anesu daka ca (sa) - icaz.org.zw 104.pdf · major inspections –ias 16.14 ... revaluation model...

Anesu Daka CA (SA)

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1. Property, plant and equipment

2. Intangible assets

3. Impairment of assets

4. Investment property

Anesu Daka CA (SA) - Chartered Accountants Academy 2

IAS 16-PPE

Examinability


PPE IAS 16 - Definitions

6

Key Areas of Focus1. Recognition2. Measurement Cost versus Revaluation ModelCost

2.1 Dismantling Cost2.2 Replacement components, 2.3 Major inspection costs, 2.4 Repairs and maintenance, 2.5 safety and environmental costs, dismantling cost

Revaluation2.1 Timing of revaluation2.2 Determination of the market value2.3 Depreciation2.4 Residual Value

3. Tax Implications4. Disclosure- PPE note (work through an example)

Other- IAS 8 accounting for change in useful life or Residual Value


Measurement

Initial : -

Cost

Subsequent : -

Cost Model or

Revaluation Model

COST

Anesu Daka CA (SA)

Dismantling costs: IAS 16.16c- include in cost of PPE

Recognition:

• Dr PPE

Cr Provision for dismantling costs

NB:-the entity must have a present legal obligation or constructive obligation to dismantle and remove the PPE item in order to include such costs in the cost of PPE


Separate/Replacement Components

• Recognise as part of the asset

• Depreciate separately if its cost is significant in relation to the total cost of the item.

• Derecognise when replaced

Anesu Daka CA (SA)

Major inspections – IAS 16.14

Recognise initially as part of total PPE item.

Depreciate the major inspection cost separately (period before next inspection).

When new inspection occur:

derecognises previous inspection CA, and

recognise new cost as an asset.

Also depreciate separately (period before next inspection)

NB: there is no difference in accounting for major inspection costs to the replacement components.


Safety and environmental costs. IAS 16.11

Capitalise on assets if it is an involuntary cost .

Expense if acquired on a voluntary basis ;Unless:

It increases the economic life of the related asset; or

It is a constructive or legal obligation because of industrial practice or legislation.

The cost increases the safety or environmental standards of the assets.

Consider impairment loss, annually after recognising safety and environmental cost.


Subsequent Measurement

• Cost model: carry at Cost less accumulated depreciation and any impairment losses. [IAS16.31]

• Revaluation model: Revalued amount less accumulated depreciation and any impairment losses;


When to start depreciation?

when it is available for use, or when it is in the desired location and condition.

Accounting for change in residual value

• A change in residual value is a change in accounting estimate as per IAS 8 and shall be accounted for prospectively, starting with the current year (yr of change) as follows:– Determine the year of change in residual value;– Determine the CA at the beginning of year change;– Determine the remaining useful life from the beginning of the

current year , if 3 yrs remaining at end of current year therefore 4 (3+1) yrs are remaining from beginning of current year ;

– Calculate depreciation as follows:– (Opening CA- new Residual Value) divided by the remaining

years at the beginning of the current year (4)– Impact of the change is the difference between old depreciation

before the change and new depreciation


Revaluation Model

Anesu Daka CA (SA)

Determination of Revalued amount

• Use the fair value (market value) of the asset in its current condition. (1st option)

• If market value is not available use the Net Replacement Value (2nd option), as follows:


Attempt example 1 pg 9

Anesu Daka CA (SA)

Treatment of Acc Depreciation

• Restated proportionately

• Eliminated

Be able to perform JEs


Attempt example 1 pg 9

Anesu Daka CA (SA)

Timing of Revaluation

3 possibilities

• Revalue beginning of year.

• Revalue end of year.

• Revalue end of year, but base depreciation for the year on the new gross replacement value.


Attempt example 3pg 10

Anesu Daka CA (SA)

Realisation of Revaluation Surplus

• Based on Accounting Policy

Either

i. realise revaluation surplus on derecognition or disposal

ii. Realise as asset is used


IFRIC 1- accounting for changes in dismantling cost provision

Change in dismantling cost is a subsequent measurement issue:Solution: recalculate the new PV of the provision using:

(a) revised cash-flows; and/or (b) new/current discount rate at date of change

Change in provision = new PV less old PV/CA (using old cash flows and old discount rate)

Accounting for the change in provision depends on whether asset is accounted for under:• cost model, or• revaluation model


Attempt Qtn 12.1pg 21

Anesu Daka CA (SA)

Cost Model

Increase in Provision:

Dr PPE

Cr Provision for Dismantling cost

Decrease in Provision:

Dr Provision for Dismantling cost

Cr PPE


IFRIC 1- accounting for changes in dismantling cost provision

Dismantling cost: IFRIC 1- accounting for changes in dismantling cost provision

Revaluation ModelIncrease in Provision:Dr Revaluation surplus (OCI)[ltd to revaluation reserve]Dr Increase in dismantling costs (P/L) [excess over rev

reserve]Cr Provision for Dismantling cost

Decrease in Provision: Dr Provision for Dismantling cost

Cr Revaluation surplus (OCI)[excess to previousimpairment]Cr Increase in dismantling costs (P/L)


TAX Implications

Tree of life

➢Recovery assumed to be sale – Land & IP (CGT)

➢Recoverable Amount > Cost (CGT)

➢IFRS 5 CA > Cost (CGT)

➢ Recoverable amount through sale = Normal tax

➢CA < Cost = Normal tax

Anesu Daka CA (SA)

Attempt Example 2pg 11

Anesu Daka CA (SA)

Disclosure requirements

For each class of PPE

• Measurement bases used for determining the gross carrying amount

• The depreciation methods used

• The gross carrying amount and the accumulated depreciation at the beginning and end of the period

• A reconciliation of the carrying amount at the beginning and end of the period

• Depreciation policy and rates

• Details on revaluation (if any)

• The number of ancillary items which involve PPE

ImpairmentIAS 36

Key Areas of Focus

• Identify impairment indicators. (key)• Measurement of the recoverable amount (greater of

value in use & Fair value less cost of disposal).• Recognition and measurement of an impairment loss

of an individual asset (under revaluation model).• Identifying a cash generating unit (CGU) to which an

asset belongs and recognition of an impairment loss for the cash generating unit.

• Identifying and allocating goodwill and impairment to individual assets and CGUs.

• Reversal of an impairment loss for an individual asset and for a cash generating unit.


IAS 36 + IFRS 5 Exceptions

IAS 36 measurement applies to all assets EXCEPT: [IAS 36.2]

• inventories (see IAS 2) • assets arising from construction contracts (see IAS 11) • deferred tax assets (see IAS 12) • assets arising from employee benefits (see IAS 19) • financial assets (see IFRS 9) • investment property carried at fair value (see IAS 40) • agricultural assets carried at fair value (see IAS 41) • insurance contract assets (see IFRS 4) • non-current assets held for sale (see IFRS 5) NB: For the above assets impairment provisions are in specific IFRS

(mostly applicable to a group of assets or CGU impairment)


http://www.iasplus.com/standard/ias11.htm


http://www.iasplus.com/standard/ifrs04.htm

Definitions

• Impairment loss – excess of carrying amount (CA) over recoverable amount (RA)

37

Key stages in the impairment process

Assess whether there is an indication that

an asset may be impaired

• STAGE 1

If there is an indication of

impairment, then measure the asset’s recoverable amount.

• STAGE 2

Reduce the asset’s carrying amount to

its recoverable amount

• STAGE 3

Recognition of losses

Assets carried at historical cost

• Expense in I/S IAS 16

• First use up OCI

• then I/S

Revaluedassets

Debitentry

Recognition: Impairment loss

COST MODEL

Dr Impairment loss (P/l)

Cr Acc Dep & impairment

Dr Deferred Tax

Cr Tax Expense (P/L)


Recognition: Impairment loss

REVALUATION MODEL

• Revaluation Surplus:

Dr Rev surplus (oci)

Cr Acc Dep & impairment

if rev surplus b4 tax is greater than the impairment loss

Dr deferred Tax

Cr Revaluation surplus (OCI)


Reversal of an Impairment Loss

• The increased CA should be limited to what the depreciated historical cost would have been if the impairment had not been recognised. [IAS 36.117]

• Reversal of an impairment loss is recognised as income in the income statement first for previous impairments in p/l then to RR [IAS 36.119]

• Adjust depreciation for future periods. [IAS 36.121]

• Reversal of an impairment loss for goodwill is prohibited. [IAS 36.124]


Attempt Example 1pg 54

Anesu Daka CA (SA)

Identifying a Cash-Generating Units [66-73]

The recoverable amount of an individual asset cannot be determined if:

• (a) the asset’s value in use cannot be estimated to be close to its fair value less costs to sell (for example, when the future cash flows from continuing use of the asset cannot be estimated to be negligible); and

• (b) the asset does not generate cash inflows that are largely independent of those from other assets.

NB: In such cases, value in use and, therefore, recoverable amount, can be determined only for the asset’s cash-generating unit.


Impairment of a CGU

Compare the CA of the CGU to the RA, where:RA is greater of the FVLCS and VIU of the CGU as a unit,

CA is [IAS 36.76]includes the CA of only those assets that can be attributed

directly, or allocated on a reasonable and consistent basis, to the cash-generating unit and will generate the future cash inflows used in determining the cash-generating unit’s value in use; and

excludes the carrying amount of any recognised liability,.unless the recoverable amount of the cash-generating unit cannot be determined without consideration of this liability-e.g. provision for dismantling costs. (see next example)


Impairment of Goodwill

• A CGU to which goodwill has been allocated shall be tested for impairment at least annually : [IAS 36.90]

– If the RA > CA of the unit, the unit and the goodwill allocated to that unit is not impaired.

– If the CA > RA of the unit of the unit , the entity must recognise an impairment loss.


Allocation of CGU impairment loss

• The CGU impairment loss is allocated to the CA of the assets of the unit (group of units) in the following order: [IAS 36.104] – first, reduce the carrying amount of any goodwill allocated to the cash-

generating unit (group of units); and – then, reduce the carrying amounts of the other assets (excluding those

that are exempt from IAS 36.2) of the unit (group of units) on pro rata basis.

• NB: The CA of an asset should not be reduced below the highest of: [IAS 36.105] – its fair value less costs to sell (if determinable), – its value in use (if determinable), and – zero.

• If the preceding rule is applied, further allocation of the impairment loss is made pro rata to the other assets of the unit (group of units).


HomeworkAttempt Qtn 14.1 pg 57

Anesu Daka CA (SA)


Questions ?

Intangible Assets: IAS 38


Recognition: Is it an intangible asset?

Intangible asset: an identifiable nonmonetary asset without physical substance. An asset is a resource that is controlled by the entity as a result of past events (for example, purchase or self-creation) and from which future economic benefits (inflows of cash or other assets) are expected. [IAS 38.8] Thus, the three critical attributes of an intangible asset are:

identifiable

control (power to obtain benefits from the asset)

future economic benefits (such as revenues or reduced future costs)


Recognition: Is it an intangible asset?

• Identifiability: an intangible asset is identifiable when it: [IAS 38.12]

– is separable (capable of being separated and sold, transferred, licensed, rented, or exchanged, either individually or together with a related contract) or

– arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity or from other rights and obligations.


Ways of acquiring Intangible assets

• Intangibles can be acquired:

In Separate entity:– by separate purchase

– by a government grant - IFRIC 12 (out of syllabus)

– by exchange of assets

– by self-creation (internal generation)

At Group level- at acquisition date

– as part of a business combination


Recognition Criteria Recognition criteria. IAS 38 requires an entity to recognise an intangible

asset, whether purchased or self-created (at cost) if, and only if: [IAS 38.21] it is probable that the future economic benefits that are attributable to the

asset will flow to the entity; and the cost of the asset can be measured reliably.

This requirement applies whether an intangible asset is acquired externally or generated internally. IAS 38 includes additional recognition criteria for internally generated intangible assets (see below).

The probability of future economic benefits must be based on reasonable and supportable assumptions about conditions that will exist over the life of the asset. [IAS 38.22]

The probability recognition criterion is always considered to be satisfied for intangible assets that are acquired separately or in a business combination. [IAS 38.33]


Recognition Criteria

If recognition criteria not met. If an intangible item does not meet both the definition of and the criteria for recognition as an intangible asset, IAS 38 requires the expenditure on this item to be recognised as an expense when it is incurred. [IAS 38.68]

Business combinations. There is a presumption that the fair value (and therefore the cost) of an intangible asset acquired in a business combination can be measured reliably. [IAS 38.35] An expenditure (included in the cost of acquisition) on an intangible item that does not meet both the definition of and recognition criteria for an intangible asset should form part of the amount attributed to the goodwill recognised at the acquisition date.

Reinstatement. The Standard also prohibits an entity from subsequently reinstating as an intangible asset, at a later date, an expenditure that was originally charged to expense. [IAS 38.71]


Initial Recognition: Research and Development Costs

Charge all research cost to expense. [IAS 38.54] Development costs are capitalised only after technical and

commercial feasibility of the asset for sale or use have been established. This means that the entity must intend and be able to complete the intangible asset and either use it or sell it and be able to demonstrate how the asset will generate future economic benefits. [IAS 38.57]

If an entity cannot distinguish the research phase of an internal project to create an intangible asset from the development phase, the entity treats the expenditure for that project as if it were incurred in the research phase only.


Initial Recognition

In-process Research and Development Acquired in a Business Combination

A research and development project acquired in a business combination is recognised as an asset at cost, even if a component is research. Subsequent expenditure on that project is accounted for as any other research and development cost (expensed except to the extent that the expenditure satisfies the criteria in IAS 38 for recognising such expenditure as an intangible asset). [IAS 38.34]


Initial Recognition

• Internally Generated Brands, Mastheads, Titles, Lists

• Brands, mastheads, publishing titles, customer lists and items similar in substance that are internally generated should not be recognised as assets. [IAS 38.63]


Initial Recognition

Computer Software Purchased: capitalise separatelyOperating system for hardware: include in

hardware cost Internally developed (whether for use or sale):

charge to expense until technological feasibility, probable future benefits, intent and ability to use or sell the software, resources to complete the software, and ability to measure cost.

Amortisation: over useful life, based on pattern of benefits (straight-line is the default).


Initial Recognition

Certain Other Defined Types of Costs The following items must be charged to expense when incurred: internally generated goodwill [IAS 38.48] start-up, pre-opening, and pre-operating costs [IAS 38.69] training cost [IAS 38.69] advertising and promotional cost, including mail order catalogues

[IAS 38.69] relocation costs [IAS 38.69] For this purpose, 'when incurred' means when the entity receives

the related goods or services. If the entity has made a prepayment for the above items, that prepayment is recognised as an asset until the entity receives the related goods or services. [IAS 38.70]


Measurement

Initial Measurement

• Intangible assets are initially measured at cost. [IAS 38.24]


Measurement

Measurement Subsequent to Acquisition An entity must choose either the cost model or the revaluation

model for each class of intangible asset. [IAS 38.72] Cost model. After initial recognition the benchmark treatment is

that intangible assets should be carried at cost less any amortisation and impairment losses. [IAS 38.74]

Revaluation model. Intangible assets may be carried at a revalued amount (based on fair value) less any subsequent amortisation and impairment losses only if fair value can be determined by reference to an active market. [IAS 38.75] Such active markets are expected to be uncommon for intangible assets. [IAS 38.78] Examples where they might exist:

production quotas fishing licences taxi licences


Classification of Intangible Assets Based on Useful Life

• Intangible assets are classified as: [IAS 38.88]

– Indefinite life: no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the entity.

– Finite life: a limited period of benefit to the entity.


Measurement Subsequent to Acquisition

Intangible Assets with Finite Lives The cost less residual value of an intangible asset with a finite useful

life should be amortised on a systematic basis over that life: [IAS 38.97]

The amortisation method should reflect the pattern of benefits. If the pattern cannot be determined reliably, amortise by the

straight line method. The amortisation charge is recognised in profit or loss unless

another IFRS requires that it be included in the cost of another asset.

The amortisation period should be reviewed at least annually. [IAS 38.104]

The asset should also be assessed for impairment in accordance with IAS 36. [IAS 38.111]


Subsequent Expenditure

• Subsequent expenditure on an intangible asset after its purchase or completion should be recognised as an expense when it is incurred, unless it is probable that this expenditure will enable the asset to generate future economic benefits in excess of its originally assessed standard of performance and the expenditure can be measured and attributed to the asset reliably. [IAS 38.60]


Measurement Subsequent to Acquisition:

Intangible Assets with Indefinite Lives An intangible asset with an indefinite useful life should

not be amortised. [IAS 38.107] Its useful life should be reviewed each reporting

period to determine whether events and circumstances continue to support an indefinite useful life assessment for that asset. If they do not, the change in the useful life assessment from indefinite to finite should be accounted for as a change in an accounting estimate. [IAS 38.109]

The asset should also be assessed for impairment in accordance with IAS 36. [IAS 38.111]


Measurement Subsequent to Acquisition:

Intangible Assets with finite Lives [IAS 38.97] Chose a systematic basis of amortisation based on consumption of

economic benefits- units of out-put e.t.c straight-line over the useful life method is a default, Begin amortisation when asset is available for use Stop amortisation at date when asset is classified as held for sale or

disposed of. Recognise depreciation in P/L or on cost of another asset (inventory,

e.t.c) if allowed by another IFRS Change of useful life, amortisation method or residual value should

be accounted for as change in accounting estimate as per IAS 8.Example 1- Pg 67 of Module and Example 2 on page 68


Website Dvt Cost- SIC 32

• Websites for External Access:

– Selling websites (income generating) (Kalahari.com, e.t.c)- generate probable future economic benefits in accordance with IAS 38.57(d) when, for example, direct revenues from enabling orders to be placed –capitalise all expenditure when incurred

– Promotional & Advertising websites (non-income generating) -not able to demonstrate how a web site will generate probable future economic benefits-recognised as an expense when incurred.


Income generating Website Planning — includes undertaking feasibility studies, defining objectives

and specifications, evaluating alternatives and selecting preferences.-expense

Application and Infrastructure Development — includes obtaining a domain name, purchasing and developing hardware and operating software, installing developed applications and stress testing. Capitalise cost to intangible assets and recognise hardware as PPE

Graphical Design Development — includes designing the appearance of web pages.- capitalise to intangible asset

Content Development — includes creating, purchasing, preparing and uploading information, either textual or graphical in nature, on the web site before the completion of the web site's development. capitalise to intangible asset

Once development of a web site has been completed, the Operating stage begins. expense


Anesu Daka CA (SA)

Planning — includes undertaking feasibility studies, defining objectivesand specifications, evaluating alternatives and selecting preferences. –expense

Application and Infrastructure Development — includes obtaining a domain name, purchasing and developing hardware and operating software, installing developed applications and stress testing. – expense and recognise hardware as PPE

Graphical Design Development — includes designing the appearance of web pages. – expense

Content Development — includes creating, purchasing, preparing and uploading information, either textual or graphical in nature, on the web site before the completion of the web site's development. – expense

This information may either be stored in separate databases that are integrated into (or accessed from) the web site or coded directly into the web pages. – expense

Operating stage begins. - expense

Non-income generating website

AttemptExample 1 pg 34

&Example 2 pg 35

Anesu Daka CA (SA)

Investment Property: IAS 40


Key Areas of Focus

• Is it investment property?

• Accounting for fair adjustment

• Transfers to PPE, Inventory and IFRS 5

• Deferred tax implications


Definition

• Definition of Investment Property• Investment property is property (land or a

building or part of a building or both) held (by the owner or by the lessee under a finance lease) to earn rentals or for capital appreciation or both. [IAS 40.5]

• Owner-occupied property is property held (by the owner or by the lessee under a finance lease) for use in the production or supply of goods or services or for administrative purposes.


Examples of investment Property:

• Examples of investment property: [IAS 40.8] – Land held for long-term capital appreciation – Land held for undecided future use – Building leased out under an operating lease – Vacant building held to be leased out under an operating

lease – Property that is being constructed or developed for future

use as investment property

• In May 2008 the IASB expanded the scope of IAS 40 to include property under construction or development for future use as an investment property. Such property previously fell within the scope of IAS 16.


Other Classification Issues

• Property held under an operating lease

• Partial own use (Owner uses part of IP)

• Ancillary services

• Intercompany rentals


Partial own use.

• If the owner:• uses part of the property for its own use, and

• part to earn rentals or for capital appreciation, and the portions can be sold or leased out separately, they are accounted for separately.

• Therefore the part that is rented out is investment property.

• If the portions cannot be sold or leased out separately, the property is investment property only if the owner-occupied portion is insignificant (judgement, but 10% or less is generally accepted as insignificant). [IAS 40.10]


Recognition

• Investment property should be recognised as an asset when:

– it is probable that the future economic benefits that are associated with the property will flow to the enterprise, and

– the cost of the property can be reliably measured. [IAS 40.16]


Initial measurement

• Investment property is initially measured at cost, including transaction costs.

• Excluding:

– start-up costs,

– abnormal waste, or

– initial operating losses incurred before the investment property achieves the planned level of occupancy. [IAS 40.20 and 40.23]


Subsequent Measurement • IAS 40 permits enterprises to choose between:

[IAS 40.30] – a fair value model; and

– a cost model.

• One method must be adopted for all of an entity's investment property. Change is permitted only if this results in a more appropriate presentation. IAS 40 notes that this is highly unlikely for a change from a fair value model to a cost model.


Fair value model

• Investment property is re-measured at fair value.

• FV = the amount for which the property could be exchanged between knowledgeable, willing parties in an arm's length transaction.

• FV adj/Gains or losses arising from changes in the fair value of investment property must be included in net profit or loss for the period in which it arises. [IAS 40.35]


Fair value model

Determination of FV

• Apply IFRS 13


Cost Model

• After initial recognition, investment property is accounted for in accordance with the cost model as set out in IAS 16, Property, Plant and Equipment – cost less accumulated depreciation and less accumulated impairment losses. [IAS 40.56]



Transfers to or from Investment Property Classification From To Acc Treatment

Cost Model Inv property Inventory or owner occupied

No change

Inventory, owner occupied/self-constructed property

Investment Property

No change


When an entity uses the cost model for investment property, transfers between categories do not change the carrying amount of the property transferred, and they do not change the cost of the property for measurement or disclosure purposes.

Transfers to or from Investment Property Classification

From To Acc treatment

FV Model Inv Property Inventory or owner occupied

FV now deemed cost [IAS 40.60]

FV Model Owner – occupied property

Inv Property Asset revalued,revaluation gain/loss treated as per IAS 16 (revaluation surplus) [IAS 40.61]

FV Model Inventory Inv Property difference btwn the FV at the date of transfer and previous CA is recognised P& L ; [IAS 40.63]


Tax Implications

• Cost Model – Tax implications are the same as per PPE


Questions ?


anesu daka ca (sa) - icaz.org.zw 104.pdf · major inspections –ias 16.14 ... revaluation model...

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