IAS 16 PROPERTY, PLANT AND EQUIPMENT (PPE) DIPIFR BOOKLETDTTC Property, plant and equipment are tangible assets that are held: 41) For use in production or supply of goods or services, 2) For rental to others or 3) For administrative purposes ‘And are expected to be used during more than one period Eo > Bearer plants are tangible assets that are used in the production or supply of agricultural produce and are expected to be used during more than one period. Bearer plants, especially plantation trees (such as grape vines, rubber trees and oil palms) are within the scope of IAS 16. Bearer plants are measured at accumulated cost until maturity and then become subject to depreciation and impairment charges. v v Rene The recognition of property, plant and equipment depends on two criteria: (a) Itis probable that future economic benefits associated with the asset will flow to the entity. (b) The cost ofthe asset to the enfty can be measured reliably These recognition criteria apply to subsequent expenditure as well as costs incurred initially. There are no separate criteria for recognising subsequent expenditure. WS (Once an item of property, plant and equipment qualifies for recognition as an asset, it will initially be measured at cost. [@Measurementsubseauenttoinialrecogntion (a) Cost model Carry the asset at its cost less depreciation and any accumulated impairment loss (b) Revaluation model Carry the asset at a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses IAS 16 makes clear that the revaluation model is available only if the fair value of the item can be measured reliably. When an item of property, plant and equipment is revalued, the whole class of assets to which it belongs should be revalued.Revaluation surplus and revaluation decrease Any revaluation increase should be recognised as a revaluation surplus, unless it offsets a previous decrease taken as an expense in the profit or loss. Any increase greater than the previous decrease in value must be taken as a revaluation surplus in owners’ equity. # Any revaluation decrease should be recognised as an expense, unless it offsets a previous increase taken as a reveluation surplus in owners’ equity. Any decrease greater than the previous increase in value must be teken as an expense in the profit or loss. PSCC) Depreciable assets Depreciable assets are assets which: Are held by an entity for use in the production or supply of goods and services, for rental to others, or for administrative purposes Are expected to be used during more than one accounting period Y Have a limited useful fe. Residual value - In most cases the residual value of an asset is likely to be immaterial. = Ifits likely o be of any significant value, that value must be estimated at the cate of purchase or any subsequent revaluation. - The amount of residual value should be estimated based on the current situation with other similar assets, used in the same way, which are now at the end of their useful lives. - Any expectad costs of disposal should be offset against the gross residual value. Depreciable amount of Historical cost or The estimated residual — an asset SS revaluation value co value | Depreciation methods There is various methods of allocating depreciation like as: (a) The straight line method (b) The reducing belance method (c) The machine hour method (4) The sum-of-he digits method¢ IAS 16 has a long list of disclosure requirements for each class of property, plant and equipment: (a) Measurement bases for determining the gross carrying amount (if more than one, the gross cerrying amount for that basis in each category). (b) Depreciation methods used. (c) Useful lives or depreciation rates used, (8) Gross carrying amount and accumulated depreciation (aggregated with accumulated impairment losses) (e) Recon tthe beginning and end of the period. jon of the carrying amount at the beginning and end of the period. + IAS 16 also requires the following to be disclosed for each major class of depreciable asset: (a) (b} Depreciation methods used, Useful lives or the depreciation rates used. Total depreciation allocated for the period Gross amount of depreciable assets and the related accumulated depreciaton. ( ( ( ( © d) FEHHOOOE EHO ee ee oo oesIAS 19 EMPLOYEE BENEFITS DIPIFR BOOKLETCategories of employee benefits The standard recognises four categories of employee benefits, and proposes a different accounting treatment for each. These four categories are as follows: (@) Short-term {b) Post-employment | | (c) Other long-term (@) Termination benefits benefits benefits benefits Sneed Shor-term employee benefits are employee benefits (other than termination benefits) that are expected to be settled wholly before 12 months afier the end of the annual reporting period in which the employees render the related services: ‘Wages and salaries Social security contributions Paid annual leave Paid sick leave Paid matemity/patemity leave Profit shares and bonuses Non-monetary benefits, e.g. medical care, housing, cars, free or subsidised goods (a) Unpaid short-term employee benefits as at the end of an accounting period should be recognised as an acerued expense. (b) The cost of short-term employee benefits should be recognised as an expense in the period when the economic benefit is given, as employment costs (except insofar as employment costs may be included within the cost of an asset, eg property, plant and equipment). ese yey Cul Ld Post-employment benefits are employee benefits (other than termination benefits and short-term employee benefits) that are payable after the completion of employment, eg pensions and post-employment medical care and post-employment insurance.There are two types or categories of post-employment benefit plan: DP DBP: Defined contribution plans Defined benefit plans Defined contribution plans. With such plans, the employer (and possibly current employees too) pay regular contributions into the plan of a given or ‘defined’ amount each year. Tne contributions are invested, and the size of the post-employment benefits pid to former employees depends on how well or how badly the plan's investments perform. Ifthe investments perform well, the plan will be able to afford higher benefits than if the investments performed less well Defined benefit plans. With these plans, the size of the post-employment benefits is determined in advance, ie the benefits are ‘defined’. The employer (and possibly current employees too) pay contributions into the plan, and the contributions are invested. The size of the contributions is set at an amount that is expected to earn enough investment returns to meet the obligation to pay the post-employment benefits. If, however, it becomes apparent that the assets in the fund are insufficient, the employer will be required to make additional contributions into the plan to make up the expected shortall. On the other hand, ifthe fund's assets appear to be larger than they need to be, and in excess of what is required to pay the post-employment benefits, tne employer may be allowed to take a ‘contribution holiday’ (ie. stop paying in contributions for a while), The Key difference between the two types of plan is the nature of the 'promise' made by the entity to the employees in the plan: (2) Under a defined contribution pian, the ‘promise’ is to pay the agreed amount of contributions, once this is done, the entity has no further Kabilty and no exposure to risks related to the performance of the assets held in the pian, (b) Under a defined benefit pian, the ‘promise’ is to pay the amount of benefits agreed under the plan. The entity is taking on a far more uncertain liability that may change in future as a result of many variables and has Continuing exposure to risks related to the performance of assets held in the plan, Defined contribution plans IAS 19 requires the following: (2) Contributions to a defined contribution plan should be recognised as an expense in the period they are payable (except to the extent that labour costs may be included within the cost of assets). (b) Any liability for unpaid contributions that are due as at the end of the period should be recognised as a liability (accrued expense).(c) Any excess contributions paid should be recognised as an asset (prepaid expense), but only to the extent that the prepayment will ead to, e.g. 2 reduction in future payments or a cash refund, Defined benefit plans - The obligations payable in future years should be valued, by discounting, on a present value basss. Thisis because the obligations may be settled in many years’ time. - If actuarial assumptions change, the amount of required contributions to the fund will change, and there may be actuarial gains or losses. A contribution into a fund in any period will not equal the expense for that period, due to actuarial gains or losses. There is a four-step methcd for recognising and measuring the expenses and liability of a defined pension benefit plan Step @ Measure the deficit or surplus: (2) An actuarial technique (the Projected Unit Credit Method), should be used to meke a reliable estimate of the amount of future benefits employees have earned from service in relation to the current and prior years. (b) The benefit should be discounted to arrive at the present value of the defined benefit obligation and the Current service cost. (c) The fair value of any plan assets should be deducted from the present value of the defined benefit, obligation. Step @ The surplus or deficit measured in Step 1 may have to be adjusted if a net benefit asset has to be restricted by the asset ceiling Step @) Determine the amounts to be recognised in profit or loss: (@) Current service cost (b) Any past service cost and gain or loss on settlement (c) Net interest on the net defined benefit lability (asset) Step @ Determine the re-measurements of the net defined benefit liability (asset), to be recognised in other comprehensive income (items that will not be reclassified to profit or loss) (2) Actuarial gains and losses (b) Retum on plan assets (excluding amounts included in net interest on the net defined benefit liability (asset) (c) Any change in the effect of the asset celling (excluding amounts included in net interest on the net defined benefit labilty (asset)The suggested approach to defined benefit plans is to deal with the change in the obligation and asset in the following order: Step Item 1 10 " Record opening figures: *Asset + Obligation Interest cost on obligation + Based on discount rate and PV obligation at start of period + Should also reflect any changes in obligation during period Interest on pian assets + Based on discount rate and asset value at start of period * Technically, this interest is also time apportioned on contributions less benefits paid in the period Current service cost + Increase in the present value ofthe obligation resulting ftom employee service in the current period Contributions As advised by actuary Benefits + Actual pension payments made Past service cost + Increase/decrease in PV obligation as a result of introduction or improvement of benefits Gains and losses on settlement + Difference between the value of the obligation, being Me d andithe settlement price. Re-measurements: actuarial gains and lasses + Arising from annual valuations of obligation + On obligation, differences between actuarial assumptions and actual experience during the period, or changes in actuanal assumptions Re-measurements: return on assets (excluding amounts in net-nterest) + Arising from annual valuations of plan assets. Disclose in accordance with the standard __ Recognition DEBIT Interest cost (PL) (3% x bid objigation) CREDIT PV defined benefit obligation. (SOFP) DEBIT CREDIT Plan assets (SOFP) Interest cost (PIL) (2% x bid assets) DEBIT CREDIT Current service cost (P/L) : PV defined benefit obligation (SOFP DEBIT CREDIT Plan assets (SOFP) Company cash DEBIT PV defined beneiit-obligetion (SOFP) CREDIT Pian assets (SOFP Postive (increase in obligation): DEBIT Past service cost (PIL) CREDIT PV defined beneft obigation (SOFP) Negative (decrease in obligation|: DEBIT PV defined beneiit obligation (SOFP) CREDIT Past service cost (P/L) Gain DEBIT —_P'V defined benefit obligation (SOFP) CREDIT Service cost(PIL) Loss DEBIT Service cost (PIL) CREDIT PV defined benef obligation (SOFP) Gain DEBIT PV defined beneiit obligation (SOFP) CREDIT Other comprehensive income Loss DEBIT Other comprehensive income CREDIT PV defined benefit obligation (SOFP Gain DEBIT FV plan assets (SOFP) CREDIT Other comprehensive income Loss DEBIT Other comprehensive income CREDIT FV pian assets (SOFP) See comprehensive questionOther long-term benefits E.g. profit shares, bonuses or deferred compensation payable later than 12 months after the year end, sabbatical leave, long-service benefits and long-term disability benefits UT Cea ee E.g. early retirement payments and redundancy payments Benefits may be paid to the employees themselves, to their dependents (spouses, children, etc.) orto third parties. FHOHOOOE OHO OH OE Oo oesIAS 20 GOVERNMENT GRANTS DIPIFR BOOKLETScope - The treatment of government grants is covered by IAS 20 Accounting for government grants and disclosure of government assistance. - IAS 20 does not cover the following situations: Accounting for government grants in financial statements reflecting the effects of changing prices. * Government assistance given in the form of ‘tax breaks’. * Government acting as part-owner of the enti Cee cs Recognition An entity should not recognise government grants untl it has reasonable assurence that: ¥ The entity will comply with any conditions attached to the grant. Y The entity will actualy receive the grant. Presentation There are two choices for how government grants related to assets (including non-monetary grants at fair value) should be shown in the statement of financial position (a) Treating the grant as deferred income. (b) Deducting the grant from the cost ofthe asset (reducing the cost of asset). & Deducting the grant from the cost of the asset is simpler, but Treating the grant as deferred income has the advantage that the non-current asset continues to be carried at cost in the financial statements. There are two choices for how goverment grants related to income should be shown (2) Treating the grant as a separate credit or under a general heading, e.g. ‘other income! (b) Deducting the grant from the related expense (reducing the expense) ecu - Some forms of government assistance cannot reasonably have a value placed on them, e.g. free technical or marketing advice, provision of guarantees. - Disclosure of government assistance may be necessary because ofits significance. Its nature, extent and duration should be disclosed.Government grants Government Related 0 assistance (Ces) (___treome penal Reducing Other Reducing Disclosure igen asset income expense (only) (equity) POOP OOOEOHOOE ee ee oesIAS 23 BORROWING COSTS DIPIFR BOOKLETTT elt 4 Borrowing costs are Interest and other costs incurred by an entity in connection with the borrowing of funds, + Qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale. - Assets that are manufactured or otherwise produced over a short period of time are not qualifying assets. - Assets that are ready for their intended use or sale when purchased are not qualifying assets. Ete keekc le Borrowing costs eligible for capitalisation » Once the borrowings which relate to a specific asset are identified, then the amount of borrowing costs available for capitalisation will be the actual borrowing costs incurred on those borrowings during the period, less any investment income on the temporary investment of those borrowings. Ina situation where borrowings are obtained generally and are applied in part to obtaining a qualifying asset, the amount of borrowing costs eligible for capitalisation is found by applying the ‘capitalisation rate' to the expenditure on the asset. > The capitalisation rate is the weighted average of the borrowing costs applicable to the entity's, borrowings that are outstanding during the period excluding borrowings that made specifically to obtain a qualifying asset. v Commencement of capitalisation Three events must be taking place for capitalisation of borrowing costs to be started (2) Expenditure on the asset is _(o) Borrowing costs are being (©) Activities are in progress that being incurred incured are necessary to prepare the asset for its intended use ot sale Suspension of capitalisation - If active development is interrupted for any extended periods, capitalisation of borrowing costs should be suspended for those periods. - Suspension of capitalisation of borrowing costs is not necessary for temporary delays or for periods when substantial technical or administrative work is taking place. Cessation of capitalisation Once substantially ell the activiies necessary to prepare the qualifying asset for its intended use or sale are complete, then captalisation of borrowing costs should cease. The asset may be completed in parts or stages, where each part can be used while construction is sill taking place on the other parts. Capitalisation of borrowing costs should cease for each part as itis completed. For example a business park consisting of several buildings.IAS 36 IMPAIRMENT OF ASSETS DIPIFR BOOKLETue Cn An impairment loss is the amount by which the carrying amount of an asset or a cash-generating unit exceeds its recoverable amount. & Carrying amount is the amount at which an asset is recognised after deducting any accumulated depreciation (amortisation) and accumulated impairment losses thereon. - If an asset's value in the financial statements (carrying amount) is higher than its realistic value (its recoverable amount), the asset is judged to have suffered an impairment loss. Identifying a potentially impaired asset - An entity should assess at the end of each reporting period whether there are any indications of impairment to any assets. - If there are indications of possible impairment, the entity is required to make a formal estimate of the recoverable amount of the assets concemed, - Even if there are no indications of impairment, the following assets must always be tested for impairment annually: (a) An intangible asset with an indefinite useful life (b) Goodwill acquired in a business combination. CEST RUC CEU ea UEC +b The recoverable amount of an asset should be measured as the higher value of. (2) The asset's fair value less costs of disposal. (b) Its value in use. - An asset's fair value less costs of disposal is the price that would be received to sell the assetin an orderly transaction between merket participants at the measurement date, less direct disposal costs, such as legal expenses. The asset's fair value a ‘ If there is an active market in the asset If there is no active market in the asset The fair value should be based It might be possible to estimate fair value using best -on the market price estimates of what market participants might pay in an - or on the price of recent transactions in similar assets orderly transaction, The asset's value in use is the present value of the future cash flows expected to be derived from an assets or cash-generating unit.REO ne ene The rule for Assets at historical cost Assets at a revaluated amount Ifthe recoverable amount of an asset is lower than Any impairment loss of the asset should be the carrying amount, the carrying amount should be recognised as an expense to proft or loss, unless reduced by the difference (le the impairment loss) there is a previous revaluation surplus held in which should be charges as exoense in profit or respect of the asset, to the extent that there is a loss. revaluation surplus, the impairment loss should be charged to other comprehensive income (as a revaluation decrease), rr GUS es - As a basic rule, the recoverable amount of an asset should be calculated for the asset individually. - However, there will be occasions when it is not possible to estimate such @ value for an individual asset, particularly in the calculation of value in use. This is because cash inflows and outflows cannot be attributed to the individual asset. - Ifit|s not possible to calculate the recoverable amount for an individual asset, the recoverable amount of the asset's cash-generating unit should be measured instead. - A cash-generating unitis the smallest identifiable group of assets for which independent cash flows can be identified and measured. Ce OCU RUA CU ee Lg Allocating goodwill to cash-generating units - Goodwill acquired in 2 business combination does not generate cash flows independently of other assets. = It must be allocated to each of the acquirer's cash-generating units (or groups of cash-generating units) that are expected to benefit from the synergies of the combination. Testing cash-generating units with goodwill for impairment - Acash-generating unit to which goodwill has been allocated is tested for impairment annually. - The annual impairment test may be performed at any time during an accounting period, but must be performed al the same time every year. - The carrying amount of the urit, including goodwill, is compared with the recoverable amount. Ifthe carying amount of the unit exceeds the recoverable amount, the entity must recognise an impairment lossAccounting treatment of an impairment loss # If, and only if, the recoverable amount of an asset is less than its carying amount in the statement of financial position, an impairment loss has occurred. This loss should be recognised immediately. (2) The asset's carrying amount should be reduced to its recoverable amount in the statement of financial position, (b) The impairment loss should be recognised immediately in profit or loss (unless the asset has been revalued upwards in which case the loss is treated as a revaluation decrease). Alter reducing an asset to its recoverable amount, the depreciation charge on the asset should then be based on its new carying amount, its estimated residual value (ff any) and its estimated remaining useful life. An impairment loss should be recognised for a cash-generating unit if (and only if) the recoverable amount for the cash-generating unit is less than the carrying amount in the statement of financial position for all the assets in the unit, - When an impairment loss is recognised for a cash-generating unit the loss should be allocated between the assets in the unit in the following order: (a) Firstto the carrying amount of any goodwill allocated to the cash generating unit. (b) Then to all other assets in the cash-generating unit, on a pro rata basis Ifany individual assets within a cash generating unit can be specifically identified as being impairment, because those assets are damaged or have become obsolete, then the carrying amount of those assets should be reduced first. # Inallocating an impairment loss, the carrying amount of an asset should not be reduced below the highest of: (2) Its fair value less costs of disposal (b) Its value in use (if determinable) (©) Zero Reversal of an impairment loss - In some cases, the recoverable amount of an asset that has previously been impaired might turn out to be higher than the asset's current carrying value. In other words, there might have been a reversal of some of the previous impairment loss. - In which cases, the carrying amount of the asset should be increase to its new revocable amount and: (a) Ifthe asset is carried at revalued amount, the reversal of the impairment loss should be accounted for as a revaluation increase (IAS 16). (b) Ifthe asset is not carried at revalued amount, the reversal ofthe impairment loss should be recognised immediately as income in profit or loss. ~ An exception to this rule is for goodwill. An impairment loss for goodwill should not be reversed in a ‘subsequent period.IAS 37 PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS DIPIFR BOOKLETace - A provision is a liability of uncertain timing or amount. - Before IAS 37, provisions were used for profit smoothing, That is misleading - The key aim of IAS 37 Provisions, contingent liabilities and contingent assets is to ensure that provisions are made only where there are valid grounds for them. IAS 37 states that a provision should be recognised as a liability in the financial statements when: An entity has a present Itis probable that an outflow of A reliable estimate can be made of obligation (legal or resources embodying economic _the amount of the obligation. constructive) as a result of a benefits will be required to settle the past event obligation. IAS 37 defines a constructive obligation as an obligation that derives from an entiy’s actions, the entity has indicated to other parties that it will accept certain responsibilities and as a result, the entity has created a valid expectation on the part of thase other parties that it will discharge those responsibilities - The amount recognised as a provision should be the best estimate of the expenditure required to sett the present obligation at the end of the reporting period - The estimates will be determined by the judgement of the entity's management supplemented by the experience of similar transactions. - Where the provision involves a large population of items, the obligation is estimated by weighting all possible outcomes by their associated probabilities, ie expected value - Where the provision involves a single item, such as the outcome of a legal case, provision is made in full for the most likely outcome. Time value of money Where the effect of the time value of money is material, the amount ofa provision should be the present value of the expenditure required to settle the obligation. An appropriate discount rate should be used. Future events Future events which are reasonably expected to occur (eg new legislation, changes in technology) may affect the amount required to settle the entity's obligation and should be taken into account.Expected disposal of assets Gains from the expected disposal of assets should not be taken into account in measuring a provision. Reimbursements ‘Some or all of the expenditure needed to settle a provision may be expected to be recovered from a third party. If so, the reimbursement should be recognised only when itis virtually certain that reimbursement will be received if the entity settles the obligation. + The reimbursement should be treated as a separate asset, and the amount recognised should not be greater than the provision itsett. «The provision and the amount recognised for reimbursement may be netted off in profit o loss. Changes in provisions Provisions should be reviewed al the end of each reporting period and adjusted to reflect the current best estimate, If itis no longer probable that a transfer of resources will be required to settle the obligation, the provision should be reversed Use of provisions A provision should be used only for expenditures for which the provision was originally recognised. Setting expenditures against a provision that was originally recognised for another purpose would conceal the impact of ‘wo different events. (a) Warranties - Those are a clear legal obligations in this case. The provision must be estimated on the basis of the class as whole and not on individual claims. - Warranties are also covered by IFRS 15 Revenue from contracts with customers. The nature of the warranty granted will determine whether the warranty should be accounted for under IAS 37 or IFRS 15. (b) Self-insurance - Anumber of companies created a provision for self-insurance based on the expected cost of making good fire damage ete instead of paying premiums to an insurance company. - Under IAS 37 this provision is no longer justifiable as the entity has no obligation until a fire or accident ‘occurs. No obligation exists until that time. (c) Environmental contamination ifthe comoany has an environmental policy such that other parties would expect the company to clean up any contamination or ifthe company has broken current environmental legislation then a provision for environmental damage must be made(d) Decommissioning or abandonment costs When an oil company initially purchases an oilfield itis put under a legal obligation to decommission the site at the end of its life - IAS 37, insists that a legal obligation exists on the inital expenditure on the fleld and therefore a lability exists immediately. (e) Future operating losses Provisions should not be recognised for future operating losses. They do not meet the definition of a liability and the general recognition criteria set out in the standard. (f) Onerous contracts IAS 37 defines an onerous contract as a contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it. For example, a supply contract related to a particular that an entity can no longer sell would be onerous. IAS 37 requires a provision to be recognised for an onerous contract, after recognising any impairment losses for assets related to the contract. Arestructuring provision should include only direct expenditures arising from the restructuring. Direct expenditure are those which it has been necessary to incur because of the restructuring and which are not related to the ongoing activities of the business. ‘The following costs shouldn't be included in a restructuring provision: (X) Costs relating to marketing (X) Costs relating to investment in new systems and distribution networks (X) Costs relating to retraining or relocating existing staf. Contingent liabilities and contingent assets IAS 37 defines a contingent liability as: A possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity or A present obligation that arises from past events but is not recognised because: + Itis not probable that an outflow of resources embodying economic benefits will be required to settle the obligation or «The amount ofthe obligation cannot be measured with sulficient reliability‘Treatment of contingent Contingent liabilities should not be recognised in financial statements but they should be disclosed. The required disclosures are: ¥ Abrief description of the nature of the contingent liability ¥ Anestimate of its financial effect ¥ An indication of the uncertainties that exist ¥ The possibilty of any reimbursement | Start | | YN / Preset obligation 6 a result of an us Possible No A ottigting event? obligation? =, Yes | Yes a. ——_ | oO Probable Si Yes \ outlow? Bernie? | _ ~ ves No wes i Reliable No (rare) estimate? ‘Yes y y [Disclose contingent | Provide | liability Do nothing (IAS 37: Implementation Guidance, 8) IAS 37 defines a contingent asset as: A possible asset that arises from past events and whose existence will be confirmed by the occurrence or non-occurrence of one or more uncertain future events not wholly within control of the entity. Treatment of contingent assets contingent assets must not be recognised in financial statements but they should be disclosed. FOOOHOOH OOO HOH eo eesIAS 38 AND IFRS 3 INTANGIBLE ASSETS AND GOODWILL DIPIFR BOOKLETIAS 38 Intangible assets Definition of an intangible asset An intangible asset is an identifiable non-monetary esset without physical substance. The asset must be: (a) Controlled by the entity as a result of events in the past (b) Something from which the entity expects future economic benefits to flow. Prince lec - Research activities do not mest the citeria for recognition under IAS 38. This is because, at the research stage of a projec, it cannot be certain that future economic benefits will probably flow to the entity from the project. There is too much uncertainty about the likely success or otherwise of the project - Research costs should therefore be written off as an expense as they are incurred. - IAS 38 gives these examples: Activities aimed at obtaining new knowledge. The search for, evaluation and final selecton of, applications of research findings or other knowledge The search for altematives for materials, devices, producs, processes, systems or services. The formulation, deign, evaluation and final selection of possible alternatives for new or imoroved materials, devices, products, processes, systems or services. - Development costs may qualify for recognition as intangible assets provided that the following strict criteria can be demonstrated: ) The technical feasibility of completing the intangible asset so that it will be available for use or sale. The entity's intention to complete the intangible asset and use or sell it The entity's ability to use or sel the intangible asset. The entity's abilty to confirmation of generation future economic benefits ofthe intangible asset. The entity's ability to measure the expenditure attributable to the intengible asset during its development reliably. @ (b) (c) (d) ( (e} - Once these criteria are met, IAS 38 requires development expenditure to be capitalized. - In contrast with research costs development costs are incurred at a later stage in a project, and the probability of success should be more apparent. - IAS 38 gives these examples: + The design, construction and testing of pre-production prototypes and models. + The design of tools, jigs, moulds and dies involving new technology. The design, construction and operation of a pilot plant that is not of a scale economically feasible for commercial producton, + The design, construction and testing of a chosen alternative for new or improved materials, devices, products, processes, systems or services.Initial measurment of internally generated intangible asset - The costs allocated to an internally generated intangible asset should be only costs that can be directly attributed or allocated on a reasonable and consistent basis to creating, producing or preparing the asset for its intended use. - The costs that have already been recognised as expenses before recognition of intangible asset, it should not be retrospectively recognised at a later date as pert of the cost of an intangible asset. - All expenditure related to an intangible which does not meet the criteria for recognition either as an identifiable intangible asset or as goodwill arising on an acquisition should be expensed as incurred. The IAS gives examples of such expenditure: * Startup costs = Advertising costs © Training costs ‘* Business relocation costs - Prepaid costs for services, for example advertising or marketing costs for campaigns that have been prepared but not launched, can still be recognised as a prepayment. Measurement of intangible assets subsequent to initial recognition - The standard allows two methods of valuation for intangible assets after they have been first recognised. The cost model The revaluation model An intangible asset should be carried at its cost, An intangible asset should be carried at a revalued less any accumulated amortisation and less any amount, which is its fair value at the date of accumulated impairment losses. revaluation, less any subsequent accumulated amortisation and any subsequent accumulated impairment losses. When the revaluation model is used, and an intangible asset is revalued upwards, the cumulative revaluation surplus may be transferred to retained earings when the surplus is eventually realised. The surplus would be realised when the assets disposed of, However, the surplus may also be realised over time as the asset is used by the entiy. The realised surplus in such cases should be transferred from revaluation surplus directly to retained eamings, and should not be taken through profit or loss. USL An entity should assess the useful ife of an intangible asset, which may be finite or indefinite. An intangible asset has an indefinite useful life when there is no foreseeable limit to the period over which the asset is ‘expected to generate net cash inflows for the entity. Amortisation period and amortisation method - An intangible asset with a finite useful life should be amortised over its expected useful life. The amortisation method used should reflect the pattem in which the asset's future economic benefits are consumed. If such a pattern cannot be predicted reliably, the straight-line method should be used. - The residual value of an intangible asset witha finite useful ie is assumed to be zero unless a third party is committed to buying the intangible asset at the end ofits useful life or unless there is an active market for that type of asset.Intangible assets with indefinite useful lives IAS 36 requires that an intangible asset is tested for impairment at least annually to determine whether is stl appropriate to assess its useful life as indefinite Peer - Ain intangible asset should be eliminated from the statement of financial position when itis disposed of or when there is no further expected economic benefit from its future use. - On disposal the gain or loss arising from the difference between the net disposal proceeds and the carrying amount of the asset should be taken to profit or loss as a gain or loss on disposal (ie treated as income or expense). POH OO OTOH OOEOH Oo OED Ha eRe Oem CLE} Internally generated goodwill - The goodwill is inherent in the business but it has not been paid for, and it does not have an ‘objective’ value Thus you do not recognise an asset which is subjective and cannot be measured reliably. - The value of goodwill fo a business might be considerable, However, goodwill is not usually valued in the financial statements of a business at all, and we should not normally expect to find an amount for goodwill - Also goodwill is continually changing in value, so it cannot realistically be recorded in the financial statements of the business. - The standard deliberately precludes recognition of internally generated goodwill because it requires that, for initial recognition, the cost of the asset rather than its fair value should be capable of being measured reliably and that it should be identifiable and controlled. Purchased goodwill - There is one exception to the general rule that goodwill has no objective valuation. This is when a business is sold. When a buyer purchases an existing business, he will have to purchase not only its long-term assets and inventory (and perhaps take over its accounts payable and receivable too) but also the goodwill of the business, - Purchased goodwil is shown in the statement of financial position because it has been paid for. Ithas no tangible substance, and so itis an intangible non-current asset. ey How is the value of purchased goodwill decided? When a business is sold, there is likely to be some purchased goodwill in the selling price. But how is the amount of this purchased goodwill decided?- The value of the goodwil is a matter for the purchaser and seller to agree upon in fixing the purchase/sale price. However, two methods of valuation are worth mentioning here: (2) The seller and buyer agree on a price for the (b) However, the calculation of goodwill often business without specifically quantifying the precedes the fixing of the purchase price and goodwill becomes a central element of negotiation. - The goodwill shown by the purchaser in his accounts will be the difference between the purchase consideration and his own valuation of the net assets acquired. Characteristics of goodwill ‘Goodwill may be distinguished from other intangible non-current assets by reference to the following characteristics, (a) Itis incapable of realisation separately from the business as a whole. (b) Its value has no reliable or predictable relationship to any costs which may have been incurred. (c) Its value arises from various intangible factors such as skilled employees, effective advertising or a sirategic location. These indirect factors cannot be valued (4) The value of goodwill may fluctuate widely over relatively short periods of time, (e) The assessment of the value of goodwill is highly subjective. SIRE USER ULE es) - Goodwil. Future economic benefits arising from assets that are not capable of being individually identified and separately recognised. - Goodwill acquired in a business combination is recognised as an asset and is initially-measured at cost. = Cost is the excess of the cost of the combination over the acquirer's interest in the net fair value of the acquiree's identifiable assets, liabilities and contingent liabilities. - After initial recognition goodwill acquired in a business combination is measured at cost ess any accumulated impairment losses. Its not amortised, instead its tested for impairment at least annually, in accordance with IAS 36 Impairment of assets. Ne - IFRS 3 refers to negative goodwill as the ‘excess of aoquire’s interest in the net fer value of acquiree's identifiable assets, liabilities and contingent liabilities over cost’. ive good in on a bargain purchase! - Where there is negative goodwil, an entity should first reassess the amounts at which it has measured both the cost of the combination and the acquiree’s identifiable net assets. Any negative goodwill remaining should be recognised immediately in profit or loss. FHOHOOOE OHO Oe Oe oe oesIAS 40 INVESTMENT PROPERTY DIPIFR BOOKLETInvestment property is property (land or a building - or part of a building - or both) held (by the owner or by the lessee as a right-of-use asset) fo earn rentals or for capital appreciation or both, rather than for: (@) Use in the production or supply of goods ar services or for administrative purposes, or (b) Sale in the ordinary course of business ow ner-occupied property is property held by the owner (or by the lessee as a right-of-use assat) for use in the production or supply of goods or services or for administrative purposes. Property held for (long time) capital appreciation Investment property IAS 40 Property being constructed or developed {or future as an investment property Investment property IAS 40 Property held by the owner (or by the lessee as right of use asset) under IFRS 46 and leased out under an operation lease Investment property IAS 40 Property held for (short term) sale in the ordinary course or business Inventory IAS 2 Property being constructed or developed on behalf of third party Revenue IFRS 15 Owner-occupied property Property, plant and equipment IAS 16If an entity has not determined that it will use the property as an owner-occupied propery, for short-term sale in the ordinary course of business, or for investment, the property is classified as an investment property under IAS 40. Some properties may be partly owner-occupied and partly held for investment purposes. IAS 40 says that > Ifthe portions could be sold separately (or leased out separately under a finance lease), an entity should accounts for the portions separately > Ifthe portions could not be sold separately, the property is investment property only if an insignificant portion is held for use in the production or supply of goods or services or for administrative purposes i.e. if only an insignificant partis owner-occupied, Investment property should be recognised as an asset when two conditions are met: (a) Itis probable that the future economic benefits that are associated with the investment property will flow to the entity (0) The cost of the investment property can be measured reliably. CEST Cile An investment property should be measured initially at its cost, including transaction costs - A right-of-use asset classified as an investment property should be measured in accordance with IFRS 16. IAS 40 requires an entity to choose between two models: The fair value model The cost model Whatever policy it chooses should be applied to all of its investment property. Fair value model - After initial recognition, an entity that chooses the fair value model should measure all of its investment property at fair value, except in the extremely rare cases where this cannot be measured reliably. In such cases it should apply the IAS 16 cost model until the investment propery is disposed of. The residual value must be assumed to be zero. A gain or loss arising from a change in the fair value of an investment property should be recognised in net profit or loss for the period in which it arises. - In determining fair value an entity should not double count assets. For example, elevators or air conditioning are often an integral part ofa building and should be included in the investment property, rather than recognised seperately.Cost model - The cost model is the cost model in IAS 16. Investment property should be measured at depreciated cost, less any accumulated impairment losses. ~ An entity that chooses the cost model should disclose the fair value of its investment property. Changing models = It should not change from one model to the other unless the change will result in @ more appropriate presentation. IAS 40 states that tis highly unlikely that a change from the fair value model to the cost model will result in a more appropriate presentation. Transfers - Transfers to of from investment property should only be made when there is a change in use - When there is a transfer from investment property carried at fair value fo owner-occupied property or inventories, the property's cost for subsequent accounting under IAS 16 or IAS 2 should be its fair value at the date of change of use. - When there is a transfer from owner-occupied property to investment property and nead to be carried at fair value. An entity should apply [AS 16 up to the date of change of use. Disposals - Any gain or loss on disposal is the difference between the net disposal proceeds and the carrying amount of the assel. It should generally be recognised as income or expense in profit or oss. Pitino These relate to: Choice of fair value model or cost mode! Criteria for classification as investment property ‘Assumptions in determining fair value Use of independent professional valuer (encouraged but not required) Rental income and expenses Any testrictions or obligations . . Fair value model - additional disclosures An entity that adopts this must also disclose a reconciation ofthe carrying amount of the investment property atthe beginning and end of the period Cost me iddi These relate mainly to the depreciation method. In addition, an entity which adopts the cost mode must disclose the fair value of the investment property. nal disclosure:IFRS 15 REVENUE FROM CONTRACTS WITH CUSTOMERS DIPIFR BOOKLETWhy was IFRS 15 issued? » IFRS 15 revenue from contracts with customers replaces “ JAS 18 revenue & JAS 11 construction contracts > Under IFRS 15 the transfer of goods and services is based upon the transfer of control, rather than the transfer of risks and rewards as in JAS 18. » Inthe standard, the meaning of Control of an asset is the ability to direct the use of and obtain ‘substantially all of the remaining benefits from the asset. » IFRS 15 provides a more robust information to make the revenue recognition decision in order to ensure faithful representation. tel eee IFRS 15 requires that revenue is recognised and measured according to the following five steps 4) + Identify the contract with the customer, + Identify the separate performance obligations. + Determine the transaction price. A Allocate the transaction price to the performance obligations. LOL ILL) + Recognise revenue when (or as) a performance obligation is satisfied. © Identify the contract with the customer A contract with @ customer is within the scope of IFRS 15 only when all of the following criteria have been met (a) The parties have approved and are committed to fulfiling the terms of the contract. (0) Each party's rights regarding the goods and services to be transferred can be identified (c) Cleer identification of the payment terms for the goods and services. (d) The contract hes commercial substance. (e) itis probable thatthe entity will collect the consideration to which it will be entitled () The contract can be witten, verbal or implied. @® Identify the separate performance obligations > The key point is distinct goods and services. > IFRS 15 states that 2 good or service that is promised to a customer i distinc if both of following criteria are met (a) The customer can benefit from the goods ar services either on its own or together with other resources. (b) The entity's promise to transfer the good or service to the customer is separately identifiable from other promises in the contract.© Determine the transaction price > The transaction price is the amount that the company expects to obtain from the customer in exchange for transierring goods or services. > The transaction price would reflect the company’s probability weighted estimate or variable consideration in adoition fo the effects of the customer's credit risk and the time value of money (if material). @ Allocate the transaction price to the performance obligations > Where a contract contains more than one distinct performance obligation a company allocates the transaction price to all separate performance obligations in proportion to the stand-alone selling price of the good or service underiying each performance obligation. > Ifthe good or service is not sold separately, the company would have to estimate its stand-alone selling price. © Recognise revenue when (or as) a performance obligation is satisfied > The amount of revenue recognised is the amount allocated to that performance obligation in Step 4. > An entity must be able to reasonably measure the outcome of a performance obligation before the related revenue can be recognised. Contract costs > The incremental costs of obtaining @ contract (such as sales commission) are recognised as an asset if the entity expects to recover those costs. That asset are amortised on a systematic basis consistent with the contract. > Costs that would have been incurred regardless of whether the contract was obtained are recognised as an expense as incurred. Principal versus agent Principal Agent Has control of goods or services Doesn't obtain control of goods or services Consignment arrangement ‘The dealer/aistributor doesn’t obtain control of product. Bill-and-hold arrangements An entity will need to determine at what point the customer obtains control of ihe product.Warranties ‘fa customer has the option to purchase a warranty if the customer does not have the option to ‘separately from the product to which it relates. purchase the warranty separately. It constitutes a distinct service and is accounted for That does not give rise to a performance obligation as a separate performance obligation. and the warranty is accounted for as a provision in accordance with IAS 37 Repurchase agreements Repurchase agreements generally come in three forms Cae Re ics p ovis ‘An entity has an obligation to ‘An entity has the right to ‘An entity must repurchase the repurchase the asset repurchase the asset asset ifthe customer request to For do thet. In the case of a forward ora call option the customer does not obtain control of the asset mH f UR ec n) 1 {Repurchase price < Original sling price {Repurchase price & Original sling price) f ( The entity will account for the contract as a lease | | aS Srey Lecco URE coil ac Les | financing arrangement (loan) aa Cire Repurchase price 2 Original sling price | | Repurchase price < Original siling price [ and Repurchase price > Expected market value The customer is likely to | The customer is not likely exercise that option. to exercise that option. The entity will account for the contract as a financing arrangement (loan) ‘The entity wil account for (revenue)Take AOL Le CLC cL A ee Contracts where performance obligations are satisied over time as revenues and costs in each accounting period. 4% Summary of accounting treatment © Estimated profit / loss: Total contract price (revenue) soe (4) Costs to dete (x) (,) Estimated costs to completion (99) Estimated profit / loss e«— xx L_+ The full estimated loss is recognised e————— @® Percentage complete @® Statement of profit or loss: Revenue (Percentage complete * Total revenue) xx () Cost of sales (Percentage complete * Total cost) or (Balancing figure) (xx) Profit/loss xx «— @ Statement of financial position: Costs to date xx (4) Recognised profit xx (-) Recognised loss (x) (-) Amounts invoiced (xx) Contract asset / liability +— xx L_+ Presented separately under curent assets / current liabilities © Contract receivables (unpaid invoices) = payments invoiced - payments received Presentation > The contract liability is recognised and presented in the statement of financial position when the customer has paid an amount of consideration prior to the entity performing by transferring control of the related good or service to the customer. > The contract asset or receivable is recognised and presented in the statement of financial position when the entity has performed but the customer has not yet paid the related consideration. POOOeO ee eeeeseneroesIFRS 16 LEASES DIPIFR BOOKLETWhy was IFRS 16 issued? > The previous IAS 17 did not require lessees to recognise assets and liabilities arising from operating leases, and as such, did not reflect the substance of the transaction or ensure the faithful representation. > IFRS 16 replaces IAS 17. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases. The objective is to ensure that lessees and lessors provide relevant information in a manner that faithfully represents those transactions > IFRS 16 requires a lessee to recognise assets and liabiliies forall long-term leases (more than 12 months), unless the underlying asset is of low value. For short-term leases or low value assets, the lease payments are simply charged to profit or loss as an expense. IFRS 16 requires a lessor to classify leases into finance and operating leases. Identifying a lease ® An entity must identify whether a contract contains a lease, which is the case if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The right to control the use of an identified asset depends on the lessee having: (a) The right to obtain substantially all of the economic benefits from use of the identified asset, and () The right to direct the use of the identified asset. Recognition exemptions IFRS16 provides an optional exemption from the {ull requirements of the standard for: oF (a) Short-term leases. (b) Low value leases. Ifthe entity elects to take the exemption, lease payments are recognised as an expense on a straightine basis over the lease term or another systematic basis, if more representative of the pattem ofthe lessee's benefits rena } The lessee recognises a Alease liability } A ight-of-use assetLease liability @ The lease liability is intially measured at the present value of lease payments not paid at the commencement date, discounted at the interest rate implicit in the lease. If that rate cannot be readily determined, the lessee's incremental borrowing rate should be used. @ After the commencement date the carrying amount of the lease liability is increased by interest charges on the outstanding liability and reduced by lease payments made. Interest charges — Lease payments made Right of use asset © The right-of use asset is initially measured at cost, which includes: (a) The amount of the initial measurement of the lease liability. (b) Any lease payments made at/before the commencement date, less any lease incentives received (c) Any initial direct costs (ag legal costs) incurred by the lessee. (@) Any costs which the lessee will incur for dismantling and removing the underlying asset or restoring the site at the end of the lease term.@ Subsequently measurement The cost model The fair value model The revaluation model__| ‘> The cost model of IAS 16 The right-of-use asset is normally measured at cost less accumulated depreciation and impairment losses in accordance with the cost model of IAS 16 Property, plant and equipment - The right-of-use asset is depreciated from the commencement date to the earlier of the end cf its useful life or the end of the lease term. - However, if ownership of the underlying asset is expected to be transferred to the lessee at the end of the lease, the right-of-use asset should be depreciated over the useful life of the underiying asset, + The revaluation model of JAS 16 This is optional if the right-of-use asset relates to the property, plant and equipment. 4 The fair value model of IAS 40 This is compulsory ifthe right-of-use asset relates to the invest property. Allocating the finance charge (interest charge) - IFRS 16 requires the finance charge to be allocated to periods during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the lability for each period, ie applying the interest rate implicit in the lease. - The lessee's incremental borrowing rate may be used ifthe interest rate implicit in the lease cannot be determined. Calculation of the lease liability ‘The calculation of the lease liability to be included in the financial statements can be summarised as follows: If lease payments are made in arrears: $ 1AXt Lease liability (present value of future lease payments) xx 1.4.X1-31.42.X4 Interest at x% x 34.12.X4 Instalment in arrears (XX) 34.42.X1 Liability carried down xX 1.1.X2-31.42.X2 Interest at x% x 31.12.X2 instalment in arrears (xx) 31.12.X2 Liability due in more than 1 year XXIflease payments are made in advance: $ 1.1.X4 Lease liability (present value of future lease payments) XX 1A.X4-31.12.X4 Interest at x% x 34.12X4 Liability caried down x 1.1.2 Instalment in advance 0X) Liability due in more than 1 year x - In the statement of financial position right-of-use assets can be presented on a separate line under noncurrent asses or they can be included in the total of corresponding underlying assets and disclosed in the notes. - Lease lables should be either presented separately from other lables or cisclosed in the notes - IFRS 16 does not specify that lease liabilities should be split between non-current and current liabilities, but this should be done as best practice. Sale and leaseback Tne key question in determining the accounting treatment is Does the transaction constitute a sale? This is determined by considering when the performance obligation is satisfied in accordance with IFRS 15 Revenue from contracts with customers. Transfer is a sale If the transfer satisfies the IFRS 15 requirements to be accounted for as a sale, © The seller/iessee measures the right-of-use asset arising from the leaseback at the proportion of the previous carrying amount of the asset that relates to the right of use retained by the seller/lessee. This is calculated as: ict et tc bresont value oflease payments ‘ght of use asset = Carrying amount x Gan @® The sellerlessee only recognises the amount of any gain or loss on the sale that relates tothe rights transferred to the buyer. This can be calculated in three stages: Stage 1: Caloulete the total gain Total gain Total gain = fair value - carrying amount ‘Stage 2: Calculate the gain that relates to the rights retained present value of lease payments Gain rel the tight retained = gai iain relating to the tight retained = gain x fair Value Stage 3: The gain relating to rights transferred is the balancing figure Gains relating to the rights transferred = total gain (Stage 1) - gain on rights retained (Stage 2)(Transaction not on market terms ifthe fair value of the consideration forthe sale does not equal the fair value of the asset, or ifthe lease payments are not at market rates, the following adjustments should be made: 4 Any below-market terms should be accounted for as a prepayment of lease payments (the shortall In consideration received ‘rom the lessor is treated as a lease payment made by the lessee) > Any above-market terms are accounted for as additional financing provided by the buyertlessor (the additional amount paid by the lessor is treated as additional liabilty, not as gain on the sale) Transfer is not a sale If the transfer does not satisfy the IFRS 15 requirements to be accounted for as a sale, The seller continues to recognise the transferred asset, and the transfer proceeds are treated as a financial liability, accounted for in accordance with IFRS 9. The transaction is more in the nature of a secured loan. (Sree) For lessor accounting IFRS 16 retains the IAS 17 distinction between ——— Finance leases Operating leases Definition ~ Afinance lease is a lease that transfers substantially all the risks and rewards incidental to ownership of an underlying asset = When we talk of risks here, we specifically mean the risks of ownership, not other types of risk. Risks of ownership include the possibilty of losses from idle capacity or technological obsolescence, or variations in return due to changing economic conditions. - The rewards are represented by the expectation of profitable operation over the assets economic fe, and also any gain from appreciation in value or realisation of a residual value Accounting treatment - IFRS 16 requires the amount due from the lessee under a finance lease to be recorded in the statement of financial position of a lessor as a receivable at the amount of the net investment in the lease. - The recogrition of finance income under a finance lease should normally be based on a pattern to give a constant periodic rate of return on the lessor's net investment outstanding in respect of the finance lease in each period.Definition - An operating lease is a lease that does not transfer substantially all the risks and rewards incidental to ownership of an underlying asset. Accounting treatment - An asset held for use in operating leases by a lessor should be recorded as a long-term asset and depreciated over its useful ie. - Income from an operating lease, excluding charges for services such as insurance and maintenance, should be recognised on a straight line basis over the period of the lease, unless another systematic and rational basis is more representative of the time pattem in which the benefit from the leased asset is receivable. - Alessor who is a manufacturer or dealer should not recognise any selling proft on entering into an operating lease because it is not the equivalent of a sale. - A lessee, L, may sublease an asset which it in turn leases from another lessor, H. In this situation, H is the ‘head lessor who ultimately owns the asset from a legal perspective. L then becomes an ‘intermediate lessor’, - An intermediate lessor must assess whether the sublease is a finance or operating lease in the context of the right-f-use asset being leased, not the actual underlying asset. / H Head lessor Lessor = Intermediate lessor COOH OOOH eee oeonerees