corporate reporting notes

8/7/2019 CORPORATE REPORTING notes

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TOPIC ONE

y Accounting concepts and accounting theory:What is a conceptual framework?

Conceptual Framework can be defined as constitution, a coherent system of interrelated objectives and

fundamentals that can lead to consistent standards and that prescribes the nature, function and limits

of financial reporting and financial reporting statements.

y Conceptual FrameworkNOTE:

y The credibility of the conceptual framework rests upon its general recognition and acceptanceby preparers, auditors and other users of financial statements.

y The framework is concerned with general financial statements including the consolidatedfinancial statements.

y PURPOSE AND STATUSy Assist the board of IASC in the development of future International Accounting Standards and in

its review of existing International Accounting Standards.

y Assist the board of IASC in promoting harmonization of regulations, accounting standards andprocedures relating to the presentation of financial statements by providing a basis for reducing

the number of alternative accounting treatments permitted by International Accounting

Standards.

y Assist national standard-setting bodies in developing national standards.y Assist preparers of financial statements in applying International Accounting Standards and in

dealing with topics that have yet to form the subject of an International Accounting Standard.

y Assist auditors in forming an opinion as to whether financial statements conform toInternational Accounting Standards.

y Assist users of financial statements in interpreting the information contained in financialstatements prepared in conformity with International Accounting Standards.

y Provide those who are interested in the work of IASC with information about its approach to theformulation of International Accounting Standards.


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y SCOPEy The framework deals with:a) The objective of financial statements.b) The qualitative characteristics that determine the usefulness of information in financial statements.c) The definition, recognition and measurement of the elements from which financial statements are

constructed.

d) Concepts of capital and capital maintenance.

y THEOBJECTIVEOF FINANCIAL STATEMENTSy The objective of financial statements is to provide information about the financial position,

performance and changes in financial position of an entity that is useful to a wide range of users

in making economic decisions.

y UNDERLYING ASSUMPTIONS1. ACCRUAL BASIS y In order to meet their objectives, financial statements are prepared on the accrual basis of

accounting.

y Under this basis, the effects of transactions and other events are recognized when they occur(and not as cash or its equivalent are received or paid) and they are recorded in the accounting

records and reported in the financial statements of the periods to which they relate.

2. GOING CONCERN

y The financial statements are normally prepared on the assumption that an entity is a goingconcern and will continue in operation for the foreseeable future. Hence, it is assumed that the

entity has neither the intention nor the need to liquidate or curtail materially the scale of its

operations.

y QUALITATIVECHARACRTESTICSOF FINANCIAL STATEMENTSy Qualitative characteristics are the attributes that make the information provided in financial

statements useful to users. The four principal qualitative characteristics are understandability,

relevance, reliability and comparability.

y 1. UNDERSTANDABILITYy An essential quality of the information provided in financial statements is that it is readily

understandable by users. For this purpose, users are assumed to have a reasonable knowledge


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of business and economic activities and accounting and a willingness to study the information

with reasonable diligence.

y 2. RELEVANCEy To be useful, information must be relevant to the decision making needs of users. Information

has the quality of relevance when it influences the economic decisions of users by helping them

evaluate past, present or future events or confirming, or correcting their past evaluations.

y The relevance of information is affected by its nature and materiality.y 3. RELIABILITYy To be useful, information must also be reliable. Information has the quality of reliability when it

is free from material error and bias and can be depended upon by users to represent faithfully

that which it either purports to represent of could reasonably be expected to represent.

y CONT:y For information to be reliable it must have the following attributes:a) Faithful representationb) Substance over formc) Neutralityd) Prudencee) Completenessy 4. COMPARABILITYy Users must be able to compare the financial statements of an entity through time in order to

identify trends in its financial position and performance. Users must also be able to compare the

financial statements of different entities in order to evaluate their relative financial position,

performance and changes in financial statements.

y CONSTRAINTSON RELEVANT AND RELIABLEINFORMATION1. Timelinessy If there is undue delay in the reporting of information it may lose its relevance.y To provide information on a timely basis it may often be necessary to report before all aspects

of a transaction or other event are known, thus impairing reliability.

y 2. Balance between benefit and cost


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y The benefits derived from information should exceed the cost of providing it.y The evaluation of benefits and costs is however substantially a judgmental process.y THEELEMENTSOF FINANCIAL STATEMENTS1. Assetsy An asset is a resource controlled by the entity as a result of past events and from which future

economic benefits are expected to flow to the entity.

y 2. Liabilityy A liability is a present obligation of the entity arising from past events, the settlement of which is

expected to result in an outflow from the entity of resources embodying economic benefits.

y 3. Equityy Equity is the residual interest in the assets of the entity after deducting all its liabilities.y 4. Incomey Income is increases in economic benefits during the accounting period in the form of inflows or

enhancements of assets or decreases of liabilities that result in increases in equity, other than

those relating to contributions from equity participants.

y 5. Expensesy Expenses are decreases in economic benefits during the accounting period in the form of

outflows or depletions of assets or incurrence of liabilities that result in decreases in equity,

other than those relating to distributions to equity participants.

y RECOGNITION OF THEELEMENTSOF FINANCIAL STATEMENTSy Recognition is the process of incorporating in the balance sheet and income statement an item

that meets the definition of an element and satisfies the criteria for recognition set below:

a) It is probable that any future economic benefits associated with the item will flow to or from theentity.

b) The item has a cost or value that can be measured with reliability.y MEASUREMENTOF THEELEMENTSOF FINANCIAL STATEMENTS1. Historical cost:y Assets are recorded at the amount of cash or cash equivalents paid or the fair value of the

consideration given to acquire them at the time of their acquisition.


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y Liabilities are recorded at the amount of proceeds received in exchange for the obligation, orthe amounts of cash or cash equivalents expected to be paid to satisfy the liability in the normal

course of business.

y 2. Current costy Assets are carried at the amount of cash or cash equivalents that would have paid if the same or

an equivalent asset was acquired currently.

y Liabilities are carried at the undiscounted amount of cash or cash equivalents that would berequired to settle the obligation currently.

y 3. Realizable (settlement) valuey Assets are carried at the amount of cash or cash equivalents that could currently be obtained by

selling the asset in an orderly disposal.

y Liabilities are carried at their settlement values; that is the, the undiscounted amounts of cashor cash equivalents expected to be paid to satisfy the liabilities in the normal course of business.

y 4. Present valuey Assets are carried at the present discounted value of the future net cash inflows that the item is

expected to generate in the normal course of business.

y Liabilities are carried at the present discounted value of the future net cash outflows thatexpected to be required to settle the liabilities in the normal course of business.

y CONCEPTSOF CAPITAL AND CAPITAL MAINTENANCEa) Financial capital maintenance: under this concept a profit is earned only if the financial (or

money) amount of the net assets at the end of the period exceeds the financial (or money)

amount of net assets at the beginning of the period, after excluding any distributions to, and

contributions from owners during the period. Financial capital maintenance can be measured in

either nominal monetary units or units of constant purchasing power.

y CONT:y Physical capital maintenance: under this concept profit is earned only if the physical productive

capacity (or operating capability) of the entity (or the resources or funds needed to achieve thatcapacity) at the end of the period exceeds the physical productive capacity at the beginning of

the period after excluding any distributions to, and contributions from, owners during the

period.

y INTERMEDIATE ACCOUNTINGy CONSTRUCTION CONTRACTS (IAS 11)


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y Objectivey To prescribe the accounting treatment of revenue and costs associated with construction

contracts. The primary issue in accounting for construction contracts is the allocation of contract

revenue and contract costs to the accounting periods in which construction work is performed.

y Definitions:y A construction contract: is a contract specifically negotiated for the construction of an asset or a

combination of assets that are closely interrelated or interdependent in terms of their design,

technology and function or their ultimate purpose or use.

y A fixed price contract: is a construction contract in which the contractor agrees to a fixedcontract price, or a fixed rate per unit of output, which in some cases is subject to cost

escalation clauses.

y Definitions:y A cost plus contract: is a construction contract in which the contractor is reimbursed for

allowable or otherwise defined costs plus a percentage of these costs or a fixed fee.

y Note:y under IAS 11, construction contracts include the following:

Contracts for the rendering of services which are directly related to the construction ofthe asset, e.g. those for the services of project managers and architects.

Contracts for the destruction or restoration of assets and the restoration of theenvironment following the demolition of assets.

y Types of construction contractsy Short term contracts: are those contracts that are completed within one financial period and

therefore it is easy to determine the profit which is then reported in the period in which it is

earned.

y Long term contracts: are those contracts that take more than one financial period and thereforecreate a problem in determining the amount of profit to be reported in each accounting period.

y Contract revenuey Comprise the following:y The initial amount of revenue agreed in the contracty Variations in contract work, claims and incentive payments:


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To the extent that it is probable that they will result in revenue They are capable of being reliably measured.

y CONTy The amount of contract revenue may increase or decrease from one period to the next due to

the following:

a) In a fixed price contract may increase as a result of cost escalation clauses.b) Decrease as a result of penalties arising from delays caused by the contractor in the completion

of the contract.

c) Fixed price contract involves a fixed price for unit of output which increases revenue as a resultof increase in the number of units

d) As a results of agreed variations.y CONTy Variations are an instruction by the customer for a change in the scope of the work to be

performed under the contract. A variation is included in contract revenue when:

y It is probable that the customer will approve the variation and the amount of revenue arisingfrom the variation.

y The amount of revenue can be reliably measured.y Contracts costs:y Comprise the following:y Costs that relate directly to the specific contract e.g. costs of materials; site labour costs

including supervision; depreciation of plant and equipment used on the contract; cost of moving

plant, equipment and materials to and from the contract site; costs of hiring plant and

equipment; cost of technical assistance, the estimated costs of rectification and guarantee work

including expected warranty costs and claims from third parties.

y Contracts costs:y Costs that are attributable to contract activity in general and can be allocated to the contract

e.g. insurance; costs of design and technical assistance that are not directly related to a specific

contract; construction overheads.

y Such other costs as are specifically chargeable to the customer under the terms of the contract.y Contracts costs:


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y Costs that cannot be attributed or allocated to contract activity are excluded from the costs of aconstruction contract e.g.

General administration costs Selling and distribution costs Research and development expenses Depreciation of idle plant and equipment

y Recognition of contract revenue and expensesy When the outcome of a construction contract can be estimated reliably, contract revenue and

costs associated with the construction contract shall be recognized as revenue and expenses

respectively by reference to the stage of completion of the contract activity at the balance sheet

date.

y CONTy In the case of a fixed price contract, the outcome of a construction contract can be estimated

reliably when all the following conditions are satisfied:

y Total contract revenue can be measured reliably.y It is probable that the economic benefits associated with the contract will flow to the entity.y Both the contract costs to complete the contract and the stage of contract completion at the

reporting period can be measured reliably.

y The contract costs attributable to the contract can be clearly identified and measured reliably.y CONTy In the case of a cost plus contract, the outcome of a construction contract can be estimated

reliably when all the following conditions are satisfied.

It is probable that the economic benefits associated with the contract will flow to theentity.

Contract costs attributable to the contract can be clearly identified and measuredreliably.

y Recognition of revenue and expenses by reference to the stage of completion of a contract.y Is often referred to as the percentage of completion method. Contract revenue is matched with

the contract costs incurred in reaching the stage of completion, resulting in the reporting of

revenue, expenses and profit which can be attributed to the proportion of work completed.


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y CONTy When a contractor incur contract costs that relate to future activities on the contract and is

probable that they will be recovered represent an amount due from the customer and are often

classified as contract work in progress.

y CONTy An entity is generally able to make reliable estimates after it has agreed to a contract which

establishes:

a) Each partys enforceable rights regarding the asset to be constructed.b) The consideration to be exchanged.c) The manner and terms of settlement.y Determination of stage of completion.y The entity uses the method that measure reliably the work performed. Depending on the nature

of the contract, the methods may include:

y The preparation that contract costs incurred for work performed to date bear to the estimatedtotal contract costs.

y Surveys of work performed.y Completion of a physical proportion of the contract work.y CONTy When the outcome of a construction contract cannot be estimated reliably:

Revenue shall be recognized only to the extent of contract costs incurred that it isprobable will be recoverable.

Contract costs shall be recognized as an expense in the period in which they areincurred.

y Recognition of expected lossesy When it is probable that total contract costs will exceed total contract revenue, the expected

loss shall be recognized as an expense immediately. The amount of such loss is determined

irrespective of:

a) Whether the work has commenced on the contractb) The stage of completion of contract activity


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c) The amount of profits expected to arise on other contracts which are not treated as a singleconstruction contract.

y Disclosure:y The amount of contract revenue recognized as revenue in the period.y The methods used to determine the contract revenue recognized in the period.y The methods used to determine the stage of completion of contracts in progress.y The aggregate amount of costs incurred and recognized profits (less recognized losses) to date.y The amount of advances received.y The amount of retentions.y INTERMEDIATE ACCOUNTINGy PROPERTY, PLANT AND EQUIPMENT (IAS 16)y Objective:y To prescribe the accounting treatment for property, plant and equipment so that users of the

financial statements can discern information about an entitys investment in its property, plant

and equipment and the changes in such investment.

y PPE are tangible items that:1. Are held for use in the production or supply of goods or services, for rental to others or for

administrative purposes; and

2. Are expected to be used during more than one period.y Classes ofPPE include:

Land Land and buildings Machinery Ships Aircraft Motor vehicles Furniture and fixtures


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Office equipmenty The principal issues in accounting for PPE are:y Recognition of the assetsy The determination of their carrying amountsy Depreciation chargesy Impairment lossesy Recognition ofPPE:y PPE shall be recognized as an asset if and only if:a) The PPE meet the definition of an assetb) It is probable that future economic benefits associated with the item will flow to the entity.c) The cost of the item can be measured reliably.y Measurement of PPEy Classified into twoa) Initial measurementb) Subsequent measurementy Initial measurementy Cost of an item of property, plant and equipment comprises:1. Its purchase price including import duties and non-refundable purchase taxes after deducting

trade discounts and rebates.

y Initial measurement2. Any costs directly attributable to bringing the asset to the location and condition necessary for it

to be capable of operating in the manner intended by management i.e.

Costs of employee benefits (from construction or acquisition of the item) Costs of site preparation Initial delivery and handling costs. Installation and assembly costs


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Costs of testing whether the asset is functioning properly Professional fees

y Initial measurement3. The initial estimate of the costs of dismantling and removing the item and restoring the site on

which it is located; this is done in accordance with IAS2; IAS 16 and IAS 37

4. IAS20: Government grant and disclosures of government assistance5. IAS23: Borrowing costsy Costs that are excluded from PPEy The following costs are excluded from PPE unless they can be traced directly in the acquisition

of the asset:

1. Administration and other general overheads2. Start-up and pre-production costs3. Initial operating losses before the asset reaches the planned or expected performances.4. Costs of conducting a business in a new location or with a new class of customer (including costs

of staff training)

y Subsequent costs to be capitalizedy Once the initial costs of the asset has been determined, then any other subsequent expenditure

incurred on the property, plant and equipment should be expensed unless it improves the

condition of the asset beyond its previous performances i.e.

y Subsequent costs to be capitalizeda) Modification of an item of plant to extend its useful economic life.b) Upgrading of machine parts to improve on the quality of outputc) Adoption of a new production process leading to large reductions in operating costsy Subsequent measurement of PPE1. Cost model2. Revaluation modely Cost Model


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y After recognition as an asset, an item of property, plant and equipment shall be carried at itscost less any accumulated depreciation and any accumulated impairment losses.

y Revaluation Modely After recognition as an asset, an item of property, plant and equipment whose fair value can be

measured reliably shall be carried at a revalued amount, being its fair value at the date of the

revaluation less any subsequent accumulated depreciation and subsequent accumulated

impairment losses.

y Revaluations shall be made with sufficient regularity to ensure that the carrying amount doesnot differ materially from that which would be determined using fair value at the end of the

reporting period.

y Depreciation:y Is the systematic allocation of the depreciable amount of an asset over its useful l ife.y The depreciation charge for each period shall be recognized in profit or loss unless it is included

in the carrying amount of another asset.

y Depreciation:y Depreciation of an asset begins when it is available for use i.e. when it is in the location and

condition necessary for it to be capable of operating in the manner intended by management.

y Depreciation of an asset ceases at the earlier of the date that the asset is classified as held forsale in accordance to IFRS 5 and the date the asset is derecognized

y Depreciation:y Depreciation does not cease when the asset becomes idle or is retired from active use unless

the asset is fully depreciated. However, under usage methods of depreciation the depreciation

charge can be zero while there is no production.

y Useful life is:a) The period over which an asset is expected to be available for use by an entity; orb) The number or production or similar units expected to be obtained from the asset by an entity.y Useful Lifey The following factors are considered in determining the useful life of an asset:a) Expected usage of the asset ( i.e. assets expected capacity or physical output)b) Expected physical wear and tear


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c) Technical or commercial obsolescence arising from changes or improvements in production ( i.e.change in market demand for the product or service)

d) Legal or similar limits on the use of the asset (e.g. expiry dates of related leases)y Derecognition:y The carrying amount of an item of property, plant and equipment shall be derecognized:a) On disposalb) When no future economic benefits are expected from its use or disposal.y Derecognition:y The gain or loss arising from the Derecognition of an item of property, plant and equipment

shall be determined as the difference between the net disposal proceeds if any and the carrying

amount of the item.

y Derecognitiony The gain or loss arising from the Derecognition of an item of property, plant and equipment

shall be included in profit or loss when the item is derecognized.

y Gains shall not be classified as revenue, but under the heading of other incomes.y DisclosureRequirement:y The measurement bases used for determining the gross carrying amounty The depreciation methods usedy The useful lives or the depreciation rates usedy The gross carrying amount and the accumulated depreciation (aggregated with accumulated

impairment losses) at the beginning and the end of the period.

y A reconciliation of the movements of the itemsy INTERMEDIATE ACCOUNTINGy IAS17: LEASESy Objectivey Is to prescribe for lessees and lessors, the appropriate accounting policies and disclosures to

apply in relation to leases.

y Definitions


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y 1. A lease: is an agreement whereby the lessor conveys to the lessee in return for a payment orseries of payments, the right to use an asset for an agreed period of time.

y 2. A finance lease: is a lease that transfer a substantially all the risks and rewards incidental toownership of an asset. Title may or may not eventually be transferred.

y 3. An operating lease: is a lease other than a finance leasey 4. A non-cancelable lease:y Is a lease that is cancelable only:a) Upon the occurrence of some remote contingency.b) With the permission of the lessorc) If the lessee enters into a new lease for the same or an equivalent asset with the same lessord) Upon payment by the lessee of such an additional amount that at inception of the lease,

continuation of the lease is reasonably certain.

y 5. The inception of the lease:y Is the earlier of the date of the lease agreement and the date of commitment by the parties to

the principal provisions of the lease.

y 6. The commencement of the lease term:y Is the date from which the lessee is entitled to exercise its right to use the leased asset. It is the

date of initial recognition of the lease (i.e. the recognition of the assets, liabilities, income or

expenses resulting from the lease as appropriate)

y 7. The lease term:y Is the non-cancelable period for which the lessee has contracted to lease the asset together with

any further terms for which the lessee has the opinion to continue to lease the asset, with or

without further payment when at the inception of the lease it is reasonably certain that the will

exercise the option.

y 8. Minimum lease payments:y This is the sum of all installments payable by the lease to the lessor which excludes cost of

services and taxes to be paid by the lessee or lessor, and also exclude residual amounts

guaranteed by the lessee if the lessee had done so when entering into a lease agreement.

y Classification of leasesy 1. Finance lease


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y Is a lease that transfers substantially all the risks and rewards incidental to ownership of anasset.

Risks involve:

y Possibilities of losses from idle capacityy Technological obsolescencey Variations in return because of changing economic conditionsy Classification of leases

Rewards include:

y Using the asset to generate economic benefits over the assets economic lifey Gain from appreciation in value or realization of a residual valuey Classification of leasesy The following are examples of situations that individually or in combinations would normally

lead to a lease being classified as a finance lease:

1. The lease transfers ownership of the asset to the lessee by the end of the lease term.2. The lessee has the option to purchase the asset at a price that is expected to be sufficiently

lower than the fair value at the date the option becomes exercisable for it to be reasonably

certain, at the inception of the lease, that the option will be exercised.

y Classification of leases3. The lease term is for the major part of the economic life of the asset even if title is not

transferred.

4. At the inception of the lease the present value of the minimum lease payments amounts to atleast substantially all of the fair value of the leased asset.

y Classification of leases5. The leased assets are of such a specialized nature that only the lessee can use them without

major modifications.

6. It is a non-cancellable leasey It is a non-cancellable leasey If the lease can cancel the lease, the lessors losses associated with the cancellation are borne by

the lessee


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y Gains or losses from the fluctuation in the fair value of the residual accrue to the lesseey The lessee has the ability to continue the lease for a secondary period at a rent that is

substantially lower than market rent.

y 2. Operating leasey Is a lease that does not transfer substantially all the risks and rewards incidental to ownershipy CONTy Note: Leases of land and buildings are classified as operating or finance leases in the same

way as leases of other assets.However a characteristic of land is that it normally has an

indefinite economic life and if title is not expected to pass to the lessee by the end of the lease

term, the lessee normally does not receive substantially all of the risks and rewards incidental

to ownership, in which case the lease of land will be an operating lease.

y Leases in the financial statements of lesseesFinance leases

y Initial recognitiony At the commencement of the lease term, lessees shall recognize finance leases as assets and

liabilities in their statement of financial position at amounts equal to the fair value of the leased

property or if lower the present value of the minimum lease payments, each determined at the

inception of the lease.

y CONTy The discount rate to be used in calculating the present value of the minimum lease payments is

the interest rate implicit in the lease, if this is practicable to determine; if not, the lessees

incremental borrowing rate shall be used.

y CONTy Any initial direct costs of the lessee are added to the amount recognized as an asset; (initial

direct costs are often incurred in connection with specific leasing activities such as negotiating

and securing leasing arrangements).

y Note:y In case of lessors they shall recognize assets held under a finance lease in their statements of

financial position and present them as a receivable at an amount equal to the net investment in

the lease.


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y Initial direct costs are such as commissions, legal fees and internal costs that are incrementaland directly attributable to negotiating and arranging a lease should be included in the initial

measurement of the finance lease receivable and reduce the amount of income recognized over

the lease term.

y Subsequent measurementy Minimum lease payments shall be apportioned between the finance charge and reduction of the

outstanding liability. The finance charge shall be allocated to each period during lease term so as

to produce a constant periodic rate of interest on the remaining balance of the liability.

Contingent rents shall be charged as expenses in the periods in which they are incurred.

y CONTy A finance lease gives rise to depreciation expense for depreciable assets as well as finance

expense for each accounting period. The depreciation policy should in consistent with the

relevant standards i.e. IAS 16 and IAS 38. If there is no reasonable certainty that the lessee willobtain ownership by the end of the lease term, the asset shall be fully depreciated over the

shorter of the lease term and its useful life.

y Note:y In case of lessor the recognition of finance income shall be based on a pattern reflecting a

constant periodic rate of return on the lessors net investment in the finance lease.

y Operating leasesy Lease payments under an operating lease shall be recognized as an expense on a straight-line

basis over the lease term unless another systematic basis is more representative of the pattern

of the users benefit.

y Lease payments (excluding costs for services such as insurance and maintenance) are recognizedas an expense on a straight-line basis unless another systematic basis is representative of the

time pattern of the users benefit, even if the payments are not on that basis.

y Note:y In case of lessor lease income from operating leases shall be recognized in income on a straight-

line basis over the lease term, unless another systematic basis is more representative of thetime pattern in which use benefit derived from the leased asset is diminished.

y Sale and leaseback transactions:y If a sale and leaseback transaction results in a finance lease any excess of sales proceeds over

the carrying amount shall not be immediately recognized as income by a seller-lessee. Instead it

shall be deferred and amortized over the lease term.


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3. Market interest rates or other market rates of return on investments have increased during theperiod, and those increases are likely to affect the discount rate used in calculating an assets

value in use and decrease the assets recoverable amount materially.

4. The carrying amount of the net assets of the entity is more than its market capitalization.y Internal sources of information for impairment1. Evidence is available of obsolescence or physical damage of an asset.2. Significant changes with an adverse effect on the entity have taken place during the period, or

are expected to take place in the near future, in the extent to which, or manner in which, an

asset is used or is expected to be used.

y CONT3. Evidence is available from internal reporting that indicates that the economic performance of an

asset is, or will be, worse than expected.

y Measuring recoverable amounty This Standard defines recoverable amount as the higher of an assets or cash-generating units

fair value less costs to sell and its value in use.

y Fair value less costs to selly The best evidence of an assets fair value less costs to sell is a price in a binding sale agreement

in an arms length transaction, adjusted for incremental costs that would be directly attributable

to the disposal of the asset.

y Fair value less costs to selly If there is no binding sale agreement but an asset is traded in an active market, fair value less

costs to sell is the assets market price less the costs of disposal. The appropriate market price is

usually the current bid price. When current bid prices are unavailable, the price of the most

recent transaction may provide a basis from which to estimate fair value less costs to sell,

provided that there has not been a significant change in economic circumstances between the

transaction date and the date as at which the estimate is made.

y Fair value less costs to selly If there is no binding sale agreement or active market for an asset, fair value less costs to sell is

based on the best information available to reflect the amount that an entity could obtain, at the

end of the reporting period, from the disposal of the asset in an arms length transaction

between knowledgeable, willing parties, after deducting the costs of disposal. In determining

this amount, an entity considers the outcome of recent transactions for similar assets within the


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same industry. Fair value less costs to sell does not reflect a forced sale, unless management is

compelled to sell immediately.

y Value in usey The following elements shall be reflected in the calculation of an assets value in use:y An estimate of the future cash flows the entity expects to derive from the asset;y Expectations about possible variations in the amount or timing of those future cash flows;y The time value of money, represented by the current market risk-free rate of interest;y The price for bearing the uncertainty inherent in the asset; andy Other factors, such as illiquidity, that market participants would reflect in pricing the future cash

flows the entity expects to derive from the asset.

y Composition of estimates of future cash flowsy Estimates of future cash flows shall include:y Projections of cash inflows from the continuing use of the asset;y Projections of cash outflows that are necessarily incurred to generate the cash inflows from

continuing use of the asset (including cash outflows to prepare the asset for use) and can be

directly attributed, or allocated on a reasonable and consistent basis, to the asset; and

y Net cash flows, if any, to be received (or paid) for the disposal of the asset at the end of itsuseful life.

y Discount ratey The discount rate (rates) shall be a pre-tax rate (rates) that reflect(s) current market

assessments of:

y The time value of money; andy The risks specific to the asset for which the future cash flow estimates have not been adjusted.y Recognizing and measuring an impairment lossy If and only if, the recoverable amount of an asset is less than its carrying amount, the carrying

amount of the asset shall be reduced to its recoverable amount. That reduction is an

impairment loss.

y CONT


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y An impairment loss shall be recognized immediately in profit or loss, unless the asset is carriedat revalued amount in accordance with another Standard (for example, in accordance with the

revaluation model in IAS 16). Any impairment loss of a revalued asset shall be treated as a

revaluation decrease in accordance with that other Standard.

y Cash-generating unitsy Acash-generating unitis the smallest identifiable group of assets that generates cash inflows

that are largely independent of the cash inflows from other assets or groups of assets.

y Allocation ofImpairment loss for a cash-generating unita) First, to the specific asset in which there is an indication of impairmentb) Second, to reduce the carrying amount of any goodwill allocated to the cash-generating unit

(group of units); and

c) Then, to the other assets of the unit (group of units) pro rata on the basis of the carryingamount of each asset in the unit (group of units).

y CONTy These reductions in carrying amounts shall be treated as impairment losses on individual assets.

In allocating an impairment loss, an entity shall not reduce the carrying amount of an asset

below the highest of:

a) Its fair value less costs to sell (if determinable);b) Its value in use (if determinable); andc) Zero.y Reversing an impairment loss for an individual assety A reversal of an impairment loss for an asset other than goodwill shall be recognized

immediately in profit or loss, unless the asset is carried at revalued amount in accordance with

another IFRS (for example, the revaluation model in IAS 16). Any reversal of an impairment loss

of a revalued asset shall be treated as a revaluation increase in accordance with that other IFRS.

y CONTy The increased carrying amount of an asset other than goodwill attributable to a reversal of an

impairment loss shall not exceed the carrying amount that would have been determined (net of

amortization or depreciation) had no impairment loss been recognized for the asset in prior

years.

y INTERMEDIATE ACCOUNTING


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y IAS38: Intangible Assetsy The objective of this Standard is to prescribe the accounting treatment for intangible assets.y The attributes of intangible assets1. Identifiability2. Control3. Future economic benefitsy Identifiabilityy The definition of an intangible asset requires an intangible asset to be identifiable to distinguish

it from goodwill.

y An asset is identifiable if it either:a) Is separable, i.e. is capable of being separated or divided from the entity and sold, transferred,

licensed, rented or exchanged, either individually or together with a related contract,

identifiable asset or liability, regardless of whether the entity intends to do so; or

b) Arises from contractual or other legal rights, regardless of whether those rights are transferableor separable from the entity or from other rights and obligations.

y Controly An entity controls an asset if the entity has the power to obtain the future economic benefits

flowing from the underlying resource and to restrict the access of others to those benefits.

y Future economic benefitsy The future economic benefits flowing from an intangible asset may include revenue from the

sale of products or services, cost savings, or other benefits resulting from the use of the asset by

the entity. For example, the use of intellectual property in a production process may reduce

future production costs rather than increase future revenues.

y Recognitiony IAS 38: INTANGIBLE ASSETSy An intangible asset shall be recognized if it meets the definition of an asset and if:a) It is probable that the expected future economic benefits that are attributable to the asset will

flow to the entity; and

b) The cost of the asset can be measured reliably.


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y Initial measurement/ measurement at recognitiony For the purpose on initial measurement intangible assets are classified into the following

classes:

a) Separate acquisitionb) Acquisition as part of a business combinationc) Acquisition by way of a government grantd) Exchanges of assetse) Internally generated goodwillf) Internally generated intangible assetsy Separate acquisitiony The cost of a separately acquired intangible asset comprises:a) Its purchase price, including import duties and non-refundable purchase taxes, after deducting

trade discounts and rebates; and

b) Any directly attributable cost of preparing the asset for its intended use.y Acquisition as part of a business combinationy In accordance with IFRS 3 Business Combinations, if an intangible asset is acquired in a business

combination, the cost of that intangible asset is its fair value at the acquisition date. The fairvalue of an intangible asset will reflect expectations about the probability that the expected

future economic benefits embodied in the asset will flow to the entity.

y Acquisition by way of a government granty In accordance with IAS20Accounting for Government Grants and Disclosure of Government

Assistance, an entity may choose to recognize both the intangible asset and the grant initially at

fair value. If an entity chooses not to recognize the asset initially at fair value, the entity

recognizes the asset initially at a nominal amount (the other treatment permitted by IAS20)

plus any expenditure that is directly attributable to preparing the asset for its intended use.

y Exchanges of assetsy The cost of such an intangible asset is measured at fair value unlessy The exchange transaction lacks commercial substance ory The fair value of neither the asset received nor the asset given up is reliably measurable.


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y Internally generated goodwilly Internally generated goodwilly Internally generated goodwill shall not be recognized as an asset. In some cases, expenditure is

incurred to generate future economic benefits, but it does not result in the creation of an

intangible asset that meets the recognition criteria in this Standard. Such expenditure is often

described as contributing to internally generated goodwill.

y Internally generated goodwilly Internally generated goodwill is not recognized as an asset becausea) It is not an identifiable resourceb) It is not controlled by the entityc) And cannot be measured reliably at costy Internally generated intangible assetsy To assess whether an internally generated intangible asset meets the criteria for recognition, an

entity classifies the generation of the asset into:

1. Research phase; and2. Development phasey Research phasey No intangible asset arising from research (or from the research phase of an internal project)

shall be recognized. Expenditure on research (or on the research phase of an internal project)

shall be recognized as an expense when it is incurred.

y Development phasey An intangible asset arising from development (or from the development phase of an internal

project) shall be recognized if, and only if, an entity can demonstrate all of the following:

1. The technical feasibility of completing the intangible asset so that it will be available for use orsale.

2. Its intention to complete the intangible asset and use or sell it.3. Its ability to use or sell the intangible asset.y Development phase


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4. How the intangible asset will generate probable future economic benefits. Among other things,the entity can demonstrate the existence of a market for the output of the intangible asset or

the intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset.

5. The availability of adequate technical, financial and other resources to complete thedevelopment and to use or sell the intangible asset.

6. Its ability to measure reliably the expenditure attributable to the intangible asset during itsdevelopment.

y Measurement after recognitiony An entity shall choose either the cost model or the revaluation model as its accounting policy. If

an intangible asset is accounted for using the revaluation model, all the other assets in its class

shall also be accounted for using the same model, unless there is no active market for those

assets.

y Cost modely After initial recognition, an intangible asset shall be carried at its cost less any accumulated

amortization and any accumulated impairment losses.

y Revaluation modely After initial recognition, an intangible asset shall be carried at a revalued amount, being its fair

value at the date of the revaluation less any subsequent accumulated amortization and any

subsequent accumulated impairment losses. For the purpose of revaluations under this

Standard, fair value shall be determined by reference to an active market. Revaluations shall be

made with such regularity that at the end of the reporting period the carrying amount of the

asset does not differ materially from its fair value.

y Revaluation modely The revaluation model does not allow:a) The revaluation of intangible assets that have not previously been recognized as assets;b) The initial recognition of intangible assets at amounts other than cost.y Useful lifey An entity shall assess whether the useful life of an intangible asset is finite or indefinite and, if

finite, the length of, or number of production or similar units constituting, that useful life. An

intangible asset shall be regarded by the entity as having an indefinite useful life when, based on

an analysis of all of the relevant factors, there is no foreseeable limit to the period over which

the asset is expected to generate net cash inflows for the entity.


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y Intangible assets with indefinite useful livesy An intangible asset with an indefinite useful life shall not be amortized. In accordance with IAS

36, an entity is required to test an intangible asset with an indefinite useful life for impairment

by comparing its recoverable amount with its carrying amount

y Annually, andy Whenever there is an indication that the intangible asset may be impaired.y Retirements and disposalsy An intangible asset shall be derecognized:a) On disposal; orb) When no future economic benefits are expected +from its use or disposal.y Retirements and disposalsy The gain or loss arising from the derecognition of an intangible asset shall be determined as the

difference between the net disposal proceeds, if any, and the carrying amount of the asset. It

shall be recognized in profit or loss when the asset is derecognized (unless IAS 17 requires

otherwise on a sale and leaseback). Gains shall not be classified as revenue.

y INTERMEDIATE ACCOUNTINGy IAS40: Investment Propertyy Objectivey The objective of this Standard is to prescribe the accounting treatment for investment property

and related disclosure requirements.

y DefinitionInvestment property

y Is property (land or a buildingor part of a buildingor both) held (by the owner or by thelessee under a finance lease) to earn rentals or for capital appreciation or both, rather than for:

(a) Use in the production or supply of goods or services or for administrative purposes; or

(b) Sale in the ordinary course of business.

y DefinitionOwner-occupied property


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y When a property interest held by a lessee under an operating lease is classified as an investmentproperty, the fair value model shall be applied.

y Fair value modely The fair value of investment property is the price at which the property could be exchanged

between knowledgeable, willing parties in an arms length transaction. Fair value specifically

excludes an estimated price inflated or deflated by special terms or circumstances such as a

typical financing, sale and leaseback arrangements, special considerations or concessions

granted by anyone associated with the sale.

y Fair value modely An entity determines fair value without any deduction for transaction costs it may incur on sale

or other disposal.

y The fair value of investment property shall reflect market conditions at the end of the reportingperiod.

y A gain or loss arising from a change in the fair value of investment property shall be recognizedin profit or loss for the period in which it arises.

y Cost modely After initial recognition, an entity that chooses the cost model shall measure all of its investment

properties in accordance with IAS 16s requirements for that model, other than those that meet

the criteria to be classified as held for sale (or are included in a disposal group that is classified

as held for sale) in accordance with IFRS 5 Non-currentAssets Held for Sale and Discontinued

Operations.

y Transfersy Commencement of owner-occupation, for a transfer from investment property to owner-

occupied property;

y Commencement of development with a view to sale, for a transfer from investment property toinventories;

y Transfersy End of owner-occupation, for a transfer from owner-occupied property to investment property;

or

y Commencement of an operating lease to another party, for a transfer from inventories toinvestment property.

y Disposals


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y An investment property shall be derecognized (eliminated from the statement of financialposition) on disposal or when the investment property is permanently withdrawn from use and

no future economic benefits are expected from its disposal.

y Disposalsy Gains or losses arising from the retirement or disposal of investment property shall be

determined as the difference between the net disposal proceeds and the carrying amount of the

asset and shall be recognized in profit or loss (unless IAS 17 requires otherwise on a sale and

leaseback) in the period of the retirement or disposal.

corporate reporting notes

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