CHAPTER 1 – FRAMEWORK, IFRS FOR SMES, MANAGEMENT COMMENTARY, FRS 1 AND FRS...

CHAPTER 1 – FRAMEWORK, IFRS FOR SMES, MANAGEMENT COMMENTARY,

FRS 1 AND FRS 113

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Application to non-financial assets

Highest and best use for non-financial assets A fair value measurement of a non-financial asset takes into account a market participant’s ability to generate economic benefits by using the asset in its highest

and best use or by selling it to another market participant that would use the asset in its highest and best use.

Application to liabilities and an entity’s own equity instruments

General Principles A fair value measurement assumes that a financial or non-financial liability or an entity’s own equity instrument (eg equity interests issued as consideration in a

business combination) is transferred to a market participant at the measurement date. The transfer of a liability or an entity’s own equity instrument assumes the following:

(a) A liability would remain outstanding and the market participant transferee would be required to fulfill the obligation. The liability would not be settled with the counterparty or otherwise extinguished on the measurement date.

(b) An entity’s own equity instrument would remain outstanding and the market

participant transferee would take on the rights and responsibilities associated with the instrument. The instrument would not be cancelled or otherwise

extinguished on the measurement date.

Valuation Techniques An entity shall use valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximising the

use of relevant observable inputs and minimising the use of unobservable inputs. Market Approach

The market approach uses prices and other relevant information generated by

market transactions involving identical or comparable (ie similar) assets, liabilities or a group of assets and liabilities, such as a business. Cost Approach

The cost approach reflects the amount that would be required currently to replace the service capacity of an asset (often referred to as current replacement cost).

Income Approach

The income approach converts future amounts (eg cash flows or income and expenses) to a single current (ie discounted) amount. When the income approach is used, the fair value measurement reflects current market expectations about those

future amounts. Present Value Techniques

This is the use of present value techniques to measure fair value.

CHAPTER 2 – ASSETS

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Measurement after Recognition An entity shall choose either the Cost Model or the Revaluation Model as its accounting policy and shall apply that policy to an entire class of property, plant

and equipment.

1. Cost Model After recognition as an asset, an item of property, plant and equipment shall be carried at its cost less any accumulated depreciation and any accumulated

impairment losses.

2. Revaluation Model After recognition as an asset, an item of property, plant and equipment whose fair value can be measured reliably shall be carried at a revalued amount, being its fair

value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses. Revaluations shall be made with sufficient regularity to ensure that the carrying

amount does not differ materially from that which would be determined using fair value at the year end. If an item of property, plant and equipment is revalued, the entire class of

property, plant and equipment to which that asset belongs shall be revalued. 2a. Revaluation Upwards

i. If an asset’s carrying amount is increased as a result of a revaluation, the increase shall be credited directly to equity under the heading of revaluation revaluation reserve (RR) or revaluation surplus.

ii. However, the increase shall be recognised in profit or loss to the extent that it reverses a revaluation decrease of the same asset previously recognised in profit or

loss.

FRS 36 requires that reversing impairment loss for an Individual Asset

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

reversal of an impairment loss shall not exceed the carrying amount that would have been determined (net of amortisation or depreciation) had no impairment loss been recognised for the asset in prior years.

2b. Revaluation Downwards

i. If an asset’s carrying amount is decreased as a result of a revaluation, the decrease shall be recognised in profit or loss.

ii. However, the decrease shall be debited directly to equity under the heading of revaluation surplus to the extent of any credit balance existing in the revaluation

surplus in respect of that asset.


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Depreciation 1. Each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item shall be depreciated separately.

2. The depreciable amount of an asset shall be allocated on a systematic basis over its useful life.

3. The residual value and the useful life of an asset shall be reviewed at least at each financial year-end and, if expectations differ from previous estimates, the change(s) shall be accounted for as a change in an accounting estimate in

accordance with FRS 8 Accounting Policies, Changes in Accounting Estimates and Errors. 4. The depreciation method used shall reflect the pattern in which the asset’s future

economic benefits are expected to be consumed by the entity. 5. The depreciation method applied to an asset shall be reviewed at least at each

financial year-end and, if there has been a significant change in the expected pattern of consumption of the future economic benefits embodied in the asset, the method shall be changed to reflect the changed pattern. Such a change shall be accounted for as a change in an accounting estimate in accordance with FRS 8.

Impairment To determine whether an item of property, plant and equipment is impaired, an entity applies FRS 36 Impairment of Assets.

Derecognition The carrying amount of an item of property, plant and equipment shall be

derecognised:

(a) on disposal; or

(b) when no future economic benefits are expected from its use or disposal.

The gain or loss arising from the derecognition of an item of property, plant and equipment shall be included in profit or loss when the item is derecognised (unless FRS 17 requires otherwise on a sale and leaseback). Gains shall not be classified

as revenue. The gain or loss arising from the derecognition of an item of property, plant and equipment shall be determined as the difference between the net disposal

proceeds, if any, and the carrying amount of the item. Disposal Entries:

Dr Bank (to record sales proceeds or Dr PPE if trade in) Dr Accumulated Depreciation (to remove upon disposal) Cr PPE, cost (to remove upon disposal Cr Gain on disposal or Dr Loss on Disposal

Also, remove any remaining revaluation reserve (RR) upon disposal: Dr Revaluation Reserve (RR)

Cr Retained Earnings (RE)


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Yanong (Jun 2015 Q2) The directors of Yanong, a public limited company, have seen many different ways of dealing with the measurement and disclosure of the fair value of assets, liabilities

and equity instruments. They feel that this reduces comparability among different entities’ financial statements. They would like advice on several transactions where they currently use fair value measurement as they have heard that the introduction of FRS 113 Fair Value Measurement, while not interfering with the scope of fair

value measurement, will reduce the extent of any diversity and inconsistency.

(d) Yanong uses the revaluation model for its non-current assets. Yanong has several plots of farmland which are unproductive. The company feels that the land

would have more value if it were used for residential purposes. There are several potential purchasers for the land but planning permission has not yet been granted for use of the land for residential purposes. However, preliminary enquiries with the

regulatory authorities seem to indicate that planning permission may be granted. Additionally, the government has recently indicated that more agricultural land should be used for residential purposes.

Yanong has also been approached to sell the land for commercial development at a higher price than that for residential purposes.

Yanong would like advice on how to measure the fair value of the land in its financial statements.

(5 marks)

Required:

Advise Yanong on how the above transactions should be dealt with in its

financial statements with reference to relevant Singapore Financial

Reporting Standards.

Note: Ignore any deferred tax implications of the transactions above.


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Cloud (Jun 2015 Q4 extract) On a separate issue, Cloud purchased an item of property, plant and equipment for $10 million on 1 May 2013. The asset is depreciated over five years on the straight

line basis with no residual value. At 30 April 2014, the asset was revalued to $12 million. At 30 April 2015, the asset’s value has fallen to $4 million. The entity makes a transfer from revaluation surplus to retained earnings for excess depreciation, as the asset is used.

Required:

Show how the above transactions would be dealt with in the financial

statements of Cloud from the date of the purchase of the assets.

Note: Candidates should ignore any deferred taxation effects.

(3 marks)


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Kayte (Dec 2014 Q3)

Kayte operates in the shipping industry and owns vessels for transportation.

(b) Kayte’s vessels constitute a material part of its total assets. The economic life of the vessels is estimated to be 30 years, but the useful life of some of the vessels

is only 10 years because Kayte’s policy is to sell these vessels when they are 10 years old. Kayte estimated the residual value of these vessels at sale to be half of acquisition cost and this value was assumed to be constant during their useful life. Kayte argued that the estimates of residual value used were conservative in view of

an immature market with a high degree of uncertainty and presented documentation which indicated some vessels were being sold for a price considerably above carrying value. Broker valuations of the residual value were considerably higher than those used by Kayte. Kayte argued against broker

valuations on the grounds that it would result in greater volatility in reporting. Kayte keeps some of the vessels for the whole 30 years and these vessels are

required to undergo an engine overhaul in dry dock every 10 years to restore their service potential, hence the reason why some of the vessels are sold. The residual value of the vessels kept for 30 years is based upon the steel value of the vessel at the end of its economic life. At the time of purchase, the service potential which will

be required to be restored by the engine overhaul is measured based on the cost as if it had been performed at the time of the purchase of the vessel. In the current period, one of the vessels had to have its engine totally replaced after only eight

years. Normally, engines last for the 30-year economic life if overhauled every 10 years. Additionally, one type of vessel was having its funnels replaced after 15 years but the funnels had not been depreciated separately. (11 marks)

Required:

Discuss the accounting treatment of the above transactions in the financial

statements of Kayte.

Note: The mark allocation is shown against each of the elements above.


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Electron (Pilot Q2)

Electron, a public limited company, operates in the energy sector. The company has grown significantly over the last few years and is currently preparing its financial statements for the year ended 30 June 2011.

Electron has recently constructed an ecologically efficient power station. A condition of being granted the operating licence by the government is that the power station be dismantled at the end of its life which is estimated to be 20 years. The power

station cost $100 million and began production on 1 July 2010. Depreciation is charged on the power station using the straight line method. Electron has estimated at 30 June 2011, it will cost $15 million (net present value) to restore the site to its original condition using a discount rate of five per cent. Ninety-five per

cent of these costs relate to the removal of the power station and five per cent relates to the damage caused through generating energy.

Required:

Draft a report suitable for presentation to the directors of Electron which

discusses the accounting treatment of the above transactions in the

financial statements for the year ended 30 June 2011, including relevant

calculations.

(7 marks)


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Johan (Dec 2008 Q3)

Johan, a Singapore public limited company, operates in the telecommunications

industry. The industry is capital intensive with heavy investment in licences and network infrastructure. Competition in the sector is fierce and technological advances are a characteristic of the industry.

Johan is considering extending its network and has carried out a feasibility study during the year to 30 November 2008. The design and planning department of Johan identified five possible geographical areas for the extension of its network. The internal costs of this study were $150,000 and the external costs were $100,000 during the year to 30 November 2008. Following the feasibility study, Johan chose a geographical area where it was going to install a base station for the telephone network. The location of the base station was dependent upon getting

planning permission. A further independent study has been carried out by third party consultants in an attempt to provide a preferred location in the area, as there is a need for the optimal operation of the network in terms of signal quality and coverage. Johan proposes to build a base station on the recommended site on which planning permission has been obtained. The third party consultants have charged $50,000 for the study. Additionally Johan has paid $300,000 as a single payment together with $60,000 a month to the government of the region for access

to the land upon which the base station will be situated. The contract with the government is for a period of 12 years and commenced on 1 November 2008. There is no right of renewal of the contract and legal title to the land remains with the government. The chief operating officer, a non-accountant, has asked for an explanation of the

accounting principles and practices which should be used to account for the above events. Required:

Discuss the principles and practices which should be used in the financial

year to 30 November 2008 to account for:

(b) the costs incurred in extending the network; (7 marks)


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FRS 23 BORROWING COSTS

Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset form part of the cost of that asset. Other borrowing

costs are recognised as an expense. For projects commencing on or after 1.1.2009, interest on borrowing to self-construct, acquire and production of a qualifying asset must be capitalised i.e. as an

addition to the cost of the non-current asset itself. Before that, the entity has a choice to write off to the Income Statement or to capitalise.

It should be noted that interest cost on operations are written off to the Profit and Loss Practical points

• Capitalisation of borrowing cost shall begin when the construction / development starts or when the borrowing starts, whichever is later.

• Capitalisation of borrowing costs shall be suspended, but is wriiten off to Income Statement, during extended periods in which active development is interrupted

• Capitalisation shall cease when construction / development is complete or when the borrowing cost no incurred, whichever is sooner.

Circumstances when and amount at which borrowing costs should be

capitalised

1. Borrowing Costs (BC) directly incurred on a tangible or intangible asset that takes a substantial period of time to get ready for its intended use or eventual sale (a ‘qualifying asset’) must be capitalised as part of the cost of that asset BC are based on the effective rate (including amortisation of discounts, premiums,

etc – will be covered later in Financial Instruments) on specifically borrowed funds or on the weighted average cost of a pool of funds such as overdraft facilities in the form of general borrowings.

Specifically borrowed funds: Borrowing Cost = EIR% x Specific Loan Pool of funds: Borrowing Cost = Weighted Average Cost x Asset Value

2. Capitalisation should commence when expenditure is being incurred on the asset, but this is not necessarily from the date funds are borrowed

3. Interest earned from the temporary investment of specific loans should be deducted from the BC being capitalised, except during periods of suspension (or before construction/development begins)

4. If not eligible for capitalisation, BC must be expensed. BC cannot be capitalised for assets measured at fair value


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FRS 38 INTANGIBLE ASSETS

An intangible asset is an identifiable non-monetary asset without physical substance.

The above definition requires an intangible asset to be identifiable to distinguish it from goodwill. Goodwill acquired in a business combination represents a payment made by the acquirer in anticipation of future economic benefits from assets that are not capable of being individually identified and separately recognised

but the acquirer is prepared to make a payment in the business combination. An intangible asset must be:

1. separately identifiable 2. control exists

3. probable future economic benefits

4. cost of intangible asset can be measured reliably

Scope This Standard shall be applied in accounting for intangible assets, except:

(a) intangible assets that are within the scope of another Standard;

(1) intangible assets held by an entity for sale in the ordinary course of

business (see FRS 2 Inventories).

(2) deferred tax assets (see FRS 12 Income Taxes).

(3) leases that are within the scope of FRS 17 Leases.

(4) assets arising from employee benefits (see FRS 19 Employee Benefits).

(5) financial assets as defined in FRS 109. The recognition and measurement of some financial assets are covered by FRS 27

Consolidated and Separate Financial Statements, FRS 28 Investments in Associates and Joint Ventures.

(6) goodwill acquired in a business combination (see FRS 103 Business Combinations).

(7) deferred acquisition costs, and intangible assets, arising from an insurer’s contractual rights under insurance contracts within the scope of FRS 104 Insurance Contracts. FRS 104 sets out specific

disclosure requirements for those deferred acquisition costs but not for those intangible assets. Therefore, the disclosure requirements in this Standard apply to those intangible assets.

(8) non-current intangible assets classified as held for sale (or included in

a disposal group that is classified as held for sale) in accordance with FRS 105 Non-current Assets Held for Sale and Discontinued Operations.

(b) financial assets, as defined in FRS 109 Financial Instruments;

(c) the recognition and measurement of exploration and evaluation assets (see FRS 106 Exploration for and Evaluation of Mineral Resources); and


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(d) expenditure on the development and extraction of minerals, oil, natural gas

and similar non-regenerative resources.

1. Internally Generated Goodwill Internally generated goodwill shall not be recognised as an asset.

Internally generated goodwill is not recognised as an asset because it is not an identifiable resource (i.e. it is not separable nor does it arise from contractual or other legal rights) controlled by the entity that can be measured reliably at cost.

2. Internally Generated Intangible Assets To assess whether an internally generated intangible asset meets the criteria for

recognition, an entity classifies the generation of the asset into: (a) a research phase (gaining new knowledge, materials, processes); and

No intangible asset arising from research (or from the research phase of an internal project) shall be recognised. Expenditure on research (or on the research phase of an internal project) shall be recognised as an expense

when it is incurred. (b) a development phase.

An intangible asset arising from development (or from the development phase of an internal project) shall be recognised as expenses but is capitalised as a non-current asset if, and only if, all of the following are

met: (1) the technical feasibility of completing the intangible asset so that it

will be available for use or sale.

(2) its intention to complete the intangible asset and use or sell it.

(3) its ability to use or sell the intangible asset. (4) how the intangible asset will generate probable future economic

benefits. Among other things, the entity can demonstrate the

existence of a market for the output of the intangible asset or the intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset.

(5) the availability of adequate technical, financial and other resources to

complete the development and to use or sell the intangible asset.

(6) its ability to measure reliably the expenditure attributable to the intangible asset during its development.


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Measurement An intangible asset shall be measured initially at cost.

Cost Model

After initial recognition, an intangible asset shall be carried at its cost less any

accumulated amortisation and any accumulated impairment losses. Revaluation Model

After initial recognition, an intangible asset shall be carried at a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated amortisation and any subsequent accumulated impairment losses. For the purpose of revaluations under this Standard, fair value shall be determined by reference to

an active market. Revaluations shall be made with such regularity that at the balance sheet date the carrying amount of the asset does not differ materially from its fair value.

Intangible Assets with Finite Useful Lives

The depreciable amount of an intangible asset with a finite useful life shall be amortised on a systematic basis over its useful life.

Intangible Assets with Indefinite Useful Lives An intangible asset with an indefinite useful life shall not be amortised.

In accordance with FRS 36 Impairment of Assets, an entity is required to test an intangible asset with an indefinite useful life for impairment by comparing its recoverable amount with its carrying amount

(a) annually, and

(b) whenever there is an indication that the intangible asset may be impaired. The remaining useful life of an intangible asset that is not yet being amortised shall be reviewed each 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 shall be accounted for as a change in an accounting estimate in accordance with FRS 8 Accounting Policies, Changes in Accounting Estimates and Errors.


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Lockfine (Jun 2011 Q2) Lockfine, a public limited company, operates in the fishing industry and has recently made the transition to Singapore Financial Reporting Standards (FRS).

Lockfine’s reporting date is 30 April 2011. (c) Lockfine has internally developed intangible assets comprising the capitalised

expenses of the acquisition and production of electronic map data which indicates the main fishing grounds in the world. The intangible assets generate revenue for the company in their use by the fishing fleet and are a material asset in the statement of financial position. Lockfine had constructed a database of the

electronic maps. The costs incurred in bringing the information about a certain region of the world to a higher standard of performance are capitalised. The costs related to maintaining the information about a certain region at that same standard of performance are expensed. Lockfine’s accounting policy states that intangible

assets are valued at historical cost. The company considers the database to have an indefinite useful life which is reconsidered annually when it is tested for impairment. The reasons supporting the assessment of an indefinite useful life were

not disclosed in the financial statements and neither did the company disclose how it satisfied the criteria for recognising an intangible asset arising from development. Required:

Discuss the principles and practices to be used by Lockfine in accounting

for the above valuation and recognition issues.

(6 marks)


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Seltec (June 2010 Q3)

Seltec, a public limited company, processes and sells edible oils and uses several financial instruments to spread the risk of fluctuation in the price of the edible oils.

The entity operates in an environment where the transactions are normally denominated in dollars. The functional currency of Seltec is the dollar.

(b) Seltec has decided to enter the retail market and has recently purchased two well-known brand names in the edible oil industry. One of the brand names has been in existence for many years and has a good reputation for quality. The other brand name is named after a famous film star who has been actively promoting the

edible oil as being a healthier option than other brands of oil. This type of oil has only been on the market for a short time. Seltec is finding it difficult to estimate the useful life of the brands and therefore intends to treat the brands as having indefinite lives.

In order to sell the oil, Seltec has purchased two limited liability companies from a company that owns several retail outlets. Each entity owns retail outlets in several

shopping complexes. The only assets of each entity are the retail outlets. There is no operational activity and at present the entities have no employees. Seltec is unclear as to how the purchase of the brands and the entities should be

accounted for. (9 marks) Required:

Discuss the accounting principles involved in accounting for the above

transactions and how the above transactions should be treated in the

financial statements of Seltec.


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Johan (Dec 2008 Q3)

Johan, a Singapore public limited company, operates in the telecommunications

industry. The industry is capital intensive with heavy investment in licences and network infrastructure. Competition in the sector is fierce and technological advances are a characteristic of the industry. Johan has responded to these factors

by offering incentives to customers and, in an attempt to acquire and retain them, Johan purchased a telecom licence on 1 December 2006 for $120 million. The licence has a term of six years and cannot be used until the network assets and infrastructure are ready for use. The related network assets and infrastructure became ready for use on 1 December 2007. Johan could not operate in the country without the licence and is not permitted to sell the licence. Johan expects its subscriber base to grow over the period of the licence but is disappointed with its market share for the year to 30 November 2008. The licence agreement does not

deal with the renewal of the licence but there is an expectation that the regulator will grant a single renewal for the same period of time as long as certain criteria regarding network build quality and service quality are met. Johan has no experience of the charge that will be made by the regulator for the renewal but other licences have been renewed at a nominal cost. The licence is currently stated at its original cost of $120 million in the statement of financial position under non-current assets. The chief operating officer, a non-accountant, has asked for an explanation of the accounting principles and practices which should be used to account for the above events. Required:

Discuss the principles and practices which should be used in the financial

year to 30 November 2008 to account for:

(a) the licences; (8 marks)

CHAPTER 1 – FRAMEWORK, IFRS FOR SMES, MANAGEMENT COMMENTARY, FRS 1 AND FRS...

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