1 Ifrs Ias 1-acca 3s267

DAY 1 – IFRS TTT • • • • • • • • • • • •

Introduction Framework Principles based reporting vs rules based reporting and impacts IAS 1 – Presentation of financial statements IAS 2 – Inventories IAS 8 – ing policies, changes in ing estimates and errors IAS 10 – Events after reporting date IAS 16 – Property, plant and equipment IAS 17 - Leases IAS 18 – Revenues IAS 38 – Intangible assets IFRS 1 – First time adoption of IFRS

Introduction to IFRS

IASB – an introduction I t International ti l ing A ti Standards St d d Board B d • The forerunner of the IASB (2001) was the IASC (International ing Standards Committee, 1973), an independent private sector body. • Objectives of the IASB – – Develop pq quality yg global ing g standards – Promote the use of rigorous application of those standards – Coordinate with national ing organizations and regulators to harmonize existing ing standards with the IFRS.

IASB – an introduction I t International ti l ing A ti Standards St d d Board B d • The IASB structure – The IASC Foundation oversees the IASB and its work

IASC Foundation 22 trustees

– The trustees are appointed to the SAC, IASB and IFRIC – The trustees are also responsible for overall funding and management of IASB – The IASB stays responsible for all technical matters

Standards Advisory Council

SAC

IASB 14 e be s

IFRIC IFR Interpretation C Committee itt

IASB – an introduction International ing Standards Board

• IASB – special tasks – Preparation and issue of IFRS – Preparation of exposure drafts (EDs) – Set up procedures for review of comments on issued documents – Issuing conclusions and their bases

• IASB vote on all technical issues. issues Approval of EDs and Standards requires nine (9) of the 14 IASB .

Standards Advisory Council – SAC

•

The SAC comprises 40 appointed by the IASC Trustees across the globe and from various functional background. 1. It advises the IASB on priorities and decisions agenda 2. es views of the Council on major standards setting projects to s and preparers of financial statements, and 3. Give advice to the IASC trustees and the IASB.

IFRIC – IFR Interpretations Committee • The IFRIC – –M Main i objective bj ti iis tto d develop l practical ti l and d sound d interpretations of the IFRS on a global basis – • For newly identified financial reporting issues not yet addressed by the IFRS • Where there are conflicting, conflicting divergent or non acceptable interpretations that are likely to occur or have occurred.

IFRIC – IFR Interpretations C Committee itt •

The IFRIC work approach – – Uses IAS 1 ‘Presentation of Financial Statements’ as the basis – Apply definitions definitions, measurement and recognition criteria as contained in IAS 1 – Considers accepted industry practices and pronouncement of national ing standards setting organizations

•

IFRIC pronouncements are described as IFRIC 1, IFRIC 2.

•

14 IFRICs have been issued to 31 December 2007.

The Standard Setting Process •

The due process of standard setting –

1 Identification and review of issues and 1. considerations of the application 2. Study national ing requirements and practices and exchange of views 3. Consultation with SAC about adding the topic to the IASB agenda


The due process of standard setting –

4. Formation of an advisory group to advise the IASB on the topic 5. Publish a Discussion Document (DD) for public comment 6. Publish an exposure draft (ED) for public comment

The Standard Setting Process • The due process of standard setting –

7. Consideration of all comments within a reasonable period 8. Conducting public hearing and field tests 9. Approval by IASB with at least 9 votes New IFRS


Discussion Documents (for comments) – Sets out the problem, scope and issues – Discusses research findings g and literature – Presents alternative solutions

•

Exposure Draft – Developed and published following DD – Invites comment on proposed IFRS – Sets out proposed standards and transition

International Financial Reporting St d d Standards • Hierarchy (in descending order of authoritativeness) – – – –

IFRS (including any appendices part of Standard) Interpretations p Appendices to IFRS not part of the Standard Implementation guidance by IASB

Scope of IFRS application

• All IFRS shall apply – – To profit making commercial organizations, organizations as well as non – profit, and public sector entities – To all general purpose financial statements (aimed at satisfying common information needs) – From the date specified in the standard and not retrospectively unless indicated

Application of IAS and IFRS

• All International ing Standards (IASs) and Interpretations issued by the former IASC and SIC continue to be applicable unless and until they are amended or withdrawn. • IFRSs apply to the general purpose financial statements and other financial reporting by profit-oriented entities -those engaged in commercial, industrial, financial, and similar activities, activities regardless of their legal form. form • Entities other than profit-oriented business entities may also l find fi d IFRSs IFRS appropriate. i t

Framework for the preparation & presentation of financial statements

Purpose of the Framework • To assist the Board of IASC in: – Developing future/reviewing existing IASs – Promoting g harmonisation in p presentation of financial statements

• • • •

To assist national standard-setting bodies To assist preparers of financial statements To assist auditors To provide information on how IASs are formulated

Scope of the Framework To explain: p – Objectives of financial statements – Qualitative characteristics that determine usefulness of information – Definition, recognition and measurement of elements – Concepts of capital and capital maintenance

• The importance of financial reporting evolves around the basic questions as in – • • • •

What financial statements are What are they for Who are they for What are useful to the readers / s

Key issues in the financial reporting framework • Purpose and scope – Understand the s of financial reports – What financial statements should include

• Objective of financial statements – Financial Fi i l performance f – Financial condition – Changes Ch iin fifinancial i l condition diti

s and information needs • Providers of capital – decision making / analysis of risk and return of investment • Employees – stability of employers / remuneration • Lenders – financial health • Suppliers – viability of firm • Customers C t – continuance ti • Governments – regulatory, taxation, statistics • Public – contribution, trends, developments

Financial Statements • Included: – – – – –

Statement of financial position (balance sheet) Statement of comprehensive income Statement of changes in equity Statement of cash flows Notes to the financial statements

• Not included: –R Reports t by b di directors t – Statements by chairmen – Discussion and analysis by management /other narrative reporting

Objective of financial statements • Financial Position – – – –

Economic resources controlled Financial structure Liquidity / Solvency “STATEMENT OF FINANCIAL POSITION”

• Financial Performance – Profitability / Effectiveness – Capacity to generate cash flows – “STATEMENT OF COMPREHENSIVE INCOME”

• Changes in Financial Position – Assess investing, financing and operating activities – Ability y to generate g cash and need to utilise cash flow – “STATEMENT OF CASH FLOWS”

Underlying Assumptions • Accruals Basis – Recognition of events as they occur and not as cash received/paid received/paid. – Recorded in the periods in which they relate

• Going g Concern – Assumption that entity will continue in operation for foreseeable future future.

Qualitative Characteristics • Understandability • Comparability – Through time – Between B t differentt entities diff titi

• Relevance – By nature – Materiality

• Reliability – – – – –

“Substance over form” Neutrality Completeness Faithful representation Prudence

Key issues in the financial reporting framework • Elements & statements

content

of

the

financial

– Definition – Recognition – Measurement basis

• Capital concepts and capital maintenance – Financial capital maintenance – Physical Ph i l capital it l maintenance i t

Elements of financial Statements • Asset – Resource controlled by the entity – As a result of past events – From which future economic benefits are expected to flow

• Liability – Present obligation of the entity – Arising from past events – Result in outflow of resources embodying economic benefits

• Equity – Residual interest: assets less liabilities

Elements of financial Statements • Income – Increases in the economic benefits during ing period – Results in increase of equity – In the form of inflows of assets or decreases of liabilities

• Expenses – Decreases in economic benefits – In the form of outflows of assets or increase of liabilities – Others than those relating g to distribution to equity q y participants

Recognition of Elements • An item that meets the definition of an element should be recognised if: – It is probably probabl that any an future f t re economic benefit associated with the item will flow to or from the entity – The item has a cost or value that can be measured with reliability

Recap (MCQs) ( ) What is the authoritative status of the Framework? (a) It has the highest level of authority. In case of a conflict between the Framework and a Standard or Interpretation Interpretation, the Framework overrides the Standard or Interpretation. (b) If there is a Standard or Interpretation that specifically applies to a transaction it overrides the Framework transaction, Framework. In the absence of a Standard or an Interpretation that specifically applies, the Framework should be followed. (c) If there is a Standard or Interpretation that specifically applies to a transaction it overrides the Framework transaction, Framework. In the absence of a Standard or an Interpretation that specifically applies to a transaction, management should consider the applicability of the Framework in developing and applying an ing policy that results in information that is relevant and reliable (d) The Framework applies only when IASB develops new or revised Standards. An entity is never required to consider the Framework.

Recap (MCQs) ( ) What is the objective of financial statements according to the Framework? (a) To provide information about the financial position, performance, and changes in financial position of an entity that is useful to a wide range of s in making economic decisions decisions. (b) To prepare and present a balance sheet, an income statement, a cash flow statement, and a statement of changes in equity. ((c)) To prepare and present comparable, relevant, reliable, and understandable information to investors and creditors. (d) To prepare financial statements in accordance with all applicable Standards and d IInterpretations. t t ti

Recap (MCQs) ( ) Which of the following are underlying assumptions of financial statements? (a) Relevance and reliability. (b) Financial capital maintenance and physical capital maintenance. (c) Accrual basis and going concern. (d) Prudence and conservatism.

Recap (MCQs) ( ) What are qualitative characteristics of financial statements according to the Framework? (a) Qualitative characteristics are the attributes that make the information provided in financial statements useful to s. (b) Qualitative characteristics are broad classes of financial effects of transactions and other events. (c) Qualitative characteristics are non-quantitative aspects of an entity’s position and performance and changes in financial position. (d) Qualitative characteristics measure the extent to which an entity has complied with all relevant Standards and Interpretations.

Recap (MCQs) ( ) Which of the following is not a qualitative characteristic of financial statements according to the Framework? (a) Materiality. (b) Understandability Understandability. (c) Comparability. (d) Relevance.

Recap (MCQs) ( ) When should an item that meets the definition of an element be recognized, according to the Framework? (a) When it is probable that any future economic benefit associated with the item will flow to or from the entity. (b) When the element has a cost or value that can be measured with reliability. (c) When the entity obtains control of the rights or obligations associated with the item. (d) When it is probable that any future economic benefit associated with the item will flow to or from the entity and the item has a cost or value that can be measured with reliability.

IAS 1 Presentation of Financial Statements

IAS 1 – presentation of financial statements t t t • The objective of IAS 1 - prescribes – the basis for presentation of general purpose financial statements, to – ensure comparability p y both with the entity's y financial statements of previous periods and with the financial statements of other entities.

• IAS 1 sets out the – overall framework and responsibilities for the presentation of financial statements,, p – guidelines for their structure and – minimum requirements for the content of the financial statements.

Compliance with IFRS and fair presentation t ti • The financial statements must "present fairly" the financial position, iti fi financial i l performance f and d cash h flows fl off an entity. tit • Fair presentation requires the faithful representation of the effects of transactions, transactions other events, events and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the Framework. • IAS 1 requires that an entity whose financial statements comply with IFRSs make an explicit and unreserved statement t t t off such h compliance li i the in th notes. t • Inappropriate ing policies are not rectified either by disclosure of the ing policies used or by notes or explanatory material.

IAS 1 – presentation of financial statements t t t • Components p of general g purpose p p financial statements 1. Statement of financial position 2. Statement of comprehensive p income 3. Statement of changes in equity 4. Statement of cash flows 5. Significant ing policies (often in item no. 6) 6. Notes to the financial statements 7. Voluntary disclosures – • Financial review by management • Environmental report • Value added statement

IAS 1 – presentation of financial statements t t t • Key y features – – – – – – – –

Fair presentation and compliance with IFRS Going on concern Accrual basis Materiality Offsetting Frequency of reporting Comparabilit Comparability Consistency of presentation

• Structure and content – Clear identification of elements – Disclosure and reporting period

Revised version of IAS 1 • Revised version of IAS 1 took effect on or after 1 Jan 2009 • Main reasons for revisions: – Ensure clearer separation between changes in equity arising from transaction with entity’s entity s owners and changes in equity arising from other causes – Harmonise IASB approach to financial statements presentation with US FASB

Revised version of IAS 1 – main changes • Balance sheet is renamed “Statement Statement of financial position” • Cash flow statement is renamed “Statement Statement of Cash Flow” • New “statement of comprehensive income” – In a single statement – In I two t statements: t t t (i) income i statement t t t and d (ii) statement of comprehensive income which begins with the p profit or loss from income statement

IAS 1 – presentation of financial statements t t t • Statement of financial position – Current items vs. non current items: • • • •

the 12 month guideline g Current assets – liquidity / operating cycle approach Current liabilities – obligations falling due 12 months Capital disclosures

– IAS 1 specifies minimum line items to be presented in the statement of financial position, statement of comprehensive income and statement of changes in equity, and includes guidance for identifying additional line items. IAS 7 provides guidance on line items to be presented in the statement of cash flows flows.

IAS 1 – presentation of financial statements t t t • Capital disclosure required (either in notes or face) – numbers of shares authorised, issued and fully paid, and issued but not fully paid –p par value – reconciliation of shares outstanding at the beginning and the end of the period – description of rights, preferences, and restrictions – treasury shares, including shares held by subsidiaries and associates – shares reserved for issuance under options and contracts – a description of the nature and purpose of each reserve within owners' owners equity

IAS 1 – presentation of financial statements t t t • IAS 1 does not prescribe the format of the balance sheet. h – Assets can be p presented current then noncurrent,, or vice versa, and liabilities and equity can be presented current then noncurrent then equity, or vice versa. – A net asset presentation (assets minus liabilities) is g financing g approach used in allowed. The long-term UK and elsewhere – fixed assets + current assets short term payables = long-term debt plus equity – is also acceptable.

IAS 1 – presentation of financial statements t t t • Statement of comprehensive p income – Line items • revenue; • finance costs; • share of the profit or loss of associates and t ventures ed for using the equity method; • single amount comprising the total of – the post-tax profit or loss of discontinued operations and – the post-tax gain or loss recognised on the disposal of the assets or disposal group (s) constituting the discontinued operation; and;

• tax expense; and • profit or loss.

IAS 1 – presentation of financial statements t t t • The following g items must also be disclosed on the face of the income statement as allocations of profit or loss for the period: – profit or loss attributable to minority interest; – profit or loss attributable to equity holders of the parent.

• No items may be presented on the face of the income statement or in the notes as "extraordinary extraordinary items items"..

IAS 1 – presentation of financial statements t t t • Certain items must be disclosed either on the face of the income statement or in the notes, if material, including: 1. write-downs of inventories to net realisable value or of property, plant and equipment to recoverable amount & reversals of writedowns; 2 restructurings 2. t t i off the th activities ti iti off an entity tit and d reversals l off any provisions for the costs of restructuring; 3. disposals of items of property, plant and equipment; 4 disposals of investments; 4. 5. discontinuing operations; 6. litigation settlements; and 7 other reversals of provisions 7. provisions.

IAS 1 – presentation of financial statements t t t • Material items – Should be disclosed separately

• Analysis of expenses – either by – Function F ti – Nature

IAS 1 – presentation of financial statements t t t • Statement of changes g in equity q y – IAS 1 requires an entity to present a statement of changes in equity as a separate component of the financial statements and it must show: 1.profit or loss for the period; p for the p period 2.each item of income and expense 3.total income and expense for the period (calculated as the sum of (1) and (2)),

•

XYZ Ltd – Statement of changes in equity for the year to 31 December 2009

Balance at 31 December 2008

Share capital

Other reserves

Retained earnings

Total equity

US$ m

US$ m

US$ m

US$ m

xxx

xxx

xxx

xxx

xxx

xxx

Changes in ing policy Restated balance

xxx

Changes g in equity q y for the year y Total comprehensive income

xxx

Dividends

xxx

xxx

(xxx)

(xxx)

Issue of share capital

xxx

xxx

Total changes in equity

xxx

xxx

xxx

xxx

Balance at 31 December 2009

xxx

xxx

xxx

xxx

IAS 1 – presentation of financial statements t t t – The effects of changes g in ing gp policies and corrections of errors – The following amounts may also be presented (as notes or on the face of the statement) • capital transactions with owners; • accumulated profits at the beginning and at the end of the period, i d & movements t ffor th the period; i d • a reconciliation between the various amounts

IAS 1 – presentation of financial statements t t t • The notes to the financial statements must: – present information about the basis of p p preparation – disclose any information required by IFRSs –p provide additional information that is deemed relevant to an understanding of them. • Notes should be cross-referenced from the face of the financial statements to the relevant note.

IAS 1 – presentation of financial statements t t t • IAS 1 suggests gg that the notes should normally y be presented in the following order: – a statement of compliance with IFRSs; – a summary of significant ing policies applied, including: • the measurement basis (or bases) used in preparing the fi financial i l statements; t t t and d • the other ing policies used that are relevant to an understanding of the financial statements statements.

IAS 1 – presentation of financial statements t t t – ing pp g information for items p presented on the face of the financial statements and – other disclosures, including: • contingent liabilities (see IAS 37) and unrecognised contractual commitments; and • non-financial disclosures, such as the entity financial risk management objectives and policies (see IAS 32) 32). • domicile and legal status, description of operations and name of parent company

IAS 1 – presentation of financial statements t t t • Disclosure of ing policies – The measurement bases used – Specific p ing gp policy y used

• Estimation – Further disclosure about assumptions used, and other major sources of uncertainty that can have significant effects on the assets and liabilities in the next financial year. – Example – information on the nature and their carrying value

IAS 1 – presentation of financial statements t t t • Capital and other disclosures that –

– Concern qualitative and quantitative data of what is capital and description – Concern C th the entity tit and d operations ti – Concern dividends

IAS 2 Inventories

IAS 2 - inventories • Objective of IAS 2 – The objective of IAS 2 is to prescribe the ing treatment for inventories and provides guidance for determining the cost of inventories and any write-down write down to net realisable value.

• Fundamental F ndamental Principle of IAS 2 – Inventories are required to be stated at the lower of cost and net realisable value (NRV). (NRV)

IAS 2 - inventories • Scope p – Inventories include assets held for sale in, work in process and materials – IAS 2 excludes certain inventories • work in process arising under construction contracts • financial instruments • biological assets related to agricultural activity

IAS 2 - inventories • IAS 2 does not apply to the measurement of inventories when h – In accordance with established practices – At NRV, changes in that value are recognised in profit or loss in the period of the change. – Commodity brokers and dealers who measure their inventories at fair value less costs to sell. – When measured at fair value less costs to sell

IAS 2 - inventories • Measurement of Inventories – Cost should include all: • costs of purchase (including taxes, transport, and handling) net of trade discounts received • costs of conversion (including fixed and variable manufacturing overheads) and • other costs incurred in bringing the inventories to their present location and condition

IAS 2 - inventories • Measurement of Inventories – Inventory cost should not include: • • • • •

abnormal waste storage costs istrative overheads unrelated to production selling costs foreign exchange differences arising directly on the recent acquisition of inventories invoiced in a foreign currency • interest cost when inventories are p purchased with deferred settlement .

IAS 2 - inventories • Write-Down to Net Realisable Value – NRV is the estimated selling price in the ordinary course of p and the business, less the estimated cost of completion estimated costs necessary to make the sale. ESP – EC – EE = NRV – Any write-down to NRV should be recognised as an expense in the period in which the write-down occurs. – A Any reversall should h ld be b recognised i d in i the th income i statement t t t in i the period in which the reversal occurs.

IAS 2 - inventories • Expense p Recognition g – IAS 18, Revenue addresses revenue recognition for the sale of goods. – When inventories are sold and revenue is recognised, the carrying amount of those inventories is recognised as an expense (often ( ft called ll d cost-of-goods-sold). t f d ld) – Any write-down to NRV and any inventory losses are also recognised as an expense when they occur. occur

IAS 2 - inventories • Disclosure – Required disclosures: • ing policy for inventories. • carrying amount,. • carrying amount of any inventories carried at fair value less costs to sell. • amount of any write-down of inventories recognised as an expense p in the p period.

IAS 2 - inventories • Disclosure – amount of any reversal of a write-down to NRV and the circumstances. – carrying amount of inventories pledged as security for liabilities. – cost of inventories recognised as expense (cost of goods sold).

IAS 2 - inventories • Disclosure – IAS 2 also allows an enterprise to disclose operating costs recognised during the period by nature of the cost (raw materials t i l and d consumables, bl l b labour costs, t other th operating ti costs) and the amount of the net change in inventories for the period). – This is consistent with IAS 1 which allows presentation of expenses by function or nature.

Potential tricky spots! • How do you deal with the following: – Identifying all the cost elements – Identifying and measuring write down to NRV

Recap (MCQs) Inventory should be stated at (a) Lower of cost and fair value. (b) Lower of cost and net realizable value value. (c) Lower of cost and nominal value. (d) Lower of cost and net selling price. (e) Choices b and d. (f) Choices a and c. ( ) Choices (g) Ch i a, b b, and dd d.

Recap (MCQs) Which of the following costs of conversion cannot be included in cost of inventory? (a) Cost of direct labor. (b) Factory rent and utilities. (c) Salaries of sales staff (sales department shares the building with factory supervisor). (d) Factory F t overheads h d based b d on normall capacity. it

Recap (MCQs) Which of the following costs of conversion cannot be included in cost of inventory? (a) Cost of direct labor. (b) Factory rent and utilities. (c) Salaries of sales staff (sales department shares the building with factory supervisor). (d) Factory F t overheads h d based b d on normall capacity. it

Recap (MCQs) Inventories are assets (a) Used in the production or supply of goods and services for istrative purposes. (b) Held for sale in the ordinary course of business. (c) Held for long-term capital appreciation. (d) In the process of production for such sale. (e) In the form of materials or supplies to be consumed in the production process or the rendering of services. (f) Choices b and d. (g) Choices b, d, and e.

Recap (MCQs) The cost of inventory should not include (a) Purchase price. (b) Import duties and other taxes. taxes (c) Abnormal amounts of wasted materials. (d) istrative overhead. (e) Fixed and variable production overhead. (f) Selling costs. ( ) Choices (g) Ch i c, d d, and d ff.

Example ABC LLC manufactures and sells paper envelopes. The stock of envelopes was included in the closing inventory as of December 31, 2005, at a cost of $50 each per pack. During the final audit, the auditors noted that the subsequent sale price for the inventory at January 15, 2006, was $40 each per pack. Furthermore, inquiry reveals that during the physical stock take, a water leakage g has created damages g to the paper p p and the glue. g Accordingly, g y, in the following week, ABC LLC spent a total of $15 per pack for repairing and reapplying glue to the envelopes. What is the net realizable value and inventory write-down (loss) amount ?

IAS 8 ING POLICIES, CHANGES IN ING ESTIMATES & ERRORS

WHY THE STANDARD? • The standard sets out: – Criteria for selecting g and applying pp y g ing gp policies – Classification of material items – How to for: • Changes g in ing gp policies • Changes in ing estimates • Correction of errors

WHAT DOES THE STANDARD SET OUT TO DO? • Income statement – – – – – – –

Revenue Costs ---Gross profit E Expenses ---Profit before tax Tax ---Profit after tax ----

1. Choice of ing policies and changes 2. Changes in ing estimates 3. Errors 4. Disclosures

ING POLICIES • ing policies – specific principles principles, bases conventions, rules and practices adopted by an entity in preparing and presenting financial statements t t t • Management should consider: – IFRSs dealing with similar and related transactions – Definitions and recognition criteria and measurement concepts set out in the Framework – Recent pronouncements of other standard setters – Accepted industry practice

ING POLICIES • ing policies - specific ing principles and rules adopted by a company. All IFRS shall be applied unless the effect is immaterial. • If no applicable IFRS, then use judgment that reflects the IFRS framework such as relevance, reliable and prudent. • Consistency in ing policies – IFRS

ING POLICIES • Changes in ing policies – What constitute a change • A first time adoption of policy is not a change • Reclassification and change of presentation is a change • Use of a new basis of measurement is a change

– When – for the next reporting period – How – adoption of new IFRS provisions - early adoption of IFRS is not a change – Disclosure

ING POLICIES • Change in ing policies – How a change is effected – • Adoption p of IFRS – With transitional provisions – With no transitional provisions - retrospective

• Early adoption of IFRS is NOT voluntary change • Retrospective – means backward as early as possible, where practicable,

ING POLICIES • Disclosure required q – – Nature of change in policy – Each line item for prior and current period – Amount relating to each period – If retrospective re-statement is not possible – • Explanation of the condition • Describe how and when change g effected

WORKED EXAMPLE A company which prepares financial statements to 31 December each year is engaged in the construction of a power station for its own use. Construction work began in 2005 and is financed by a bank loan. Interest charges attributable to the power station project in 2006 (US$150,000) and 2006 (US$250,000) were capitalized as permitted by IAS 23 – Borrowing Costs. Therefore, the finance cost was capitalized as part of the power station cost rather than expensed. In 2007, the company decided to change its ing policy in relation to these interest charges and treat them as an expense rather than capitalize them. The management felt that this change in policy will result in more relevant financial information. Interest charges attributable to 2007 were US$300,000. The company’s draft income statement for the year to 31 December 2007 (before ing retrospectively f the for th change h in i ing ti policy) li ) shows h th the ffollowing: ll i

Profit before interest and tax I t Interest t charges h Profit before tax Taxation Profit before taxation

2007 US$’000 2,500 300 2,200 660 1,540

2006 US$’000 2,400 2,400 720 1,680

No depreciation has been charged in relation to the power station as it is not yet in use. The tax rate is 30% of profit before tax. Retained earnings were US$840,000 on 31 December 2005. No dividends were paid in 2006 and 2007. Requirements • Prepare an extract from the company company’s s income statement for the year to 31 December 2007 2007, showing restated comparative figures for 2006 • Calculate the company’s retained earnings at 31 December 2007 and the restated retained earnings at 31 December 2005 and 2006.

WORKED EXAMPLE - SOLUTION Income statement for the year to 31 December 2007: 2007 US$’000 Profit before interest and tax 2,500 Interest charges 300 Profit before tax 2,200 Taxation 660 Profit before taxation 1,540

2006 US$’000 2,400 2 0 250 2,150 645 1,505

Retained earnings: Balance at 31 December 2005, as previous reported Change in ing policy relating to borrowing costs Restated balance at 31 December 2005 Restated profit for the year to 31 December 2006 Restated balance at 31 December 2006 Profit for the year to 31 December 2007 Balance at 31 December 2007

US$’000 840 (105) 735 1,505 2,240 1,540 3,780

Note – Interest charges were US$150,000 for 31 December 2005. This reduces the pre-tax profit by US$150,000 but also reduces the tax liability by US$45,000 (30%), Therefore the reduction in after-tax after tax profit is US$105,000 above.

CHANGES IN ING ESTIMATES • Changes in ing estimates – adjustments to the carrying values of assets and liabilities. • A change in estimate is not a change in ing gp policy y or an error • A cchange a ge may ay be revised e sed because – – Circumstances on the choice of basis have changes – New information and experience is now available

CHANGES IN ING ESTIMATES • Treatment • A change to be effected by adjusting the carrying y g value of an asset or a liability y

• Disclosure • The nature and amount on the current period and future period • Where effect cannot be estimate, then the fact is to be disclosed

ERRORS • Errors include omissions, oversights g & misstatements that have effects. • Treatment – The current financial statements are presented as if errors have been corrected. – Prior year’s opening balances to be restated. • Disclosure – Nature of the error – Line by line effect

Recap (MCQs) XYZ Inc. changes its method of valuation of inventories from weighted-average method to first-in, first-out (FIFO) method. XYZ Inc. should for this change as (a) A change in estimate and for it prospectively. (b) A change in ing policy and for it prospectively. (c) A change in ing policy and for it retrospectively. (d) for it as a correction of an error and for it retrospectively retrospectively.

Recap (MCQs) Change in ing policy does not include (a) Change in useful life from 10 years to 7 years. (b) Change of method of valuation of inventory from FIFO to weighted-average. ((c)) Change g of method of valuation of inventory y from weighted-average g g to FIFO. (d) Change from the practice (convention) of paying as Christmas bonus one month’s salary to staff before the end of the year to the new practice of paying one-half month’s salary only only.

Recap (MCQs) When a public shareholding company changes an ing policy voluntarily, it has to (a) Inform shareholders prior to taking the decision decision. (b) for it retrospectively. (c) Treat the effect of the change as an extraordinary item. (d) Treat it prospectively and adjust the effect of the change in the current period and future periods periods.

Recap (MCQs) When it is difficult to distinguish between a change of estimate and a change in ing policy, then an entity should (a) Treat the entire change as a change in estimate with appropriate disclosure. disclosure (b) Apportion, on a reasonable basis, the relative amounts of change in estimate and the change in ing policy and treat each one accordingly. (c) Treat the entire change as a change in ing policy. (d) Since this change is a mixture of two types of changes changes, it is best if it is ignored in the year of the change; the entity should then wait for the following year to see how the change develops and then treat it accordingly.

Recap (MCQs) When an independent valuation expert advises an entity that the salvage value of its plant and machinery had drastically changed and thus the change is material, the entity should (a) Retrospectively change the depreciation charge based on the revised salvage value. (b) Change the depreciation charge and treat it as a correction of an error. (c) Change the annual depreciation for the current year and future years. (d) Ignore the effect of the change on annual depreciation, depreciation because changes in salvage values would normally affect the future only since these are expected to be recovered in future.

IAS 10 EVENTS AFTER REPORTING PERIOD

WHY THE STANDARD? – To T describe d ib when h an entity tit should h ld adjust dj t its it financial statements for events after the reporting p gp period – The disclosures an entityy should g give about the date when the financial statements were authorised for issue and about events after the reporting period. period

WHAT DOES THE STANDARD SET OUT TO DO? – Provides P id guidance id on ing ti and d disclosure of events after the reporting period. – IAS 10 distinguishes between events that provide information about the state of an p entity at the reporting date and those that concern the next financial period.

WHAT ARE THE KEY DEFINITIONS?

Event after the reporting period - An event, which could be favourable or unfavourable, that occurs between the end of the reporting period and the date that the financial statements are authorised for issue.


Adjusting event: An event after the reporting period that provides further evidence of conditions that existed i t d att the th end d off the th reporting ti period, i d including i l di an event that indicates that the going concern assumption in relation to the whole or part of the enterprise is not appropriate. Non-adjusting event: An event after the reporting period that is indicative of a condition that arose after the end of the reporting period.


Authorisation date - The date when the financial statements can be considered legally authorised for issuance. General principles that need to be considered when determining the authorisation date are: • When an entity submits its financial statements to its shareholders • When management authorises the submission of p y board financial statements to a supervisory

TYPES OF EVENTS?

Nonadjusting j g

Adjusting Condition existed before financial year end and subsequent event confirms it Examples: • Bankruptcy of a customer after the balance sheet date • Sale of inventory at a price substantially lower than cost 102

Further evidence of conditions that existed i t d att the th end d of the reporting period

E.g. Fire occurred after reporting period. Losses is significant.

I A S 3 7

ACCA - IFRS 2009

Indicative of conditions that arose after ft the th end d of the reporting period

E.g. Announcement of a business acquisitions

Non-disclosure of this fact would affect the ability of making proper evaluations & decisions Examples: • Declaration of dividends • Commencing a lawsuit

HOW IS IT MEASURED? • Adjusting j g Events – Adjust financial statements for adjusting events – events after the balance sheet date that provide further evidence of conditions that existed at the end of the reporting period, including events that indicate that the going concern assumption in relation to the whole or part of the enterprise is not appropriate.

HOW IS IT MEASURED? • Non-adjusting j g events – Do not adjust for non-adjusting events – events or conditions diti th t arose after that ft the th end d off the th reporting ti period. i d – If an entity declares dividends after the reporting period, the entity shall not recognise those dividends as a liability at the end of the reporting period. That is a non-adjusting event. event

HOW IS IT ED FOR? • Going g Concern Issues Arising g After End of the Reporting Period – An entity shall not prepare its financial statements on a going concern basis if management determines after the end of the reporting period either that: • it intends to liquidate liq idate the entity entit or to cease trading; trading or, or • that it has no realistic alternative but to do so.

– Th The following f ll i di l disclosures required i d by b IAS 1, 1 if s t not prepared on going concern basis: • A note saying that the financial statements are not prepared on a going concern basis • Management is aware of material uncertainties

WHAT SHOULD BE DISCLOSED?

– Authorisation: An entity should disclose the date when the financial statements were authorised for issue and who gave the authorisation. – Non-adjusting events should be disclosed if they are of such h importance i t th t non-disclosure that di l would ld affect ff t the th ability of s to make proper evaluations and decisions. – The required disclosure is (a) the nature of the event and

(b) an estimate of its financial effect or a statement that a easo ab e est estimate ate o of tthe ee effect ect ca cannot ot be made ade. reasonable

WHAT SHOULD BE DISCLOSED? – A company should update disclosures that relate to conditions that existed at the end of the reporting period to reflect anyy new information that it receives after the reporting period about those conditions.

WHAT SHOULD BE DISCLOSED?

Adjusting

108

NonNon adjusting

Provision

Disclosure of the event

Impact to income statement & Liability

1.Nature 1 Nature of the event 2. Estimate of the financial impact

ACCA - IFRS 2009

IAS 10 – Decision Tree Has the condition existed i t d before b f financial fi i l year end?

NO

Yes Do you have more evidence or information confirming its probable settlement?

NO

Yes Adjusting Event

109

ACCA - IFRS 2009

Non-Adjusting event

WORKED EXAMPLE a)) Discovery y of fraud b) Sale of inventory at less than cost c) Exchange rate fluctuations d) Nationalisation or privatisation by government e) Earthquake f)

Announcing A i a plan l to t discontinue di ti operation ti off one of fifteen factories

WORKED EXAMPLE The statutory audit of PT McCAIN for the year ended 31 December 2008 was completed. The following events then occurred: 1)On January 15 2009, a customer who owed $180,000 to PT McCAIN filed for bankruptcy. bankruptcy The financial statements included an allowance of $40,000 for doubtful debts pertaining to this customer. 2) PT McCAIN announced a bonus issue of 25,000 shares on February 1, 2009 3) Specialised equipment costing $345,000 was destroyed by fire on 10 December 2008. 2008 On 31 December, December PT McCAIN had booked a receivable of $300,000 from the insurance company for this claim. After the insurance company completed its investigation, they place due to an unhappy ppy employee p y and realised the fire took p therefore the insurer’s liability was zero on the claim.

Recap (MCQs) ABC Ltd. decided to operate a new amusement park that will cost $1 million to build in th year 2005 the 2005. Its It financial fi i l year-end d iis D December b 31 31, 2005 2005. ABC Ltd. has applied for a letter of guarantee for $700,000. The letter of guarantee was issued on March 31,, 2006. The audited financial statements have been authorized to be issued on April 18, 2006. The adjustment required to be made to the financial statement for the year ended December 31, 2005, should be (a) Booking a $700 $700,000 000 long long-term term payable payable. (b) Disclosing $700,000 as a contingent liability in 2005 financial statement. (c) Increasing the contingency reserve by $700,000. (d) Do nothing.

Recap (MCQs) A new drug named “EEE” was introduced by Genius Inc. in the market on December 1, 2005. Genius Inc ’ss financial year ends on December 31 Inc. 31, 2005 2005. It was the only company that was permitted to manufacture this patented drug. The drug is used by patients suffering from an irregular heartbeat. On March 31, 2006, after the drug was introduced, more than 1,000 patients died. After a series of investigations, authorities discovered that when this drug was simultaneously used with “BBB,” a drug used to regulate hypertension, the patient’s blood would clot and the patient suffered a stroke. A lawsuit for $100,000,000 has been filed against Genius Inc. The financial statements were authorized for issuance on April 30, 2006. Which of the following options is the appropriate ing treatment for this post–balance sheet event under IAS 10? ((a)) The Th entity tit should h ld provide id $100 $100,000,000 000 000 because b this thi is i an “adjusting “ dj ti event” t” and d th the fifinancial i l statements were authorized to be issued after the accident. (b) The entity should disclose $100,000,000 as a contingent liability because it is an “adjusting event.” (c) The entity should disclose $100,000,000 as a “contingent liability” because it is a present obligation with an improbable outflow. (d) A Assuming i the h probability b bili off the h llawsuit i b being i d decided id d against i G Genius i IInc. iis remote, the h entity i should disclose it in the footnotes, because it is a nonadjusting material event.

Recap (MCQs) At the balance sheet date, December 31, 2005, ABC Inc. carried a receivable from XYZ, a major j customer, t att $10 million. illi The Th “authorization “ th i ti d date” t ” off the th fifinancial i l statements t t t iis on February 16, 2006. XYZ declared bankruptcy on Valentine’s Day (February14, 2006). ABC Inc. will (a) Disclose the fact that XYZ has declared bankruptcy in the footnotes. (b) Make a provision for this post–balance sheet event in its financial statements (as opposed to disclosure in footnotes) footnotes). (c) Ignore the event and wait for the outcome of the bankruptcy because the event took place after the year-end. (d) Reverse the sale pertaining to this receivable in the comparatives for the prior period and treat this as an “error” under IAS 8.

Recap (MCQs) Excellent Inc. built a new factory building during 2005 at a cost of $20 million. At December 31, 2005 the 2005, th nett book b k value l off the th building b ildi was $19 million. illi Subsequent to year-end, on March 15, 2006, the building was destroyed by fire and the claim against the insurance company proved futile because the cause of the fire was negligence on th partt off the the th caretaker t k off the th building. b ildi If th the d date t off authorization th i ti off th the fifinancial i l statements t t t for the year ended December 31, 2005, was March 31, 2006, Excellent Inc. should (a) Write off the net book value to its scrap value because the insurance claim would not fetch any compensation. (b) Make a provision for one-half of the net book value of the building. (c) Make a provision for three-fourths of the net book value of the building based on prudence. (d) Disclose this nonadjusting event in the footnotes.

Recap (MCQs) International Inc. deals extensively with foreign entities, and its financial statements reflect fl t these th foreign f i currency transactions. t ti Subsequent S b t to t the th balance b l sheet h t date, d t and d before the “date of authorization” of the issuance of the financial statements, there were abnormal fluctuations in foreign currency rates. International Inc. should (a) Adjust the foreign exchange year-end balances to reflect the abnormal adverse fluctuations in foreign exchange rates rates. (b) Adjust the foreign exchange year-end balances to reflect all the abnormal fluctuations in foreign exchange rates (and not just adverse movements). (c) Disclose the post–balance sheet event in footnotes as a nonadjusting event. (d) IIgnore the th post–balance t b l sheet h t event. t

IAS S 16 PROPERTY, PLANT & EQUIPMENT

Why the standard? •

IAS 16 prescribes the ing treatments for property, plant and equipment where the principal issues are the recognition of assets, the determination of their carrying value and the depreciation and impairment charges recognised in relation to them.

What does the standard set out to d ? do? • The p principal p issues are the timing g of recognition g of assets, the determination of their carrying amounts, and the depreciation charges to be recognised in relation to them. them • IAS 16 does not apply to biological assets related to agricultural activity (see IAS 41) or mineral rights and mineral reserves such as oil, natural gas and similar non regenerative resources non-regenerative resources, but it does apply to property, plant, and equipment used to develop or maintain such assets.

What are the key definitions? • Property, p y, plant p and equipment q p – Tangible g assets that are held for use in production or supply of goods and services, for rental to others, or for other istrative purposes and are expected to be used during more than one period. • Cost – The amount paid or fair value of other consideration given to acquire or construct an asset. • Useful life – The period over which an asset is expected to be utilised or the number of production units expected to be obtained from the asset.

What are the key definitions? • Residual value ((of an asset)) – The estimated amount,, less estimated disposals, that could be currently realised from the asset’s disposal if the asset were already of an age and condition expected at the end of its useful life life. • Depreciable amount – The cost of an asset less its residual value. • Useful life – The systematic allocation of the depreciable amount of an asset over its expected useful life. life • Fair value – The amount for which an asset could be exchanged g between knowledgeable g willing gp parties in an arm’s length transaction.

How is it measured? • Items of property property, plant plant, and equipment should be recognised as assets when it is probable that: p – the future economic benefits associated with the asset will flow to the enterprise; and – the cost of the asset can be measured reliably.

How is it measured? • This recognition principle is applied to all property, plant, and equipment costs at the time theyy are incurred. • These costs include costs incurred initially to acquire or construct an item of property, plant and equipment and costs incurred subsequently to add to, replace part of, or service it.

How is it measured? • If the cost model is used each part of an item of property, plant, and equipment with a cost that is significant in relation to the total cost of the item must be depreciated separately. • The carrying amount of an item of property, plant, and equipment replaced will include the cost off replacing l i the h part off such h an iitem when h that cost is incurred if the recognition criteria (future benefits and measurement reliability) are met.

How is it measured? • The carrying amount of those parts that are replaced is de - recognised in accordance with the de -recognition provisions of IAS 16. • The cost is recognised g in the carrying y g amount of the item of property, plant, and equipment (e.g. aircraft parts) as a replacement if the recognition criteria i i are satisfied. i fi d

What and how is it recognised? •

Initial recognition –

All PPE to be initially recorded at cost. Cost includes all costs necessary to bring the asset to working condition for its intended use.

–

Original O i i l purchase h price i plus l costs t off site it preparation, delivery, installation, related professional fees for architects and engineers, and the estimated cost of dismantling and removing the asset and restoring the site


Initial recognition –

Interest at a market rate must be recognised or imputed if PPE is acquired on deferred payment

–

If an asset is acquired in exchange, the cost will be measured d att th the ffair i value l unless l – –

(a) there is NO commercial substance or (b) the fair value of neither the asset cannot be reliably measurable. (cost of giving up)

What and how is it recognised? • Measurement after initial recognition – IAS 16 permits two ing models: • Cost Model. The asset is carried at cost less accumulated depreciation and impairment. • Revaluation Model. The asset is carried at a revalued amount, being its fair value at the date of revaluation less subsequent depreciation depreciation, provided that fair value can be measured reliably.

What and how is it recognised? • Revaluation – Revaluations should be carried out regularly, so that the carrying amount is close to its fair value. – If an item is revalued, the entire class of assets to which hi h that th t assett belongs b l should h ld b be revalued. l d – Revalued assets are depreciated in the same way as under the cost model.

What and how is it recognised? • Revaluation – Any increase in value to be credited to equity under the heading "revaluation surplus" • unless it represents the reversal of a revaluation decrease of the same asset previously recognised as an expense expense, in which case it should be recognised as income.

– A decrease arising as a result of a revaluation should be recognised as an expense.

What and how is it recognised? • Revaluation – When a revalued asset is disposed of, any revaluation surplus may be transferred directly to retained earnings, or it may be left in equity under the heading revaluation surplus. – The transfer to retained earnings should not be made through the income statement (that is, no "recycling" through profit or loss).

What and how is it recognised? • Depreciation –

The depreciable amount (cost less prior depreciation) over the asset's useful life.

–

Residual value and useful life of an asset should be reviewed i d att lleastt att each h fifinancial i l year-end. d If expectations differ from previous estimates, any change is ed for prospectively as a change in estimate under IAS 8. The depreciation method used should reflect the pattern in which the asset's asset s economic benefits are consumed by the enterprise.

–

What and how is it recognised? • Depreciation –

The depreciation method should be reviewed at least annually and,

–

If the pattern of consumption of benefits has changed, the depreciation method should be changed prospectively as a change in estimate under IAS 8. Depreciation should be charged to the income statement, statement

–

–

Depreciation begins when the asset is available for use and continues until the asset is derecognised, even if it is idle.

What and how is it recognised? • Recoverability of the carrying amount – IAS 36 requires impairment testing and, if necessary, recognition for property, plant, and equipment. – An item of property, plant, or equipment shall not be carried at more than recoverable amount. Recoverable amount is the higher of an asset's fair value less costs to sell and its value l iin use.

What and how is it recognised? • Derecognition – An asset should be removed when disposed or if future economic benefits are no longer expected. – The gain or loss on disposal is the difference between the p proceeds and the carrying y g amount and should be recognised in the income statement.

What should be disclosed? •

Disclose for each class of property, plant, and equipment – – – – – – – –

basis for measuring carrying amount; depreciation method (s) used; useful lives or depreciation rates; gross carrying amount and accumulated depreciation and impairment losses. losses restrictions on title; expenditures to construct property, plant, and equipment during the period; commitments to acquire property, plant, and equipment. compensation from third parties for items of property, plant, and equipment that were impaired impaired, lost or given up that is included in profit or loss.


Disclosure of carrying amount - reconciliation at the beginning and the end of the period, showing: – – – – – – – – –

additions;; disposals; acquisitions through business combinations; revaluation increases; impairment losses; reversals of impairment losses; depreciation; net foreign exchange differences on translation; other movements.


If property, plant, and equipment is stated at revalued amounts, certain additional disclosures are required: – the effective date of the revaluation;; – whether an independent valuer was involved; – the methods and significant assumptions used in estimating fair values;; – the carrying amount that under the cost model; – the revaluation surplus, including changes during the period and distribution restrictions.

Potential tricky spots! • Common error made by students is to muddle the accumulated depreciation amount with current year depreciation expense. • Another common pitfall is to forget that the revaluation reserve doesn’t sit on the balance sheet in perpetuity; it gets written out of the useful economic life by transfer to retained earnings This way earnings. way, when the asset is fully depreciated, the revaluation reserve should be zero too

Recap (MCQs) Healthy Inc. bought a private jet for the use of its top-ranking officials. The cost of the private i t jet j t is i $15 million illi and d can b be d depreciated i t d either ith using i a composite it useful f l lif life or useful lives of its major components. It is expected to be used over a period of 7 years. The engine g of the jjet has a useful life of 5 yyears. The p private jjet’s tires are replaced p every y 2 years. The private jet will be depreciated using the straight-line method over (a) 7 years composite useful life. (b) 5 years useful life of the engine, 2 years useful life of the tires, and 7 years useful life applied to the balance cost of the jet. (c) 2 years useful life based on conservatism (the lowest useful life of all the parts of the jet). (d) 5 years useful f l lif life b based d on a simple i l average off th the useful f l lilives off allll major j components of the jet.

Recap (MCQs) An entity imported machinery to install in its new factory premises before year-end. However, due to circumstances beyond its control, the machinery was delayed by a few months but reached the factory premises before year-end. While this was happening, the entity learned from the bank that it was being charged interest on the loan it had taken to fund the cost of the plant. What is the proper treatment of freight and interest expense under IAS 16? (a) Both expenses should be capitalized. (b) Interest may be capitalized but freight should be expensed. (c) Freight charges should be capitalized but interest cannot be capitalized under these circumstances. (d) Both expenses should be expensed.

Recap (MCQs) XYZ Inc. owns a fleet of over 100 cars and 20 ships. It operates in a capitali t intensive i industry i d t and d thus th has h significant i ifi t other th property, t plant, l t and d equipment i t that it carries in its books. It decided to revalue its property, plant, and equipment. The company’s ant has suggested the alternatives that follow. Which one of the options should XYZ Inc. select in order to be in line with the provisions of IAS 16? (a) Revalue only one-half one half of each class of property, property plant plant, and equipment, equipment as that method is less cumbersome and easy compared to revaluing all assets together. (b) Revalue an entire class of property, plant, and equipment. (c) Revalue one ship at a time, as it is easier than revaluing all ships together. (d) Since Si assets t are being b i revalued l d regularly, l l there th is i no need d to t depreciate. d i t

Recap (MCQs) An entity installed a new production facility and incurred a number of expenses at th point the i t off installation. i t ll ti The entity’s ant is arguing that most expenses do not qualify for capitalization. p Included in those expenses p are initial operating p g losses. These should be (a) Deferred and amortized over a reasonable period of time. (b) Expensed and charged to the income statement. (c) Capitalized as part of the cost of the plant as a directly attributable cost. (d) Taken to retained earnings since it is unreasonable to present it as part of the current year’s income statement.

Recap (MCQs) PT Merpati, a new company manufacturing and selling consumable products, has come out with an offer to refund the cost of purchase within one month of sale if the customer is not satisfied with the product. Wh should When h ld PT Merpati M ti recognize i the th revenue? ? (a) When goods are sold to the customers. (b) After one month of sale. ((c)) Only O l if goods d are nott returned t d by b the th customers t after ft the th period i d off one month. (d) At the time of sale along with an offset to revenue of the liability of the same amount for the possibility of the return.

Recap (MCQs) PT Chipp, a computer chip manufacturing company, sells its products to its distributors for onward sales to the ultimate customers customers. Due to frequent fluctuations in the market prices for these goods, PT Chipp has a “price protection” clause in the distributor agreement that entitles it to raise additional billings in case of upward price movement. Another clause in the distributor’s agreement is that PT Chipp can at any time reduce its inventory by buying back goods at the cost at which it sold the goods to the distributor. Distributors pay for the goods within 60 days from the sale of goods to them. When should PT Chipp recognize revenue on sale of goods to the distributors? (a) When the goods are sold to the distributors. (b) When the distributors pay to PT Chipp the cost of the goods (i.e., after 60 days of the sale of goods to the distributors). (c) When goods are sold to the distributor provided estimated additional revenue is also booked under the “protection clause” based on past experience. (d) When the distributor sells goods to the ultimate customers and there is no uncertainty with respect to the h ““price i protection” i ” clause l or the h buyback b b k off goods. d

Recap (MCQs) IAS 16 requires that revaluation surplus resulting from initial revaluation of property, plant, and equipment should be treated in one of the following ways. ways Which of the four options mirrors the requirements of IAS 16? ( ) Credited (a) C dit d to t retained t i d earnings i as this thi is i an unrealized li d gain. i (b) Released to the income statement an amount equal to the difference between the depreciation calculated on historical cost vis-à-vis revalued amount. (c) Deducted from current assets and added to the property, plant, and equipment. (d) Debited to the class of property, plant, and equipment that is being revalued and credited to a reserve captioned ti d “revaluation “ l ti surplus,” l ” which hi h is i presented t d under d “equity.” “ it ”

Example PT Roadster acquired a heavy road transporter at a cost of $100,000 (with no breakdown of component parts). The estimated useful life is 10 years. At the end of the 6th year, the engine requires replacement, as further maintenance is uneconomical due to the off-road time required. Th remainder The i d off the th vehicle hi l is i perfectly f tl roadworthy d th and d iis expected t d tto last for the next four years. The cost of the new engine is $45,000. Can the cost of the new engine be recognised as an asset, and if so, what is the ing treatment. (Assume discount rate of 5%)

Example A new plant is being installed with the following costs: – Cost of the plant – Initial delivery and handling costs – Cost of site preparation – Consultancy fees for acquisition of plant – Operating losses before commercial production

$2,500,000 $200,000 $600,000 $700,000 $500,000

Which of the costs can be capitalised in accordance with IAS 16?

IAS 17 LEASES


IAS 17 gives guidance on the ing treatments for operating and finance leases for both lessors and lessees.

•

prescribes the ing g treatment and disclosures required q for It p both finance and operating leases.

What does the standard set out to d ? do? •

IAS 17 applies to all leases other than lease agreements for minerals, oil, natural gas, and similar regenerative resources and licensing agreements for films, videos, plays, manuscripts, patents, copyrights, and similar items.

•

However, IAS 17 does not apply as the basis of measurement for the following leased assets: – Property held by lessees that is ed for as investment property for which the lessee uses the fair value model set out in IAS 40. – Investment property provided by lessors under operating leases – Biological assets held by lessees under finance leases – Biological assets provided by lessors under operating leases

What are the key definitions? • Lease – An agreement g which conveys y the lessess the right to use an asset, for a specified period of time, in return for payments to the lessor. • Finance Fi lease l – A lease l which hi h ttransfers f substantially b t ti ll allll risks and rewards incident to ownership or an asset. Title may or may not be eventually be transferred. • Operating lease – Any lease other than a finance lease. • Lease term – A non-cancellable period for which lessee h contracted has t t d to t lease l asset, t together t th with ith any further f th for which the lessess has the option to lease the asset, with or without, payment. p y

What are the key definitions? • Minimum lease p payments y – The p payments y over the lease term that are required to be made. For a lessee, this includes any amounts guaranteed to be paid; for a lessor this includes any residual value guaranteed to the lessor, lessor. • Interest rate implicit in the lease. – Discount rate that, at the inception of the lease, causes the aggregate present value of the minimum lease payments (from the view of the lessor) PLUS the unguaranteed residual value (eg scrap proceeds) to be equal to the fair value of the leased asset plus any initial direct costs (of the l lessor). )

How is it measured? • A lease is classified as a finance lease if it transfers substantially all the risks and rewards incident to ownership. p All other leases are classified as operating leases. Classification is made at the inception p of the lease. • Whether a lease is a finance lease or an p g lease depends p on the substance of operating the transaction rather than the form.

How is it measured? • Conditions of a finance lease – the lease transfers ownership of the asset to the lessee by the end of the lease term; – the lessee has the option to purchase the asset at a price i which hi h iis expected t d tto b be sufficiently ffi i tl llower th than fair value at the date the option becomes exercisable that, at the inception of the lease, it is reasonably certain that the option will be exercised;

How is it measured? • Conditions of a finance lease – the lease term is for the major part of the economic life of the asset, even if title is not transferred; – at the inception of the lease, the present value of the minimum i i llease payments t amounts t tto att least l t substantially all of the fair value of the leased asset; and – the lease assets are of a specialised nature such that only l th the llessee can use th them without ith t major j modifications being made.

How is it measured? • Other situations leading to a finance lease – If the lessee is entitled to cancel the lease, the lessor's losses associated with the cancellation are borne by the lessee; – gains i or llosses ffrom flfluctuations t ti in i th the ffair i value l off the residual fall to the lessee (for example, by means of a rebate of lease payments); and – the lessee has the ability to continue to lease for a secondary d period i d att a rentt th thatt is i substantially b t ti ll llower than market rent.

How is it measured? • Land & Buildings – For property leases, land and buildings elements would normally be separately. • The minimum lease payments are allocated between the elements in proportion to their relative fair values. • The land element is normally classified as an operating lease unless title es to the lessee at the end of the lease term. • The buildings element is classified as an operating or finance lease by applying the classification criteria in IAS 17.

– Separate measurement of the land and buildings elements is not required if it is an investment property in accordance with IAS 40 and the fair value model is adopted.


ing by lessees - Principles –

at commencement of the lease term, finance leases should be recorded as an asset and a liability at the lower of the fair value of the asset and the present value of the minimum lease payments (discounted if practical)

–

finance lease fi l payments t should h ld b be apportioned ti db between t th the finance charge and the reduction of the outstanding liability (the finance charge to be allocated so as to produce a constant periodic rate of interest on the remaining balance of the liability)


ing by lessees - Principles –

the depreciation policy for assets held under finance leases should be consistent with that for owned assets.

–

for operating leases, the lease payments should be recognised as an expense in the income statement over the lease term on a straight-line t i ht li b basis, i

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incentives for the agreement of a new or renewed operating lease to be recognised by the lessee as a reduction of the rental expense over the lease term,


ing by lessors - Principles –

at the start of the lease term, the lessor to record a finance lease in the balance sheet as a receivable, at an amount equal to the net investment in the lease

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the lessor should recognise finance income based on a pattern reflecting fl ti a constant t t rate t off return t

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assets held for operating leases to be presented in the balance sheet of the lessor according to the nature of the asset.

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Lease income should be recognised over the lease term on a straight-line basis,



Incentives for the agreement of a new or renewed operating lease to be applied by the lessor as a reduction of the rental income over the lease term

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Manufacturers or dealer lessors should include selling profit or l loss iin th the same period i d as th they would ld ffor an outright t i ht sale. l If artificially low rates of interest are charged, selling profit should be restricted to that which would apply if a commercial rate of interest were charged charged.

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Under the 2003 revisions to IAS 17, initial direct and incremental costs inc incurred rred b by lessors in negotiating leases must be recognised over the lease term.



They may no longer be charged to expense when incurred. This treatment does not apply to manufacturer or dealer lessors where such cost recognition is as an expense when the selling profit is recognised.


Sale and leaseback – Finance Lease –

For a sale and leaseback transaction that results in a finance lease, any excess of proceeds over the carrying amount is deferred and amortised over the lease term.


Sale and leaseback – Operating Lease – –

– –

if the transaction is clearly carried out at fair value - the profit or loss should be recognised immediately if the th sale l price i iis b below l ffair i value l - profit fit or loss l should h ld b be recognised immediately, except if a loss is compensated for by future rentals at below market price, the loss it should be amortised over the period of use; if the sale price is above fair value - the excess over fair value should be deferred and amortised over the period of use; and if the th fair f i value l att the th time ti off the th transaction t ti is i less l than th th the carrying amount - a loss equal to the difference should be recognised immediately.


Disclosure for lessees – Finance leases – carrying amount of asset – reconciliation between total minimum lease payments and their present value – amounts of minimum lease payments at balance sheet date and the present value thereof, for: • the next year • years 2 through 5 combined • beyond five years

– contingent rent recognised as an expense; – total future minimum sublease income under noncancellable subleases; and – general description of significant leasing arrangements, including contingent rent provisions, renewal or purchase options, and restrictions imposed on dividends, borrowings, or further leasing.


Disclosure for lessees – Operating leases – amounts of minimum lease payments at balance sheet date under noncancellable operating leases for: • the next year • years 2 through 5 combined • beyond five years

– total future minimum sublease income under noncancellable subleases; – lease and sublease payments recognised in income for the period – contingent rent recognised as an expense and – general description of significant leasing arrangements, including contingent rent provisions, renewal or purchase options, and restrictions imposed on dividends, borrowings, or further leasing


Disclosure for lessors – Finance leases – reconciliation between gross investment in the lease and the present value of minimum lease payments – gross investment and present value of minimum lease payments receivable for: • the next year; • years 2 through 5 combined; • beyond five years.

– – – – –

unearned finance income unguaranteed residual values; accumulated allowance for uncollectible lease payments receivable; contingent rent recognised in income; and general description g p of significant g leasing g arrangements. g


Disclosure for lessors – Operating leases – amounts of minimum lease payments at balance sheet date under noncancellable operating leases in the aggregate and for: • the next year • years 2 through 5 combined • beyond five years

– contingent rent recognised as in income; and – g general description p of significant g leasing g arrangements. g

Potential tricky spots! • It is common for students not to notice an inin advance payment and to treat it as a a payment in arrears

Recap (MCQs) The classification of a lease as either an operating or finance lease is based on (a) The length of the lease. (b) The transfer of the risks and rewards of ownership ownership. (c) The minimum lease payments being at least 50% of the fair value. (d) The economic life of the asset.

Recap (MCQs) The ing concept that is principally used to classify leases into operating and d finance fi is i (a) Substance over form. (b) Prudence. (c) Neutrality. (d) Completeness.

Recap (MCQs) Which of the following situations would prima facie lead to a lease being classified as an operating ti lease? l ? (a) Transfer of ownership to the lessee at the end of the lease term. (b) Option to purchase at a value below the fair value of the asset. (c) The lease term is for a major part of the asset’s life. (d) The present value of the minimum lease payments is 50% of the fair value of the asset.

Recap (MCQs) The classification of a lease is normally carried out (a) At the end of the lease term. (b) After a “cooling cooling off” off period of one year year. (c) At the inception of the lease. (d) When the entity deems it to be necessary.

Recap (MCQs) Where there is a lease of land and buildings and the title to the land is not t transferred, f d generally ll th the lease l is i treated t t d as if (a) The land is a finance lease, the building is a finance lease. (b) The land is a finance lease, the building is an operating lease. (c) The land is an operating lease, the building is a finance lease. (d) The land is an operating lease, the building is an operating lease.

Recap (MCQs) The lease of land and buildings when split causes difficulty in the allocation of the minimum i i lease l payments. t In I this thi case the th minimum i i lease l payments t should h ld be b split ((a)) According g to the relative fair value of two elements. (b) By the entity based on the useful life of the two elements. (c) Using the sum of the digits method. (d) According to any fair method devised by the entity.

Recap (MCQs) Which is the correct ing for a finance lease in the s of the lessee ( (assuming i fair f i value l is i used)? d)? (a) Dr Asset Cr Liability

} } with fair value

Dr Income statement Cr Asset

} } with depreciation of asset

Dr Income statement C Li Cr Liability bilit t

} } fifinance charge h ffor period i d

Dr Liability Cr Cash

} } cash paid in period

Recap (MCQs) Which is the correct ing for a finance lease in the s of the lessee ( (assuming i fair f i value l is i used)? d)? (b) Dr Liability Cr Asset

} } with fair value



Dr Liability C IIncome statement Cr t t t




Recap (MCQs) Which is the correct ing for a finance lease in the s of the lessee ( (assuming i fair f i value l is i used)? d)? (c) Dr Asset Cr Liability

} } with fair value

Dr Asset Cr Income statement






Recap (MCQs) Which is the correct ing for a finance lease in the s of the lessee ( (assuming i fair f i value l is i used)? d)? (d) Dr Asset Cr Liability

} } with fair value







Recap (MCQs) Which is the correct ing treatment for a finance lease in the s of a l lessor? ? (a) Treat as a noncurrent asset equal to net investment in lease. Recognize all finance payments p y in income statements. (b) Treat as a receivable equal to gross amount receivable on lease. Recognize finance paymentsin cash and by reducing debtor. (c) Treat as a receivable equal to net investment in the lease. Recognize finance payment by reducing debtor and taking interest to income statement. (d) Treat as a receivable equal to net investment in the lease. Recognize finance payments in cash and by reduction of debtor.

Recap (MCQs) The profit on a finance lease transaction for lessors who are manufacturers or d l dealers should h ld (a) Not be recognized separately from finance income. (b) Be recognized in the normal way on the transaction. (c) Only be recognized at the end of the lease term. (d) Be allocated on a straight-line basis over the life of the lease.

Recap (MCQs) In the case of sale and leaseback transactions, if the sale is at below the fair value off th the assets t and d th the loss l is i compensated t d by b future f t lease l payments, t then th the th loss l is ((a)) Recognized g immediately y in reserves. (b) Deferred and amortized over the useful life of the asset. (c) Deferred until the end of the lease term. (d) Recognized immediately in the profit and loss.

Recap (MCQs) Lessors should show assets that are out on operating leases and income there from as follows: (a) The asset should be kept off the balance sheet and the lease income should go to reserves. (b) The asset should be kept off the balance sheet and the lease income should go to the i income statement. t t t (c) The asset should be shown in the balance sheet according to its nature and the lease income should g go to reserves. (d) The asset should be shown in the balance sheet according to its nature with the lease income going to the income statement.

IAS 18 REVENUE


IAS 18 identifies the criteria that need to be met in order to recognise the revenue and also the method that should be used to measure the revenue.

•

The standard also provides practical examples and guidance to help in the application of the standard.

•

Crucial as most ing scandals revolve around revenue manipulation.

•

Crucial that the point of recognition of the revenue is properly determined.

What does the standard set out to d ? do? •

IAS 18 covers the following: – Sale of goods – Provision of services – The use by others of the entity’s entity s assets thus yielding interest interest, royalties royalties, or dividends

•

The Standard does not deal with revenue arising from the following items, as they are dealt with by other Standards: – – – – – –

Leases (IAS 17) Dividends from investments ed under the equity method (IAS 28) Insurance contracts (IFRS 4) Changes in fair values of financial instruments (IAS 39) Initial recognition g and changes g in value of biological g assets ((IAS 41)) Initial recognition of agricultural produce (IAS 41)

What are the key definitions? • Revenue – inflow of economic benefits arising g in the course of ordinary activities, resulting in increases in equity • Fair value – amount for which an asset can be exchanged, or liability settled, between knowledgeable, willing parties at arm’s length transaction • Measurement of revenue – should be measured at fair value of consideration received (taking into discounts discounts, rebates)

How is it measured? • Revenue should be measured at the fair value of the consideration received or receivable. • If the revenue is deferred, it should be measured at its present value. • In a barter transaction, the revenue should be the fair value of the goods received received, and only if unreliable, the fair value of the goods given up. p

What and how is it recognised? • For sale of goods: a) Significant risks and rewards of ownership are transferred to buyer b) Amount of revenue can be reliably measured c) Probably that economic benefits associated with t transaction ti will ill flflow tto th the entity tit d) Costs incurred in respect of the transaction can be measured reliablyy

What and how is it recognised? • For rendering of services: a) The amount of revenue can be measured reliably. b)) Probable that the economic benefits associated with the transaction will flow to the entity c) The stage of completion of the transaction at the reporting ti period i d can be b measured d reliably li bl d) Costs incurred and costs to complete can be measured reliably. y

What and how is it recognised? • For revenue from interest, interest dividend and royalties: – Interest – Time proportion basis reflecting the effective yield of the asset. – Royalties – Accrual basis – Dividends – Right to receive payment is established


ing policies adopted for revenue recognition (including methods adopted to determine stage of completion of transactions)

•

g category g y of revenue recognised g during g Amount of each significant the period.

•

Amount of revenue arising from the exchanges of goods or services included in each signficant category of revenue.

Potential tricky spots! • How do you deal with the following: – Bill and hold arrangements – Payments for goods in advance – Sale with a right of return – Presentation of turnover as a principal or agent – Payment for goods by instalments

Potential tricky spots! • How do you deal with the following: – Bill and hold arrangements – Payments for goods in advance – Sale with a right of return – Presentation of turnover as a principal or agent – Payment for goods by instalments

Recap (MCQs) “Bill and hold” sales, in which delivery is delayed at the buyer’s request but the buyer assumes title and accepts invoicing, should be recognized when ( ) The (a) Th buyer b makes k an order. d (b) The seller starts manufacturing the goods. (c) The title has been transferred but the goods are kept on the seller’s premises. (d) It is probable that the delivery will be made, payment have been established, and the buyer has acknowledged the delivery instructions.

Recap (MCQs) PT Berjaya is a large manufacturer of machines. PT Bandung, a major customer of PT Berjaya., has placed an order for a special machine for which it has given a deposit of 112,500 to PT Berjaya. The parties have agreed on a price for the machine of 150,000. As per the of the sales agreement, it is an FOB (free on board) contract and the title es to the buyer when goods are loaded onto the ship at the port. When should the revenue be recognized by PT Berjaya? (a) When the customer orders the machine. (b) When the deposit is received. (c) When the machine is loaded on the port. (d) When the machine has been received by the customer.

Recap (MCQs) Revenue from an artistic performance is recognized once (a) The audience s for the event online. (b) The tickets for the concert are sold. (c) Cash has been received from the ticket sales. (d) The event takes place.

Recap (MCQs) ABC Ltd., a large manufacturer of cosmetics, sells merchandise to XYZ Ltd., a retailer, which in turn sells the goods to the public at large through its chain of retail outlets. XYZ Ltd. purchases merchandise from ABC Ltd. under a consignment contract. When should revenue from the sale of merchandise to XYZ Ltd. Be recognized by ABC Ltd.? (a) When goods are delivered to XYZ Ltd. (b) When goods are sold by XYZ Ltd. (c) It will depend on the of delivery of the merchandise by ABC Ltd Ltd. to XYZ Ltd. (i.e., CIF [cost, insurance, and freight] or FOB). (d) Itt will depend depe d on o the t e te s of o payment pay e t between bet ee XYZ Ltd. td and a d ABC C Ltd. td (i.e., cash or credit).

Recap (MCQs) PT Merpati, a new company manufacturing and selling consumable products, has come out with an offer to refund the cost of purchase within one month of sale if the customer is not satisfied with the product. Wh should When h ld PT Merpati M ti recognize i the th revenue? ? (a) When goods are sold to the customers. (b) After one month of sale. ((c)) Only O l if goods d are nott returned t d by b the th customers t after ft the th period i d off one month. (d) At the time of sale along with an offset to revenue of the liability of the same amount for the possibility of the return.

Recap (MCQs) PT Chipp, a computer chip manufacturing company, sells its products to its distributors for onward sales to the ultimate customers customers. Due to frequent fluctuations in the market prices for these goods, PT Chipp has a “price protection” clause in the distributor agreement that entitles it to raise additional billings in case of upward price movement. Another clause in the distributor’s agreement is that PT Chipp can at any time reduce its inventory by buying back goods at the cost at which it sold the goods to the distributor. Distributors pay for the goods within 60 days from the sale of goods to them. When should PT Chipp recognize revenue on sale of goods to the distributors? (a) When the goods are sold to the distributors. (b) When the distributors pay to PT Chipp the cost of the goods (i.e., after 60 days of the sale of goods to the distributors). (c) When goods are sold to the distributor provided estimated additional revenue is also booked under the “protection clause” based on past experience. (d) When the distributor sells goods to the ultimate customers and there is no uncertainty with respect to the h ““price i protection” i ” clause l or the h buyback b b k off goods. d

Recap (MCQs) PT Inda manufacturers and sells standard machinery. One of the conditions in the sale contract is that installation of machinery will be undertaken by PT Inda. Inda During December 2005, 2005 PT Inda received a special onetime contract from ABC Ltd. To manufacture, install, and maintain customized machinery. It is the first time PT Inda will be producing this kind of machinery, machinery and it is expecting numerous changes that would need to be made to the machine after the installation is completed, which one period is described in the contract of sale as the “maintenance period.” The total cost of making the changes during the maintenance period cannot be reasonably estimated at the time of the installation. When should the revenue from sale of this special machine hi be b recognized? i d? (a) When the machinery is produced. (b) When the machinery is produced and delivered. (c) When the installation is complete. (d) When the maintenance period as per the contract of sale expires.

Example How much revenue should be recognised in each of the following situations: a) A coal mining company has a bill and hold agreement with a local power station. Under this arrangement, the mining company invoices the power station $10,000,000 a month in respect of 10,000 units of coal, which the power station collects from time to time, after giving two weeks’ notice to the mining company. During the current month, the power station has only collected 8,000 units off coal. l

Example How much revenue should be recognised in each of the following situations: b) A company publishes a magazine and on 1 July, sold annual subscriptions totalling $500,000. The monies have been received and are non refundable. The financial year end is 31 December. c) An Internet travel agent received $1000 for booking a hotel online for $100 and will p on the an customer and makes a commission of $ other $900 to the hotel.

IAS S 38 8 INTANGIBLE ASSETS

Why the standard? • The objective of IAS 38 is to prescribe the ing treatment for intangible assets that are not dealt with specifically in another IAS. • The Standard requires an enterprise to recognise an intangible asset if, and only if, certain criteria are met. • The Standard also specifies how to measure the carrying amount of intangible assets and requires certain disclosures regarding intangible assets.

What does the standard set out to do? • IAS 38 applies li to allll intangible i ibl assets other h than: h • • • •

financial assets mineral rights, exploration & development costs intangible assets arising from insurance contracts intangible assets covered by another IAS, such as intangibles held for sale, deferred tax assets, lease assets, assets arising from employee benefits, and goodwill. Goodwill is covered by IFRS 3

What are the key definitions? – Intangible asset: An identifiable nonmonetary asset without physical substance. • An asset is a resource that is controlled by the enterprise as a result of past events (for example, purchase or selfcreation) and from which future economic benefits (inflows of cash or other assets) are expected.

– The three critical attributes of an intangible asset are: • identifiability • control (power to obtain benefits from the asset) • future economic benefits

What are the key definitions?

– Identifiability: identifiable when it: • is separable (capable of being separated and sold, transferred, licensed, rented, or exchanged, either y or as p part of a p package) g ) or individually • arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity or from other rights and obligations.

EXAMPLES OF INTANGIBLE ASSETS • Examples E l off possible ibl intangible i ibl assets include: i l d • • • • • • • • • • •

computer software patents t t copyrights motion picture films customer lists mortgage servicing rights licenses import quotas franchises customer and supplier relationships marketing rights

INTANGIBLES THAT CAN BE ACQUIRED

• Intangibles that can be acquired: – – – – –

by separate purchase as part of a business combination by a government grant by exchange of assets by self-creation (internal generation)

What and how is it recognised? • Recognition g - recognition g criteria. – To recognise an intangible asset, whether purchased or self-created (at cost) if, and only if: • it is probable that the future economic benefits that are attributable to the asset will flow to the enterprise; and • the cost of the asset can be measured reliably.

What and how is it recognised? • Recognition g . – Applies an intangible asset is acquired externally or generated internally. – The probability of future economic benefits must be based on reasonable and able assumptions about conditions that will exist over the life of the asset. asset – The probability recognition criterion is always considered to be satisfied for intangible assets that are acquired separately or in a business combination

What and how is it recognised? – If recognition g criteria not met. – If an intangible item does not meet both the definition of and the criteria for recognition as an intangible asset, the expenditure on this item to be recognised as an expense when it is incurred.

What and how is it recognised? – Business combinations – There is a rebuttable presumption that the fair value (and therefore the cost) of an intangible asset acquired in a business combination can be measured reliably. reliably – An expenditure (included in the cost of acquisition) on an intangible item that does not meet both the definition of and recognition criteria for an intangible asset should form part of the amount attributed to the goodwill recognised at the acquisition date.

What and how is it recognised? – Reinstatement – The Standard also prohibits an enterprise from subsequently reinstating as an intangible asset, at a later date, an expenditure that was originally charged to expense.

What and how is it recognised? • Initial Recognition: Research and Development Costs – Charge all research cost to expense. – Development costs are capitalised only after feasibility of the asset for sale or use have been established. – The enterprise must be able to complete the intangible asset and be able to demonstrate future economic benefits. – If expense cannot be distinguish the research phase from development phase, phase it to be treated as if it were incurred in the research phase only.

What and how is it recognised? • Initial Recognition: In-process Research and D Development l t Acquired A i d in i a Business B i C Combination bi ti – A R &D project acquired in a business combination is recognised i d as an assett att cost, t even if a componentt is research. – Subsequent expenditure on that project is ed for as any other research and development cost

What and how is it recognised? • Initial Recognition: g Internally y Generated Brands,, Mastheads, Titles, Lists – Brands, mastheads, publishing titles, customer lists and items similar in substance that are internally generated should not be recognised as assets.

What and how is it recognised? • Initial Recognition: Computer Software

– Purchased software: capitalise – Operating system for hardware: include in hardware cost – Internally developed (whether for use or sale): charge to expense until technological feasibility, probable future benefits, be e ts, intent te t a and d ab ability ty to use o or se sell tthe e so software, t a e, resources to complete the software, and ability to measure cost. – Amortisation: over useful life,, based on p pattern of benefits (straight-line is the default).

What and how is it recognised? • Initial Recognition: g Certain Other Defined Types yp of Costs – The following items must be charged to expense when incurred: • internally generated goodwill • start-up, start p pre pre-opening, opening and pre pre-operating operating costs, costs training cost • advertising and promotional cost, including mail order catalogues • relocation costs

What and how is it recognised? • Initial Recognition: g Certain Other Defined Types yp of Costs – For this purpose, purpose 'when when incurred incurred' means when the entity receives the related goods or services. – If the entity has made a prepayment for the above items, items that prepayment is recognised as an asset until the entity receives the related goods or services.

How is it measured? • Initial Measurement – Intangible assets are initially measured at cost.

• Measurement Subsequent to Acquisition: Cost M d l and Model d Revaluation R l ti Models M d l Allowed All d – An entity must choose either the cost model or the revaluation model for each class of intangible asset. asset – Cost model. After initial recognition the benchmark treatment is g assets should be carried at cost less any y that intangible amortisation and impairment losses.

How is it measured? • Measurement Subsequent to Acquisition: Cost M d l and Model d Revaluation R l ti Models M d l Allowed All d – Revaluation model – Intangible I t ibl assets t may be b carried i d att a revalued l d amountt (b (based d on fair value) less any subsequent amortisation and impairment losses only if fair value can be determined by reference to an active market. E.g. • Exports quotas. • Stock exchange seats. • Taxi licences

How is it measured? • Measurement Subsequent q to Acquisition: q Cost Model and Revaluation Models Allowed – Under the revaluation model – Revaluation increases are credited directly to "revaluation surplus" within equity – If the revalued intangible has a finite life, then the revalued amount is to be amortised.

How is it measured? •

Classification of Intangible g Assets Based on Useful Life – Intangible assets are classified as with: 1. Indefinite life: No foreseeable limit to the period over which the asset is expected to generate net cash inflows for the entity. 2. Finite life: A limited period of benefit to the entity.

How is it measured? • Measurement Subsequent to Acquisition: Intangible A Assets t with ith Finite Fi it Lives Li – The cost less residual value of an intangible asset to be amortised ti d on a systematic t ti b basis i over th thatt lif life: • • • •

The amortisation method to reflect the pattern of benefits. Otherwise to amortise by the straight line method method. The amortisation charge is recognised in profit or loss The amortisation period to be reviewed at annually.

– Th The assett should h ld also l b be assessed d ffor iimpairment i t iin accordance with IAS 36.

How is it measured? • Measurement Subsequent q to Acquisition: q Intangible g Assets with Indefinite Lives – An intangible asset with an indefinite useful life should not be amortised. • Its useful life to be reviewed each reporting period to determine whether an indefinite useful life is applicable • If not, then a change from indefinite to finite should be ed for as a change in an ing estimate.

– The asset should also be assessed for impairment in accordance with IAS 36.

How is it measured? • Subsequent q Expenditure p – Subsequent expenditure on an intangible asset after its purchase or completion to be recognised as an expense when it is incurred – unless it is probable that this expenditure will enable the asset to generate future economic benefits in excess of its originally assessed standard of performance and the expenditure can be measured and attributed to the asset reliably.

What should be disclosed? • For each class of intangible asset, disclose: • • • • •

useful f l lif life or amortisation ti ti rate t amortisation method gross carrying amount accumulated amortisation and impairment losses line items in the income statement in which amortisation is included

What should be disclosed? • reconciliation of the carrying amount at the beginning and the end of the period showing: • • • • • • • •

additions (business combinations separately) assets held for sale retirements and other disposals revaluations impairments p reversals of impairments amortisation foreign exchange differences

What should be disclosed?

• basis for determining that an intangible has an indefinite life • description and carrying amount of individually material intangible assets • certain special disclosures about intangible assets acquired by way of government grants • information about intangible assets whose title is restricted • commitments to acquire intangible assets – Additional disclosures are required about: • intangible assets carried at revalued amounts • the amount of research and development expenditure recognised as an

expense in the current period

Recap (MCQs) A newly set up dot-com entity has engaged you as its financial advisor. The entity h recently has tl completed l t d one off its it highly hi hl publicized bli i d research h and d development d l t projects and seeks your advice on the accuracy of the following statements made by one of its stakeholders. Which one is it? (a) Costs incurred during the “research phase” can be capitalized. (b) Costs incurred during the “development phase” can be capitalized if criteria such as technical feasibility of the project being established are met met. (c) Training costs of technicians used in research can be capitalized. (d) Deg of jigs and tools qualify as research activities.

Recap (MCQs) Which item listed below does not qualify as an intangible asset? (a) Computer software. (b) ed patent patent. (c) Copyrights that are protected. (d) Notebook computer.

Recap (MCQs) Which of the following items qualify as an intangible asset under IAS 38? (a) Advertising and promotion on the launch of a huge product. (b) College tuition fees paid to employees who decide to enroll in an executive M M.B.A. BA program at Harvard University while working with the company. (c) Operating losses during the initial stages of the project. (d) Legal costs paid to intellectual property lawyers to a patent.

Recap (MCQs) Once recognized, intangible assets can be carried at (a) Cost less accumulated depreciation. (b) Cost less accumulated depreciation and less accumulated amortization amortization. (c) Revalued amount less accumulated depreciation. (d) Cost plus a notional increase in fair value since the intangible asset is acquired.

Recap (MCQs) Which of the following disclosures is not required by IAS 38? (a) Useful lives of the intangible assets. (b) Reconciliation of carrying amount at the beginning and the end of the year year. (c) Contractual commitments for the acquisition of intangible assets. (d) Fair value of similar intangible assets used by its competitors.

Worked example PT Bluebird owns a freely transferrable taxi operator’s license, which it acquired on 1 J January 20X1 20X1, att an initial i iti l costt off $10 $10,000. 000 The Th useful f l life lif off the th license li iis fifive years (based on the date it is valid for). The entity uses the straight-line method to amortise the intangible. Such licenses are frequently traded either between existing operators or with aspiring operators. At the balance sheet date, on December 31 20X2, due to a government permitted increase in fixed taxi fares, the traded value of the license was $12,000. The , accumulated amortisation on December 31 20X2 amounted to $4,000. Required: What journal entries are required at 31 December 20X2, to reflect the increase/decrease in carrying value (cost or revalued amount less accumulated depreciation) on the revaluation of the operating license based on the traded values of similar license. Also, what would be the resultant carrying value of the intangible asset after the revaluation?

Worked example - Solution Solution The journal entries to be recorded in the books of s are: Dr – Intangible asset (accumulated amortisation) $4,000 $4 000 Cr – Intangible asset (cost) $4,000 (Being elimination of accumulated depreciation against the cost of the asset) Dr – Intangible asset (cost) $6,000 Cr – Revaluation reserve (Being uplift of net book value to revalued amount)

$6,000

The net result is that the asset has a revised carrying amount of$12,000 (10,000 – 4000 + 6000)

IFRS S1 FIRST TIME ADOPTION

WHY THE STANDARD? – To ensure that an entity entity’s s first IFRS contains high quality information that is: • • • •

Transparent for s p over all p periods p presented Comparable A starting point for ing under IFRS Generated at a cost that does not exceed the benefits

WHAT DOES IT SET OUT TO DO?

– IFRS 1 applies to: • First IFRS financial statements • Any interim financial statements (under IAS 34) for any part of the period covered by first IFRS financial statements

WHAT ARE THE KEY DEFINTIONS? First IFRS financial statements: the first annual financial statements in which IFRS are adopted by an explicit and unreserved statement that its general purpose financial statements comply with IFRSs First IFRS reporting period: the latest reporting period covered by first IFRS financial statements First time adopter: an entity that presents its first IFRS financial statements Date of transition: the beginning of the earliest comparative period presented in the financial statements

STAGES IN TRANSITION TO IFRS – ing A ti P li i Policies: consistent with IFRS

S l t Select

policies li i

– Opening IFRS statement of financial position: Prepare and present opening IFRS statement of financial position

– Estimates: Make estimates in accordance – Presentation & disclosure: Make presentation & disclosure requirements in accordance with IFRS1

WHAT IS DEEMED A FIRST TIME ADOPTER? • if its most previous financial statement were: – Under GAAP and inconsistent with IFRS – In conformity with IFRS, but NO explicit & unreserved statement of compliance with IFRS – Stating some compliance with IFRS but not all – When financial statements were prepared under IFRS but b t meantt for f internal i t l use only l

WHO IS DEEMED A FIRST TIME ADOPTER? – However, an entityy is not a first-time adopter p if, in the preceding year, its published financial statements asserted: • Compliance with IFRSs even if the auditor's report contained a qualification with respect to conformity with IFRSs. • Compliance C with both previous G GAAP and IFRSs. S

OVERVIEW OF FIRST TIME ADOPTION • Overview for an entity that adopts IFRSs for the first ti time ffor th the year ended d d 31 D December b 2005 – ing policies. S l Select iits ing i policies li i b based d on IFRS IFRSs iin force at 31 December 2005. – IFRS reporting periods. periods Prepare at least 2005 and 2004 financial statements and restate retrospectively the opening balance sheet by applying the IFRSs in force at 31 December 2005.

OVERVIEW OF FIRST TIME ADOPTION • Overview for an entity that adopts IFRSs for the first time for the year ended 31 December 2005 a. Since IAS 1 requires that at least one year of comparative prior period financial information be presented, the opening balance sheet will be 1 January 2004 if not earlier. b. If a 31 December 2005 adopter reports selected financial data (but not full financial statements) on an IFRS basis for periods prior i to t 2004, 2004 in i addition dditi to t full f ll financial fi i l statements t t t for f 2004 and 2005, that does not change the fact that its opening IFRS balance sheet is as of 1 January 2004.

REQUIRED ADJUSTMENTS? •

Adjustments j required q to move from previous p GAAP to IFRSs at the time of first-time adoption

1.

Recognition g all assets and liabilities whose recognition is required under IFRS

2.

Derecognize g assets and liabilities that are not allowed to be recognized under IFRS

3.

Reclassify items as current/non-current, current/non current, liability/equity in accordance with IFRS

4.

Measure all recognized assets and liabilities in accordance with IFRS

WORKED EXAMPLE • Case study y PT OBAMA adopted IFRS from 2008 and is required to prepare an opening IFRS balance sheet as at 1 Jan 2007. In preparing the opening BS, PT OBAMA found the following: • Under previous GAAP, PT OBAMA had deferred advertising costs of $350,000 • PT OBAMA had also classified proposed dividends of $100,000 as a current liability • It had not made a provision for the warranty of $50,000 as this was not required under the previous GAAP • PT OBAMA had not included installation charges of a machine it uses of $220,000 as part of the fixed asset’s cost and had expensed it as per the previous GAAP.

EXEMPTIONS? • IFRS 1 requires full retrospective applications of all IFRSs on first time adoption with limited exemptions for: – – – – – –

Property, p y p plant & equipment q p Business combinations Cumulative translation differences Compound p financial instruments Assets & liabilities of subsidiaries, associates & t ventures Decommissioning liabilities included in the cost of property, plant q p and equipment

EXEMPTIONS? •

Limited Exemptions – Property, plant & equipment: Property, plant & equipment can be measured at fair value at the date of transition – Business combinations: First time adopters exempt from applying IFRS 3 retrospectively. – Cumulative translation differences: All translation adjustments arising i i on the th translation t l ti off the th financial fi i l statements t t t off foreign f i entities can be recognized in retained earnings at the date of transition – Compound financial instruments: “Split-ing” provisions of IAS 32 need not be applied if the liability component of a compound financial instrument is no longer outstanding at date of transition. transition

EXEMPTIONS? • Limited Exemptions – Assets and liabilities of subsidiaries: A subsidiary who adopts IFRS later than its parent may measure its assets/liabilities at carrying amounts determined for: (i) its own transition date OR (ii) the parent’s IFRS transition date – Decommissioning liabilities: liabilities First time adopters exempt from IFRIC 1 requirements

PROHIBITIONS? •

IFRS 1 prohibits retrospective application of some aspects of other IFRSs relating to: – Derecognition of financial assets and financial liabilities: If a first-time adopter derecognized financial assets or liabilities under its previous GAAP, GAAP it should not recognize those assets and liabilities under IFRS 1. – Hedge ing: A first-time adopter is required, at the date of the transition to IFRS to measure all derivatives at fair value and eliminate all deferred losses and gains on derivates that were reported under the previous GAAP. – Estimates: An entity entity’ss estimates under IFRS at the date of transition should be consistent with estimates made under the previous GAAP (unless there is objective evidence that the estimates were “in error”)

What should be disclosed? - Comparative Information - At least one year’s comparative i f information ti mustt be b included i l d d to t comply l with IAS 1 - Explanation of transition - Entity must explain how the transition to IFRSs has affected its reported financial position, performance and cash flows

What should be disclosed? - Reconciliations - A reconciliation of equity under IFRS and previous GAAP at: o The transition date o The end of the latest period presented under the previous GAAP

- A reconciliation to its total comprehensive income under IFRS for the latest period

What should be disclosed? - Other disclosures - If a statement of cash flows was presented under previous GAAP, GAAP material adjustments must be explained - If fair value used for property, plant and equipment as alternative to cost-based measurement, following must be disclosed: - Aggregate of those fair values - Aggregate adjustment to carrying amounts reported under previous GAAP

IFRS 1 – First Time adoption starts NOW • • • •

Finance Director must initiate conversion process Training on IFRS starts now.. IFRS competencies in staff Identify contracts, agreements and reports that will be affected by IFRS • Initial estimate using IFRS to gauge the impact • Identifying weakness in financial reporting systems 258

ACCA - IFRS 2009

Recap (MCQs) Under which one of the following circumstances would an entity’s current year’s financial statements not qualify as first IFRS financial statements? (a) The entity prepared its financial statements under IFRS in the previous year and these were meant for internal purposes only. (b) The entity prepared the previous year’s financial statements under its national GAAP. (c) The entity prepared its previous year’s financial statements in conformity with all requirements of IFRS, but these statements did not contain an explicit and unreserved statement that theyy complied p with IFRS. (d) The entity prepared its previous year’s financial statements in conformity with all requirements of IFRS, and these statements did contain an explicit and unreserved statement that they complied with IFRS. IFRS

Recap (MCQs) XYZ Inc. is a first-time adopter under IFRS 1. The most recent financial statements it presented under its previous GAAP were as of December 31,2005. It has adopted IFRS for the first time and intends to present the first IFRS financial statements as of December 31, 2006. It plans to present two-year comparative information for the years 2005 and 2004. The opening IFRS balance sheet should be prepared as of (a) January 1, 2005. ((b)) January y 1, 2003. (c) January 1, 2004. (d) January 1, 2006.

Recap (MCQs) Which one of the following is not a required adjustment in preparing an opening IFRS balance sheet? (a) Recognize all assets and liabilities whose recognition is required under IFRS. IFRS (b) Derecognize items as assets or liabilities if IFRS do not permit such a recognition. (c) Disclose as comparative information all figures under previous GAAP alongside figures for the current year presented under IFRS. (d) Measure all recognised assets and liabilities according to principles contained in IFRS.

Recap (MCQs) Which one of the following does not qualify for an exemption allowed by IFRS 1? (a) Business combinations that occurred before or prior to the date of transition to IFRS. (b) Financial instruments (other than compound financial instruments). ((c)) Cumulative translation differences. (d) Cumulative unrecognised actuarial gains and losses under IAS 19.

Recap (MCQs) Which one of the following does not qualify for exemption under IFRS 1 for the purposes of retrospective application? (a) Hedge ing. ing (b) Financial assets and financial liabilities derecognised prior to January 1, 2001. (c) Estimates made under previous GAAP. (d) Fair value ing for investment property.

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