CPA A1.3 ADVANCED FINANCIAL REPORTING Study Manual

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CPA
Certified Public Accountant Examination
Stage: Advanced 1.3
Subject Title: Financial Reporting
Study Manual
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© iCPAR
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contents of this book.
INSTITUTE OF
CERTIFIED PUBLIC ACCOUNTANTS
OF
RWANDA
ADVANCED 1.3
FINANCIAL REPORTING
First Edition 2012
This study manual has been fully revised and updated
in accordance with the current syllabus.
It has been developed in consultation with experienced lecturers.
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CONTENTS
Study Unit Title Page
Introduction to Course 13
1 Regulatory and Conceptual Framework of Accounting 17
Structure of IASC Foundation 18
Development of an IFRS 20
The Regulatory Framework 20
The Conceptual Framework 21
The Framework for the Preparation and Presentation of
Financial Information 22
Commonly Used Concepts in Financial Reporting 27
2 IAS 1 (Revised) Presentation of Financial Statements 29
Introduction 30
Objective 30
Purpose of Financial Statements 30
Components of Financial Statements 30
Financial Review by Management 31
Structure, Content and Reporting 31
Sundry Matters 32
Statement of Financial Position Format 33
Statement of Comprehensive Income 36
Information to be Presented on Face of Income Statement or in the Notes 37
Statement of Changes in Equity 38
Disclosure of Significant Accounting Policies 39
3 IAS 16 – Property, Plant & Equipment 41
Objective 42
Definition 42
Recognition 42
Initial Measurement 43
Subsequent Expenditure 45
Measurement after Recognition 46
Derecognition 50
Depreciation 50
Disclosure 52
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Study Unit Title Page
4 IAS 36 – Impairment of Assets 55
Introduction 56
Definitions 57
Calculating an Impairment Loss 58
Recognition of Impairment Losses in the Financial Statements 59
Cash Generating Units 62
Reversal of Impairment Losses 69
Disclosures 70
Example 71
5 IAS 23 – Borrowing Costs 75
Definition 76
Accounting Treatment 76
Borrowing Costs Eligible for Capitalisation 76
Commencement of Capitalisation 77
Cessation of Capitalisation 77
Suspension of Capitalisation 77
Interest Rates 78
Disclosure 80
6 IAS 20 – Accounting for Government Grants & Disclosure of
Government Assistance 81
Introduction 82
Definitions 82
Recognition 83
Accounting Treatment 83
Repayment of Government Grants 85
Disclosure 86
Sundry Matters 86
7 IAS 17 – Leases 89
Introduction 90
Types of Leases 90
Accounting Treatment of Leases 91
Detailed Treatment of Finance Leases 91
Payments in Advance 97
Recording Finance and Operating Leases in the Books of the Lessor 98
Disclosure Requirements for Lessees 99
Disclosure Requirements for Lessors 100
Sale and Leaseback Transactions 101
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Study Unit Title Page
8 IAS 40 – Investment Properties 103
Objective 104
Exclusion 104
Definition 104
Recognition and Initial Measurement 104
Subsequent Measurement 105
Cost Model 105
Fair Value Model 106
Cost model Vs Fair Value Model 107
Transfers 108
Owner-Occupied Property and Investment Property 110
Disposals 110
Disclosure 111
9 IAS 38 – Intangible Assets 113
Objective 115
Exclusions 115
Accounting Treatment 116
Acquisition by Government 117
Exchange of Assets 117
Internally Generated Goodwill 117
Internally Generated Intangible Assets 117
Research 118
Development 118
Measurement of Intangible Assets After Recognition 119
Cost Model 120
Revaluation Model 120
Useful Life 121
Disposals and Retirements 122
Disclosure Requirements 122
Assets with Both Tangible and Intangible Elements 124
Website Development Costs 124
Questions 124
10 IAS 2 Inventories 127
Objective 128
Definitions 128
Measurement 128
Valuation Methods 130
Disclosure 130
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Study Unit Title Page
11 IAS 37 – Provisions, Contingent Liabilities & Contingent Assets 133
Objective 134
Provisions 134
Definitions 134
Restructuring 137
Onerous Contract 137
Contingent Liabilities 138
Contingent Assets 138
Disclosure 139
12 IAS 10 – Events After The Reporting Period 141
Objective 142
Definition 142
Dividends 144
Updating Disclosures 144
Disclosure 144
Going Concern Considerations 144
13 IAS 8 Accounting Policies, Changes in Accounting Estimates and
Errors 145
Introduction 146
Definition 146
Accounting Policies 147
Changes in Accounting Policies 147
Disclosures 149
Limitations of Retrospective Application 149
Changes in Accounting Estimates 150
Correction of Prior Period Errors 151
Questions
14 Consolidated Financial Statements 1
Introduction to the Consolidated Statement of Financial Position 153
Introduction 154
Control 155
Exemptions from the Requirement to Prepare Consolidated
Financial Statements 155
Accounting Dates 157
Accounting Policies 157
Cessation of Control 157
Disclosure IAS 27 157
Acquisition Costs 158
Mechanics and Techniques 160
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Study Unit Title Page
15 Consolidated Financial Statements 2
– Advanced Consolidated Statement of Financial Positions 165
Introduction 166
Determining the Fair Value of Net Assets 166
Inter-Company Inventory Profit 168
Inter-Company Profit on Sale of a Non-Current Asset 169
Inter-Company Debts 170
Preference Shares in Subsidiary Company 173
Loan Notes in a Subsidiary Company 174
Inter-Company Dividends 174
Acquisitions of Subsidiary During the Year 179
16 Consolidated Financial Statements 3
Associates and Joint Ventures 189
Investments in Associates and Interests in Joint Ventures 190
Equity Method of Accounting 190
Disclosure Requirements 191
Mechanics and Techniques 192
Transactions Between Group and Associate 194
Interests in Joint Ventures 195
Disclosure 197
17 Consolidated Financial Statements 4
Consolidated Income Statements 203
Introduction 204
Non-Controlling Interest 205
Profit and Loss – Balance Forward in Subsidiary 206
Inter-Company Profits 208
Dividends 210
Transfers to Reserves 215
Debit Balance on Income Statement at Acquisition 216
Sales and Costs of sales 217
Debenture Interest 218
Acquisition of Subsidiary During the Year 218
Revision and Examination Practice Questions 220
Associate Companies in the Income Statement 225
Goodwill on Acquisition of an Associate 228
18 IAS 21 – The Effects of Changes in Foreign Exchange Rates 235
Introduction 236
Functional and Presentation Currencies 236
Accounting for Individual Transactions 237
Translating the Financial Statements of Foreign Operation 242
Cash Flow Statements and Overseas Transactions 244
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Study Unit Title Page
19 Cash Flow Statements 245
Objective 247
Definitions 247
Operating Activities 247
Investing Activities 248
Financing Activities 248
Reporting Cash Flows from Operating Activities 249
Worked Examples 251
Disposal of a Tangible Non-Current Asset 257
Taxation 258
Dividends 259
Worked Example 259
Limitations of the Cash Flow Statement 271
Advantages of the Cash Flow Statement 271
Surmounting a Cash Shortage 272
20 IAS 11 – Construction Contracts 273
Objective 274
Definitions 274
Contracts 274
Contract Costs 275
Contract Revenue 275
Recognition of Costs and Revenues 276
Measuring Outcome Reliably 276
Stage of Completion 276
Presentation 277
Disclosures 282
Further Definitions 282
21 IAS 33 – Earnings Per Share 283
Explanatory Note 284
Scope 284
Definitions 284
Number of Shares 285
Measurement of Basic Earnings Per Share 286
Changes in Capital Structure 287
Presentation and Disclosure 292
Retrospective Adjustments 293
Fully Diluted Earnings Per Share 293
Share Warrants and Options 294
Dilutive/Anti-Dilutive Potential Ordinary Shares 298
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Study Unit Title Page
22 IFRS 5 Non-Current Assets Held For Sale and Discontinued
Operations 303
Objective 304
Assets Held for Sale Definition 304
Assets Held For Sale Measurement 305
Assets Held For Sale Presentation 306
Assets Held For Sale – Miscellaneous Points 306
Discontinued Operations – Definition 307
Discontinued Operations – Presentation 308
23 IAS 12 – Income Taxes 311
Introduction 312
Current Tax 312
Deferred Tax 313
Calculation of Deferred Tax 314
Why Account for Deferred Tax? 317
Deferred Tax Liabilities and Assets 318
Tax Rate 319
Further Specific Examples 319
Disclosure Requirements 321
24 IAS 18 – Revenue 325
The Timing of Revenue Recognition 326
Recognition 326
Critical Event v Accretion Approach 326
IAS 18 Revenue - Introduction 327
Sale of Goods 328
Rendering of Services 328
Interest, Royalties and Dividends 328
Disclosure 329
25 IAS 32, IAS 39, IFRS 7 – Financial Instruments 331
IAS 32 – Financial Instruments: Presentation 332
IAS 39 – Financial Instruments: Recognition and Measurement 336
IFRS 7 Financial Instruments: Disclosures 339
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Study Unit Title Page
26 Analysing Financial Information 343
Introduction 344
Interested Parties 345
Liquidity Ratios 350
Investment Ratios 355
Limitations of Ratio Analysis 358
Other Measures of Business Operations 358
27 IFRS 1 – First Time Adoption of International Financial Reporting
Standards 361
Introduction 362
Accounting Policies 362
Exemptions and Exceptions 363
Comparative Information 364
28 IAS 34 – Interim Financial Reporting 365
Introduction 366
Minimum Components of an Interim Financial Report 366
Selected Explanatory Notes 367
Periods for which Interim Financial Statements are
Required to be Presented 368
Materiality 368
Seasonal or Uneven Revenue and Costs 368
29 IAS 41 – Agriculture 369
Introduction 370
Definitions 370
Recognition and Measurement 371
Gains and Losses 373
Government Grants 374
Disclosure 374
30 IFRS 8 Operating Segments 377
Introduction 378
Definition 378
Reportable Segments 379
Disclosing Segmental Information 380
Drawbacks to Segmental Reporting 381
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Study Unit Title Page
31 Purchase of Own Shares and Distributable Profits 385
Purchase of Own Shares 386
Distributable Profits 389
32 IAS 19 – Employee Benefits 393
Introduction 394
Short-Term Employees Benefits 394
Post Employment Benefit Plans 396
Accounting for Pension Plans 397
The 10% Corridor Rule 405
Settlement and Curtailments 409
Past Service Costs 411
Other Long-Term Employee Benefits 411
Termination Benefits 412
Disclosure 413
IAS 26 – Accounting and Reporting by Retirement Benefit Plans 414
33 IAS 24 – Related Party Disclosures 417
Objective 418
Impact on the Financial Statements 418
Definitions 419
Disclosure Requirements 420
34 IFRS 2 Share Based Payment 423
Introduction 424
Arguments Against Accounting for Share Based Payments 424
Accounting for Share Based Transactions 424
Disclosures 430
Example 430
35 IPSAS
36 Reporting for Various Entities
Social and Environmental Accounting and Reporting
Government Sector Financial Reporting
Accounting for Inflation
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INTRODUCTION TO THE COURSE
Stage: Advanced Level 1
Subject Title: A1.3 Advanced Financial Reporting
Aim
The aim of this subject is to ensure that students apply the appropriate judgement and
technical ability in the preparation and interpretation of financial statements for
complex business entities. Students must also be able to evaluate and communicate the
impact of current issues and developments in financial reporting to those who may not
have that technical expertise.
Advanced Financial reporting as an Integral Part of the Syllabus
By using a case study approach Advanced Financial reporting develops the technical
skills acquired in Financial Accounting and Financial reporting to ensure that students
can view financial reporting in its broadest context.
Learning Outcomes
On successful completion of this subject students should be able to:
Apply and explain the acquisition method of accounting and related disclosure
requirements in financial statements and notes.
Interpret and apply international financial reporting standards (including
reference to IPSAS) and interpretations adopted by the IASB selecting the
appropriate accounting treatment for transactions and events
Analyse and evaluate financial statements.
Write detailed reports, tailored to the technical understanding of the different
user groups.
Evaluate and discuss the main accounting issues currently facing the
professional accountant in the field of financial accounting.
Demonstrate appropriate professional judgement and ethical sensitivity.
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Syllabus:
1. Legislation
Company Law relating to the preparation of all financial statements
2. Preparation of Financial Statements (Including
Consolidated Financial Statements)
Statutory financial statements for incorporated entities
Consolidated financial statements.
Re-Construction & Re- Organisation
Effects of Inflation
Social Responsibility Accounting
Environmental Accounting
3. International Financial Reporting
An in depth knowledge of all technical pronouncements currently in issue with
particular reference to their application to practical situations (including
reference to the public sector).
Current issues in financial reporting
International Accounting Standards and International Financial Reporting
Standards
- (Revised) Presentation of Financial Statements
- Property, Plant & Equipment
- Impairment of Assets
- Borrowing Costs
- Accounting for Government Grants & Disclosure of Government
Assistance
- Leases
- Investment Properties
- Intangible Assets
- Inventories
- Provisions, Contingent Liabilities & Contingent Assets
- Events after the Balance Sheet Date
- Accounting Policies, Changes in Accounting Estimates & Errors
- The effects of changes in Foreign Exchange Rates
- Cash Flow Statements
- Construction Contracts
- Earnings Per Share
- Non Current Assets
- Income Taxes
- Revenue
- Financial Instruments
- First time adoption of
- Interim Financial Reporting
- Agriculture
- Operating Segments
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- Employee Benefits
- Related Party Disclosures
- Share Based Payment
4. Analysis, Evaluation and Interpretation of Financial
Statements
Ratio analysis and cash flow analysis.
Critical appraisal of financial statements; and
Interpretation of financial statements and preparation of reports thereon.
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Study Unit 1
The Regulatory and Conceptual Frameworks of Accounting
Contents
______________________________________________________________________
A. Structure of IASC Foundation
______________________________________________________________________
B. Development of an IFRS
______________________________________________________________________
C. The Regulatory Framework
D. The Conceptual Framework
___________________________________________________________________________
E. The Framework for the Preparation and Presentation of Financial Information
___________________________________________________________________________
F. Commonly Used Concepts in Financial Reporting
___________________________________________________________________________
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A. STRUCTURE OF THE IASC FOUNDATION
In 1999, in a move that reflected the growing importance of international accounting
standards, the board of the International Accounting Standards Board (IASB) recommended
and later adopted a new constitution and structure.
As a result, the International Accounting Standards Committee Foundation was established in
the USA in 2001. An independent not-for-profit organisation, it is governed by 22 IASC
Foundation Trustees, who are required to have a comprehensive understanding of
international issues relevant to accounting standards for use in the world’s capital markets.
The main objectives of the IASC are:
To develop a single set of understandable and enforceable global accounting standards
which of are high quality
To require high quality, transparent and comparable information in financial statements
to help users in making economic decisions.
To promote the use and application of these standards.
To bring about convergence of national accounting standards and international
accounting standards.
The IASC Foundation has a number of subsidiary bodies:
The International Accounting Standards Board (IASB)
The International Financial Reporting Interpretations Committee (IFRIC)
The Standards Advisory Council (SAC)
IASB
SAC
IFRIC
The IASC
Foundation
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The IASB
The IASB is made up of 14 members and has the same objectives as the IASC Foundation. It
has sole responsibility for issuing International Financial Reporting Standards (IFRS’s),
following rigorous and open due process. The IASB cannot enforce compliance with its
standards and therefore it relies upon the co-operation of national standard setters.
All the most important national standard setters are represented on the IASB and their views
are taken into account so that a consensus is reached. These national standard setters can also
issue discussion papers and exposure drafts for comment in their own countries so that the
views of all preparers and users of financial statements can be represented.
With all the major national standard setters now committed to the international convergence
project, the IASB aims to develop a single set of understandable and enforceable, high quality
worldwide accounting standards.
The SAC
THE Standards Advisory Council provides a forum for experts from different countries and
different business sectors with an interest in international financial reporting to offer advice
when drawing up new standards. Its main objective is to give advice to the Trustees and the
IASB on agenda decisions and work priorities and on the major standard-setting projects.
The IFRIC
This committee has taken over the work of the previous Standing Interpretations Committee.
In reality, it is a compliance body whose role is to provide rapid guidance on the application
and interpretation of international accounting standards where contentious or divergent
interpretations have arisen.
It operates an open due process in accordance with its approved procedures. Its
pronouncements (known as SICs and IFRICs) are important because financial statements
cannot be described as being in compliance with IFRSs unless they also comply with the
interpretations.
Other Bodies
The IASB has enhanced its reputation and credibility even further by developing its
relationship with the International Organisation of Securities Commissions (IOSCO). This is
a very influential organisation of the world’s stock exchanges.
In 1995, the then International Accounting Standards Committee agreed to develop a core set
of standards which, when endorsed by IOSCO, would be used as an acceptable basis for
cross-border listings. This was achieved in 2000, arguably making the international
accounting standards the first steps towards global accounting harmonisation. Furthermore,
since 2005, as part of its harmonisation process, the European Union requires all listed
companies in all member states to prepare their consolidated financial statements using
IFRSs.
National standard setters (such as the UK’s Accounting Standards Board and The USA’s
Financial Accounting Standards Board) have a role to play in the formulation of international
accounting standards. Seven of the leading national standard setters work closely with the
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IASB, which the IASB sees as a “partnership” between the IASB and the national standard
setters, as they work towards the convergence of accounting standards worldwide. Often the
IASB will ask members of national standard setting bodies to work on particular projects in
which those countries have greater experience or expertise. Many countries that are
committed to closer integration with IFRSs will publish domestic standards equivalent (if not
identical) to IFRSs on a concurrent timescale.
B. DEVELOPMENT OF AN IFRS
As mentioned above, the IASB is responsible for the development and publication of
international accounting standards. The standard requires the votes of at least eight of the
fourteen IASB members. The procedure is as follows:
1. The IASB (advised by the SAC) identifies a subject and appoints an advisory
committee to advise on the issues relevant to the subject area. If the subject matter is
complex and of high importance, the IASB may publish Discussion Documents for
public comment.
2. Following the receipt and review of comments, the IASB then develops and publishes
an Exposure Draft for public comment. The Exposure Draft is a draft version of the
intended subject. The normal comment period for both the Discussion document and the
Exposure Draft is ninety days.
3. After the review of any comments received, an International Financial Reporting
Standard (IFRS) is issued. The IASB also publishes a Basis for Conclusions, which
explains how it arrived at its conclusions and helps users to apply the standard in
practice. Sometimes, the IASB will conduct public hearings at which the proposed
standards are openly discussed and occasionally, field tests are conducted to ensure that
proposals are practical and workable around the world.
It is important to note that the IASC Foundation, the IASB and the accountancy profession
itself does not have the power to enforce compliance with the IFRSs. However, some
countries do adopt the IFRSs as their local standards, with others ensuring that there is no
significant difference between their standards and IFRs. Over the last decade or so, the profile
and status of the IASB has increased with the result being a commensurate increase in the
persuasive force of the IFRSs globally.
C. THE REGULATORY FRAMEWORK
The purpose of a regulatory framework is to regulate both the format and content of financial
statements. Accounting disclosure is regulated through a combination of:
National company law and EU directives
Stock exchange rules
IFRS
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Accounting standards by themselves would not be a sufficient regulatory framework. Legal
and market regulations are also required to ensure the full regulation of both the preparation
and publication of financial statements.
A regulatory framework is desirable for the following reasons:
Financial statements are based on principles and rules that can vary significantly from
country to country are prepared for users. There is also a wide range of users of these
financial statements (for example, investors, lenders, customers, government).
Preparation of accounts based on different principles makes it difficult, if not
impossible, for investors to analyse and interpret the information. A regulatory
framework would ensure consistency in financial reporting.
The information needs to be comparable, as without this quality the credibility of the
financial reports would be undermined. This could have a negative impact on
investment. A regulatory framework would increase the users understanding of and
confidence in the financial statements.
Increasingly, globalisation has resulted in trans-national financing, foreign direct
investment and securities trading. Thus, a single set of rules for the measurement and
recognition of assets, liabilities, income and expenses is required.
A regulatory framework would also regulate the behaviour of companies towards their
investors, protecting the users of the financial statements. It would help ensure that the
financial statements give a true and fair view of the company’s financial performance
and position.
D. THE CONCEPTUAL FRAMEWORK
A conceptual framework can be defined as a coherent system of interrelated objectives and
fundamental principles. It is framework which prescribes the nature, function and limits of
financial accounting and financial statements. It can be thought of as an outline of the
generally accepted principles which form the theoretical foundation for financial reporting.
The IASB follows the principles-based approach to financial reporting (as opposed, say, to
the rules-based approach favoured by the FASB in the USA).
The establishment of these principles provide the basis for both the development of new
accounting standards and an appraisal of the standards already in issue.
There are a number of arguments in favour of having a conceptual framework:
It allows both accounting standards and generally accepted accounting practice (GAAP)
to be developed in line with agreed principles. It would be extremely difficult to attempt
to address all technical issues that would satisfy the needs of every user.
It helps avoid a situation where accounting standards are developed in an ad hoc and
piecemeal fashion, as a kneejerk response to specific problems and/or abuses. This sort
of “fire-fighting” can lead to inconsistencies between different accounting standards.
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The conceptual framework enables critical issues to be addressed. For example, until
relatively recently, no accounting standard contained a definition of basic terms such as
“asset” or “liability”.
With certain types of transactions becoming more and more complex over the years, a
conceptual framework aids accountants and auditors to deal with transactions not
covered per se by an accounting standard. It can give guidance of the general principles
on how transactions should be recorded and presented in the financial statements.
Where a conceptual framework exists, an issue not yet covered by an accounting
standard can be dealt with temporarily by providing an interim approach until a specific
standard is issued.
It is believed that standards that are based on principles are more difficult to circumvent
than a rules-based approach (the “cookbook” approach).
It makes it less likely that the standard setting process can be influenced or even
hijacked by vested interests, for example large corporations or business sectors. This
enhances the credibility of the IFRSs and the accounting profession.
E. THE FRAMEWORK FOR THE PREPARATION AND PRESENTATION OF
FINANCIAL INFORMATION
The “Framework for the Preparation and presentation of Financial Information” (or simply,
“The Framework”) is a conceptual accounting framework that sets out the concepts and
principles that underpin the preparation and presentation of financial statements for external
users. It applies to the financial statements of both private and public entities.
The purpose of the framework is to:
Assist the IASB in its role of developing future accounting standards and reviewing
existing IFRSs/IASs.
Assist the IASB by providing a basis for reducing the number of alternative accounting
treatments permitted by the IFRSs
Assist national standard setting bodies in developing national standards.
Assist those preparing financial statements to apply IFRSs and also to deal with areas
where there is no relevant standard
Assist auditors when they are forming an opinion as to whether financial statements
conform with IFRSs
Assist users of financial statements when they are trying to interpret the information in
financial statements which have been prepared in accordance with IFRSs
Provide information to other parties that are interested in the work of the IASB
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The Framework identifies the users of financial statements, and their main information needs,
to be:
Investors: concerned about the risk and return of their investments.
Employees: concerned about risks to their continuing employment and remuneration
Lenders: concerned about the entities ability to service and repay loans and interest
Suppliers and other trade creditors: concerned about whether they will be paid in
full and on time
Customers: concerned about the ability of the entity to continue in business
Governments and their agencies: concerned about taxation national statistics etc.
The public: concerned about local economy, environmental issues, employment
opportunities etc.
The Framework has seven chapters:
1. The objective of financial statements
2. Underlying assumptions
3. The qualitative characteristics of financial statements
4. The elements of financial statements
5. Recognition of the elements of financial statements
6. Measurement of the elements of financial statements
7. Concepts of capital and capital maintenance
The salient points of each chapter will be outlined here.
Objective of financial statements
According to the Framework, the objective of financial statements is to provide information
about the financial position, performance and changes in financial position of an enterprise
that is useful to a wide range of users in making economic decisions.
The Framework points out that financial statements prepared for this purpose should meet the
common needs of most users, whilst also showing the results of the stewardship and
accountability of management. It is important to remember that the information is based on
historical information. However, if the information is reliable, its predictive value (i.e. its use
in assessing future performance) is greatly enhanced. Users can then use this information in
making their economic decisions.
Underlying assumptions
The Framework makes reference to two specific underlying assumptions:
(a) Accruals basis of accounting
Transactions are recognised when they occur and are recorded and reported in the
accounting periods to which they relate, regardless of the timing of the cash flows
arising from these transactions.
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(b) Going concern
Financial statements are prepared (normally) on the assumption that an enterprise is a
going concern and will continue in operation for the foreseeable future. If it is
management’s intention to liquidate (or significantly reduce the scale of its operations)
the accounts would have to be prepared on a different basis (e.g. the “break-up basis)
and this would have to be disclosed.
The qualitative characteristics of financial information
The Framework identifies four qualitative characteristics (all are subject to a threshold quality
of materiality):
(a) Relevance
Information provided by financial statements needs to be relevant. Information that is
relevant has predictive and confirmatory value. Information is considered relevant if :
It has the ability to influence the economic decisions of users: and
It is provided in time to influence those decisions
(b) Reliability
Information that is reliable can be depended upon to present a faithful representation
and is neutral, error free, complete and prudent. It also depends on the concept of
substance over form, because by applying this concept, users will see the economic
reality of transactions.
(c) Comparability
Users must be able to:
Compare the financial statements of an entity over time to identify trends in its
financial position and performance
Compare the financial statements of different entities to evaluate their relative
financial performance and financial position
In order to achieve this, there must be both consistency and adequate disclosure. Users
must be informed of the accounting policies employed in the preparation of the
financial statements as well as any changes in those policies in the period and the
effects of such changes. Furthermore, to compare the performance of the entity over
time, it is important that the financial statements show comparative information for the
preceding period(s).
(d) Understandability
It is assumed that users have a reasonable knowledge of business and economic
activities and are willing to study the information provided with reasonable diligence.
For information to be understandable, users needs to be able to perceive its significance.
Information that is relevant and reliable should not be excluded from the financial
statements simply because it is difficult for some users to understand.
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The elements of financial statements
The Framework provides definitions of the elements of financial statements. When applied
with the recognition criteria, the definitions provide guidance on how and when the financial
effect of transactions or events should be recognised in the financial statements.
(a) Assets
Assets are resources controlled by the entity as a result of past events, from which
future economic benefits are expected to flow to the entity.
(b) Liabilities
Liabilities are an entity’s obligations to transfer economic benefits, as a result of past
transactions and/or events.
(c) Equity Interest
Equity interest is the residual amount found be deducting all liabilities of the entity
from all of the entity’s assets.
(d) Income
Income is an increase in economic benefits during the accounting period in the form of
inflows or enhancements of assets or decrease in liabilities that result in increases in
equity (other than those relating to contributions from equity participants).
This definition follows a statement of financial position approach rather than the more
traditional income statement approach to recognising income>
(e) Expenses
Expenses are decreases in economic benefits during the accounting period in the form
of outflows or depletions of assets or incurring of liabilities that result in decreases in
equity (other than those relating to contributions from equity participants).
Recognition of the elements of financial statements
Recognition is the depiction of an element in words and by monetary amount in the financial
statements.
In order to be recognised in the financial statements, an item must meet the definition of an
element (see above). In addition, the Framework has two other criteria which must be met
before it can be recognised:
(a) It is probable that any future economic benefit associated with the item will flow to or
from the enterprise; and
(b) The item has a cost or value that can be measured with reliability.
Measurement of the elements of financial statements
Once an item meets the above criteria and is to be recognised in the financial statements, it is
necessary to decide on what basis it is to be measured. The item must, of course, have a
monetary value attached to it. The Framework outlines four measurement bases that are
frequently used in reporting; historic cost, current cost, realisable value, and present value. It
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mentions that historic cost is the most commonly adopted , although often within a
combination of bases, for example valuing inventories at the lower of cost and realisable
value or impairing a receivable to the present value of the amount considered collectible.
(a) Historic cost
Assets are recorded at cash paid at the date of acquisition. Liabilities are recorded at the
amount of proceeds received in exchange for the obligation (e.g. loan notes) or the
amount of cash expected to be paid to satisfy the liability (e.g. taxation).
(b) Current cost
Assets are recorded at cash that would have to be paid to acquire the same or equivalent
asset. Liabilities are carried at the undiscounted amount of cash required to settle the
obligation.
(c) Realisable value
Assets are recorded at cash that would be obtained by selling the asset in an orderly
disposal. Liabilities are carried at their settlement values (i.e. the undiscounted amounts
of cash expected to be paid to satisfy the liabilities in the normal course of business.
(d) Present Value
Assets are recorded at the present discounted value of future net cash flows that the item
is expected to generate in the normal course of business. Liabilities are carried at the
present discounted value of the future net cash outflows that are expected to be required
to settle the liabilities in the normal course of business.
Concepts of capital maintenance
The Framework refers to two concepts of capital; the financial concept of capital and the
physical concept of capital. The great majority of enterprises adopt the financial concept of
capital, which deals with the net assets of the entity. The physical concept of capital may be
more applicable where the users of the financial information are more concerned with the
operating capability of the enterprise.
The needs of the user should determine the most appropriate basis to adopt.
(a) Financial concept
A profit is earned if the financial amount of the net assets at the end of the period is
greater than that at the beginning of the period (excluding any distributions to and
contributions from the owners). Financial capital maintenance is measured in either
nominal monetary units or units of constant purchasing power.
(b) Physical concept
A profit is earned if the physical productive capacity (operating capacity) of the
enterprise (or the resources needed to achieve that capacity) at the end of the period is
greater than at the beginning of the period (excluding any distributions to and
contributions from the owners).
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F. COMMONLY USED CONCEPTS IN FINANCIAL REPORTING
Though the Framework mentions two accounting policies that underpin the financial
statements of the company, other concepts can be employed too, to varying degrees:
Prudence
Cautious presentation of the entity's financial position. Profits
are recognised only when realised while losses are provided for
as soon as they are foreseen
Consistency
There is similar accounting treatment of like items within each
accounting period and from one period to the next
Entity
That the accounts recognise the business as a distinct separate
entity from its owners
Money Measurement
Accounts only deal with those items to which a monetary value
can be attributed
Materiality
If omission, misstatement or non disclosure affects the view
given, item is material and disclosure is required
Substance over Legal
Form
Recognises economic substance from legal form e.g. assets
acquired on hire purchase
Stable Monetary Unit
That the value of the monetary unit used is consistent over time
Accounting Periods
Accounts are prepared for discrete time periods
Page 28
BLANK
Page 29
Study Unit 2
IAS 1 (Revised) Presentation of Financial Statements
Contents
_____________
A. Introduction
_____________
B. Objective
_____
C. Purpose of Financial Statements
_____
D. Components of Financial Statements
_____
E. Financial Review by Management
_____
F. Structure, Content and Reporting
______
G. Sundry Matters
______
H. Statement of Financial Position Format
______________________________________________________________________
I. Statement of Comprehensive Income
_____
J. Information to be Presented on Face of Income Statement or in the Notes
_____
K. Statement of Changes in Equity
______
L. Disclosure of Significant Accounting Policies
_____
M. Question / Solution
______
Page 30
A. INTRODUCTION
IAS 1 (Revised) was published in September 2007. It introduced a number of changes, the
main ones being as follows:
The titles of the main financial statements were amended to Statement of Changes in
Position, Statement of Comprehensive Income and Statement of Cash Flows
To present all non-owner changes in equity (comprehensive income) either in one
statement of comprehensive income or a separate income statement and statement
showing other comprehensive income
To present a statement of financial position at the beginning of the earliest comparative
period when the entity applies a prior period adjustment.
The intention of the revision is to improve the quality of the information provided to users by
aggregating information in the financial statements on the basis of shared characteristics.
B. OBJECTIVE
The objectives of IAS 1 are to:
1. Provide the formats for the presentation of Financial Statements, such as Income
Statement and Statement of Financial Position.
2. Ensure that the Financial Statements are comparable year on year for the entity and
comparable to competitors.
3. Set out the disclosure required by management relating to the judgements they have
made in selecting the entitys accounting policies.
4. Set out the disclosure to be made in relation to estimating uncertainty at the Statement
of Financial Position date, in particular where there is a significant risk of causing a
material adjustment to the carrying amounts at which assets and liabilities will be
presented in the next financial year.
C. PURPOSE OF FINANCIAL STATEMENTS
The objective of general purpose financial statements is to provide information about the
financial position of an entity. General purpose financial statements are those intended to
serve users who do not have the authority to demand financial reports tailored for their own
needs.
Financial statements also show the results of management’s stewardship of the entity’s
resources.
D. COMPONENTS OF FINANCIAL STATEMENTS
A complete set of financial statements should include:
Page 31
A statement of financial position at the end of the period,
A statement of comprehensive income for the period,
A statement of changes in equity for the period
Statement of cash flows for the period, and
Notes, comprising a summary of accounting policies and other explanatory notes.
When an entity applies an accounting policy retrospectively or makes a retrospective
restatement of items in its financial statements, or when it reclassifies items in its financial
statements, it must also present a statement of financial position as at the beginning of the
earliest comparative period.
An entity may use titles for the statements other than those stated above. For example, an
entity may continue to use the previous title of Statement of Financial Position and cash flow
statement.
E. FINANCIAL REVIEW BY MANAGEMENT
In addition to the Financial Statements identified in Section D above, management may
present a Financial Review outside of the Financial Statements. The Financial Review
explains the main features of the entities financial performance and financial position as well
as the main areas of uncertainty. This Financial Review typically includes:
(a) An outline of the main factors affecting performance including changes in the business
environment in which the entity operates. How the entity has reacted to those changes
and the effect.
(b) Entity’s policy for investment and its dividend policy.
(c) How the entity is financed.
(d) Any resources that the entity uses that are not disclosed on the Statement of Financial
Position in accordance with IFRS’s.
Other reports which may be included are:
(a) Environmental Reports Particularly in industries where environmental issues are of
significance.
(b) Value Added Statements.
Any reports provided in addition to the Financial Statements are outside the scope of the
IAS’s.
F. STRUCTURE, CONTENT AND REPORTING
The financial statements shall be identified clearly and distinguished from other
information.
The financial statements should show:
The name of the reporting entity
Page 32
The Statement of Financial Position date or the period covered by the income
statement
The currency in which the financial statements are presented
The level of rounding used in presenting amounts e.g. RWF000, RWFm or the like.
The financial statements shall be presented at least annually.
G. SUNDRY MATTERS
Fair Presentation and Compliance with IFRSs
The financial statements must "present fairly" the financial position, financial performance
and cash flows of an entity. Fair presentation requires the faithful representation of the effects
of transactions, other events, and conditions in accordance with the definitions and
recognition criteria for assets, liabilities, income and expenses set out in the Framework. The
application of IFRSs, with additional disclosure when necessary, is presumed to result in
financial statements that achieve a fair presentation.
IAS 1 requires that an entity whose financial statements comply with IFRSs make an explicit
and unreserved statement of such compliance in the notes. Financial statements shall not be
described as complying with IFRSs unless they comply with all the requirements of IFRSs
(including Interpretations).
Inappropriate accounting policies are not rectified either by disclosure of the accounting
policies used or by notes or explanatory material.
IAS 1 acknowledges that, in extremely rare circumstances, management may conclude that
compliance with an IFRS requirement would be so misleading that it would conflict with the
objective of financial statements set out in the Framework. In such a case, the entity is
required to depart from the IFRS requirement, with detailed disclosure of the nature, reasons,
and impact of the departure
Going Concern
An entity preparing IFRS financial statements is presumed to be a going concern. If
management has significant concerns about the entity's ability to continue as a going concern,
the uncertainties must be disclosed. If management concludes that the entity is not a going
concern, the financial statements should not be prepared on a going concern basis, in which
case IAS 1 requires a series of disclosures.
Accruals Basis of Accounting
IAS 1 requires that an entity prepare its financial statements, except for cash flow
information, using the accrual basis of accounting.
Consistency of Presentation
The presentation and classification of items in the financial statements shall be retained from
one period to the next unless a change is justified either by a change in circumstances or a
requirement of a new IFRS.
Page 33
Materiality and Aggregation
Each material class of similar items must be presented separately in the financial statements.
Dissimilar items may be aggregated only if they are individually immaterial.
Materiality has been defined as follows: “Omissions or misstatements of items are material if
they could, individually or collectively, influence the economic decisions of users taken on the
basis of the Financial Statements. Materiality depends in the size and nature of the omission
or misstatement judged in the circumstances. The size or nature of the item, or a combination
of both, could be the determining factor.”
Offsetting
Assets and liabilities, and income and expenses, may not be offset unless required or
permitted by a Standard or an Interpretation.
Comparative Information
IAS 1 requires that comparative information shall be disclosed in respect of the previous
period for all amounts reported in the financial statements, both face of financial statements
and notes, unless another Standard requires otherwise.
If comparative amounts are changed or reclassified, various disclosures are required.
H. STATEMENT OF FINANCIAL POSITION FORMAT
It is important before attempting a Statement of Financial Position to clearly understand the
split between current and non-current assets and liabilities
Current Assets
An asset shall be classified as current when it satisfies any of the following criteria:
(a) It is expected to be realised or is intended for sale or use in the entity’s normal operating
cycle;
(b) It is held primarily for the purpose of being traded;
(c) It is expected to be realised within 12 months after the Statement of Financial Position
date, or
(d) It is cash or a cash equivalent (as defined by IAS 7 Cash Flow Statements)
All other assets shall be classified as non-current.
Current Liabilities
A liability shall be classified as current when it satisfies any of the following criteria:
(a) It is expected to be settled in the entitys normal operating cycle;
(b) It is held primarily for the purpose of being traded;
(c) It is due to be settled within 12 months after the Statement of Financial Position date.
All other liabilities shall be classified as non-current liabilities.
Page 34
EXAMPLE OF A STATEMENT OF FINANCIAL POSITION
ABC LTD
STATEMENT OF FINANCIAL POSITION AS AT 31ST DECEMBER 2009
RWFm
RWFm
Assets
Non-Current Assets
Property
150
Plant and Equipment
78
Intangible Assets
22
Investments
30
280
Current Assets
Inventories
81
Trade Receivables
76
Prepayments
4
Cash and Cash Equivalents
22
183
Total Assets
463
Equity and Liabilities
Shareholders Equity
Share Capital
100
Share Premium
20
Revaluation Reserve
35
Retained Earnings
97
Total Equity
252
Non-Current Liabilities
Long-Term Borrowings
150
Long-Term Provisions
10
Total Non-Current Liabilities
160
Current Liabilities
Trade Payables
35
Accruals
4
Income Tax Payable
12
Total Current Liabilities
51
Total Equity and Liabilities
463
Page 35
Example 1 – Statement of Financial Position
The following information is available about the balances of ALP, a limited liability
company.
Balances at 31st May 2010
RWF
Non-Current
Assets
- Cost
500,000
- Accumulated Depreciation
100,000
Cash at Bank
95,000
Issued Share Capital Ordinary Shares of RWF1 each
200,000
Inventory
125,000
Trade Payables
82,000
Retained Earnings
292,500
10% Loan Notes
150,000
Trade Receivables
112,000
Loan Note Interest Owing
7,500
REQUIREMENT:
Prepare the Statement of Financial Position of ALP as at 31st May 2010 using the format IAS
1 – Presentation of Financial Statements.
ALP Limited
Statement of Financial Position as at 31st May 2010
Assets
RWF
RWF
Non-Current Assets:
Cost
500,000
Less Accumulated Depreciation
(100,000)
400,000
Current Assets
Inventory
125,000
Trade Receivables
112,000
Cash at Bank
95,000
332,000
Total Assets
732,000
Equity and Liabilities
Shareholders Equity
Share Capital
200,000
Retained Earnings
292,500
492,500
Non-Current Liabilities
10% Loan Notes
150,000
Current Liabilities
Trade Payables
82,000
Accruals
7,500
89,500
Total Current Liabilities
239,500
Total Liabilities
Page 36
Total Equity and Liabilities
732,000
I. STATEMENT OF COMPREHENSIVE INCOME
IAS 1 allows a choice of two presentations of comprehensive income:
1. A statement of comprehensive income showing total comprehensive income; OR
2. An income statement showing the realised profit or loss for the period PLUS a
statement showing other comprehensive income.
Total comprehensive Income is the realised profit or loss for the period, plus other
comprehensive income.
Other comprehensive income is income and expenses that are not recognised in profit or loss.
That is, they are recorded in reserves rather than as an element of the realised profit for the
period. For example, other comprehensive income would include a change in revaluation
surplus.
Statement of Comprehensive Income
The recommended pro-forma layout is as follows:
PQR
Statement of Comprehensive Income for the Year Ended 31st December 2009
RWF’000
Revenue X
Cost of sales (X)
Gross profit X
Administrative expenses (X)
Profit from operations X
Finance costs (X)
Investment income X
Profit before tax X
Income tax expense (X)
Profit for the year X
Other Comprehensive Income
Gain/Loss on revaluation of PPE X
Gain/Loss on available for sale investments X
Total comprehensive income for the year X
Income Statement Plus Statement of Comprehensive Income
The recommended pro-forma layout is as follows:
Page 37
PQR
Income Statement for the year ended 31st December 2009
RWF’000
Revenue X
Cost of sales (X)
Gross profit X
Administrative expenses (X)
Profit from operations X
Finance costs (X)
Investment income X
Profit before tax X
Income tax expense (X)
Profit for the year X
A recommended format for the presentation of other comprehensive income is as follows:
PQR Other Comprehensive Income for the year ended 31st December 2009
RWF’000
Profit for the Year X
Other comprehensive income
Gain/Loss on revaluation of PPE X
Gain/Loss on available for sale investments X
Total comprehensive income for the year X
J. INFORMATION TO BE PRESENTED EITHER ON THE FACE OF THE
INCOME STATEMENT OR IN THE NOTES
When items of income and expense are material, their nature and amount shall be disclosed
separately. Examples of these would include:
(a) The write down of inventories to net realisable value
(b) The write down of property, plant and equipment to recoverable amount
(c) Gains/losses on disposal of property, plant and equipment
(d) Gains/losses on disposal of investments
(e) Legal settlements
An entity shall not present any items of income and expenses as extraordinary items. The
description extraordinary items was used in the past to represent income and expenses arising
from events outside the ordinary activities of the business. IAS 1 has therefore abolished this
classification of items.
Page 38
Example – Income Statement Function of Expenditure Method
Set out below are details from the financial records of Watt Limited:
RWFm
Distribution Costs
5,470
Interest Costs
647
Cost of Sales
18,230
Sales Revenue
44,870
Income Tax Expense
1,617
Administration Expenses
9,740
REQUIREMENT:
Prepare the Income Statement
SOLUTION:
Watt Limited - Income Statement for the year ended 31st March 2009
RWFm
Sales Revenue
44,870
Cost of Sales
18,230
Gross Profit
26,640
Administration Expenses
(9,740)
Distribution Costs
(5,470)
Profit from Operations
11,430
Interest Costs
(647)
Profit Before Tax
10,783
Income Tax Expense
(1,617)
Net Profit for the Year
9,166
K. STATEMENT OF CHANGES IN EQUITY
An entity shall present a statement of changes in equity showing on the face of the statement:
(a) Profit or loss for the period
(b) Each item of income and expense for the period that is recognised directly in equity e.g.
a revaluation surplus on the revaluation of property
(c) The effects of changes in accounting policies and correction of errors recognised in
accordance with IAS8
(d) The amounts of transactions with equity holders e.g. issue of shares, any premium
thereon and dividends to equity holders.
(e) The balance of retained earnings (accumulated profit) at the start of the year, changes
during the year and the balance at the end of the year.
(f) The balance on each reserve account at the start of the year, changes during the year and
the balance at the end of the year.
Therefore, the statement of changes in equity provides a summary of all changes in equity
arising from transactions with owners, including the effect of share issues and dividends.
Other non-owner changes in equity are disclosed in aggregate only.
Page 39
Statement of Changes in Equity
Essentially the statement of changes in equity presents in a columnar format all the changes
which have affected the various equity balances of share capital and reserves.
Share Share Revaluation Retained
Total
Capital Premium Reserve Earnings
Equity
RWF RWF RWF RWF
RWF
Balance at 1.1.09 X X X X
X
Change in accounting
policy (X)
(X)
__ ___ ___ ____ ___
Restated Balance X X X X
X
Issue of shares X X X
Revaluation gain X
X
Transfer (X) X -
Profit for the year X
X
Dividends (X) (X)
__ ___ ___ ____ ____
Balance at 31.12.09 X X X X X
__ ___ ___ ____ _____
L. DISCLOSURE OF SIGNIFICANT ACCOUNTING POLICIES
An entity shall disclose the significant accounting policies used in preparing the financial
statements.
Page 40
BLANK
Page 41
Study Unit 3
IAS 16 Property, Plant and Equipment
Contents
___________________________________________________________________________
A. Objective
___________________________________________________________________________
B. Definition
___________________________________________________________________________
C. Recognition
___________________________________________________________________________
D. Initial Measurement
___________________________________________________________________________
E. Subsequent Expenditure
___________________________________________________________________________
F. Measurement after Recognition
___________________________________________________________________________
G. Derecognition
___________________________________________________________________________
H. Depreciation
___________________________________________________________________________
I. Disclosure
___________________________________________________________________________
Page 42
A. OBJECTIVE
The objective of IAS 16 is to prescribe the accounting treatment for property, plant and
equipment (PPE), so that users of the financial statements can understand the nature of the
entities investment in such assets and any changes that have occurred in that investment.
The standard indicates that the main issues to be dealt with are:
(a) The recognition of assets
(b) The determination of their carrying amount
(c) Depreciation and impairment losses
(d) Disclosure requirements
The standard does not apply to:
(a) Property, plant and equipment classified as held for sale under IFRS 5
(b) Mineral rights and reserves
(c) Biological assets
B. DEFINITION
Property, plant and equipment are tangible items that:
(a) Are held for use in the production or supply of goods or services, for rental to others or
for administration purposes; and
(b) Are expected to be used during more than one period.
The carrying amount refers to the amount at which an asset is recognised after deducting
accumulated depreciation and accumulated impairment losses, i.e. its net book value.
C. RECOGNITION
An item of property, plant and equipment should be recognised as an asset in the Statement
of Financial Position if, and only if:
(a) It is probable that future economic benefits associated with the item will flow to the
entity; and
(b) The cost of the item can be measured reliably.
The Framework for the Preparation and Presentation of Financial Statements also states that
having control over as asset is an important feature in the recognition of that asset in the
accounts (for example, legal ownership of an asset is not essential in establishing the
existence of the asset, as long as the entity can show that it controls the benefits which are
expected to flow from that asset, e.g. Finance Lease).
Page 43
An entity controls an asset if it has the power to obtain the future economic benefits flowing
from that asset and also restrict the access of others to those benefits.
D. INITIAL MEASUREMENT
If an asset qualifies for recognition, then it should initially be measured at its cost.
Cost is the amount of cash or cash equivalents paid or the fair value of other consideration
given to acquire an asset at the time of acquisition or construction.
The cost of an asset comprises:
The Purchase Price less trade discounts and rebates
+ Import duties and non-refundable purchase taxes
+ Any costs that are directly attributable to bringing the asset to the location and condition
necessary for the asset to be used as intended, for example:
Site preparation costs
Initial delivery and handling costs
Installation and assembly costs
Professional fees
Costs of testing whether the asset is functioning properly (after deducting the sales
proceeds of any samples produced during testing)
+ The initial costs of dismantling and removing the item and restoring the site, if such an
obligation is placed on the entity (legally or constructively)
Administration and other general overheads are not included in the cost of the asset.
Likewise, the following are also excluded: training costs, advertising and promotional costs,
and costs incurred while an asset, capable of being used as intended, is yet to be brought into
use, is left idle or is operating below full capacity.
[Note that in the case of self-constructed assets, the following are excluded from the cost of
the asset:
(a) Internal profits
(b) Abnormal amounts of wasted material, labour or other resources]
In certain circumstances, IAS 23 allows part of the borrowing cost to be capitalised.
If an asset is acquired in exchange for another asset, the acquired asset is measured at its fair
value unless the exchange lacks commercial substance or the fair value cannot be measured
reliably. If this is the case, the acquired asset should be measured at the carrying value of the
asset given up (carrying amount being equal to cost less accumulated depreciation and
impairment losses).
Page 44
Question:
TTR Limited has recently acquired an item of plant. The details of this acquisition are:
RWF
RWF
List price of plant
240,000
Trade discount applicable to TTR
12.5%
Ancillary costs:
Shipping and handling costs
2,750
Pre-production testing
12,500
Maintenance contract for three years
24,000
Site preparation costs:
Electrical cable installation
14,000
Concrete reinforcement
4,500
Own labour costs
7,500
26,000
TTR paid for the plant (excluding the ancillary costs) within four weeks and thus received a
3% early settlement discount.
An error was made in installing the electrical cable. This error cost RWF6,000 and is
included in the RWF14,000 figure.
The plant is expected to last for 10 years. At the end of this period, there will be compulsory
costs of RWF18,000 to dismantle the plant and restore the site. (Ignore discounting).
What is the initial cost of the plant that should be recognised in the Statement of Financial
Position?
Solution:
RWF
RWF
List price of plant
240,000
Less trade discount (12.5%)
(30,000)
210,000
Shipping and handling costs
2,750
Pre-production testing
12,500
Site preparation costs:
Electrical cable (14,000 – 6,000)
8,000
Concrete reinforcement
4,500
Own labour costs
7,500
20,000
Dismantling and restoration
18,000
Initial cost of plant
263,250
Note:
Early settlement discount is a revenue item
Maintenance cost is also a revenue item
The electrical error must be charged to the income statement
Page 45
E. SUBSEQUENT EXPENDITURE
The cost of day-to-day servicing of an asset is not included in the carrying amount of an
asset. This expenditure is referred to as “repairs and maintenance” and should be charged to
the income statement in the period it is incurred.
However, if part of an asset is replaced, e.g. new engine in a plane or new lining in a furnace,
then the cost of this replacement can be capitalised if the recognition criteria mentioned
earlier are met.
The part of the asset that is replaced must then be derecognised (with any resulting profit or
loss on disposal being calculated and recognised).
Some assets require ongoing and substantial expenditure for overhauling and restoring
components of an asset, for example:
Overhaul of Airplane, to keep it airworthy
Dry docking of a ship
Replacing the lining of a furnace
A provision for this expenditure cannot be made. Rather, the cost is capitalised and
depreciated separately over its individual useful economic life. It is important to note that this
variety of subsequent expenditure can only be treated in this way if the asset is treated as
separate components for depreciation purposes.
If the asset is not accounted for as several different components, this kind of subsequent
expenditure must be treated as normal repairs and renewals and charged to the income
statement as it is incurred.
Example
SHNK Limited purchases a plane that has an expected useful life of 20 years, and has no
residual value. The plane requires a substantial overhaul every 5 years (i.e. at the end of years
5, 10, and 15). The plane cost RWF45 million and RWF5 million of this figure is estimated to
be attributable to the economic benefits that are restored by the overhauls.
The annual depreciation charge would be calculated as follows:
The plane is treated as two separate components for depreciation purposes:
The RWF5 million is depreciated over 5 years (i.e. RWF1 million per annum)
The balance of RWF40 million is depreciated over 20 years (i.e. RWF2 million per
annum).
The total annual depreciation charge is RWF3 million.
When the first overhaul is carried out at the end of year 5 at a cost of, say, RWF10 million,
this cost is capitalised and depreciated to the date of the next overhaul.
Page 46
This means that total depreciation for years 6 to 10 will be RWF4 million (RWF10m/5 years
+ RWF40m/20 years).
F. MEASUREMENT AFTER RECOGNITION
IAS 16 provides two options when accounting for property, plant and equipment after their
initial recognition.
(a) Cost Model
After recognition, the asset should be carried in the Statement of Financial Position at:
Cost
Less Accumulated Depreciation
Less Accumulated Impairment Losses
(b) Revaluation Model
After recognition, an asset, whose fair value can be measured reliably, should be carried
at a revalued amount.
The revalued amount is the fair value of the asset at the date of revaluation less subsequent
accumulated depreciation and impairment losses.
The fair value of property is based on its market value, as assessed by a professionally
qualified valuer.
The fair value of plant and equipment is usually their market value, determined by appraisal.
If there is no market based evidence of fair value because the asset is of a specialised nature
and is rarely sold, then the fair value of that asset will have to be estimated using an income
or a depreciated replacement cost approach.
All revaluations should be made with such frequency so that the carrying amount does not
differ materially from the fair value at the Statement of Financial Position date.
If an item of property, plant and equipment is revalued, then the entire class of property, plant
and equipment to which the asset belongs shall be revalued.
If an asset is revalued upwards:
Debit Asset
Credit Revaluation Surplus
With the amount of the increase
However, if the revaluation gain reverses a previous revaluation loss, which was recognised
as an expense, then the gain should be recognised in the income statement (but only to the
Page 47
extent of the previous loss of the same asset). Any excess over the amount of the original
loss goes to the Revaluation Surplus.
Example:
GJ Limited has land in its books with a carrying value of RWF14 million. Two years ago the
land was worth RWF16 million. The loss was recorded in the Income Statement. This year
the land has been valued at RWF20 million.
Thus:
RWFm
RWFm
Debit
Land
6
Credit
Income Statement
2
Credit
Revaluation Surplus
4
If an asset is revalued downwards:
Debit
Income Statement
Credit
Asset
With the amount of the
decrease
However, the decrease should be debited directly to the revaluation surplus to the extent of
any credit balance existing in the revaluation surplus in respect of that asset.
Example:
GJ Limited has land in its books with a carrying value of RWF20 million. Two years ago the
land was worth RWF15 million. The gain was credited to the Revaluation Surplus. This year
the land has been valued at RWF13 million.
Thus:
RWFm
RWFm
Debit
Revaluation Surplus
5
Debit
Income Statement
2
Credit
Land
7
[Note that the Revaluation Surplus is part of owners’ equity.]
If however, the asset is subject to depreciation, then the treatment of revaluation surpluses
becomes a little more complicated.
If an asset is revalued upwards, then the annual depreciation charge will be greater. This will
reduce profits to lower than they would be if no revaluation took place. Consequently, the
accumulated reserves will also be lower.
The revaluation surplus will be realised if and when the asset is sold or disposed of in the
future. But, it can be argued that the surplus is also being realised when the asset is being
used, i.e. over its remaining useful life.
Thus, the revaluation surplus being realised is the difference between:
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The new depreciation charge on the revalued amount of the asset; and
The old depreciation charge on the cost of the asset.
Example:
SBN Limited bought an item of machinery for RWF100,000 at the start of 2009. The asset
had an estimated useful life of 5 years, with no residual value.
At the start of 2009, the asset was revalued to RWF120,000. There was no change in its
expected useful life.
Solution:
RWF
At 1st January 2011:
Carrying amount of asset
60,000
Revalued to
120,000
Revaluation surplus
60,000
Thus:
RWF
RWF
Debit
Machinery
60,000
Credit
Revaluation Reserve
60,000
The new annual depreciation charge, after revaluation will be:
120,000
= RWF40,000
per annum
3 years
This represents an increase of RWF20,000 per annum over the old depreciation charge.
To compensate for this, SBN Limited can “release” from the revaluation reserve to the
accumulated reserves an amount to reflect the “realisation” of the revaluation reserve. The
revaluation surplus is released on a straight-line basis over the remaining life of the machine,
i.e.
RWF60,000
= RWF20,000
per annum
3 years
Thus:
RWF
RWF
Debit
Revaluation Reserve
20,000
Credit
Accumulated Reserves
20,000
[This would occur in the Statement of Changes in Equity and is not part of the profit or loss.]
The depreciation charge changes from the date of the revaluation onwards.
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Example:
On the 31st December 2010, SXB Limited had the following shown in its Statement of
Financial Position:
Buildings:
RWF
Cost
5,000,000
Accumulated depreciation
1,000,000
Carrying amount
4,000,000
Depreciation on buildings has been charged at the rate of 2% per annum.
[Note: this means that the annual charge is RWF100,000 per annum and thus, the buildings
were acquired 10 years previously. At the end of December 2009, the buildings had an
estimated useful life of 40 years remaining.]
The building is revalued to RWF5,925,000 on the 30th June 2011. There is no change in its
remaining estimated useful life.
Show the extracts from the financial statements for the year ended 31st December 2011.
Solution:
Depreciation charge for year:
RWF
RWF5,000,000 x 2% x 6/12 =
50,000
+
5,925,000
x 6/12 75,000
39.5
years
125,000
The asset is depreciated as normal up to the date of the revaluation. Thereafter, the revalued
amount is written off over the remaining life of the asset.
Thus:
Income Statement
RWF
Depreciation
125,000
Statement of Financial Position
Valuation at 30th June 2009
5,925,000
Accumulated depreciation
75,000
Carrying amount
5,850,000
At the date of revaluation a revaluation surplus would have been created:
RWF
Carrying amount
3,950,000
Revalued amount
5,925,000
Revaluation surplus
1,975,000
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The revaluation surplus can be “released” to accumulated reserves over the remaining life of
the asset, i.e.
RWF1,975,000
= RWF50,000
per annum
39.5 years
[In 2009, RWF50,000 x 6/12 = RWF25,000 would be released.]
In 2010 onwards, the annual depreciation charge will be RWF150,000 per annum.
As an alternative to releasing the revaluation surplus over the assets remaining useful life, the
surplus could instead be transferred in its entirety to retained earnings when the asset is
eventually derecognised.
G. DERECOGNITION
If an asset is sold, scrapped or withdrawn from use (so that no future economic benefits are
expected) then the asset must be removed from the Statement of Financial Position.
Any gain or loss arising on disposal must be calculated and included as part of profit or loss
for period.
The gain or loss on disposal is the difference between:
The carrying amount of the asset; and
The net sales (disposal) proceeds.
[Note: any consideration receivable on disposal of an item of property, plant and equipment
is measured at its fair value.]
H. DEPRECIATION
Each part of an item of property, plant and equipment that has a cost that is significant in
relation to the total cost of the item should be depreciated separately.
This means that an entity should allocate the amount initially recognised in respect of an item
of property, plant and equipment and each part should be separately depreciated.
For example, a company acquires a property at a cost of RWF100 million. For depreciation
purposes, the asset has been separated into the following elements:
Separate Asset
Cost
Life
Land
RWF25m
Freehold
Buildings
RWF50m
50 years
Lifts
RWF15m
15 years
Heating System
RWF10m
10 years
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Thus, each asset should be depreciated accordingly.
The depreciation charge for a period should be recognised in the profit or loss for the period.
It is usually an expense item. But if the asset is used in the process of producing goods for
sale, then the depreciation of that asset is included in the cost of sales.
There are situations however, when the depreciation of any asset should be included in the
carrying amount of another asset. For example, under IAS 38 Intangible Assets, depreciation
of assets used for development purposes may be included in the cost of the intangible asset
(development costs) capitalised in the Statement of Financial Position.
So, if the future economic benefits embodied in an asset are absorbed in producing other
assets, then the depreciation charge constitutes part of the cost of the other asset and thus is
included in its carrying amount.
The depreciable amount of an asset should be allocated on a systematic basis over its useful
life. The method of depreciation should reflect the pattern in which the asset is used in the
entity. Whichever method is chosen by the entity, it should be applied consistently from
period to period unless there is a change in the expected pattern of consumption of the assets
future economic benefits.
The entity should review both the residual value of the asset and its expected useful life on an
annual basis. If necessary, these should be revised (as a change in estimate, in accordance
with IAS 8).
Because an asset is being repaired or maintained does not mean it should avoid depreciation.
Depreciation begins when the asset is available for use and ceases at the earlier date of:
(a) When it is classified as held for resale under IFRS 5; and
(b) When the asset is derecognised.
Land, with some exceptions, has an unlimited useful life and so it is not subject to
depreciation. Buildings have a useful life and, thus, are depreciated.
If an asset is revalued, the revalued amount should be depreciated over its remaining useful
life, starting at the date of its revaluation.
If the useful life of an asset is revised, the carrying value of the asset should be written off
over the remaining life, starting with the period in which the change is made.
Example:
STPA Limited purchased an asset on 1st January 2007. It had an expected useful life of 5
years. Its residual value is immaterial. Its cost was RWF500,000. At 31st December 2009,
the remaining useful life is revised to 7 years.
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Thus the depreciation charge in the accounts for 2009 will be as follows:
Net Book Value at 31st December 2008
RWF300,000
Remaining useful life at the start of the year 2009
(i.e. 7 years from the end of this year + this year)
8 years
Depreciation charge
RWF37,500
(Note, the estimated useful life at the year 2009 is 7 years, but this information is used to
compute this years depreciation charge too.)
I. DISCLOSURE
For each class of property, plant and equipment, the following information must be disclosed:
(1) The measurement bases for calculating the gross carrying amount
(2) Depreciation method used
(3) The useful lives or the depreciation rates used
(4) The gross carrying amount and the accumulated depreciation at the beginning of the
period
(5) A reconciliation of the carrying amount at the beginning and end of the period showing:
(i) Additions
(ii) Assets held for sale in accordance with IFRS 5
(iii) Acquisitions through business combinations
(iv) Increases or decreases arising from revaluations
(v) Impairment losses
(vi) Reversals of impairment losses
(vii) Depreciation
(viii) Other changes, including foreign currency exchange differences
The following, if they arise, should also be disclosed:
(i) Existence of restrictions on title and whether assets have been pledged as security for
liabilities and the amounts involved
(ii) Amount of expenditure recognised in the course of the assets construction
(iii) Amount of contractual commitments to acquire property, plant and equipment
(iv) The amount of compensation from third parties for assets that were impaired, lost or
given up included in profit or loss (if not disclosed separately on the face of the income
statement)
If assets have been revalued, the following should be disclosed:
(i) Date of revaluation
(ii) Whether an independent valuer was used
(iii) Methods and assumptions used in estimated fair value
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(iv) The extent to which estimates were based on active markets or other techniques which
were used
(v) The carrying amount of the asset if the cost model had been used
(vi) The revaluation surplus
IAS 16 encourages the disclosure of:
(i) The carrying amount of idle property, plant and equipment
(ii) The gross carrying amount of fully depreciated assets still in use
(iii) The carrying amount of assets retired from active use and not classified as held for sale
(iv) It the cost model is used, then disclose the fair value of the assets if materially different.
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BLANK
Page 55
Study Unit 4
IAS 36 Impairment of Assets
Contents
___________________________________________________________________________
A. Introduction
___________________________________________________________________________
B. Definitions
___________________________________________________________________________
C. Calculating an Impairment Loss
___________________________________________________________________________
D. Recognition of Impairment Losses in the Financial Statements
___________________________________________________________________________
E. Cash Generating Units
___________________________________________________________________________
F. Reversal of Impairment Losses
___________________________________________________________________________
G. Disclosures
___________________________________________________________________________
H. Example
___________________________________________________________________________
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A. INTRODUCTION
There is a long-standing principle in financial accounting that an asset should not be shown at
more than its recoverable amount in the financial statements. If the carrying value of the asset
is greater than its recoverable amount, the asset is said to be impaired. This requires action to
be taken to bring the value of the asset down to its recoverable amount.
IAS 36 Impairment of Assets outlines how the recoverable amount of the asset is calculated,
and also the necessary action required by the entity in the event of an impairment loss arising.
It also covers situations where an impairment should be reversed as well as the disclosures
that are necessary.
IAS 36 applies to accounting for impairment of all asses, with the exception of:
Inventories
Investment property measured at fair value
Biological assets
Non-current assets held for resale (IFRS 5)
Construction contracts
Deferred tax assets
Financial assets covered by IAS 39
Assets arising from employee benefits
Impairment is the sudden reduction in the value of a non-current asset (or cash generating
unit) over and above the normal wear and tear or reduction in value caused by depreciation. It
arises because something happens to the asset itself and / or the environment in which it
operates.
With the exception of intangible assets with indefinite lives and goodwill (which must be
tested for impairment annually), a formal estimate of an asset’s recoverable amount is not
required annually unless there is an indication that the asset may be impaired. The indicators
of impairment may be of an external or internal nature. Examples of these indicators would
be:
External Indicators:
Market value of asset has fallen, more than expected
Technological, market, economic, legal change
Changes in interest rates (which may impact on the calculation of the asset’s Value in
Use)
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Internal Indicators
Evidence of obsolescence or physical damage
Changes in the way an asset is to be used e.g. asset will become idle
Evidence from internal reporting that indicates that the economic performance of an
asset is, or will be, worse than expected
Furthermore, evidence from internal reporting which may suggest impairment of an asset has
occurred may derive from:
Cash budgets for the operation and maintenance of the asset are significantly higher
than expected.
Actual cash flows are worse than expected
A significant fall in budgeted cash flows or operating profit
Operating losses.
If the asset is impaired and its value in the accounts is written down to its recoverable
amount, it is important to remember that the depreciation charge in respect of that asset
should also be reviewed and adjusted accordingly (for example, the remaining useful
economic life may now be much shorter).
B. DEFINITIONS
Before we look at any examples, it is important to note some key definitions:
Impairment
Loss The amount by which the carrying amount of the asset (or cash-generating
unit) exceeds its recoverable amount
Carrying
amount
The amount at which the asset is recognised in the Statement of Financial
Position after deducting accumulated depreciation / amortisation and any
accumulated impairment losses
Recoverable
amount The HIGHER of an asset’s:
Fair value less costs to sell; and
Value In Use
Fair vale less
costs to sell
The amount obtainable from the sale of an asset in an arm’s length
transaction between knowledgeable and willing parties, less the costs of
disposal
Costs of
Disposal
The incremental costs directly attributable to the disposal of an asset.
Examples include legal costs, costs of bring the asset into the condition
necessary for its sale and the costs relating to the removal of a sitting tenant
(in the case of a building) but they exclude finance costs and income tax
Value in use The Present Value of the future cash flows expected to be derived from
using an asset, including its eventual disposal
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C. CALCULATING AN IMPAIRMENT LOSS
Example 1
Asset values at year end:
RWF RWF
Carrying value 220,000
Fair value less costs to sell 224,000
Value in use 226,000
Therefore, recoverable amount is: 226,000
Because the carrying value is less than the recoverable amount, there is no impairment
loss and no action is therefore necessary.
Example 2:
Asset values at year end:
RWF RWF
Carrying value 220,000
Fair value less costs to sell 214,000
Value in use 210,000
Therefore, recoverable amount is: 214,000
Because the carrying value is greater than the recoverable amount, the asset is impaired. It
needs to be written down to RWF214,000, creating an impairment loss of RWF6,000. In
addition, the new recoverable amount of the asset will need to be depreciated over its
remaining useful economic life.
The fair value less costs to sell should be determined by the best judgement of management.
The best evidence of this value would be a binding sale agreement, adjusted for incremental
costs of disposal. If there is no binding sale agreement, but an active market exists, then the
fair value less costs to sell will be the assets market price less the costs of disposal. The price
should be the current bid price or the price of the most recent transaction. Failing either of
these indicators being present, the fair value less costs to sell should be based on the best
information available to reflect what would be received between willing parties at arm’s
length. (It should not be based on a forced sale or fire sale).
The Value In Use (VIU) is arrived at by estimating the future cash inflows and outflows from
the use of the asset (including its ultimate disposal, but excluding tax and interest) and
discounting them to their present value.
The discount rate should be the rate of return that the market would expect from an equally
risky investment. It should exclude the effects of any risk for which the cash flows have been
adjusted and it should be calculated on a pre-tax basis.
When estimating the future cash flows, an entity should base is projections on reasonable and
supportable assumptions that represent management’s best estimate of the economic
conditions that will exist over the remaining useful life of the asset. The projections should
cover a maximum period of five years (unless a longer period can be justified) and should not
include the costs of future restructurings.
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D. RECOGNITION OF IMPAIRMENT LOSSES IN THE FINANCIAL
STATEMENTS
An impairment loss is normally charged immediately in the Income Statement / Statement of
Comprehensive Income, to the same heading as the related depreciation (i.e. cost of sales,
administration or distribution).
That is: Debit Income Statement
Credit Asset Account
with the amount of the impairment loss
But, if the asset has previously been revalued upwards, the impairment should be treated as a
revaluation decrease (and shown in “Other Comprehensive Income”). That is, the loss is first
set against any revaluation surplus for that asset until the surplus relating to that asset has
been exhausted. Then, any excess is recognised as an expense in the Income Statement.
After adjusting for the impairment loss, the new carrying amount is written off over the
remaining useful life of the asset.
Any related deferred tax assets or liabilities are determined under IAS 12 by comparing the
revised carrying value of the asset with its tax base.
Example
ABP Ltd. hires out power boats to tourists, based on an hourly rate.
The financial statement for the year ended 31st December 2008 (draft) includes the following
power boat:
RWF RWF
Cost 20,000
Depreciation: b/fwd 5,000
Charge for year 5,000
(10,000)
Carrying amount 10,000
Depreciation is 25% per annum straight line
In December 2008, the only coach firm bringing tourists to the lake side where ABP is
based, withdraws from the route. The resultant tourist market faces significant uncertainty
and an impairment review is carried out by the company.
The following projections have been made by directors in respect of the power boat asset:
Expected revenue of RWF4,800 p.a. in 2009 and 2010. The power boat will then be
scrapped.
The power boat could be sold for RWF5,600 (less RWF500 selling costs) immediately.
The cost of borrowing is currently 10%.
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First, calculate the “recoverable amount”:
Fair value less selling costs: RWF
5,600 – 500 = 5,100
Value In Use
2009 4,800 x 0.909 = 4,363
2010 4,800 x 0.826 = 3,965
8,328
(0.909 and 0 .826 are the discount factors in respect of 10%, for years 1 and 2 respectively).
Therefore, the recoverable amount is RWF8,328. Since the carrying amount is RWF10,000,
there is an impairment loss of RWF1,672. This impairment loss is charged to the Income
Statement for the year ended 31st December 2008. Effectively, in the financial statements:
RWF RWF
Cost 20,000
Depreciation: b/fwd 5,000
Charge for year 5,000
Impairment loss 1,672
11,672
Carrying amount 8,328
The depreciation charge over the remaining 2 years of the assets life (2009 and 2010) will be:
RWF8,328 = RWF4,164
2 years
Example
At 1st January 2009, a non-current asset had a carrying amount of RWF120,000, based on a
revalued amount, and a depreciated historical cost of RWF90,000. An impairment loss of
RWF40,000 arose during the year ended 31st December 2009.
A loss of RWF30,000 (RWF120,000 - RWF90,000) is recognised as “Other Comprehensive
Income” (i.e. the revaluation reserve is debited with this amount). The remaining loss of
RWF10,000 is recognised as an expense in the period.
Example
CRMN Ltd owns and operates an item of plant that cost RWF640,000 and had accumulated
depreciation of RWF400,000 on 1st October 2009. It is being depreciated at 12.5% per annum
on cost. On 1st April 2010 (exactly half way through the year) the plant was damaged when a
factory vehicle collided into it. Due to the unavailability of replacement parts, it is not
possible to repair the plant, but it still operates, albeit at a reduced capacity. Also, it is
expected that as a result of the damage, the remaining life of the plant from the date of the
damage will be only two years.
Based on its reduced operating capacity, the estimated present value of the plant in use is
RWF150,000. The plant has a current value of RWF20,000 (which will be nil in two years
time), but CRMN has been offered a trade-in value of RWF180,000 against a replacement
machine, which has a cost of RWF1 million (there would be no disposal costs for the
replaced plant).
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CRMN is reluctant to replace the plant, as it is worried about the long-term demand for the
product produced by the plant. The trade-in value is only available if the plant is replaced.
Prepare extracts from the Statement of Financial Position and Statement of
Comprehensive Income of CRMN in respect of the plant for the year ended 30th September
2010.
At the date of the impairment on 1st April 2010, the plant had a carrying amount as follows:
RWF’000
1st October 2009 Carrying Value 240,000
Depreciation (6 months) 40,000 (RWF640,000 x 12.5% x
6/12)
1st April 2010 Carrying Value 200,000
The recoverable amount is the higher of the fair value less costs to sell and the Value In Use.
If CRMN trades in the plant, it would receive RWF180,000 by way of part exchange, but this
is conditional on buying new plant, which CRMN is reluctant to do. A more realistic amount
of the fair value of the plant is its current disposal value of only RWF20,000. Thus, because
the Value In Use is RWF150,000, this can be taken to be the recoverable amount. This will
result in an impairment loss of RWF50,000, as the asset is written down from RWF200,000
to RWF150,000.
The remaining effect on income would be that a depreciation charge for the last six months of
the year (i.e. after the impairment loss occurred) would be required. As the damage has
reduced the remaining useful life to only two years (from the date of the impairment) the
depreciation would be RWF37,500 (i.e. RWF150,000 / 2 years x 6/12).
Thus, extracts from the financial statements for the year ended 30th September 2010 would
be:
Statement of Comprehensive Income:
RWF’000
Plant depreciation:
1st 6 months of year 40,000
2nd 6 moths of year 37,500
77,500
Plant impairment loss 50,000
Statement of Financial Position:
RWF’000
Non-Current Assets
Plant (150,000 – 37,500) 112,500
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E. CASH GENERATING UNITS
In some instances, it may not be possible to determine the recoverable amount of particular
assets. For example, a production line in a factory may be made up of a number of different
machines, with the output of Machine 1 becoming the input of Machine 2 and so on.
Therefore, revenues are earned by the production line as a whole, rather than a single asset.
This means that the Value In Use must be calculated for groups of assets rather than for
individual assets. Likewise, any subsequent impairment review must be in respect of this
group of assets.
Another example would be the case of a private railway servicing the mining activities of an
organisation. If the railway’s exclusive purpose is to support the mine and it does not
generate independent cash flows from those of the mine, then when conducting an
impairment review, the entire assets of the mining activities, including the railway, must be
considered. The railways Value In Use cannot be separately identified and its fair value less
costs to sell might merely be its scrap value.
These groups of assets are called “Cash Generating Units” (CGUs) and can be defined as
segments of the business whose income streams are largely independent of each other. In
reality, they are likely to represent the strategic business units for monitoring the performance
of the business. It could also include a subsidiary or associate within a corporate group
structure.
The identification of a CGU involves judgement and should be the lowest identifiable group
of assets that generate largely independent cash flows from continuing use. Only cash inflows
from external parties should be considered. If an active market exists for the asset’s (or group
of assets) output, then they should be identified as a CGU, even if some of the output is used
internally.
If this is the situation, management’s best estimate of future market prices should be used in
determining the Value In Use of:
The CGU, when estimating the future cash inflows relating to internal uses; and
Other CGUs of the entity, when estimating future cash flows that relate to internal use
of the output.
CGUs should be identified consistently from period to period unless a change is justified.
Allocating assets to Cash Generating Units
The recoverable amount of a CGU is the higher of its fair value less costs to sell and its Value
In Use. The carrying amount should be determined consistently with the way the recoverable
amount is determined.
The net assets of the business that can be attributed directly or allocated on a reasonable and
consistent basis (including capitalised goodwill, but excluding tax balances and interest-
bearing debt) are allocated to cash-generating units. However, there are two areas of concern:
Corporate Assets:
Page 63
These are assets that are used by several cash-generating units (e.g. a head office building or
an R&D facility). They do not generate their own cash inflows, so cannot be considered
CGUs in their own right.
Goodwill
This does not generate cash flows independently of other assets and often relates to a whole
business.
It may be possible to allocate corporate assets and/or goodwill over other cash-generating
units on a reasonable basis. It is important to remember that when a CGU has been allocated
goodwill, that CGU must be subjected to an impairment review at least annually.
If no reasonable allocation of corporate assets or goodwill is possible, then the entity should:
(i) Compare the carrying amount of the CGU (excluding the corporate asset) to its
recoverable amount and recognise any impairment loss accordingly
(ii) Identify the smallest CGU to which a portion of the corporate asset can be allocated on
a reasonable and consistent basis and
(iii) Compare the carrying amount of the larger CGU, including a portion of the corporate
asset, to its recoverable amount and recognise any impairment loss.
Example
KHR Ltd acquired a business consisting of 3 cash-generating units: HNE, DGH and ATR.
There is no reasonable way of allocating the resulting goodwill to them. After a number of
years, the carrying amount and the recoverable amount of the net assets of the CGUs,
together with the purchased goodwill (calculated using the full goodwill method), are as
follows:
HNE DGH ATR Goodwill Total
RWF’000 RWF’000 RWF’000 RWF’000 RWF’000
Carrying Amount 720 1,080 1,260 450 3,510
Recoverable Amount 900 1,260 1,080 3,240
Firstly, review the individual CGUs for impairment. ATR is the only one impaired, as its
recoverable amount is lower than its carrying amount. The impairment loss in respect of ATR
is RWF180,000. This is recognised and its carrying amount is reduced to RWF1,080,000.
Secondly, compare the carrying amount of the business as a whole, including the goodwill, to
its recoverable amount. After accounting for the impairment loss in ATR, the value of the
business is now RWF3,330,000 (RWF3,510,000 - RWF180,000). Since its recoverable
amount is RWF3,240,000, this means that a further impairment loss of RWF90,000 must be
recognised in respect of the goodwill.
Page 64
Thus, after the impairment review process, the carrying amounts of the CGUs, and the
goodwill, are now as follows:
HNE DGH ATR Goodwill Total
RWF’000 RWF’000 RWF’000 RWF’000 RWF’000
Carrying Amount 720 1,080 1,080 360 3,240
Allocation of an impairment loss to the CGU’s assets
If an impairment loss arises in respect of a cash-generating unit, it is allocated among the
assets in the unit in the following order:
1. Any individual assets that are obviously impaired
2. Goodwill
3. Other assets, pro rata to their carrying amount
However, as a result of the allocation, the carrying amount of an asset cannot be reduced
below the highest of:
Its fair value less costs to sell (if determinable)
Its Value In Use (if determinable)
Zero
Example
BKLB identified an impairment loss of RWF60 million in one of its CGUs. The CGU had a
carrying amount of RWF160 million and a recoverable amount of RWF100 million at 31st
December 2009
Details of the carrying amount RWFm
Goodwill (full goodwill method used) 20
Property 60
Machinery 40
Motor Vehicles 20
Other Assets 20
160
The fair value less costs to sell of the unit assets do not differ significantly from their carrying
values, with the exception of the property which had a market value of RWF70 million.
Allocation of Impairment Loss
Carrying Impairment Revised
Amount Loss
Carrying amount
RWFm RWFm
RWFm
Goodwill 20 (20)1 -
Property 60 - 2
60
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Machinery 40 (20)3 20
Motor Vehicles 20 (10)3
10
Other Non-Monetary Assets 20 (10)3 10
160 (60) 100
Notes
1. Loss is firstly allocated to goodwill
2. No loss is allocated to property, because its fair value less cost to sell is greater than its
carrying amount
3. The balance of the loss (RWF40m) is allocated to other assets on a pro rata basis, i.e.:
Machinery 40 40m x 40/80 = 20
Motor Vehicles 20 40m x 20/80 = 10
Other assets 20 40m x 20/80 = 10
80 40
Under IAS36, no impairment loss is set against monetary assets, should they exist.
Receivables may become impaired, but IAS 39 would be relevant in this case, not IAS 36.
Example:
On the 1st January 2010, TMP Ltd acquired the whole of PFR Ltd., a company that operates a
sceniccoach service along the through a popular tourist area. The summarised Statement of
Financial Position at fair values of PFR on 1st January 2010, reflecting the terms of
acquisition was:
RWF’000
Goodwill 200
Operating licence 1,200
Property – bus stations, garages and land 300
Coaches 300
Two steam engines 1,000
Purchase consideration 3,000
The operating licence is for 10 years. It was renewed on 1st January 2010 by the transport
authority and is stated at the cost of its renewal. The carrying values of the property and
coaches are based on their Value In Use. The vehicles are identical to each other and are
valued at their net selling prices.
On 1st February 2010, the engine of one of the coaches caught fore up, completely destroying
the whole vehicle. Fortunately, no one was injured, but the coach was beyond repair. Due to
its age, a replacement could not be obtained. Because of the reduced passenger capacity, the
estimated Value In Use of the entire business after the accident was assessed at RWF2
million.
Passenger numbers after the accident were below expectations, even after allowing for the
reduced capacity. A market research report concluded that the tourists were not using the firm
because of their fear of a similar accident occurring to the remaining coach.
Page 66
In the light of this, the Value In Use of the business was re-assessed on 31st March 2010 at
RWF1.8 million. On this date, TMP Ltd received an offer of RWF900,000 in respect of the
operating licence (it is transferable). The realisable value of the other assets has not changed
significantly.
Calculate the carrying values of the assets of PFR Ltd (in TMP Ltd’s consolidated
Statement of Financial Position) at 1st February 2010 and 31st March 2010, after
recognising the impairment losses.
After the accident occurred, an impairment loss of RWF1 million arises, as the carrying value
of the CGU exceeded the recoverable amount (in this case, its Value In Use) by this amount.
The first impairment loss is allocated against the assets of the CGU in the following order:
1. RWF500,000 must be written off the coaches, as one of them no longer exists and is no
longer part of the CGU. The other coach is not impaired, as it cannot be reduced below
its net selling price.
2. The goodwill of RWF200,000 must be eliminated; and
3. The balance of RWF300,000 is allocated pro rata to the other remaining assets
RWF’000 RWF’000
Licence 1,200 (1,200/1,800) x 300 = 200
Property 300 ( 300/1,800) x 300 = 50
Coaches 300 ( 300/1,800) x 300 = 50
1,800 300
Following the second impairment review, a further impairment loss of RWF200,000 must be
recognised, as follows:
1. The first RWF100,000 is applied to the licence, to write it down to its net selling price
2. The balance of RWF100,000 is applied pro rata to assets other than those carried at
their net selling prices, i.e. RWF50,000 is allocated to both the property and the rail
track and coaches
RWF’000 RWF’000
Property 300 ( 300/600) x 100 = 50
Coaches 300 ( 300/600) x 100 = 50
600 100
Page 67
In summary,
1st January
2010
RWF’000
1st
impairment
RWF’000
Revised
Assets
1st
February
2010
RWF’000
2nd
Impairment
RWF’000
Revised
assets
31st March
2010
RWF’000
Goodwill
200
(200)
-
-
Operating
Licence
1,200
(200)
1,000
(100)
900
Property
garages/ land
300
(50)
250
(50)
200
Coaches
300
(50)
250
(50)
200
Maintenance
equipment
1,000
(500)
500
500
3,000
(1,000)
2,000
(200)
1,800
If goodwill is calculated using the proportion of net assets method, the Non-controlling
interest (NCI) share of goodwill is not reflected in the group accounts. Therefore, any
comparison between the carrying value of the CGU (including goodwill) and its recoverable
amount will not be on a like for like basis.
In order to address this problem, goodwill must be grossed up to include goodwill attributable
to the NCI, prior to conducting the impairment review. This grossed up goodwill is called
“total notional goodwill”.
Once any impairment loss is determined, it should be allocated firstly to the total notional
goodwill and then to the CGUs assets on a pro rata basis. As only the parent’s share of
goodwill is recognised in the group accounts, only the parent’s share of the impairment loss
should be recognised.
On the other hand, if the full method of valuing NCI is used, the goodwill in the group
Statement of Financial Position represents full goodwill. Thus, together with the rest of the
CGU, it can be compared to the recoverable amount of the CGU on a like for like basis.
On the examples above:
BKLB used the full goodwill method
TMP owns 100% of PFR, so there is no grossing up of notional goodwill for the
amount attributable to the NCI
Page 68
Example
X owns 80% of Y. At 31st December 2009, the carrying value of Y’s net assets is RWF120
million, excluding goodwill of RWF16 million that arose on the original acquisition. The
NCI is calculated using the proportion of net assets method.
Calculate the impairment loss if the recoverable amount is:
(i) RWF128 million
(ii) RWF100 million
If the recoverable amount is RWF128 million:
Goodwill Net assets Total
RWFm RWFm
RWFm
Carrying amount 16 120
136
Notional NCI (20/80) 4 .
4
Notionally adjusted carrying amount 20 120
140
Recoverable amount 128
Impairment 12
The impairment loss only relates to goodwill. Only the proportion relating to the
recognised goodwill is recognised in the financial statements, so 80% of RWF12m, i.e.
RWF9.6m
If the recoverable amount is RWF100 million:
Goodwill Net assets Total
RWFm RWFm
RWFm
Carrying amount 16 120
136
Notional NCI (20/80) 4 .
4
Notionally adjusted carrying amount 20 120
140
Recoverable amount 100
Impairment 40
The impairment loss is recognised as follows:
RWF16 million to recognised goodwill and the remaining RWF20 million (RWF40m -
RWF20) to the other net assets
Page 69
F. REVERSAL OF IMPAIRMENT LOSSES
The calculation of impairment losses is based on predictions of what may happen in the
future. However, because actual events may turn out to be more favourable that originally
predicted, it may be the case that the impairment loss accounted for in the past may now no
longer be appropriate (or significantly lower than anticipated).
If this is the case, the recoverable amount is recalculated and the previous write-down is
reversed. The procedure to be followed, in respect of an individual asset is as follows:
Assets that have been subject to impairment should be reviewed at each reporting
period to determine whether there are indications that the impairment has reversed.
A reversal of an impairment loss is recognised as income in profit or loss immediately.
If the original impairment was charged against a revaluation surplus, it is now
recognised as “Other Comprehensive Income” and credited to the revaluation reserve.
However, after the reversal, the new carrying amount of the asset must not exceed the
carrying amount that would have existed if no impairment loss has been recognised in
previous years (i.e. its depreciated historical cost)
The future depreciation charge after the reversal should be adjusted to reflect the
revised carrying amount, i.e.
Revised carrying amount - residual value
Remaining useful life
An impairment loss recognised for goodwill cannot be subsequently reversed. This is because
IAS 38 Intangible Assets expressly forbids the recognition of internally generated goodwill.
Example
In Section D above, we saw the example of ABP and how an impairment loss was recognised
in 2008, as the business faced grave uncertainty.
Suppose in December 2009, a new coach firm, ACK, announce that it will commence a new
service to the lake side. At the end of 2009, the directors now determine that the recoverable
amount of the power boat, impaired at the end of 2008 by RWF1,672, is now estimated to be
RWF3,900.
Therefore, in the accounts for 2009, in respect of the power boat in question:
RWF RWF
Cost 20,000
Depreciation and impairment losses b/fwd 11,672
Depreciation charge for 2009 (as calculated earlier) 4,164
Reversal of Impairment (836)
15,000
Carrying amount 5,000
Page 70
The recoverable amount is RWF3,900 but the asset can only be restated to the depreciated
historical cost it would have had on 31st December 2009, if the asset had never been impaired
in the first place, i.e.
RWF20,000 – 3 years depreciation
RWF20,000 – 15,000 = RWF5,000
The impairment reversal in credited to the Income Statement, while simultaneously
increasing the value of the asset in the Statement of Financial Position.
Reversal of an impairment loss for a CGU
If the reversal relates to a CGU, the reversal is allocated to assets, other than goodwill, on a
pro rata basis. The carrying amount of an asset should not be increased above the lower of:
Its recoverable amount (if determinable); and
The carrying amount that would have been determined (net of amortisation or
depreciation) had no impairment loss been recognised for the asset in prior periods.
The amount of the reversal of the impairment loss that would otherwise have been allocated
to the asset is allocated pro rata to the other assets of the CGU, except for goodwill.
As mentioned earlier, impairment losses relating to goodwill can never be reversed. The
reason for this is that once purchased goodwill has become impaired, any subsequent increase
in its recoverable amount is likely to be an increase in internally generated goodwill, rather
than a reversal of the impairment loss for the original purchased goodwill. Under IAS 38,
internally generated goodwill cannot be recognised.
G. DISCLOSURES
Extensive disclosures are required by IAS 36 Impairments. The most salient disclosures are:
Losses recognised during the period, and where charged in Income Statement /
Statement of Comprehensive Income
Reversals recognised during the period, and where credited in Income Statement /
Statement of Comprehensive Income
For each material loss or reversal in the period:
The amount of loss or reversal and the events causing it
The nature of the asset (or CGU) and its reportable segment
Whether the recoverable amount is the fair value less costs to sell or Value In Use
Basis used to determine the fair value less costs to sell
The discount rate used to determine the Value In Use
Page 71
H. EXAMPLE
NLK Ltd. prepares financial statements to the 31st December each year. The company
manufactures bottled methane gas and its operations are divided into two cash-generating
units: domestic and industrial. The following issue needs to be resolved before the financial
statements for the year ended 31st December 2009 can be finalised.
The following information is available in relation to the CGUs
Domestic
RWF’000
Industrial
RWF’000
Goodwill
-
1,200
Other intangible assets
1,500
300
Property
2,400
6,400
Plant & equipment
3,300
1,400
Historic-cost based carrying value
7,200
9,300
Fair value less costs to sell
7,500
4,200
The estimated future net cash inflows are:
Year
Domestic
RWF’000
Industrial
RWF’000
2010
1,200
1,200
2011
900
1,300
2012
2,700
1,600
2013
1,500
1,500
2014
1,600
900
2015
1,800
1,800
Discount rates appropriate to the activities of the CGUs: Domestic 10%
Industrial 12%
(a) Calculate whether an impairment loss arises for either of the two cash-generating
units, domestic and industrial
(b) Allocate any impairment loss arising in accordance with IAS 36 Impairment of
Assets
Period / Rate
10%
12%
1
0.909
0.893
2
0.826
0.797
3
0.751
0.712
4
0.683
0.636
5
0.620
0.567
6
0.564
0.507
Page 72
The relevant Present Value factors are:
SOLUTION
First, determine the recoverable amounts of each CGU. The fair value less costs to sell have
be given in the question, but the Value In Use (VIU) must be calculated. The VIU is the
present value of the future cash flows of the CGU.
Domestic
Industrial
Year
Cash
Flow
RWF’00
0
10%
Discoun
t
Factor
PV
RWF’00
0
Cash
Flow
RWF’00
0
12%
Discoun
t
Factor
PV
RWF’00
0
201
0
1,200
0.909
1,090.8
1,200
0.893
1,071.6
201
1
900
0.826
743.4
1,300
0.797
1,036.1
201
2
2,700
0.751
2,027.7
1,600
0.712
1,139.2
201
3
1,500
0.683
1,024.5
1,500
0.636
954.0
201
4
1,600
0.620
992.0
900
0.567
510.3
201
5
1,800
0.564
1,015.2
1,800
0.507
912.6
Total
NPV
6,893.6
Total
NPV
5,623.8
Domestic:
RWF’000 RWF’000
Carrying Value 4,200.0
Fair value less costs to sell 7,500.0
Value In Use 6,893.6
Recoverable Amount 7,500.0
As the carrying value of the CGU is lower than the recoverable amount, there is no
impairment and no further action is required.
Page 73
Industrial:
RWF’000 RWF’000
Carrying Value 9,300.0
Fair value less costs to sell 4,200.0
Value In Use 5,623.8
Recoverable Amount 5,623.8
As the carrying value of the CGU is higher than the recoverable amount, there is an
impairment loss which needs to be recognised. The carrying value of the CGU must be
written down to RWF5,623.8 from RWF9,300, creating an impairment loss of RWF3,676.2
in the Income Statement.
The impairment loss of RWF3,676.2 must be allocated to the assets of the CGU, in the
following order:
1. Any individual assets that are obviously impaired (that does not appear to be the case
here)
2. Goodwill
3. Other assets, pro rata to their carrying amount
However, as a result of the allocation, the carrying amount of an asset cannot be reduced
below the highest of:
Its fair value less costs to sell (if determinable)
Its Value In Use (if determinable)
Zero
Allocation of Impairment Loss
Carrying Impairment Revised
Amount Loss
Carrying amount
RWF’000 RWF’000
RWF’000
Goodwill 1,200 (1,200.0) -
Other intangible assets 300 ( 91.7)
208.3
Property 6,400 (1,956.5)
4,443.5
Plant and equipment 1,400 ( 428.0) 972.0
9,300 (3,676.2) 5,623.8
Of the RWF3,676.2 impairment loss, RWF1,200 is set against goodwill first, leaving a
remaining loss of RWF2,476.2 to be allocated on a pro rata basis against the other assets, as
follows:
Page 74
RWF’000
RWF’000
Other intangible assets 300 (300/8,100) x RWF2,476.2 =
91.7
Property 6,400 (6,400/8,100) x RWF2,476.2 =
1,956.5
Plant and equipment 1,400 (1,400/8,100) x RWF2,476.2 =
428.0
8,100 2,476.2
Effectively, the journal entry to be carried out is:
RWF’000 RWF’000
Debit Income Statement 3,676.2
Credit Goodwill 1,200.0
Credit Intangible assets 91.7
Credit Property 1,956.5
Credit Plant and equipment 428.0
Page 75
Study Unit 5
IAS 23 Borrowing Costs
Contents
___________________________________________________________________________
A. Definition
___________________________________________________________________________
B. Accounting Treatment
___________________________________________________________________________
C. Borrowing Costs Eligible for Capitalisation
___________________________________________________________________________
D. Commencement of Capitalisation
___________________________________________________________________________
E. Cessation of Capitalisation
___________________________________________________________________________
F. Suspension of Capitalisation
___________________________________________________________________________
G. Interest Rates
___________________________________________________________________________
H. Disclosure
___________________________________________________________________________
Page 76
A. DEFINITION
Borrowing costs are interest and other costs incurred by an entity in connection with the
borrowing of funds. They may include, for example:
(a) Interest on bank overdrafts, short-term and long-term loans
(b) Amortisation of discounts or premiums related to borrowing
(c) Finance charges in respect of finance leases
(d) Exchange differences arising from foreign currency borrowings to the extent that they
are regarded as an adjustment to interest costs.
The Standard only applies to borrowing costs related to external borrowings and not to
equity. Therefore, the Standard does not deal with the imputed or actual cost of equity,
including preference share capital not classified as equity.
B. ACCOUNTING TREATMENT
IAS 23 Borrowing Costs regulates the extent to which entities are allowed to capitalise
borrowing costs incurred on money borrowed to finance the acquisition of certain assets.
Borrowing costs must be capitalised as part of the cost of an asset when:
It is probable that the costs will result in future economic benefits and the costs can be
measured reliably; and
They are directly attributable and they would have been avoided if the asset was not
bought, constructed or produced.
Note that this is a departure from the previous position which existed up to 1st January 2009,
where a benchmark treatment and an allowed alternative were available to entities.
Other borrowing costs are recognised as an expense in the period they were incurred. A
qualifying asset is an asset that takes a substantial period of time to get ready for its intended
use or sale. Examples of such assets include:
(a) Inventories that require substantial time periods to bring them to saleable condition
(b) Manufacturing plants
(c) Investment properties
C. BORROWING COSTS ELIGIBLE FOR CAPITALISATION
When an entity borrows funds specifically to acquire a qualifying asset, the borrowing costs
relating to that asset can be readily identified. Such costs are directly attributable since they
could have been avoided if the asset had not been acquired, constructed or produced.
Page 77
However, if the financing activity of an entity is centrally co-ordinated, it may be difficult to
identify the relationship between particular borrowings and a qualifying asset. In this case,
IAS 23 says that judgement must be exercised.
If funds are borrowed generally and used to obtain a qualifying asset, the amount of funds
eligible for capitalisation is calculated by applying a “capitalisation rate” to the cost of the
asset. This rate is the weighted average of the borrowing costs that are applicable to the
borrowings of the entity that are outstanding during the period.
On the other hand, if the funds have been specifically borrowed to acquire the asset, the
amount of funds that can be capitalised is calculated as follows:
Actual borrowing costs incurred on that borrowing
Less: Any investment income on the temporary investment of those borrowings*
*Borrowed funds are sometimes temporarily invested pending their expenditure on qualifying
assets.
D. COMMENCEMENT OF CAPITALISATION
The capitalisation of borrowing costs shall commence when:
(a) Expenditures for the asset are being incurred
(b) Borrowing costs are being incurred, and
(c) Activities that are necessary to prepare the asset for its intended use or sale are in
progress. This includes not only physical work constructing the asset but also technical
and administration work prior to the commencement of construction.
E. CESSATION OF CAPITALISATION
The capitalisation of borrowing costs shall cease when substantially all the activities
necessary to prepare the qualifying asset for its intended use or sale are complete.
An asset is normally ready for use or sale when the physical construction of the asset is
complete.
F. SUSPENSION OF CAPITALISATION
The capitalisation of borrowing costs should be suspended during extended periods in which
active development is interrupted.
Thus, for example, borrowing costs incurred during builders’ holidays would continue to be
capitalised, whereas borrowing costs incurred during prolonged industrial disputes would not
be capitalised.
Page 78
G. INTEREST RATES
Where assets are financed by specific borrowings, IAS 23 requires that the cost of this
specific borrowing, related to the financing, be capitalised.
However, where the general borrowings of the company are used to finance qualifying assets,
then a weighted average cost of capital (excluding any specific borrowings) should be applied
to the average investment in the asset.
In addition, any interest from the temporary investment of any surplus funds relating to the
financing of the assets is treated as a reduction of the borrowing cost.
Example 1
On the 1st June 2009, SZC Limited commenced construction of a new factory that is expected
to take 3 years to complete. It is being financed entirely by a 3-year term loan of RWF6
million (taken out at the start of construction).
The loan carries a fixed interest rate of 9% per annum and issue costs of 1.5% of the loan
value were incurred on the loan. During the year, RWF57,000 had been earned from the
temporary investment of these borrowings.
The company’s year-end is 31st December.
How much interest must be capitalised under IAS 23 for the year ended 31st December 2009?
(You may use the straight-line method to amortise issue costs)
Solution
RWF
Interest*
315,000
PLUS
Issue costs**
17,500
LESS
Interest earned from temporary investment of funds
(57,000)
Amount to be capitalised
275,500
* Interest
RWF6 million x 9% x 7/12 = 315,000
*Issue Costs
RWF6 million x 1.5% = RWF90,000
Amortised over three years, RWF30,000 per annum
Thus, for this year, RWF30,000 x 7/12 = RWF17,500
Example 2
SNZ Company Limited is constructing an investment property. Due to the poor state of the
property letting market, construction of this property was halted for the first three months of
the year. On the 30th September 2009, the company completed the property. Despite attempts
to let the property, it remained empty at the year end.
Page 79
The average carrying value of the property, before the inclusion of the current years
borrowing cost, is RWF15 million.
The investment property has been financed out of funds borrowed generally for the purpose
of financing qualifying assets. The company’s weighted average cost of capital is 12%
including all borrowings. However, if a specific loan acquired to fund a different specific
asset is excluded, then the weighted average cost of capital is 10.5%.
The company’s year end is 31st December.
How much interest must be capitalised under IAS 23 for the year ended 31st December 2009?
Solution
RWF15 million x 10.5% x 6/12 = RWF787,500
Note that borrowing costs should not be capitalised during periods when no construction or
development occurs. In addition, capitalisation should cease when the asset is ready for use.
In this example, this excludes capitalisation for the first 3 months and the last 3 months of the
year.
Example 3:
3KR Limited commenced the construction of a new manufacturing plant on 1st March 2009.
Construction of the building cost RWF18 million. The plant was completed on 1st December
2009 and brought into use on 1st February 2010.
3KR Limited borrowed RWF12 million to help finance the construction of the plant. Interest
on the loan is 8% per annum.
What is the total cost of the building to be capitalised?
Solution:
RWF
Cost of building
18,000,000
Borrowing costs RWF12m x 8% x 9/12
720,000
18,720,000
Page 80
Example 4:
On 1st January 2008, HCK Ltd began construction of a toll bridge. The construction is
expected to take 3.5 years. It is being financed by issuing bonds for RWF7 million at 12% per
annum. The bonds were issued at the beginning of the construction. The costs of issuing the
bonds are 1.5%. The project is also partly funded by the issue of share capital, with a 14%
cost of capital. HCK Ltd has opted to capitalise borrowing costs, under IAS 23.
The company’s year end is December.
How much must be capitalised in the first year?
RWF
Interest on the bond = RWF7 million x 12% = 840,000
Amortisation of issue costs = (RWF7 million x 1.5%)/3.5
years = 30,000
Total to be capitalised = 840,000 + 30,000 = 870,000
H. DISCLOSURE
The financial statements must disclose:
(a) The accounting policy adopted
(b) The amount of borrowing costs capitalised during the period
(c) The capitalisation rate used to determine the amount of borrowing costs eligible for
capitalisation.
Page 81
Study Unit 6
IAS 20 Accounting for and Disclosure of Government
Assistance
Contents
___________________________________________________________________________
A. Introduction
___________________________________________________________________________
B. Definitions
___________________________________________________________________________
C. Recognition
___________________________________________________________________________
D. Accounting Treatment
___________________________________________________________________________
E. Repayment of Government Grants
___________________________________________________________________________
F. Disclosure
___________________________________________________________________________
G. Sundry Matters
___________________________________________________________________________
Page 82
A. INTRODUCTION
IAS 20 sets out the accounting procedures to be followed when dealing with government
grants. It also outlines the disclosure requirements necessary upon receipt of such grants.
The standard recognises that government assistance can come in a variety of forms and may
be motivated by different government objectives. Indeed some or all of the grant aid may
become repayable if certain conditions are not met. IAS 20 also outlines the action to be
taken in this situation.
IAS 20 sets out to achieve two main objectives:
1. Outline an appropriate accounting treatment for the resources received by the entity
from government sources.
2. Provide an indication of the extent to which an entity has benefited from such assistance
in the accounting period.
B. DEFINITIONS
Government refers to government, government agencies and similar bodies whether local,
national or international.
Government assistance is action by government designed to provide an economic benefit
specific to an entity or range of entities qualifying under certain criteria. For the purposes of
IAS 20, government assistance does not include benefits provided only indirectly through
action affecting general trading conditions, such as the provision of infrastructure in
development areas or the imposition of trading constraints on competitors.
Government Grants are assistance by government in the form of transfers of resources to an
entity in return for past or future compliance with certain conditions relating to the operating
activities of the entity. They exclude those forms of government assistance which cannot
reasonably have a value placed upon them and transactions with government which cannot be
distinguished from the normal trading transactions of the entity. (See Section G).
Grants related to assets are government grants whose primary condition is that an entity
qualifying for them should purchase, construct or otherwise acquire long-term assets.
Subsidiary conditions may also be attached restricting the type or location of the assets or the
periods during which they are to be acquired or held.
Grants related to income are government grants other than those related to assets.
Forgivable loans are loans which the lender undertakes to waive repayment of under certain
prescribed conditions.
Page 83
C. RECOGNITION
Government grants should not be recognised in the financial statements until there is
reasonable assurance that:
(a) The entity will comply with the conditions attaching to them; and
(b) The grants will be received.
The standard states that the manner in which the grant is received will not affect the
accounting treatment. For example, an entity may receive cash or alternatively the
government may reduce a liability owed to it by the entity. Both constitute government
grants and must be treated as such.
Note that a forgivable loan from government is also treated as a government grant when there
is reasonable assurance that the entity will meet the terms for forgiveness of the loan.
If the grant takes the form of a non-monetary asset, then the fair value of that asset is assessed
and both the asset and the grant are treated at this value.
Example:
The district Council transfer title of a building to Big Limited, as part of an overall package to
encourage the development of a research and development facility to aid the tea industry.
The building has a fair value of RWF100,000.
Solution:
This constitutes a government grant. Thus in the books of Big Limited:
RWF
RWF
DR
Land and Buildings
Account
100,000
CR
Grant Account
100,000
Note that in circumstances where a non-monetary asset is transferred, an alternative
sometimes used is to record both the asset and the grant at a nominal amount.
D. ACCOUNTING TREATMENT
Government grants and assistance should be recognised as income over the periods necessary
to match them with the related costs which they are intended to compensate, on a systematic
basis.
1. For grants related to income the grant can be:
(a) Presented as a credit in the income statement, either separately or under a general
heading such as “other income”; or
(b) They are deducted in reporting the related expense e.g. a labour cost subsidy could
be deducted from the cost of labour to be shown in the income statement.
Page 84
Both methods are acceptable. However, in either case disclosure of the grant, and the
effects of the grant must be made.
Example
FGN Ltd. obtained a grant of RWF30 million to compensate it for costs incurred in
planting trees and hedgerows over a period of 3 years. FGN ltd. will incur costs as
follows:
Year 1 RWF5 million
Year 2 RWF5 million
Year 3 RWF10 million
(Thus total costs expected to be incurred come to RWF20 million and grant aid of
RWF30 million has been received).
Applying IAS 20, the grant will be recognised as income over the period which matches
the cost, using a systematic and rational basis. As a result, the total grant recognised per
annum will be:
Year 1 RWF30 x 5/20 = RWF7.5 million
Year 2 RWF30 x 5/20 = RWF7.5 million
Year 3 RWF30 x 10/20 = RWF10 million
2. For grants related to assets, there are two allowable accounting treatments:
(a) Show the grant as a deferred credit in the Statement of Financial Position,
amortising it to the income statement over the life of the asset to which it relates;
or
(b) Deduct the grant in arriving at the carrying amount of the asset. In this way, the
grant is recognised over the life of the asset by way of a reduced depreciation
charge in the income statement.
Note that regardless of which method is used the cash flow statement would normally
show the purchase of an asset and the receipt of a grant as two separate cash flows.
Example:
SCH Limited receives a 50% assistance/grant towards the cost of a machine, which has a
cash price of RWF100,000. The machine has an estimated useful life of five years and its
residual value is expected to be immaterial.
Solution:
The asset cost is RWF100,000 and the grant is RWF50,000. Thus, the net cost to the
company is RWF50,000.
Option 1:
On acquiring the asset:
RWF
RWF
DR
Machine Account
100,000
CR
Bank Account
100,000
Page 85
On receiving the grant:
RWF
RWF
DR
Bank Account
50,000
CR
Government Grant
Account
50,000
Thus, the annual depreciation
charge is:
RWF100,000
=
RWF20,000
5 years
The annual amortisation of
grant is:
RWF50,000
=
RWF10,000
(this is credited to the income
statement)
5 years
Option 2:
On acquiring the asset:
RWF
RWF
DR
Machine Account
100,000
CR
Bank Account
100,000
On receiving the grant:
RWF
RWF
DR
Bank Account
50,000
CR
Machine Account
50,000
Thus, the annual depreciation
charge is:
RWF50,000
=
RWF10,000
5 years
Note that both options have the same impact on the profit or loss for the period.
E. REPAYMENT OF GOVERNMENT GRANTS
If the grant becomes repayable, for example its prescribed conditions are not subsequently
met by the entity, then it should be treated as a revision of an accounting estimate.
Repayment of a grant related to an asset should be recorded by increasing the carrying
amount of the asset or reducing the deferred income balance by the amount repayable. The
total extra depreciation that would have been recognised to date as an expense, if the grant
had not been received, should be recognised immediately as an expense.
Repayment of a grant related to income should be first set against any unamortised deferred
credit in relation to the grant. If the repayment exceeds the amount of that deferred credit, or
if no deferred credit existed in the first place, the excess should be recognised as an expense
immediately.
Page 86
Example:
FBT Ltd. qualified for a grant of RWF80 million to construct and manage a sawmill in an
economically disadvantaged area.. It is estimated that the mill would cost RWF150 million to
build. The grant stipulates that FBT must employ labour from the locality in the construction
and going forward, must maintain a 1:1 ratio of local to outside labour for the next 7 years.
The mill will be depreciated on a straight line basis over 10 years.
Therefore, the grant received by FBT will also be recognised over a 10 year period. In each
of the 10 years, the grant will be recognised in proportion to the annual depreciation of the
mill. This means that RWF8 million per annum will be recognised as income in each of the
10 years.
Additionally, the condition to maintain the local workforce at the levels stipulated needs to be
disclosed. This contingency would have to be disclosed for the next 7 years (during which
period the condition is in force). This will also meet the requirements of IAS 37.
F. DISCLOSURE
The following must be disclosed:
(a) The accounting policy adopted for government grants, including the methods of
presentation adopted in the financial statements.
(b) The nature and the extent of government grants recognised in the financial statements
and an indication of other forms of government assistance from which the entity has
directly benefited.
(c) Unfulfilled conditions and other contingencies attaching to government assistance that
has been recognised.
G. SUNDRY MATTERS
Examples of government assistance that cannot reasonably have a value placed upon them
are:
Free technical advice
Free marketing advice
Provision of guarantees
Thus, these are excluded from the definition of government grants and should not be treated
as such.
Furthermore, entities may receive government assistance which is not specifically related to
their operating activities. For example, transfers of resources to entities operating in an
underdeveloped area.
Page 87
SIC 10 states that such forms of assistance do constitute grants and should be accounted for
in accordance with IAS 20. This is because the grants received are conditional upon the
recipient operating in a particular industry or area.
Finally, if a grant is received in relation to an asset that is not depreciated, then the grant
should be amortised over the period in which the cost of meeting the obligations or
conditions attached to the grant is incurred.
Page 88
BLANK
Page 89
Study Unit 7
IAS 17 Leases
Contents
___________________________________________________________________________
A. Introduction
___________________________________________________________________________
B. Types of Leases
___________________________________________________________________________
C. Accounting Treatment of Leases
___________________________________________________________________________
D. Detailed Treatment of Finance Leases
___________________________________________________________________________
E. Payments In Advance
___________________________________________________________________________
F. Recording Finance and Operating Leases in the Books of the Lessor
___________________________________________________________________________
G. Disclosure Requirements for Lessees
___________________________________________________________________________
H. Disclosure Requirements for Lessors
___________________________________________________________________________
I. Sale And Leaseback Transactions
___________________________________________________________________________
Page 90
A. INTRODUCTION
Leasing represents a very common and important method of acquiring non-current assets. A
lease can offer very significant cash flow advantages, as the payment of the full cost of an
asset on acquisition is avoided.
Under a lease agreement, the lessee enters into a contract with the lessor in which an asset is
essentially hired by the lessee. For the duration of the lease, legal ownership of the asset does
not pass from the lessor to lessee. In fact, legal ownership might never pass to the lessee,
title remaining with the lessor indefinitely.
However, IAS 17 takes the view that the substance of the transaction should be considered
over its legal form. If the risks and rewards of ownership pass substantially to the lessee, IAS
17 states that the leased asset should be capitalised in the balance sheet and a liability created
to reflect the outstanding debt due to the lessor.
On the other hand, if the risks and rewards are not transferred to the lessee, then the leased
asset should not be capitalised. Instead, lease payments are simply expensed to the income
statement in the period in which they occur.
B. TYPES OF LEASES
There are two broad categories of leases.
1. A finance lease is a lease that transfers substantially all the risks and rewards incidental
to ownership of an asset. Title may or may not be eventually transferred.
2. An operating lease is a lease other than a finance lease.
Because the accounting treatment of these leases is very different, it is important to be able to
distinguish between them. To this end, IAS 17 gives examples of situations that, either
individually or in combination, would normally lead to a lease being classified as a finance
lease. These are where:
(i) The lease transfers ownership of the asset to the lessee by the end of the lease term
(ii) The lessee has the option to purchase the asset at a price expected to be lower than the
fair value at the date the option becomes exercisable, so that the exercise of the option is
reasonably certain
(iii) The lease term is for the major part of the economic life of the asset
(iv) At the start of the lease the present value of the minimum lease payments amounts to
substantially all of the fair value of the leased asset
(v) The leased assets are of a specialised nature so that only the lessee can use them without
major modifications
(vi) Gains or losses from fluctuations in the fair value accrue to the lessee
(vii) The lessee has the ability to continue the lease for a secondary period at a rent that is
substantially below market rent
Page 91
C. ACCOUNTING TREATMENT OF LEASES
1. Operating Lease
Lease payments should be recognised as an expense on a straight-line basis over the
lease term, unless another systematic basis is more representative of the time pattern of
the users benefit.
Hence, the treatment of operating leases is straightforward as the lease payments appear
in the income statement as an expense.
2. Finance Leases
The treatment of finance leases is more complicated. In summary, the main points are:
(a) The leased asset is capitalised in the balance sheet and is subsequently depreciated
(b) A liability is created at the start of the lease in respect of the amount outstanding
to the lessor
(c) The lease payments are split into their interest portion and capital portion. The
interest is treated as a finance charge in the income statement. The capital portion
reduces the liability in the balance sheet.
(d) By the end of the lease term the asset will be fully depreciated and the liability
cleared from the balance sheet
D. DETAILED TREATEMENT OF FINANCE LEASES
On commencement of the lease, the asset concerned must first be valued so that the asset and
liability can initially be measured.
IAS 17 states that the asset, and thus the liability, should initially be recorded at the lower of:
(a) The fair value; and
(b) The present value of the minimum lease payments. (In essence, these are the payments
the lessee is required to make over the entire lease, discounted at the implicit interest
rate of the lease. If this interest rate cannot be determined, the incremental borrowing
rate of the lessee is used).
Calculation of Minimum Lease Payments
Company X Limited acquires an asset under a finance lease. The asset, with an expected
useful life of 5 years, has a cash price of RWF10,900. The lease is for five years, with an
annual payment of RWF3,000 in arrears. The implicit rate of interest in the lease is 12%.
Calculate the value at which the asset will be initially recorded in the accounts.
Page 92
Solution
First, calculate the present value of the minimum lease payments.
Year
Lease Payment
12% Discount Factor
Present Value
1
3,000
0.893
2,679
2
3,000
0.797
2,391
3
3,000
0.712
2,136
4
3,000
0.636
1,908
5
3,000
0.567
1,701
10,815
Second, compare to the fair value.
RWF
Fair Value (cash price)
10,900
PV of lease payments
10,815
Thus:
Dr
Leased Asset Account
10,815
Cr
Leasing Obligation
10,815
Therefore, at the start of the lease:
Dr
Non-Current Assets
Cr
Leasing Obligation
With fair value of the leased asset (or the present value of the minimum lease
payments, if lower)
The leased asset is subsequently depreciated over the shorter of:
(a) The useful economic life of the asset; or
(b) The lease term
[Note: The lease term may be comprised of both a primary period and a secondary period.
The secondary period is included in the lease term if it is reasonably certain at the beginning
of the lease that this period will be exercised]
As the lease progresses, the finance charge included in the lease payments must be calculated
and charged to the income statement.
This means that the lease payment must be split into its component parts:
Finance cost, charged to income statement
Lease Payment
Capital portion, reducing balance sheet liability
Page 93
Thus, for each lease payment under a finance lease:
Dr
Income statement (interest element)
Dr
Leasing obligation in balance sheet (capital element)
Cr
Bank
In calculating the amount of the finance charge, there are two main methods:
(a) The actuarial method
(b) The sum of digits method, also known as the Rule of 78
The aim of each method is to allocate the finance cost in such a way as to produce a
reasonably constant periodic rate of return on the outstanding balance of the leasing
obligation.
[The actuarial method gives the most accurate result. However, if the examination question
does not provide the implicit rate of interest on the lease, use the sum of digits method.]
Example 1
Company Y Limited acquires a machine under a finance lease agreement. The machine has a
cash price of RWF6,000.
The terms of the lease are:
Deposit RWF900 followed by three annual payments of RWF2,100 per annum in arrears.
The implicit rate of interest is 11.35%.
Using the Actuarial Method:
This method apportions the interest as it actually accrues, using the rate of interest implicit in
the contract.
Thus,
RWF
Cash price
6,000
Deposit
900
Amount financed by leasing
5,100
Consequently, the initial recording of the lease will be:
RWF
RWF
Dr
Leased machinery
6,000
Cr
Bank account
900
Cr
Leasing obligation
5,100
Then in each year of the lease:
Year
Opening
Balance
Interest
Lease Rentals
Closing Balance
1
5,100
*579
2,100
**3,579
2
3,579
406
2,100
1,885
3
1,885
215
2,100
-
Page 94
* 5,100 x 11.35% = 579
** (5,100 + 579) – 2,100 = 3,579
In year one, extracts from the financial statements would show:
Income Statement:
RWF
Finance charge
579
Depreciation
RWF6,000
2,000
3 years
Balance Sheet:
Leased assets (6,000 – 2,000)
4,000
Non-current liabilities
Leasing obligations
1,885
Total 3,579
Current liabilities
Leasing obligations (3,579 – 1,885)
1,694
Using the Sum-of-Digits Method:
There are 3 years in the lease
Thus, the sum-of-digits is:
3+2+1 = 6
Note: An alternative, quicker way to calculate the sum-of-digits is to use the formula:
n(n+1)
2
Where n = number of years in the lease.
In the above example, this becomes:
3(4)
= 6
2
Next, calculate the total interest payable over the life of the lease:
RWF
Total amount financed
5,100
Total repayments (RWF2,100 x 3)
6,300
Total interest
1,200
Thus, the interest charge each year will be:
Year 1
1,200 x
3/6
= 600
Year 2
1,200 x
2/6
= 400
Year 3
1,200 x
1/6
= 200
The extracts from the accounts will be in year one:
Page 95
Income Statement:
RWF
Finance charge
600
Depreciation (as before)
2,000
Balance Sheet:
Leased assets
4,000
Non-current liabilities
Leasing obligations
1,900
Total 3,600 i.e.
Current liabilities
(5,100 + 600) – 2,100
Leasing obligations
1,700
Note: There is a slight difference in the finance charge, and therefore the closing balance of
the liability, between the two methods.
Example 2
Company Z Limited acquired a machine by way of a lease agreement. The fair value of the
machine was RWF15,850. Estimated life of the machine is 4 years.
The terms of the lease are:
Annual lease rental of RWF5,000 payable in arrears each year for 4 years.
The implicit interest rate is 10%.
Solution
Is this lease a finance lease?
RWF
PV of minimum lease payments
=
15,850
Cash price (fair value)
=
15,850
It is a finance lease
Initially,
RWF
RWF
Dr
Leased machinery
15,850
Cr
Leasing obligation
15,850
Then, to calculate the finance charge and the closing balance of the liability (using the
actuarial method):
Year
Opening
Balance
10% Interest
Lease Rentals
Closing Balance
1
15,850
1,585
5,000
12,435
2
12,435
1,243
5,000
8,678
3
8,678
868
5,000
4,546
4
4,546
454
5,000
-
Page 96
In year one, the extracts from the financial statements would show:
Income Statement:
RWF
Finance charge
1,585
Depreciation
RWF15,850
3,962
4 years
Balance Sheet:
Leased assets (15,850 – 3,962)
11,888
Non-current liabilities
Leasing obligations
8,678
Total 12,435
Current liabilities
Leasing obligations
3,757
Note: If the sum of digits method was to be used in the above example, the calculation of the
annual finance cost would be:
4 year lease
Sum of digits = 4 + 3 + 2 + 1 =
10 or
4 (5)
= 10
2
RWF
Fair value of asset
15,850
Total repayments (4 x RWF5,000)
20,000
Interest
4,150
Year
1
4,150 x 4/10
=
1,660
2
4,150 x 3/10
=
1,245
3
4,150 x 2/10
=
830
4
4,150 x 1/10
=
415
The depreciation charge would not change, thus the carrying value of the leased asset in the
balance sheet would also be the same.
The total value of the leasing obligation at the end of year 1 would be:
Opening balance + interest – payment
Thus,
15,850 + 1,660 – 5,000 = 12,510
In year 2 the leasing obligation would be:
12,510 + 1,245 – 5,000 = 8,755
This means that in year 1, the liabilities will be:
The long term element
8,755
The short term element (12,510
8,755)
3,755
Page 97
E. PAYMENTS IN ADVANCE
In the examples used so far, the lease payments were “in arrears” i.e. the payment is made on
the last day of the period.
If the payments are made in advance, i.e. on the first day of the period, the calculation of
interest and therefore the closing balance of the lease obligation is different.
Actuarial Method
Consider the following example.
RKY Limited enters into a finance lease on the first day of the current financial period. The
lease equipment has a cash purchase price of RWF80 million. Its useful life is estimated at 5
years. The terms of the lease are:
5-year lease
Annual payment of RWF20 million in advance
Implicit interest rate 12% per annum
Thus, the calculation of interest over the first 2 years of the lease would be:
Year
Opening
Balance
Lease Payment
12% Interest
Closing Balance
RWF’000
RWF’000
RWF’000
RWF’000
1
80,000
20,000
*7,200
67,200
2
67,200
20,000
5,664
52,864
* (80,000 – 20,000) x 12% = 7,200
The closing liability must be split between its current and non-current elements:
Current Liabilities RWF20,000,000
Since this represents the amount to be paid next year
Non-Current Liabilities RWF47,200,000
i.e. (67,2000,000 – 20,000,000)
Sum of Digits
If the sum of digits method is used, then one year is deducted from the lease life. In the
above example:
5 year lease, in advance
Sum of digits = 5 – 1 = 4
Thus,
4 + 3 + 2 + 1 = 10
Page 98
Thus the interest charge in year one will be:
RWF
Total payments (5 x 20m)
100,000,000
Cash value of machine
80,000,000
Total interest
20,000,000
Year 1 20,000,000 x 4/10 = 8,000,000
Thus the closing liability will be:
80,000,000 + 8,000,000 – 20,000,000 = 68,000,000
RWF
Current liabilities
20,000,000
Non-Current liabilities
48,000,000
With payments in advance, there will be no finance charge in the final year of the lease. This
is because the final lease payment, clearing the outstanding liability, is made on the first day
of the period. Therefore, no more interest is incurred.
F. RECORDING FINANCE AND OPERATING LEASES IN THE BOOKS OF
THE LESSOR
If an asset has been acquired under a lease agreement by the lessee, the treatment of the lease
in the books of the lessor will be the converse of that adopted by the lessee.
Thus, as we have seen, in a finance lease the lessee treats the asset in a similar way to an
owned asset. It is capitalised and depreciated. Taking this substance over form concept to its
logical conclusion, the lessor has provided finance to the lessee. This means that in the
lessor’s books, the finance lease should be treated as being equivalent to the provision of
finance.
It follows that the operating lease should be accounted for by the lessor by capitalising and
depreciating the asset.
The differences between the two types of leases can be summarised as follows:
Statement
Finance Lease
Operating Lease
Balance Sheet Show a receivable in respect
of the Net Investment in
Finance Lease
Show the asset at cost less
depreciation, as property held
for Operating Leases
Income Statement Finance Income, allocated to
give a constant periodic
return on investment
Rental Income, Depreciation
In treating the finance lease, the lessor will create a receivable in the balance sheet, in respect
of the net investment in the lease. This is the cost of the asset less any grants receivable.
Page 99
The lease rentals that the lessor then receives must be split into:
Interest element, shown then as gross earnings in the income statement; and
The repayment of capital, reducing the receivable in the balance sheet
In other words, the lessor treatment of the finance lease is the mirror image of the lessee’s
treatment of the same lease.
In the case of an operating lease, the lessor will show the asset in its balance sheet. Lease
rentals from the lease should be shown in the income statement on a straight-line basis over
the life of the lease. Depreciation of the asset should also be provided for.
G. DISCLOSURE REQUIREMENTS FOR LESSEES
Finance Leases
In addition to complying with IAS 32 Financial Instruments, the following information must
be disclosed for finance leases:
(a) The net carrying amount in the balance sheet for each class of asset
(b) A reconciliation between the total future minimum lease payments and their present
value, at the balance sheet date.
In addition, disclose the future minimum lease payments and their present value,
analysed for each of the following periods:
(i) Not later than one year
(ii) Later than one year and not later than five years
(iii) Later than five years
(c) Contingent rents recognised as an expense in the period.
(d) The total future minimum sublease payments expected to be received under non-
cancellable subleases at the balance sheet date
(e) A general description of the lessee’s material leasing arrangements, including but not
limited to:
(i) The basis on which contingent rent payable is determined
(ii) The existence and terms of renewal or purchase options and escalation clauses
(iii) Restrictions imposed by lease agreements, such as those concerning dividends,
additional debt and further leasing
Operating Leases
In addition to meeting the requirements of IAS 32, the following information must be
disclosed for operating leases:
(a) The total future minimum lease payments under non-cancellable operating leases for
each of the following periods:
Page 100
(i) Not later than one year
(ii) Later than one year and not later than five years
(iii) Later than five years
(b) The total future minimum sublease payments expected to be received under non-
cancellable subleases at the balance sheet date
(c) Lease and sublease payments recognised as an expense in the period with separate
amounts for minimum lease payments, contingent rents and sublease payments
(d) A general description of the lessee’s significant leasing arrangements including, but not
limited to:
(i) The basis on which contingent rent payable is determined
(ii)