IAS 20

Accounting for Government

Grants and Disclosure of
Government Assistance
 Overview
 SCOPE

 DEFINITIONS

 GOVERNMENT GRANTS

 NON-MONETARY GOVERNMENT GRANTS

 PRESENTATION OF GRANTS RELATED TO ASSETS

 PRESENTATION OF GRANTS RELATED TO INCOME

 REPAYMENT OF GOVERNMENT GRANTS

 GOVERNMENT ASSISTANCE

 DISCLOSURE
 SCOPE

The Standard shall be applied in accounting

for, and in the disclosure of, government grants
and in the disclosure of other forms of
government assistance.
 DEFINITIONS
Government:- refers to government, government agencies and
similar bodies whether local, national or international.

Government assistance:- is action by government designed

to provide an economic benefit to an entity.

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.
 continued
Grants related to assets are government grants whose
primary condition is that an entity qualifying for them should
purchase, construct Or otherwise acquire long-term assets.

Grants related to income are government grants other than

those related to assets.

Forgivable loans are loans which the lender undertakes to

waive repayment of under certain prescribed conditions.
 GOVERNMENT GRANTS

Government grants, including non-monetary grants at

fair value, shall not be recognized until there is
reasonable assurance that:

(a) the entity will comply with the conditions

attaching to them; and

(b) the grants will be received.

 continued

Government grants shall be recognized in profit or

loss on a systematic basis over the periods in which
the entity recognizes as expenses the related costs for
which the grants are intended to compensate.

Non-monetary government grants:- Recognized based

on fair value
 continued

There are two broad approaches to the accounting for

government grants: the

• capital approach, under which a grant is recognized outside

profit or loss, and

• Income approach, under which a grant is recognized in profit

or loss over one or more periods.
 Disclosure
• the accounting policy adopted for government grants, including the methods
of presentation adopted in the financial statements;

• the nature and extent of government grants recognized in the financial

statements and an indication of other forms of government assistance from
which the entity has directly benefited; and

• unfulfilled conditions and other contingencies attaching to government

assistance that has been recognized.
 END OF IAS 20

Any Questions?
 IAS 23

Borrowing Costs
 Overview
 CORE PRINCIPLE

 SCOPE

 DEFINITIONS

 RECOGNITION

 BORROWING COSTS ELIGIBLE FOR CAPITALIZATION

 COMMENCEMENT OF CAPITALIZATION

 SUSPENSION OF CAPITALIZATION

 CESSATION OF CAPITALIZATION

 DISCLOSURE

 QUESTIONS AND DISCUSSION

 CORE PRINCIPLE

Borrowing costs that are directly attributable to

the acquisition, construction or production of a
qualifying asset form part of the cost of that
asset. Other borrowing costs are recognized as
an expense.
 SCOPE
Scope

For all borrowing cost issues

 DEFINITIONS
Definitions
Borrowing costs are:- interest and other costs that an
entity incurs in connection with the borrowing of funds.

A qualifying asset:- is an asset that necessarily takes a

substantial period of time to get ready for its intended
use or sale.
 continued
Continued
Examples of qualifying assets:-
(a) inventories

(b) manufacturing plants

(c) power generation facilities

(d) intangible assets

(e) investment properties (f) bearer plants.

Examples of not qualifying assets:-

(a) Financial assets

(b) inventories that are manufactured over a short period of time

 RECOGNITION
 An entity shall capitalize borrowing costs when it is probable

that they will result in future economic benefits to the entity and

the costs can be measured reliably.

 An entity shall recognize other borrowing costs as an expense

in the period in which it incurs them.

 continued
Borrowing costs eligible for capitalization

 actual borrowing costs incurred on that

borrowing during the period less any investment
income on the temporary investment of those
borrowing.
 continued

To the extent that an entity borrows funds

generally and uses them for the purpose of
obtaining a qualifying asset, the entity shall
determine the amount of borrowing costs
eligible for capitalization by applying a
capitalization rate
 continued
The capitalization rate shall be the weighted average
of the borrowing costs that are outstanding during the
period, other than borrowings made specifically for the
purpose of obtaining a qualifying asset.
 continued

• The amount of borrowing costs that an

entity capitalizes during a period shall not
exceed the amount of borrowing costs it
incurred during that period.
 continued
Commencement of capitalization
 The commencement date for capitalization Is the date when

the entity first meets all of The following conditions:

(a) it incurs expenditures for the asset;

(b) it incurs borrowing costs; and

(c) it undertakes activities that are necessary to prepare the

asset for its intended use or sale.

 continued
Suspension of capitalization

 An entity shall suspend capitalization of borrowing costs during

extended periods in which it suspends active development of a
qualifying asset.
 continued

Cessation of capitalization
 An entity shall cease capitalizing borrowing costs when substantially all the
activities necessary to prepare the qualifying asset for its Intended use or
sale are complete.
 Disclosure

An entity shall disclose:

(a) the amount of borrowing costs capitalized during

the period; and

(b) the capitalization rate used to determine the amount

of borrowing costs eligible for capitalization.
 END OF IAS 23

Any Questions?
 IAS 21

The Effects of Changes in

Foreign Exchange Rates
 Overview
 OBJECTIVE
 SCOPE
 DEFINITIONS
 Elaboration on the definitions
 REPORTING FOREIGN CURRENCY TRANSACTIONS IN THE
FUNCTIONAL
CURRENCY
 Initial recognition
 Reporting at the ends of subsequent reporting periods
 Recognition of exchange differences
 Change in functional currency
 USE OF A PRESENTATION CURRENCY OTHER THAN THE
FUNCTIONALCURRENCY
 Translation to the presentation currency
 DISCLOSURE
 OBJECTIVE
 to prescribe how to include foreign currency transactions and foreign

operations in the financial statements.

 how to translate financial statements into a presentation currency.

 to determine which exchange rate(s) to use and

 how to report the effects of changes in exchange rates in the financial

statements.
 SCOPE

For all IAS 21 issues and except for IFRS 9

Linked to IAS 12, IAS 29 , IFRS 3 & IFRS 10

 DEFINITIONS
 Closing rate :-is the spot exchange rate at the end of the

Reporting period.

 Exchange difference :-is the difference resulting from translating

a given number of units of one currency into another currency at

different exchange rates.

 continued

Exchange rate :-is the ratio of exchange for

two currencies.
Foreign currency :-is a currency other than
the functional currency of the entity.
 continued
Foreign operation :-is an entity that is a subsidiary,
associate, joint arrangement or branch of a reporting
entity, the activities of which are based or conducted in
a country or currency other than those of the reporting
entity.

Functional currency :-is the currency of the primary

economic environment in which the entity operates.
 continued
Presentation currency :-is the currency in which the
financial statements are presented.

Spot exchange rate :- is the exchange rate for

immediate delivery.
 Elaboration on the definitions

 Factors to be consider during determining Functional

Currency:-

(a) sales prices for goods and services are denominated and
settled

(b) The currency of competitive forces and regulations

(c) the currency that mainly influences labor, material and other
costs
 continued
 factors that provide evidence of an entity’s functional currency:

(a) the currency in which funds from financing activities (ie

issuing debt and equity instruments) are generated.

(b) currency in which receipts from operating activities are

usually retained.
 continued
Note:-
 When the above indicators are mixed and the functional
currency is not obvious, management uses its judgment to
determine the functional currency that most faithfully represents
the economic effects of the underlying transactions, events and
conditions

 once determined, the functional currency is not changed unless

there is a change in those underlying transactions, events and
conditions.
 REPORTING FOREIGN CURRENCY
TRANSACTIONS
IN THE FUNCTIONAL CURRENCY

Initial recognition

A foreign currency transaction shall be recorded, on

the functional currency, by applying to the foreign
currency amount the spot exchange rate between the
functional currency and the foreign currency at the
date of the transaction.
 continued
Reporting at the ends of subsequent reporting periods

 At the end of each reporting period:

(a) foreign currency monetary items shall be translated using the closing rate;

(b) non-monetary items that are measured in terms of historical cost in a foreign

currency shall be translated using the exchange rate at the date of the transaction; and

(c) non-monetary items that are measured at fair value in a foreign currency shall be
translated using the exchange rates at the date when the fair value was measured.
Example
Example 2
 continued
Recognition of exchange differences
 When a gain or loss on a non-monetary item is recognized in Other comprehensive
income, any exchange component of that gain or loss shall be recognized in other
comprehensive income.
 conversely, when a gain or loss on a non-monetary item is recognized in profit or
loss, any exchange component of that gain or loss shall be recognized in profit or
loss.
 Exchange differences arising on monetary Items shall be recognized in profit or loss.
Change in functional currency
 The effect of a change in functional currency is accounted for prospectively
 USE OF A PRESENTATION CURRENCY OTHER THAN
THE FUNCTIONALCURRENCY

Translation to the presentation currency

 Procedures to translate functional currency to presentation currency in

(a) assets and liabilities for each statement of financial position presented (ie
including comparatives) shall be translated at the closing rate at the date of that
statement of financial position;

(b) income and expenses for each statement presenting P/L and other
comprehensive income (ie including comparatives) shall be translated at
exchange rates at the dates of the transactions; and

(c) all resulting exchange differences shall be recognized in other

comprehensive income.
 DISCLOSURE

The following will be disclosed

(a) The functional currency

(b) amount of exchange differences recognized in p/L and OCI

(c) the reason for using a different presentation currency.

 END OF IAS 21

Any Questions?
 IAS 36

Impairment of
Assets
 Overview
 OBJECTIVE

 SCOPE

 DEFINITIONS

 IDENTIFYING AN ASSET THAT MAY BE IMPAIRED

 MEASURING RECOVERABLE AMOUNT

 RECOGNISING AND MEASURING AN IMPAIRMENT LOSS

 CASH-GENERATING UNITS AND GOODWILL

 REVERSING AN IMPAIRMENT LOSS

 DISCLOSURE

 Questions and Discussion

 OBJECTIVE

 The objective of this Standard is to prescribe the

procedures that an entity applies to ensure that its
assets are carried at no more than their
recoverable amount
 SCOPE

The standard shall be applied for all assets except IAS

20, IAS 12, IAS 19, IAS 40, IAS 41 IFRS 4, IFRS 5,
IFRS 9, IFRS 15
 DEFINITIONS

Carrying amount:- is the amount at which an asset is recognized after

deducting any accumulated depreciation (amortization) and Accumulated
impairment losses thereon.
 continued

A cash-generating unit:- is the smallest identifiable

group of assets That generates cash inflows that are
largely independent of the cash Inflows from other
assets or groups of assets
 continued
Example
1. A mining entity owns a private railway to support its mining
activities. The private railway could be sold only for scrap
value and it does not generate cash inflows that are largely
independent of the cash inflows from the other assets of the
mine.
2. A bus company provides services under contract with a
municipality that requires minimum service on each of five
separate routes. Assets devoted to each route and the cash
flows from each route can be identified separately. One of the
routes operates at a significant loss.
 continued
An impairment loss:- is the amount by which the carrying
amount of an asset or a cash-generating unit exceeds its
recoverable amount.

The recoverable amount of an asset or a cash-

generating unit:- is the higher of its fair value less costs of
disposal and its value in use.
 IDENTIFYING AN ASSET THAT MAY BE
IMPAIRED

 An entity shall assess at the end of each reporting period whether there is
any indication that an asset may be impaired. If any such indication exists,
The entity shall estimate the recoverable amount of the asset.
 continued
o Irrespective of whether there is any indication of impairment, an entity shall

also test:

 an intangible asset with an indefinite useful life & goodwill acquired in a

business combination

Note:- Impairment test should be made before the end of the period at the

same time on yearly basis

 continued
Indications for Impairment:-

External sources of information:-

 The decline in asset values

 significant change in technological, market, economic

or legal environment in which the entity operates

 the increase in market interest rate or market rate of

return on investment
 continued
Internal sources of information:-

 obsolescence or physical damage

 decline in performance

 significant plan change made by the management

 decline in performance
 MEASURING RECOVERABLE
AMOUNT

 Recoverable amount:- is the higher of its fair value less

costs of disposal and its value in use.

 RECOGNISING AND MEASURING AN IMPAIRMENT
LOSS

 The value of the impairment loss is the difference between the

carrying amount and its recoverable amount

 An impairment loss shall be recognized immediately in profit or

loss, unless the asset is carried at revalued amount in
accordance with another Standard e.g IAS 16
 CASH-GENERATING UNITS AND
GOODWILL

 If it is not possible to estimate the recoverable

amount of the individual asset, an entity shall
determine the recoverable amount of the cash-
generating unit to which the asset belongs
 continued
Note:-
o Cash-generating units shall be identified consistently from
period to period for the same asset or types of assets, unless a
change is justified.

o For the purpose of impairment testing, goodwill acquired in a

business combination shall, from the acquisition date, be
allocated to each of the acquirer’s cash generating units.

o A cash-generating unit to which goodwill has been allocated

shall be tested for impairment annually
 continued
o The impairment loss shall be allocated to reduce the
Carrying amount of the assets of the unit (group of
units) in the following order:
(a) first, on goodwill
(b) then, to the other assets on pro rata basis
o In allocating an impairment loss in accordance an
entity shall not reduce the carrying amount of an
asset below the Highest of:
(a) its fair value less costs of disposal
(b) its value in use ,and (c) zero.
 continued
Example
A machine has suffered physical damage but is still working,
although not as well as before it was damaged. The machine’s fair
value less costs of disposal is less than its carrying amount. The
machine does not generate independent cash inflows.
The smallest identifiable group of assets that includes the
machine and generates cash inflows that are largely independent
of the cash inflows from other assets is the production line to
which the machine belongs. The recoverable amount of the
production line shows that the production line taken as a whole is
not impaired.
 continued
 Assumption 1: budgets/forecasts approved by management reflect no
commitment of management to replace the machine.

 Assumption 2: budgets/forecasts approved by management reflect a

commitment of management to replace the machine and sell it in the near
future.

Cash flows from continuing use of the machine until its disposal are estimated
to be negligible.

Can we recognized impairment loss?

 REVERSING AN IMPAIRMENT
LOSS
An entity shall assess at the end of each reporting period whether there is any
indication that an impairment loss recognized in prior periods for an asset other
than goodwill may no longer exist or may have decreased.
External sources of information:-

The increase in asset values, Favorable change in technological,

market, economic or legal environment in which the entity
operates, the decrease in market interest rate or market rate of
return on investment

Internal sources of information:-

Increase in performance, Favorable plan change made by

the management
,
 continued
An impairment loss recognized in prior periods for an asset other
than goodwill shall be reversed if, and only if, there has been a
change in the estimates used to determine the asset’s
recoverable amount since the Last impairment loss was
recognized.
Note:-
a reversal of an impairment loss shall not exceed the carrying
amount of the asset that was in the prior period

A reversal of an impairment loss for an asset other than goodwill

shall be recognized immediately in profit or loss, unless the asset
is carried at revalued amount in accordance with another
 continued
Reversing an impairment loss for a cash-generating unit:-
A reversal of an impairment loss for a cash-generating unit shall be allocated to the
assets of the unit, except for goodwill, pro rata with the carrying amounts of those
assets.

In allocating a reversal of an impairment loss for a cash-generating unit the carrying

amount of an asset shall not be increased above the lower of:

(a) its recoverable amount and

(b) the carrying amount of the asset in the prior period

Reversing an impairment loss for goodwill- An impairment loss recognized for goodwill
shall not be reversed in a subsequent period.
 Cost model
example
»1 January 2011 you buy a machine
» cost = $1 million
» useful life = 10 years
» depreciation method = straight-line
» nil residual value
»31 December 2014 the recoverable amount =
$300,000
»31 December 2016 the recoverable amount of
the machine = $800,000
 Disclosure
An entity shall disclose the following for each class of assets:

 the amount of impairment losses recognized in profit

or loss

 the amount of reversals of impairment losses

recognized in profit or loss

 Explanation of the events and circumstances that

contributed to the impairment loss or reversal
 END OF IAS 36

Any Questions?