itself)
e) The availability of adequate technical, financial and other resources to
complete the development, the use and/or sell of the intangible asset
f) The ability to measure reliably the expenditure attributable to the intangible
asset during its development.
So the cost of an internally generated intangible asset is represented by the sum of
the expenditure borne from the date when the intangible asset first meets the
recognition criteria for the recognition and measurement (so the probability of future
economic benefits attributable to the asset, the capability to measure reliably the cost
of the asset and finally the aforementioned conditions from a) to f)).
N.B. Its prohibited to capitalize expenditure previously recognized as expenses!
How to evaluate intangible assets?
There is a distinction between the first evaluation and the further ones:
1) Initially it shall be measured at cost
2) Afterwards the entity can choose between the Cost Model and the Revaluation
Model.
The Cost Model is the benchmark treatment for intangible assets while the Revaluation
Model is the allowed alternative one.
An important aspect to keep in mind is the intangible asset useful life; an entity shall
assess whether the useful life is finite or indefinite and, if finite, the length (meaning

the period over which an asset is expected to be available for use by an entity or the
number of production or similar units expected to be obtained from the asset by the
entity) of that useful life. We can define an intangible asset as with an indefinite useful
life if there is no foreseeable limit to the period over which the asset is expected to
generate net cash inflows for the entity.

Cost Model: after initial recognition at its cost, if the intangible asset has a finite
useful life, it shall be carried at its cost less any accumulated amortization and
impairment loss; if it has an indefinite useful life, it shall be carried at its cost
less any impairment losses.
Revaluation Model: after initial recognition at its cost, if finite useful life it shall
be carried at a revalued amount (it is the fair value of the intangible asset at the
date of the revaluation, determined by reference to an active market, but only if
exists an active market its possible to adopt the revaluation model, LESS any
accumulated depreciation and any accumulated impairment losses); if indefinite
useful life it shall be carried at a revalued amount that is its fair value at the
date of the revaluation LESS any accumulated impairment losses.
Revaluations shall be made with regularity in such a way that at the end of the
reporting period the carrying amount of the asset does not differ from its fair
value.
If the carrying amount is increased as a result of a revaluation, the increase
shall be recognized in Other Comprehensive Income and at the same time
accumulated in equity under Revaluation Surplus. The increase shall be
recognized in P&L when it reverses a revaluation decrease of the same asset
recognized previously.
If the carrying amount is decreased as a result of a revaluation, the decrease
shall be recognized in P&L. But the decrease shall be recognized in Other
Comprehensive Income when there is a credit balance in the Revaluation
Surplus in respect of that asset.
The part of the Revaluation Surplus relating to the intangible asset can be
transferred to Retained Earnings (utili a nuovo) when the whole surplus is
realized that is to say on the retirement or disposal of the asset. Part of the
surplus can be realized even if the asset is used by the entity and the amount
realized is the difference between the depreciation related to the revalued
carrying amount of the asset and the depreciation related to the assets
historical cost.
N.B. The amount transferred from the from the Revaluation Surplus to the
Retained Earnings is not made through P&L.

Amortization can happen only if the intangible asset has a finite useful life. The
amount over which depreciation is applied is the cost of an asset or another amount
that replaces it (if the revaluation model is applied). The depreciable amount of an
intangible asset with a finite useful life shall be allocated on a systematic basis over its
useful life. When to start with depreciation? When the asset is available for use. And
when to stop? The most recent date between the date the asset is classified as held
for sale and the date the asset is derecognized (eliminata contabilmente). Which
amortization method to apply? It shall reflect the pattern in which the future economic
benefits are expected to be consumed by the entity (straight-line method, diminishing
balance method, unit of production method).

If an intangible asset is revalued, any accumulated amortization at the date of the

revaluation is either revalued proportionately with the change in the gross carrying
amount of the asset or is eliminated and the net amount restated to the revalued
amount of the asset.
What about impairment losses?
An entity shall assess at the end of each reporting period whether there is any
indication that an asset may be impaired, it means that when its carrying amount
exceeds its recoverable amount (the higher of its fair value and its value in use (it is
the net present value of future cash flows) an asset may be impaired.
An impairment loss shall be recognized immediately in P&L unless the asset is carried
at revalued amount (in this case it has to be treated as a revaluation decrease so
represented in equity).
INVENTORIES (IAS 2)
A primary issue in accounting for inventories is the amount of cost to be recognized as
an asset and carried forward until the related revenues are recognized.
Inventories are goods:
a) Held for sale in the ordinary course of business
b) In the process of production
c) In the form of materials or supplies to be consumed in the production process or
in the rendering of services
How to evaluate inventories?
Inventories shall be measured at the lower of cost and net realizable value (is the
estimated selling price in the ordinary course of business LESS the estimated costs of
completion and the costs necessary to make the sale).
The cost of inventories shall comprise all costs of purchase and other costs incurred in
bringing the inventories to their present location and condition.
How to determine acquisition cost?
Inventory acquisition costs comprise the purchase price, import duties and other taxes
(not the ones that the entity can recover from taxing authorities), transport, handling
and other costs directly attributable to the acquisition of finished goods, materials and
services. Trade discounts, rebates and other similar items are deducted in determining
the cost of purchase.
How to determine cost of conversion?
The costs of conversion of inventories include costs directly related to the units of
production such as direct labour and a systematic allocation of fixed and variable
production overheads that are incurred in converting materials into finished goods.
Fixed production overheads are those indirect costs of production that remain constant
regardless of the volume of production such as depreciation and the maintenance of
factory buildings and equipment and the cost of factory management and
administration. Variable production overheads are those indirect costs of production
that vary directly with the volume of production such as indirect materials and indirect
labour.
The cost of inventories of items that are not interchangeable and the cost of
inventories of goods or services produced for specific projects shall be assigned
identifying their individual costs. For other inventories costs shall instead be assigned

using the FIFO or weighted average cost formula (costo medio ponderato). The same
cost formula has to be used for all inventories with similar nature and use.
When inventories are sold, the carrying amount of those inventories shall be
recognized as an expense in the period in which the related revenue is recognized.
When a loss occurs it has to be recognized as an expense in the period in which it
occurs. A reversal may occur and it could be recognized as a reduction in the amount
of inventories recognized as an expense.