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SME Tangible Assets IFRS.

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The I FRS fo r SMEs

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Topic 2.3 Section 13 I n v e n t o r i e s In v e s t m e n t P r o p e r t y Section 16 Sec 17 P r o p e r t y , P la lan t & E q u i p m en t Section 18 I n t a n g i b l e A s s e t s ir m en t o f A s s e t s Section 27 I m p a ir

© 2011 IFRS Foundation

 

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This PowerPoint presentation was prepared by IFRS Foundation education staff as a convenience convenience for others. It has not been approved approved by the IASB. IASB. The IFRS Foundation allows individuals and organisations to use this presentation to conduct training on the IF IFRS RS for SMEs  . However, if you make any changes to the PowerPoint presentation, your changes should be clearly identifiable as not part of the presentation prepared by the IFRS Foundation education staff and the copyright notice must be removed from every amended page . This presentation may be modified from time to time. The latest version may be downloaded from:  http://www.ifrs.org/IFRS+for+SMEs/SME+Workshops.htm   http://www.ifrs.org/IFRS+for+SMEs/SME+Workshops.htm The accounting requirements applicable to small and medium-sized entities (SMEs) are set out in the Intern ation al Financ Financ ial Repor Repor ting Stan dard (IFRS) (IFRS) f o r S MEs ME s   , which was issued by the IASB in July 2009. The IFRS Foundation, the authors, the presenters and the publishers do not accept responsibility for loss caused to any person who acts or refrains from acting in reliance on the material in this PowerPoint presentation, presentation, whether such loss is caused by negligence or otherwise. © 2011 IFRS Foundation

 

The I FRS fo r SMEs

Scope of Sections 13 and 16 –  –18 18

© 2011 IFRS Foundation

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Section 13 – 13 – scope  scope Inventories are assets:  –  held held for sale in the ordinary course of business (finished goods);  – in the process of production for such sale (work in process); or  – in the form of materials or supplies to be consumed in the production process or in the rendering of services (raw materials & consumables). • Section 13 specifies accounting + reporting for inventories  inventories  © 2011 IFRS Foundation

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Section 13 – 13 – scope  scope exclusions

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• Section 13 applies to all inventories, except  – work in progress arising under construction contracts  – financial instruments  – biological assets related to agricultural activity and agricultural produce at the point of harvest © 2011 IFRS Foundation

 

Section 17 – 17 – definition  definition of PP&E Property, plant and equipment (PP&E) are tangible assets: • held for  – use in the production or supply of goods or services,  – for rental to others, or  – for administrative purposes; • & are expected to be used in +1 period. © 2011 IFRS Foundation

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Section 17 – 17 – scope  scope

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• Section 17 specifies accounting & reporting for:  – property, plant and equipment; and  – investment property whose fair value cannot be measured reliably without undue cost or effort on an ongoing basis.

© 2011 IFRS Foundation

 

Section 16 – 16 – scope  scope Investment orheld a building (or part of aproperty building,is orland both) by the owner or by the lessee under a finance lease to earn rentals or for capital appreciation or both. both. • Section 16 specifies accounting & reporting for:  – investment property whose fair value can be determined reliably without undue cost or effort on an ongoing basis  basis  © 2011 IFRS Foundation

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Section 18 – 18 – definition  definition intangible asset

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Intangible = identifiable non-monetary asset without physical substance  Identifiable when:  – separable, ie can be separated from the entity & sold, transferred, licensed, rented or exchanged, either individually or together with a related contract, asset or liability, or  – arises from contractual or legal rights  rights  © 2011 IFRS Foundation

 

Section 18 – 18 – scope  scope

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• Section 18 specifies accounting & reporting for intangible assets, excluding  – goodwill  – financial assets  – mineral rights & mineral reserves, such as oil, natural gas and similar non-regenerative resources

© 2011 IFRS Foundation

 

Sections 13 & 16 –  –18 18 –  – scope  scope examples

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In scope of S13, S16, S17 or S18? • Ex 1* 1*:  A trades in property (ie it buys property to sell it at a profit near-term) • Ex 2* 2*:  B trades in transferable taxi licences • Ex 3*:  C produces 3* wine from in grapes harvested from its vineyards a 3-year production cycle material   * see example with the same number in Module 13 of the IFRS Foundation training material  © 2011 IFRS Foundation

 

Sections 13 & 16 –  –18 18 –  –examples examples continued

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In scope of S13, S16, S17 or S18? • Ex 4* 4*:  D holds lubricants that are consumed by its machine in producing goods • Ex 6* 6*:  E maintains its plant using:  – a bespoke long-life cleaning machine; &  – a set of low-value common tools acquired from a local hardware store. * see example with the same number in Module 13 of the IFRS Foundation training material © 2011 IFRS Foundation

 

Sections 13 & 16 –  –18 18 –  –examples examples continued

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In scope of S13, S16, S17 or S18? • Ex 9* 9*:  F operate a hotel from a building it owns  – it rents out hotel rooms for short-stays  – guest services included in the room rate = breakfast and television  – services charged for separately = other meals, room bar, gymnasium facilities & guided tours * see example 9 in Module 16 of the IFRS Foundation training material © 2011 IFRS Foundation

 

Sections 13 & 16 –  –18 18 –  –examples examples continued In scope of S13, S16, S17 or S18?

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• Ex 3* 3*:  G buys a building to earn rentals under an operating lease from its subsidiary. The sub sells its products from the building • Ex 7* 7*:  H owns  – a herd of cattle— cattle—breeding stock of its agricultural activities  – a tractor used to transport feed to the herd * see example with the same number in Module 17 of the IFRS Foundation training material © 2011 IFRS Foundation

 

Sections 13 & 16 –  –18 18 –  –examples examples continued

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In scope of S13, S16, S17 or S18? • Ex 1:  1:  I owns digital films and audio recordings which it licenses to its customers • Ex 12:  12:  In accounting for the acquisition of the net assets and operations of a competitor J recognised future economic benefits arising from assets that are not individually identified as an asset (goodwill)

© 2011 IFRS Foundation

 

Examples of classification judgements

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 – when unclear what purpose of acquiring property is (inventories, IP or PP&E?)  – when property owner provide ancillary services to the occupants of a property (IP or PP&E?)  – mixed use property (IP or PP&E?)  – when is undue cost or effort necessary to measure the fair value of an IP on an ongoing basis (IP or PP&E?) © 2011 IFRS Foundation

 

The I FRS fo r SMEs

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Section 13 I n v e n t o r i e s and Paragraphs 27.2 –  –27.4 27.4 (impairment of inventories)

© 2011 IFRS Foundation

 

Section 13  – measurement – measurement

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• Inventories in the scope of Section 13 are measured at the lower of:  – cost; and  – estimated selling price less costs to complete and sell (SP-CTC&S).

© 2011 IFRS Foundation

 

Section 13 – 13 – measurement  measurement exemptions

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• Section 13 does not apply to the measurement of inventories of  – producers of agricultural and forest products, agricultural produce after harvest, and minerals and mineral products, or  – commodity brokers and dealers  dealers  when measured at fair value less value less costs to sell through profit or loss  loss  © 2011 IFRS Foundation

 

Section 13 – 13 – measurement  measurement examples 

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Are these inventories measured in accordance with Section 13? • Ex 7* 7*:  A commodity broker-trader acquires wheat in anticipation of selling it in the short-term. The broker-trader measures such inventories at fair value less costs to sell • Ex 8* 8*:  Same as Ex 7 except the broker-trader measures inventories at cost material   * see example with the same number in Module 13 of the IFRS Foundation training material  © 2011 IFRS Foundation

 

Section 13   –  – cost  cost

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• Cost = costs of purchase + costs of conversion + other costs incurred in bringing the inventories to their present location and condition 

© 2011 IFRS Foundation

 

Section 13  – cost – cost of purchase

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• Cost = purchase price + import dutiesof+purchase other taxes (non-refundable in nature) + other direct costs  – costs of purchase is after deducting trade discounts, rebates etc  – if purchase arrangement effectively contains an unstated financing element, eg a difference between the purchase price for normal credit terms and the deferred settlement amount, the difference is recognised as interest expense over the period of the financing (ie it is not added to the cost of the inventories) © 2011 IFRS Foundation

 

Section 13 – 13 – examples  examples cost of purchase 23 • Ex 13* 13*: A buys a good priced at CU500 per unit unit from Z. Z awards awards A a 20% 20% discount on orders of +100 units and 10% discount when A buys +999 units in 1 year. The discounts apply to all units acquired in a year. A buys as follows: 800 units on 1/1/20X1 and 200 units on 24/12/20X1. On 31/12/20X1, 150 units were unsold (ie inventories of A). material   * see example 13 in Module 13 of the IFRS Foundation training material  © 2011 IFRS Foundation

 

Section 13 – 13 – examples  examples cost of purchase 24 •

Ex 13

continued:

A measures the cost of the inventories in 20X1 at CU350,000 [ie 1,000 units × (CU500 list price less 30%(CU500) volume discount)], because all units purchased in the year get the full 30% discount. • A recognises:   – expense (cost of sales) of CU297,500 [ie 850 units sold × (CU500 list price less 30%(CU500) volume discount)] in profit or loss in 20X1  – asset (inventories) of CU52,500 [ie 150 units unsold × (CU500 less 30%(CU500) discount)] at 31/12/20X1. © 2011 IFRS Foundation

 

Section 13 – 13 – examples  examples cost of purchase 25 • Ex 17* 17*: A buys inventory for CU2,000,000 on 2-year interest-free credit. Appropriate discount rate = 10% per year. The cost of the inventory is CU1,652,893 (ie the present value of the future payment). Calculation: CU2,000,000 future payment ÷ (1.1)2.  * see example 17 in Module 13 of the IFRS Foundation training material   © 2011 IFRS Foundation

 

Section 13  – cost – cost of conversion

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• Cost of conversion = direct costs + indirect costs (allocated production overheads)  – allocated production overheads = fixed production overheads + variable production overheads

© 2011 IFRS Foundation

 

Section 13 – 13 – examples  examples conversion costs 27 •

Ex 18*: Amoulds. 18* makes concrete blocks in reusable Blocks dry in a drying room for 2 weeks. Dried blocks & raw mat’s stored in separate rooms. A front-end loader (man 1) adds materials to the mixing machine operated by man 2. Casual labourers remove blocks from moulds. Man 3 supervises the factory. Man 4 does admin, finance and sales. A operates from rented premises (fixed payments).  * see example 18 in Module 13 of the IFRS Foundation training material © 2011 IFRS Foundation

 

Section 13 – 13 – examples  examples conversion cost

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• Ex 18 continued:  Costs of conversion include  – direct costs: casual labour.  – production overheads: factory rent (incl. raw mat’s area & drying room but excl. finished goods room); staff cost of man 1,2 & 3; depreciation of equipment (front end loader, mixing machine and moulds).

© 2011 IFRS Foundation

 

Section 13  –  – allocate  allocate production overheads • Allocate production on  – normalfixed capacity if low or overheads normal production  – actual production (units) if abnormally high production (so that inventory is not measured above cost)  – note: unallocated overheads are expensed when incurred • Allocate variable production overheads on actual production  production  © 2011 IFRS Foundation

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30 Section 13 – 13 – example  example FP overheads • Ex 20* 20*: Fixed production (FP) overheads = CU900,000. 200,000 units produced. Normal capacity = 250,000 units.  Allocation rate: CU900,000 CU900,000 ÷ 250,000 units units normal capacity = CU3.6 per unit produced. Allocate to inventories: CU3.6 × 200,000 units = CU720,000. Unallocated overheads of CU180,000 are expense (ie CU900,000 less CU720,000 in inventory).  material   * see example 20 in Module 13 of the IFRS Foundation training material  © 2011 IFRS Foundation

 

Section 13 – 13 – example  example FP overheads

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• Ex 21* 21*: Same as Ex 20 except 300,000 units produced. Normal capacity = 250,000 units.  Allocation rate: CU900,000 ÷ 300,000 units actual production = CU3 per unit produced. Allocate to inventories: CU3 × 300,000 units = CU900,000 * see example 21 in Module 13 of the IFRS Foundation training material © 2011 IFRS Foundation

 

Section 13 – 13 – example  example wastage • Ex 27* 27*: Total costs of a production run = CU100,000 (including a cost of normal wastage of CU2,000). The weakening of operating controls while the ownermanager was in hospital caused the wastage of raw materials to increased to CU7,000 per production run. The abnormal wastage of CU5,000 (CU7,000 – (CU7,000  – CU2,000)  CU2,000) is cost not included in the cost of inventory but recognised as an expense.  * see example 27 in Module 13 of the IFRS Foundation training material © 2011 IFRS Foundation

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Section 13  – joint – joint and by-products

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• Production process results in more than one product being produced simultaneously   –  joint product, or  – main product and by-product.

• Allocate joint costs on a rational and consistent basis  • If by-product is immaterial  – measure by-product at selling price less costs to complete and sell (SP-CTC&S)  – deduct this amount from the cost of the main product. © 2011 IFRS Foundation

 

Section 13 – 13 – example  example by-product

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• Ex 22*: A production 22* process costs CU100,000 (including allocated overheads). It mixes base chemicals to produce:  – 5,000 litres of product A (sales value = CU250,000); and  – 1,000 litres of by-product C (sales value = CU2,000). Cost per litre of A = CU19.60 (ie CU100,000 less CU2,000 SP of C) ÷ 5,000 litres = CU19.60. material   * see example 22 in Module 13 of the IFRS Foundation training material  © 2011 IFRS Foundation

 

Section 13 – 13 – example  example joint product

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• Ex 23* 23*: Same as in Ex 22 except, instead of by-product by-product ‘C’ there is a joint product ‘B’. Total costs = CU300,000 to produce:  – 5,000 litres of A (sales value = CU250,000); and  – 4,000 litres of B (sales value = CU400,000). Allocate joint process costs on relative sales values.  * see example 23 in Module 13 of the IFRS Foundation training material © 2011 IFRS Foundation

 

Section 13 – 13 – example  example joint product

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• Ex 23 continued: 

Cost per litre of A = CU23.08 & B = CU46.15. Calculation A: CU250,000 A: CU250,000 SP of A ÷ CU650,000 combined of A B × CU300,000 costs = CU115,385SP cost of&5,000 5,000 litres of A. CU115,385 ÷ 5,000 litres = CU23.08. Calculation B: CU400,000 B: CU400,000 SP of B ÷ CU650,000 combined SP of A & B × CU300,000 costs = CU184,615 cost of 4,000 4,000 litres of of B. CU184,615 ÷ 4,000 litres = CU46.15. © 2011 IFRS Foundation

 

Section 13  – other – other costs 37 • Include other costs in the cost of inventories only to the extent that they are incurred in bringing the inventories to their present location and condition. • Ex 25* 25*: A manufactures individually packaged pens. The cost of the inventory includes the cost of manufacturing the pens and the individual packaging in which they are presented for sale. * see example 25 in Module 13 of the IFRS Foundation training material © 2011 IFRS Foundation

 

Section 13  – cost – cost formulas

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•  – Specific identification of costs if goods not ordinarily interchangeable or  – segregated for specific projects • Other inventories  – FIFO or  – weighted average (WA) • Can use other ways if approximates cost  – standard cost  – retail method  – most recent purchase price  price  © 2011 IFRS Foundation

 

Section 27  – impairment – impairment of inventories • Assess at each reporting dateby whether any inventories are impaired,  – comparing the carrying amount (CA) of each item of its selling less costs to inventory complete with and sell (SP- price CTC&S)  – if CA > SP-CTC&S reduce CA to SPCTC&S  – that reduction = impairment loss  – impairment loss = expense in profit or loss © 2011 IFRS Foundation

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Section 27 – 27 – examples  examples impairment

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• Ex 1:  1:  At reporting date  – CA (cost) of raw materials = 100  – replacement cost = 80  – est. selling price of finished good = 200  – est. costs to convert the raw material into finished good = 60  – est. costs to sell the finished good = 30 • Ex 2:  2:  Same as Ex 1 except est. SP = 180

© 2011 IFRS Foundation

 

Section 27  – impairment – impairment exception • Inventory is assessed for impairment item by item  if it is impracticable  to determine SP – only only if impracticable to CTC&S item-by-item may items of inventory:  –relating  – relating to the same product line that have similar purposes or end uses; and that are produced and marketed in the same  –that  – geographical area  –be  – be grouped for the purpose of assessing impairment.

© 2011 IFRS Foundation

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Section 27 – 27 – examples  examples impairment

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• Ex 3:  3:  A has 3 items of inventory (finished goods) that qualify for impairment testing as a group  – CA (cost) 90 + 100 + 130 = 320  – est. SP-CTC&S for the 3 items = 330 • Ex 4:  4:  Same as Ex 3 except  – items do not qualify for impairment testing as a group; and  – est. SP-CTC&S = 110 each. © 2011 IFRS Foundation

 

Section 27 – 27 – reversal  reversal of impairment

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• Reverse the impairment when:  – circumstances that caused inventories to be impaired no longer exist; or  – there is clear evidence of an increase in SP-CTC&S because of changed economic circumstances • Amount of reversal is limited to the amount of the original impairment loss  – ie CA cannot be > cost © 2011 IFRS Foundation

 

Section 27 – 27 – example  example reverse impairment

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•  –Ex 5:  At 31/12/20X1 5:  because of a decline in economic circumstances recognised an impairment loss on an item of inventory of 30 (ie cost = 100 &

SP-CTC&S = 70) At 31/12/20X2

 – because of an improvement in economic  – because circumstance the SP-CTC&S of that item is 120 © 2011 IFRS Foundation

 

Section 13  – measurement – measurement judgements • For cost, examples include  – determining normal capacity  – separating normal & abnormal wastage  – allocating joint cost to joint products  –if no market for joint products at separation  –if  – if multiple joint products and exit joint production at different stages • For the impairment  – estimating SP-CTC&S  SP-CTC&S  © 2011 IFRS Foundation

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Section 13  – derecognition – derecognition

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• Expense inventory when  – impaired  – derecognised (ie when sold) • Allocate inventory to another asset  – eg inventory used as a component of selfconstructed PP&E.

© 2011 IFRS Foundation

 

Section 13  – disclosure – disclosure

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• Disclose  – accounting policies for measuring inventories  – carrying amount of inventories analysed by class  – amount expensed in the period  – impairment losses recognised or reversed  – amount pledged as security for liabilities © 2011 IFRS Foundation

 

The I FRS fo r SMEs

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Section 17 P r o p e r t y , P l an a n t an an d E q u i p m en t

(including investment property whose fair value cannot be measured reliably on an ongoing basis)

© 2011 IFRS Foundation

 

Section 17 – 17 – recognition  recognition Recognise the cost of an item of PP&E as an asset if:  – probable future benefits inflows; and  – cost can be measured reliably.

© 2011 IFRS Foundation

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Section 17  – measurement – measurement

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• Initial measurement of PP&E = cost  – cost = purchase price + direct cost for PP&E become capable of operating as intended + initial estimate of obligation to dismantle/remove  – cash price equivalent at the recognition date  –if  – if payment deferred beyond normal credit terms, cost = present value of future payments • Subsequent measurement = cost less depreciation and impairment losses © 2011 IFRS Foundation

 

Section 17  – replacing – replacing parts

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• Parts that require replacement at regular intervals (eg roof and furnace’s lining)  – add cost of replacement to the carrying amount of the item if the replacement adds benefits  – if consumption pattern different, depreciate component separately over its useful life  – derecognise the parts replaced. • Day-to-day servicing costs = expense © 2011 IFRS Foundation

 

Section 17  – exchange – exchange of assets

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• Cost of PP&E acquired in exchange for a non-monetary asset = fair value unless the transaction lacks commercial substance  – if fair value cannot be measured reliably, cost = carrying amount of the asset given up

© 2011 IFRS Foundation

 

Section 17  – cost – cost

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•  –Cost of PP&E comprises: purchase price (incl. fees, duties & purchase taxes after deducting trade discounts & rebates)  – costs directly attributable to bring for the itPP&E to location & condition necessary to be capable of operating as intended by management:  – site prep. costs, delivery & handling, installation & assembly, & testing functions.  – initial estimate of dismantling & removing costs and site restoration.  © 2011 IFRS Foundation

 

54 Section 17 – 17 – example  example cost • Ex 15* 15*:  Costs before ready for use as intended:  – purchase price = 600 (incl 50 refundable purch tax)  – costs 120 to get equip to site and to install  – in 10 yrs must restore land (PV to restore = 100)  – costs 135 to modify equip to operate as intended  – costs 10 to train staff to operate equip.  – costs 37 for testing and final modifications 23 = operating loss after ready for use. material   *  Adapted from example 15 in Module 17 of the IFRS Foundation training material  © 2011 IFRS Foundation

 

Section 17 – 17 – depreciation  depreciation

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• To allocate amount to  over items usefuldepreciable life use judgement use judgement to   estimate  – lifevalue  – useful residual  – depreciation method (eg straight-line, diminishing balance, units of production)  • Re-evaluate estimates if change indicator  – change is a change in accounting estimate  © 2011 IFRS Foundation

 

Section 17 – 17 – depreciation  depreciation continued

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• Depreciation begins when the PP&E is  available for use  – ie when it is in the t he location and condition necessary for it to be capable of operating in the manner intended by management • Depreciation stops when the PP&E is derecognised 

© 2011 IFRS Foundation

 

Section 17 – 17 – example  example depreciation

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• Ex 20* 20*: On 1/1/20X1 buy machine for CU100,000. Initial estimates &  judgements:  – useful life = 10 yrs & residual value = 0  – straight-line depreciation is appropriate At 31/12/20X5 year-end reassess:  – useful life = 24 yrs (from the date of acq) and residual value = CU20,000  – straight-line depreciation is appropriate * adapted from example 20 in Module 17 of the IFRS Foundation training material © 2011 IFRS Foundation

 

Section 17 – 17 – derecognition  derecognition

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• Derecognise PP&E on disposal or when no further benefits are expected from its use or disposal • Gain or loss = net disposal proceeds (if any) less carrying amount  – show gain or loss in profit or loss (except for some sale & leasebacks)  – gain is not revenue © 2011 IFRS Foundation

 

Section 17 – 17 – example  example derecognition

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• Ex 35* 35*: On 1/11/20X5 sold building for 3,500. Carrying amount = 2,000. Selling costs = 350 commission & 10 legal fees.  fees.  On 1/11/20X5 recognise gain of CU1,140 in profit or loss

[calculation: 3,500 less (2,000 + 350 + 10)] * see example 35 in Module 17 of the IFRS Foundation training material  material  

© 2011 IFRS Foundation

 

Section 17 – 17 – disclosures  disclosures • Disclose for each class of class of PP&E  – measurement bases  – depreciation methods  – lives or depreciation rates  – useful gross carrying amount & accumulated depreciation (incl. impairment losses) at beginning & end of period  – reconciliation of carrying amount at beginning & end of the reporting period showing specified items (comparatives not required) © 2011 IFRS Foundation

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Section 17 – 17 – other  other disclosures

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• Also disclose  – existence and carrying amounts of PP&E when entity has restricted title or PP&E is pledged as security for liabilities  – amount of contractual commitments for the acquisition of PP&E

© 2011 IFRS Foundation

 

The I FRS fo r SMEs

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Section 18 I n t a n g i b l e A s s e t s o t h e r t h an a n G o o d w i ll ll

© 2011 IFRS Foundation

 

63 Section 18 – 18 – recognition  recognition Recognise the cost of intangible as asset if:  – probable future benefits inflows, and  – cost can be measured reliably  – the asset does not result from

expenditure incurred internally on an intangible item  –  cannot  – cannot recognise  recognise R&D costs; internally generated brands, logos, publishing titles, customer lists; expenditure to open new facilities or launch new products; training activities; advertising; relocating or reorganising costs. © 2011 IFRS Foundation

 

Section 18 – 18 – recognise  recognise this brand?

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• Ex 1:  1:  A developed a brand that allows it to charge a premium for its products. A maintains local & enhances itsadvertising. brand by   sponsoring events & • Ex 2:  2:  Same as Ex 1 except A bought brand from a competitor in a separate acquisition.

© 2011 IFRS Foundation

 

Section 18 – 18 – intangibles  intangibles in business com

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•  – Intangible asset acquired bus com is normally recognised asinaaseparate asset  –fair  – fair value can be measured reliably  – however, not recognised when arises from

legal/contr legal/contractual actual rightsbecause & fair value cannot be measured reliably the asset either:  –is not separable from goodwill; or  –is separable but no history or evidence of exchange transactions for similar assets, and otherwise estimating fair value would be dependent on immeasurable variables. © 2011 IFRS Foundation

 

Section 18  – initial – initial measurement

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• Initial measurement of intangible = cost  – if separately acquired, cost = purchase price + directly attrib. cost of preparing for intended use  – if acquired in a business combination, combination, cost = at acquisition fair value grant, cost = fair  – if acquired in government grant, value at the date the grant is received or receivable Internally generated intangibles are not recognised & therefore are not measured © 2011 IFRS Foundation

 

Section 18 – 18 – example  example business com

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Ex 3:  3:  A buys B when B’s intangibles were:  were:  CA

FV

Customer list

0

50

In process R&D project

0

80

100

150

0

300

Licence to operate Brand (trademark & brand name)

A incurred 200 to complete in-process R&D project & decides to develop the related product commercially. © 2011 IFRS Foundation

 

Section 18 – 18 – judgements  judgements about cost •  –Judgements in measuring cost include: deferred payment— payment —determining the discount rate  – exchange transaction— transaction—estimating fair

value if no for asset received oractive asset market given up combination—  – acquired in a business combination— estimating fair value if no active markets & judging if fair value can be measured reliably (for recognition)  – acquired by government grant— grant— estimating fair value of if no active market © 2011 IFRS Foundation

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Section 18  – subsequent – subsequent measurement

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• After initial measure intangibles at cost less recognition amortisation & impairment losses • Similar to PP&E but  – all intangibles considered to have finite useful life  – useful life not > the t he contractual/legal right  – useful life includes renewal periods only if evidence to support likely renewal without significant cost  – useful life = 10 yrs if cannot estimate reliably  – residual value is 0, except in specified circumstances © 2011 IFRS Foundation

 

Section 18 – 18 – estimating  estimating useful life • Ex 4:  A acquires 4:  customer list. Expects to benefitafrom list for 1 –  –3 3 yrs. • Ex 5:  5:  B acquires a 5-yr airline route authority 5 yrs at no(ARA) cost that is renewable every  – renewal is routine if specified rules & regulations are complied with  – B is compliant & expects to fly the t he route indefinitely  – an analysis of demand and cash flows supports those assumptions © 2011 IFRS Foundation

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Section 18 – 18 – derecognition  derecognition

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• Derecognise intangibles on disposal or when no further benefits are expected from its use or disposal • Gain or loss = net disposal proceeds (if any) less carrying amount  – show gain or loss in profit or loss (except for some sale & leasebacks)  – gain is not revenue © 2011 IFRS Foundation

 

Section 18 – 18 – disclosures  disclosures

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•  –Disclose class class of  of intangible line itemfor in each income statement (or SOCI or SOI&RE) in which amortisation is included  –  – amortisation useful lives ormethods amortisation rates  – gross carrying amount & accumulated amortisation (incl. impairment losses) at & end of periodamount at  – beginning reconciliation of carrying beginning & end of the reporting period showing specified items (comparatives not required) © 2011 IFRS Foundation

 

Section 18 – 18 – other  other disclosures

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 – expenditure expensed in of theintangible period  – R&D existence & carrying amounts with restricted title or pledged as security for liability  – amount of contractual commitments for the acquisition of intangibles  – (i) description, (ii) carrying amount and (iii) remaining amortisation period of individual

intangible asset that is material entity’s financial statements    to the  – if acquired as government grant & initially recognised at fair value―the fair value initially recognised & the carrying amount © 2011 IFRS Foundation

 

The I FRS fo r SMEs

Section 27 I m p ai ai r m e n t o f A s s et s

© 2011 IFRS Foundation

74

 

Section 27 – 27 – scope  scope

75

• Section 27 specifies accounting and reporting of impairment losses of all assets except:  – deferred tax assets  – assets arising from employee benefits  – financial assets in scope of Sections 11 & 12  – assets measured at fair value

© 2011 IFRS Foundation

 

Section 27 – 27 – general  general principles

76

•  –Assets except inventories:   at reporting date assess whether there is any indication that an asset may be impaired  – if any such indication exists, estimate the amount (RA) (CA) of the> asset  – recoverable impair if carrying amount RA  – recognise impairment loss in profit or loss

• Note: if impairment indicated  – review the remaining useful life, the depreciation (amortisation) method or the residual value for the asset even if no impairment loss found © 2011 IFRS Foundation

 

Section 27 – 27 – impairment  impairment testing level

77

•  –Impairment test at(iflevel test  of individual asset possible)  – otherwise cash-generating unit (CGU)  – eg  –  eg when need to calculate value in use and the individual assets do not generate cash flows by themselves  themselves  A CGU that is the smallest cash identifiable of assets generates inflowsgroup that are largely independent of the cash inflows from other assets or groups of assets. © 2011 IFRS Foundation

 

Section 27 – 27 – impairment  impairment indicators

78

• Consider, as a minimum: • External sources of information in a period  – asset’s market value declined significantly significantly > expected  – significant changes in the technological, market, economic or legal environment  – market rates increased (eg effect on discount rate)  – CA of the net assets > estimated fair value of the entity  entity  © 2011 IFRS Foundation

 

Section C continued

27 – impairment 27 –  impairment indicators  79

• Internal sources of information  – obsolete or physical damaged asset  – significant changes in the extent or manner in which, an asset is (or is expected to be) used  – eg idle assets, plans to discontinue or restructure operation, plans to dispose before expected, and reassessing the useful life of an asset as finite rather than indefinite.  – internal reporting indicates that the economic performance performance of an asset is, or will be, worse than expected (eg operating results & cash flows) © 2011 IFRS Foundation

 

Section 27 – 27 – recoverable  recoverable amount

80

• Recoverable amount = amount = higher of value in use (VIU) & fair value less costs to sell (FV-CTS)  – if either VIU or FV-CTS > CA then no need to determine the other  – if no reason to believe VIU > FV-CTS, then FV-CTS may be used as RA

© 2011 IFRS Foundation

 

Section 27 – 27 – estimating  estimating FV-CTS

81

• FV-CTS = amount obtainable from the sale of an asset in an arm’s length transaction between knowledgeable, willing parties, less the costs of disposal  – best evidence is a price in a binding sale agreement in an arm’s length transaction or a market price in an active market  – if not available, estimate using best information available considering the outcome of recent transactions for similar

assets within the same industry © 2011 IFRS Foundation

 

Section 27 – 27 – estimating  estimating VIU

82

• VIU = present value of the future net cash flows expected to be derived from an asset. •  –Steps to calculate VIU: flows (in & out) from estimate future cash continuing use of the asset & its ultimate

disposal, and  – apply appropriate discount rate to future cash flows © 2011 IFRS Foundation

 

Section 27 – 27 – estimating  estimating VIU

83

•  –Reflect in calculation VIU: entity est. future cash flowsof (FCFs) expects  – expectations about possible variations in the amount or timing of those FCFs  – time value of money (current market riskfree rate of interest)  – uncertainty inherent in market the asset  – price other for factors (eg illiquidity) that participants would adjust for  Avoid double-counting in FCFs & discount discount rate © 2011 IFRS Foundation

 

Section 27 – 27 – est.  est. VIU cash flows

84

•  –Estimates of FCFs cash inflows from include: the continuing use  – cash outflows necessary to generate cash inflows (directly attributed or allocated on & consistent basis) from  – reasonable net cash flows, if any, expected disposal at end of useful life • May:  – use recent budgets/forecasts to est. cash flows  – extrapolate beyond forecast period using steady or declining growth rate, unless another is justified © 2011 IFRS Foundation

 

Section 27 – 27 – est.  est. VIU cash flows

continued

85

• Est. FCFs for asset in current condition • Est. FCFs don’t include in/outflows from:  from:   – a future restructuring to which an entity is not yet committed, or  – improving or enhancing the asset’s asset’s performance. • Est. FCFs also don’t include:  include:   – cash in/outflows from financing activities, and  – income tax receipts/payments. © 2011 IFRS Foundation

 

Section 27 – 27 – est.  est. VIU discount rate

86

• Discount rate/s is a pre-tax rate/s that reflect/s current market assessments of:  – the time value of money (ie current market risk-free rate of interest); and  – the risks specific to the asset for which the future cash flow estimates have not been adjusted (ie avoid double-counting).

© 2011 IFRS Foundation

 

Section 27 – 27 – cash  cash generating unit (CGU) 87 • Allocate impairment loss:  – 1st to any goodwill allocated to the CGU  – 2nd to other assets pro rata on the basis CA of each asset in CGU  – however, cannot reduce the CA of any asset below the highest of 0, FV-CTS & VIU (if determinable) reallocate to other assets of CGU  –reallocate  – © 2011 IFRS Foundation

 

Section 27 – 27 – example  example CGU impairment 88 • Ex 1: At 31/12/20X1 CA of a CGU’s CGU’s assets = 210 (ie 150 taxis, 50 taxi licence & 10 goodwill) Impairment indicated & RA = 170. Fair value of taxis = 140. Impairment loss = 40 (ie 210 CA less 170 RA) 1st allocate 10 loss to goodwill 2nd allocate remaining 30 loss, ie 22.5 to taxis & 7.5 to licence (pro rata on CA) 3rd reallocate 12.5 loss from taxis to licence  licence  © 2011 IFRS Foundation

 

Section 27 – 27 – goodwill  goodwill

89

• On acquisition date goodwill is allocated to each cash-generating unit that is expected to benefit from the synergies of the business combination • CA of partly-owned CGU is notionally adjusted for the NCI’s share of goodwill before being compared with its RA

© 2011 IFRS Foundation

 

Section 27 – 27 – example  example goodwill

90

• Ex 2: Goodwill of CU40 A’s on acquisition of 75% of B’son shares 1/1/20X1. To reflect synergies the group allocated the goodwill 10 to A’s CGU and 30 to B’s CGU. • For impairment testing purposes only B’s goodwill is notionally grossed up to 40 (ie additional goodwill for NCI = 10). © 2011 IFRS Foundation

 

Section 27 – 27 – goodwill  goodwill continued

91

• If goodwill cannot be allocated to CGU/s on a non-arbitrary basis, then for the purposes of testing goodwill for impairment, the entity determines the recoverable amount of either:  – the acquired entity in its entirety (if goodwill relates to an acquired entity that

not been integrated).  – has the entire group of entities, excluding any entities that have not been integrated (if the goodwill relates to an acquired entity that has been integrated). © 2011 IFRS Foundation

 

Section 27 – 27 – reversing  reversing impairment loss

92

•  –General principles: principles:    at reporting date assess whether there is any indication that impairment has reversed  – any such indicationinexists, estimate RA<  – if reverse impairment profit or loss if CA RA, but  –reversal  – reversal cannot increase the CA above the that would have been determined (netCA of amortisation or depreciation) had no impairment loss been recognised in prior years.  –goodwill  – goodwill impairment cannot be reversed  © 2011 IFRS Foundation

 

Section 27 – 27 –  example reverse impairm’t  impairm’t  93 • Ex 3: Facts from Ex 1. At 31/12/20X2 CA of CGU = 120 (ie 100 taxis & 20 licence) Impairment reversal indicated & RA

estimated = 150 Potential impairment impairment reversal = 30 (ie 150 RA less 120 CA) but limited to 20 (as follows) st

1  allocate licence & 25totoassets taxis pro rata on CAs, ie 5 to 2nd limit amt allocated to taxis to 7 (if (if no impairment in 20X1,  20X1, CA at 20X2 = 107) 107)  © 2011 IFRS Foundation

 

Section 27 – 27 – example  example reversal continued • Ex 3 continued:

94

3rd reallocate 18 reversal from taxis to licence Total reversal allocated to licence = 23 (ieprovisionally 5 + 18) 4th limit amt allocated to licences to 13 (if (if no impairment in 20X1,  20X1, CA at 20X2 = 33) 33)

5th as there are no other assets to reallocate the unallocated 10 (ie 23 less 13) reversal to, limit the total impairment reversal to 20 (ie 7 for taxis and 13 for licence) © 2011 IFRS Foundation

 

Section 27 – 27 – after  after reversal • After reversing impairment loss  – adjust the depreciation/amortisation charge for the asset in future periods to allocate the asset’s revised CA, less its residual value (if any), on a systematic basis over its remaining useful life.

© 2011 IFRS Foundation

95

 

Section 27 – 27 – impairment  impairment disclosures

96

• Disclose separately for each of ―(a) inventories; (b) PP&E; (c) goodwill; (d) intangibles other than goodwill; (e) investments in associates; (f) investments in  joint ventures:  – amount of impairment losses recognised in profit or loss & line item(s) in the income statement (or SOCI or SOI&RE) in which included.  – same for reversals of impairment im pairment losses © 2011 IFRS Foundation

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