RECOGNITION AND MEASUREMENT OF ASSETS Prepared by Naga Praveen Naga Praveen 1 IAS 2, 16, 40, 36, 38...

RECOGNITION AND MEASUREMENT OF ASSETS Prepared by Naga Praveen Naga Praveen 1 IAS 2, 16, 40, 36, 38 and related Interpretations

2 Introduction Objective of Financial Statements Recognition and Measurement of Assets IAS 16 Property Plant & Equipment IAS 2 Inventories IAS 40 Investment Property IAS 38 Intangible Assets IAS 36 Impairment of Assets Related Interpretations Naga Praveen 2

3 Objective of Financial Reporting Objective of Financial Reporting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity Framework Objective of Financial Statements is to provide information about the financial position performance and cash flows of an entity that is useful to a wide range of users in making economic decisions IAS 1 Naga Praveen 3

4 IAS 1 Presentation of Financial Statements application of IFRSs with additional disclosures when necessary results in a fair presentation (faithful representation of transactions, events and conditions) Naga Praveen 4

FRAMEWORK BASED UNDERSTANDING OF IFRS 5 Naga Praveen

6 Framework-based understanding 6 PrinciplesRulesConcepts relates IFRS requirements to the concepts in the Conceptual Framework reasons why some IFRS requirements do not maximise those concepts (eg application of the cost constraint or inherited requirements) Naga Praveen

Framework-based understanding 7 a cohesive understanding of IFRSs Framework facilitates consistent and logical formulation of IFRSs a basis for judgement in applying IFRSs Framework established the concepts that underlie the estimates, judgements and models on which IFRS financial statements are based a basis for continuously updating IFRS knowledge and IFRS competencies 7 Naga Praveen

8 Framework Based understanding Identify the element (Asset, Liability, Equity, Income and Expense) Connect the Objective of Financial Reporting with the Objective of Standard Read the Definition of the element (Framework) Read the Definition of the element in particular IFRS Read the Scope of particular IFRS 8 Naga Praveen

9 Framework Based Teaching Read the Recognition principle (Framework) Read the Recognition principle in particular IFRS Read the Measurement Principle (Framework) Measurement Principle in particular IFRS De-recognition (IFRS) Disclosures (IFRS) 9 Naga Praveen

10 Concept Asset An asset is defined as: a resource controlled by the entity as a result of a past event from which future economic benefits are expected to flow to the entity. 10 Naga Praveen

11 Asset Recognition An asset is recognised when: it is probable that any future economic benefit associated with the item will flow to the entity; and the item has a cost or value that can be measured with reliability. 11 Naga Praveen

12 Assets overview Naga Praveen 12 Classification, recognition and measurement

13 Asset Type ASSET TYPEUSE IN BUSINESS ?FORM OF FUTURE ECONOMIC BENEFITS Inventory (IAS 2)Sale or used in production of items for sale or in services Usually cash or other asset received in exchange PP&E (IAS 16)Used in production or supply of goods or services, rental or administration (more than one period) Usually cash through sale of final product or service Intangibles (IAS 38) Used in production or supply of goods or services Usually cash through sale of final product or service Investment property IAS 40) Earn rentals or capital appreciation, or both Usually cash inflows independent from other assets 13 Naga Praveen

14 Definition of Inventory (IAS 2) Inventories are assets: held for sale in the ordinary course of business in the process of production for sale or materials or supplies to be used in the production for sale 14 Naga Praveen

15 Definition of PPE Property, plant and equipment (PPE) are tangible items that are held for use in the production or supply of goods or services, for rental to others, or for administration purposes are expected to be used during more than one period 15 Naga Praveen

16 Definition of Investment Property Investment property is land or a building (including part of a building) or both, held to earn rentals or for capital appreciation or both It is neither owner-occupied (see IAS 16 Property, Plant and Equipment) nor held for sale in the ordinary course of business (see IAS 2 Inventories). 16 Naga Praveen

17 Definition of Intangible Assets An intangible asset is an identifiable non- monetary asset without physical substance. Such an asset is identifiable when it is separable, or when it arises from contractual or other legal rights 17 Naga Praveen

PROPERTY PLANT AND EQUIPMENT IAS 16 Naga Praveen 18

19 IAS 16 Property Plant & Equipment Principal Issues History of IAS 16 Objective Scope Definition Recognition Measurement De-recognition Disclosures Naga Praveen 19

20 Principal Issues The principal issues in accounting for Property Plant and Equipment (herein after referred to as PPE) are the recognition of the assets the determination of their carrying amounts and the depreciation charges and impairment losses to be recognised in relation to them 20 Naga Praveen

21 History IAS 4 Depreciation Accounting issued Nov 1975 IAS 16 Accounting for Property, Plant & Equipment issued March 1982 (replaced IAS 4) IAS 16 Property, Plant & Equipment issued December 1993(replaced IAS 16 1982) IASB adopted IAS 16 Dec 1993 in April 2001 IAS 16 revised in December 2003 Other IFRSs have made minor consequential amendments to IAS 16 Naga Praveen 21

22 Scope of IAS 16 Exclusions PPE classified as held for sale in accordance with IFRS 5 Biological assets related to agricultural activity (see IAS 41) The recognition and measurement of exploration and evaluation assets (see IFRS 6) Mineral rights and mineral reserves such as oil, natural gas and similar non-regenerative resources Naga Praveen 22

23 Objective of IAS 16 to prescribe the accounting treatment for PPE so that users of the financial statements can discern information about an entitys investment in its PPE and the changes in such investment Naga Praveen 23

24 Definition of PPE PPE are tangible items that: are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes are expected to be used during more than one period. Naga Praveen 24

25 Are PPEs asset of an entity? Refer Framework for Asset Definition An asset is a resource controlled by the entity as a result of a past event from which future economic benefits are expected to flow to the entity PPEs are asset of an entity controlled by it as a result of past event The Cash flows generated from PPE are usually cash through sale of final product or service Naga Praveen 25

26 Discussion Questions For the following 3 Scenarios ask the below questions 1)Does the reporting entity have an asset? 2)Is the asset identified in question 1 an item of PPE? 3)Is that item of PPE within the scope of IAS 16? Naga Praveen 26

27 Scenario 1 a chemical manufacturer installed new chemical handling processes to comply with environmental requirements for the production and storage of dangerous chemicals without which the entity is unable to manufacture and sell chemicals Naga Praveen 27

28 Scenario 2 An entity builds a nuclear power plant with which it generates electricity that it sells to its customers (members of the general public). The entity operates the plant in accordance with rigorous conditions imposed by the government of the jurisdiction in which it operates. Failure to comply with the operating procedures would potentially result in the government agency revoking the entitys licence to operate the plant. The entity expects to operate the power generator in compliance with the licence conditions for about 50 years before decommissioning the nuclear plant. Naga Praveen 28

29 Scenario 3 An entity purchases a deep-sea drilling rig to explore for oil and gas under a two-year licence from a government in a specified area of that countrys territorial waters. If the entity finds oil or gas, or both, within the two-year exploratory drilling licence period, the government will pay the entity a single amount equal to 1 per cent of the estimated market value of the oil and gas reserves found. If no oil or gas is found, then the entity receives nothing. Geological surveys of the area suggest that there is only a 10 per cent probability that there is oil and gas to be found in the area covered by the licence. Moreover, if oil and gas exist in the licenced area, management estimates that there is only a 20 per cent chance that it will be found by the entity during the licence period. In accordance with the licence conditions, the drilling rig must be dismantled and recycled at the end of the two-year licence period. Naga Praveen 29

30 Recognition IAS 16 The cost of an item of PPE shall be recognised as an asset if, and only if: it is probable that future economic benefits associated with the item will flow to the entity and the cost of the item can be measured reliably Refer Framework recognition of an Asset Naga Praveen 30

31 Cost Definition amount of cash or cash equivalents paid fair value of the other consideration given to acquire an asset at the time of its acquisition or construction amount attributed to that asset when initially recognised in accordance with the specific requirements of other IFRSs, eg IFRS 2 Share-based Payment Naga Praveen 31

32 Measurement Initial Measurement At Cost Subsequent Measurement Cost Model Revaluation Model Naga Praveen 32

33 Initial Recognition Cost purchase price, including import duties and non- refundable purchase taxes, after deducting trade discounts and rebates any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located Naga Praveen 33

34 Initial Recognition Cost Naga Praveen 34 PPE AcquiredSelf Constructed Cost Purchase Price Trade Discounts + Taxes (Non Refundable) + Directly attributable expenses + Cost of Dismantling Cost Related directly to specific asset Attributable to construction activity Cash Exchanged Another AssetSecurities FMV of asset given up or Asset acquired or Net Book value of asset given up FMV of asset acquired or securities issued

35 Costs of Purchase purchase price import duties and non-refundable purchase taxes trade discounts and rebates are excluded Naga Praveen 35

36 Cost Directly Attributable costs of employee benefits arising directly from the construction or acquisition of the item of PPE costs of site preparation initial delivery and handling costs installation and assembly costs costs of testing professional fees Naga Praveen 36

37 Costs of Dismantling initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located, the obligation for which an entity incurs either when the item is acquired or as a consequence of having used the item during a particular period for purposes other than to produce inventories during that period Naga Praveen 37

38 Costs exclusions costs of opening a new facility costs of introducing a new product or service (including costs of advertising and promotional activities) costs of conducting business in a new location or with a new class of customer (including costs of staff training) administration and other general overhead costs Naga Praveen 38

39 Costs exclusions costs incurred while an item capable of operating in the manner intended by management has yet to be brought into use or is operated at less than full capacity initial operating losses, such as those incurred while demand for the items output builds up and costs of relocating or reorganising part or all of an entitys operations Naga Praveen 39

40 Replacement Costs If the recognition criteria are met, an entity recognises in the carrying amount of an item of PPE, the cost of replacing part of such an item when that cost is incurred and the carrying amount of those parts that are replaced is derecognised Naga Praveen 40

41 Subsequent Measurement Cost Model Historical Cost Less Accumulated Depreciation Less Accumulated Impairment Revaluation Model Fair Value Less Accumulated Depreciation Less Accumulated Impairment Naga Praveen 41

42 Depreciation Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life Depreciable amount is the cost of an asset, or other amount substituted for cost, less its residual value Naga Praveen 42

43 Residual Value Residual value of an asset is the estimated amount that an entity would currently obtain from disposal of the asset, after deducting the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life Naga Praveen 43

44 Useful Life the period over which an asset is expected to be available for use by an entity or the number of production or similar units expected to be obtained from the asset by an entity. Naga Praveen 44

45 Depreciation Each part of an item of PPE with a cost that is significant in relation to the total cost of the item shall be depreciated separately The depreciable amount of an asset shall be allocated on a systematic basis over its useful life The depreciation charge for each period shall be recognised in profit or loss unless it is included in the carrying amount of another asset. Naga Praveen 45

46 Depreciation Period Depreciation Begins when the asset is available for use, ie when it is in the location and condition necessary for it to be capable of operating in the manner intended by management. Ceases at the earlier of the date that the asset is classified as held for sale (or included in a disposal group that is classified as held for sale) in accordance with IFRS 5 the asset is derecognised Naga Praveen 46

47 Depreciation Method method used shall reflect the pattern in which the assets future economic benefits are expected to be consumed by the entity method applied to an asset shall be reviewed at least at each financial year-end and the method shall be changed to reflect the changed pattern of consumption of future economic benefits change is treated as change in accounting estimated (IAS 8) Naga Praveen 47

48 Depreciation Method Straight Line Method Diminishing Balance Method Units of Production Naga Praveen 48

49 Change in Residual Value and Useful Life 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 IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. Naga Praveen 49

50 Revaluation Model Applicable in case of assets when fair value can be measured reliably If an item of PPE is revalued, the entire class of PPE to which that asset belongs shall be revalued Naga Praveen 50

51 Revaluation Model Naga Praveen 51

52 Class Discussion To what extent do the revaluation model and the cost model provide investors, lenders and other creditors (existing and potential) with useful financial information for making decisions about providing resources to the entity? Does the existence of the accounting policy choice (between the cost model and the revaluation model) affect the ability of a potential investor or a potential creditor to choose between investment alternatives? Naga Praveen 52

53 De-recognition The carrying amount of an item of PPE shall be derecognised: on disposal or when no future economic benefits are expected from its use or disposal The gain or loss shall be included in profit or loss when the item is derecognised The revaluation surplus in respect of an item of PPE may be transferred directly to retained earnings when the asset is derecognised Naga Praveen 53

54 Disclosures the measurement bases used for determining the gross carrying amount the depreciation methods used the useful lives or the depreciation rates used; the gross carrying amount and the accumulated depreciation (aggregated with accumulated impairment losses) at the beginning and end of the period and Naga Praveen 54

55 Disclosures a reconciliation of the carrying amount at the beginning and end of the period showing: additions assets classified as held for sale or included in a disposal group classified as held for sale in accordance with IFRS 5 and other disposals acquisitions through business combinations increases or decreases resulting from revaluations and from impairment losses recognised or reversed in other comprehensive income impairment losses recognised and reversed in profit or loss Naga Praveen 55

56 Disclosures depreciation the net exchange differences arising on the translation of the financial statements from the functional currency into a different presentation currency, including the translation of a foreign operation into the presentation currency of the reporting entity other changes Naga Praveen 56

57 Example Disclosures Naga Praveen 57

60 Case Study 1 A Ltd incurred (and paid) the following expenditures in acquiring an administration building and the land on which it is built Naga Praveen 60 DateRsAdditional Information 1 Jan 201420 Crores20 per cent of the price is attributable to the land 1 Jan 20142 Crores Non-refundable transfer taxes (not included in the purchase price) 1 Jan 201410 LacsLegal Costs 1 Jan 201410,000 Reimbursing the previous owner for prepaying the non-refundable local government property taxes for the six-month period ending 30 June 2014 30 June 201420,000Non-refundable annual local government property taxes for the year ending 30 June 2015

61 Case Study 1 At 31 December 2014 A Ltd made the following assessments: Useful life of the building: 50 years from the date of acquisition Residual value of the building: Rs 2 Crores The entity will consume the buildings future economic benefits evenly over 50 years from the date of acquisition Fair value less costs to sell of the land and building: Rs 25 Crores Prepare accounting entries to record the effects of the PPE in the accounting records of A Ltd for the year ended 31 December 2014 Naga Praveen 61

62 Solution Journal Entries At 1 January 2014 To recognise the acquisition of the property To recognise the non-refundable transfer taxes incurred in acquiring the property Naga Praveen 62 DebitLand & Buildings (At Cost)200 Crores CreditCash200 Crores DebitLand & Buildings (At Cost)20 Crores CreditCash20 Crores

63 Solution Journal Entries To recognise Legal Costs To recognise local government property taxes prepaid for the six months ending 30 June 2014 and 30 June 2015 Naga Praveen 63 DebitLand & Buildings (At Cost)10 Lakhs CreditCash10 Lakhs DebitPrepaid Expenses (Asset)0.1 Lakhs CreditCash0.1 Lakhs

64 Solution Journal Entries At 30 June 2014 To recognise local government property taxes paid on 30 June 2014 for the twelve months ending 30 June 2015 Naga Praveen 64 DebitPrepaid Expenses (Asset)0.2 Lakhs CreditCash0.2 Lakhs

65 Solution Journal Entries For the year ended 31 December 2014 To recognise as an expense local government property taxes prepaid To recognise depreciation of buildings during 2014 Naga Praveen 65 Debit Profit or Loss (Operarting Expense) 0.2 Lakhs CreditPrepaid Expenses (Asset)0.2 Lakhs Debit Profit or Loss (Operarting Expense) 31.36 Lakhs CreditAccumulated Depreciation31.36 Lakhs

INVESTMENT PROPERTY IAS 40 Naga Praveen 66

67 Investment Property Investment property is property (land or a building or part of a buildingor both) held (by the owner or by the lessee under a finance lease) to earn rentals or for capital appreciation or both, rather than for use in the production or supply of goods or services or for administrative purposes or sale in the ordinary course of business 67 Naga Praveen

68 Investment Property Example land held for long-term capital appreciation rather than for short-term sale in the ordinary course of business land held for a currently undetermined future use a building owned by the entity (or held by the entity under a finance lease) and leased out under one or more operating leases a building that is vacant but is held to be leased out under one or more operating leases property that is being constructed or developed for future use as investment property 68 Naga Praveen

69 Owner Occupied Property 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. IAS 16 PPE applies to Owner Occupied Property 69 Naga Praveen

70 Operating Lease A property interest held by a lessee under an operating lease may be classified and accounted for as investment property if, and only if, the property would otherwise meet the definition of an investment property and the lessee uses the fair value model for the asset recognised. 70 Naga Praveen

71 Operating Lease This classification alternative is available on a property-by-property basis. However, once this classification alternative is selected for one such property interest held under an operating lease, all property classified as investment property shall be accounted for using the fair value model 71 Naga Praveen

72 Recognition Investment property shall be recognised as an asset when, and only when: it is probable that the future economic benefits that are associated with the investment property will flow to the entity and the cost of the investment property can be measured reliably 72 Naga Praveen

73 Initial Measurement An investment property shall be measured initially at its cost. Transaction costs shall be included in the initial measurement. The cost of a purchased investment property comprises its purchase price and any directly attributable expenditure. 73 Naga Praveen

74 Initial Measurement The initial cost of a property interest held under a lease and classified as an investment property shall be recognised at the lower of the fair value of the property and the present value of the minimum lease payments 74 Naga Praveen

75 Subsequent Measurement Fair Value Model Cost Model 75 Naga Praveen

76 Fair Value After initial recognition, an entity that chooses the fair value model shall measure all of its investment property at fair value A gain or loss arising from a change in the fair value of investment property shall be recognised in profit or loss for the period in which it arises For a property interest held by a lessee under an operating lease is classified as an investment property Fair Value is mandatory 76 Naga Praveen

77 Cost Model After initial recognition, an entity that chooses the cost model shall measure all of its investment properties in accordance with IAS 16s requirements for that model 77 Naga Praveen

78 Transfers Investor Property to Owner Occupied or Inventory Fair Value is the cost Owner Occupied to Investor Property Fair Value Changes in carrying amount follow IAS 16 Inventory to Investor Property Fair Value Changes in carrying amount to Profit or Loss 78 Naga Praveen

INVENTORIES IAS 2 79 Naga Praveen

80 Issues at what point of time should the items be included in inventories? what costs should be included in the valuation of inventories? what cost flow assumptions should be used? at what value should inventories be reported? 80 Naga Praveen

81 Contents History of IAS 2 Objective of IAS 2 Measurement of Inventories Cost Net Realisable Value Recognition as Expense Disclosures 81 Naga Praveen

82 History of IAS 2 October 1975 - IAS 2 Valuation and Presentation of Inventories in the Context of the Historical Cost System December 1993 IAS 2 Inventories December 2003 IASB revised IAS 2 82 Naga Praveen

83 Objective of IAS 2 to prescribe the accounting treatment for inventories provides guidance on the determination of cost and its subsequent recognition as an expense, including any write-down to net realisable value cost formulas that are used to assign costs to inventories. 83 Naga Praveen

84 Inventories Inventories are assets: held for sale in the ordinary course of business in the process of production for such sale in the form of materials or supplies to be consumed in the production process or in the rendering of services 84 Naga Praveen

85 Inventories Inventories include goods produced or to be produced by the entity for the purpose of sale goods purchased for resale, such as merchandise purchased by a retailer land and other property held for resale in case of a service provider, cost of service for which the entity has not yet recognised the related revenue 85 Naga Praveen

86 Measurement of Inventory 86 Naga Praveen

87 Measurement of Inventory 87 Naga Praveen

88 Cost 88 Naga Praveen

89 Cost Cost of inventories should comprise all Costs of purchase Costs of conversion and Other costs incurred in bringing the inventories to their present location and condition 89 Naga Praveen

90 Cost of Purchase Cost of Purchase consists of purchase price including duties and taxes (other than those subsequently recoverable by the enterprise from the taxing authorities), freight inwards and other expenditure directly attributable to the acquisition Trade discounts, rebates, duty drawbacks and other similar items are deducted in determining the costs of purchase. 90 Naga Praveen

91 Example Cost of purchase A buys a good priced at $500 per unit from Z. Z awards A a 20% discount on orders of +100 units and additional 10% discount when A buys +999 units in 1 year. The discounts apply to all units acquired in a year. A buys as follows: 800 units on 1/1/2013 and 200 units on 24/12/2013. On 31/12/2013, 150 units were unsold (ie inventories of A). 91 Naga Praveen

92 Example Cost of purchase A measures the cost of the inventories in 2013 at $350,000 [ie 1,000 units ($500 list price less 30%($500) volume discount)], because all units purchased in the year get the full 30% discount. A recognises: expense (cost of sales) of $ 297,500 [ie 850 units sold ( $ 500 list price less 30%( $ 500) volume discount)] in profit or loss in 2013 asset (inventories) of $ 52,500 [ie 150 units unsold ( $ 500 less 30%(CU500) discount)] at 31/12/2013. 92 Naga Praveen

93 Costs of Conversion costs directly related to the units of production, such as direct labour. a systematic allocation of fixed and variable production overheads that are incurred in converting materials into finished goods. 93 Naga Praveen

94 Fixed Production Overheads those indirect costs of production that remain relatively constant regardless of the volume of production, such as depreciation of factory buildings maintenance of factory buildings cost of factory management and cost of factory administration 94 Naga Praveen

95 Variable Production Overheads those indirect costs of production that vary directly, or nearly directly, with the volume of production, such as indirect materials and indirect labour 95 Naga Praveen

96 Overheads Cost Allocation Fixed Overheads Normal Capacity Normal Capacity is the production expected to be achieved on an average over a number of periods or seasons under normal circumstances, taking into account the loss of capacity resulting from planned maintenance. Variable Overheads Actual Usage 96 Naga Praveen

97 Joint & By Products Joint Products If costs of conversion of each product are not separately identifiable, they are allocated between the products on a rational and consistent basis. E.g Market Value at the point of separation By Products If value of the By Products is immaterial then they are measured at net realizable value and this value is deducted from the cost of the main product 97 Naga Praveen

98 Other Costs of Conversion Other costs are included in the cost of inventories only to the extent that they are incurred in bringing the inventories to their present location and condition E.g. it may be appropriate to include overheads other than production overheads or the costs of designing products for specific customers in the cost of inventories 98 Naga Praveen

99 Cost Exclusions abnormal amounts of wasted materials, labour, or other production costs storage costs, unless those costs are necessary in the production process prior to a further production stage administrative overheads that do not contribute to bringing the inventories to their present location and condition selling costs 99 Naga Praveen

100 Example Conversion costs A makes concrete blocks in reusable moulds. Blocks dry in a drying room for 2 weeks. Dried blocks & raw mats stored in separate rooms. A front-end loader (man 1) adds materials to the mixing machine operated by man 2. Casual labourers remove blocks from moulds. Man 3 supervises the factory. Man 4 does admin, finance and sales. A operates from rented premises (fixed payments). 100 Naga Praveen

101 Example Conversion costs Costs of conversion include direct costs: casual labour. production overheads: factory rent (incl. raw mats area & drying room but excl. finished goods room); staff cost of man 1,2 & 3; depreciation of equipment (front end loader, mixing machine and moulds). 101 Naga Praveen

102 Cost Borrowing Costs Borrowing costs included in cost of inventory when inventory of an entity satisfies the definition of Qualified Asset Inventories that require a substantial period of time to bring them to a saleable condition are Qualified Assets. E.g. Production of Wine from Grapes. If inventory is purchased on deferred settlement terms difference between the purchase price for normal credit terms and the amount paid, is recognised as interest expense over the period of the financing 102 Naga Praveen

103 Cost of Inventories of a Service Provider To the extent that service providers have inventories, they measure them at the costs of their production. These costs consist primarily of the labour and other costs of personnel directly engaged in providing the service, including supervisory personnel, and attributable overheads 103 Naga Praveen

104 Cost of Agricultural Produce harvested from Biological Assets In accordance with IAS 41 Agriculture inventories comprising agricultural produce that an entity has harvested from its biological assets are measured on initial recognition at their fair value less costs to sell at the point of harvest. This is the cost of the inventories at that date for application of IAS 2 104 Naga Praveen

105 Techniques for the Measurement of Cost 105 Naga Praveen

106 Specific Identification Method The cost of inventories of items that are not ordinarily interchangeable and goods or services produced and segregated for specific projects should be assigned by specific identification of their individual costs. Specific identification of cost means that specific costs are attributed to identified items of inventory. 106 Naga Praveen

107 First In, First Out Method The first in, first out (FIFO) method of inventory valuation operates under the assumption that the first goods purchased are also the first goods sold. In most companies, this accounting assumption closely matches the actual flow of goods, and so is considered the most theoretically correct inventory valuation method. 107 Naga Praveen

108 Example FIFO The inventory of an organisation at 01 August was 36 units at Rs6.80 each. The following transactions occurred in the month: 08 August : 12 units sold for Rs7.60 each 14 August : 24 units purchased for a total cost of Rs170.88 18 August : 20 units sold for Rs8.00 each 25 August : 16 units sold for a total Rs134.40 30 August : 20 units purchased for Rs7.40 each 108 Naga Praveen

109 Example FIFO What would be the valuation of the inventory at 31 August by adopting the first in first out (FIFO) cost formula? a)Rs217.60 b)Rs229.60 c)Rs233.44 d)Rs251.20 109 Naga Praveen

110 Example FIFO What would be the valuation of the inventory at 31 August by adopting the first in first out (FIFO) cost formula? a)Rs217.60 b)Rs229.60 c)Rs233.44 d)Rs251.20 110 Naga Praveen

111 Weighted Average Method 111 Naga Praveen

112 Example Weighted Average A company is following weighted average cost method for valuing its inventory. The details of its purchase and issue of raw-materials during the week are as follows: 3.3.2014 opening stock 50 units value Rs 2,200. 4.3.2014 purchased 100 units @ Rs 47. 5.3.2014 issued 50 units. 6.3.2013 purchased 200 units @Rs 48. 112 Naga Praveen

113 Example Weighted Average The value of inventory at the end of the week and the unit weighted average costs is a) Rs 14,200 Rs 47.33 b) Rs 14,300 Rs 47.67 c) Rs 14,000 Rs 46.66 d) Rs 14,400 Rs 48.00 113 Naga Praveen

114 Example Weighted Average The value of inventory at the end of the week and the unit weighted average costs is a) Rs 14,200 Rs 47.33 b) Rs 14,300 Rs 47.67 c) Rs 14,000 Rs 46.66 d) Rs 14,400 Rs 48.00 114 Naga Praveen

115 Standard Costing The standard costing methodology arrives at inventory valuation from an entirely different direction, which is to set a standard cost for each item and to then value those items at the standard cost not the actual cost at which the items were purchased. However, its primary failing is that the resulting inventory valuation may not equate to the actual cost. The difference is handled through several types of variance calculations, which may be charged to the cost of goods sold (if minor) or allocated between inventory and the cost of goods sold (if material) 115 Naga Praveen

116 Retail Price Method This is used in the retail trade for measuring inventories of large numbers of rapidly changing items that have similar margins The cost of the inventory is determined by reducing from the sales value of the inventory the appropriate percentage gross margin. 116 Naga Praveen

117 LIFO not accepted IAS 2 does not permit the use of the last-in, first-out (LIFO) method to measure the cost of inventories 117 Naga Praveen

118 Net Realisable Value The cost of inventories may not be recoverable if they are damaged, they have become wholly or partially obsolete selling prices have declined estimated costs of completion or the estimated costs necessary to make the sale have increased 118 Naga Praveen

119 Net Realisable Value Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. NRV = Estimated Selling Price Costs to complete Costs to Sell 119 Naga Praveen

120 Write-down to Net Realisable Value Inventories are reduced to NRV when this is lower than cost. The write-down is made on an item by item basis. The write-down of groups of items may occur when the grouped items have similar uses, are produced or marketed in the same area and cannot be practicably evaluated separately from other items in that product line. Write-downs can be reversed. 120 Naga Praveen

121 Firm Sales The NRV of the quantity of inventory held to satisfy firm sales or service contracts is based on the contract price. If the sales contracts are for less than the inventory quantities held, NRV of the excess inventory is based on general selling prices 121 Naga Praveen

122 NRV of Raw Materials Materials and other supplies held for use in the production of inventories are not written down below cost if the finished products in which they will be incorporated are expected to be sold at or above cost But if the cost of finished goods exceed the NRV the materials are written down to NRV Replacement Cost of the materials is the best measure of NRV 122 Naga Praveen

123 Example NRV Ex 1: At reporting date CA (cost) of raw materials = 100 replacement cost = 80 est. selling price of finished good = 200 est. costs to convert the raw material into finished good = 60 est. costs to sell the finished good = 30 Ex 2: Same as Ex 1 except est. selling price = 180 123 Naga Praveen

124 Reversal of Write Down of NRV When the circumstances that previously caused inventories to be written down below cost no longer exist When there is clear evidence of an increase in net realisable value because of changed economic circumstances 124 Naga Praveen

125 Recognition as an expense in Profit and Loss When inventories are sold, the carrying amount of those inventories shall be recognised as an expense in the period in which the related revenue is recognised 125 Naga Praveen

126 Recognition as an expense in Profit and Loss The amount of any write-down of inventories to net realisable value and all losses of inventories shall be recognised as an expense in the period the write- down or loss occurs The amount of any reversal of any write-down of inventories, arising from an increase in net realisable value, shall be recognised as a reduction in the amount of inventories recognised as an expense in the period in which the reversal occurs. 126 Naga Praveen

127 Journal Entries Trading Company To recognise Goods purchased for sale To recognise Sale of Goods To recognise expense DebitInventory CreditCash/ Accounts Payable DebitCash/ Accounts Receivable CreditSales DebitCost of Goods Sold (P&L) CreditInventory 127 Naga Praveen

128 Journal Entries Manufacturing To recognise Raw Material purchased On Consumption of Raw Material To recognise expense incurred on Manufacturing DebitRaw Material Inventory CreditCash/Accounts Payable DebitWIP Inventory CreditRaw Material Inventory DebitEmployee Benefits DebitOverhead CreditCash/Accounts Payable 128 Naga Praveen

129 Journal Entries Manufacturing To calculate the cost of WIP On Production of Finished Goods for sale DebitWIP Inventory CreditEmployee Benefits CreditOverheads DebitFinished Goods CreditWIP Inventory 129 Naga Praveen

130 Journal Entries Manufacturing To recognise Sale of Goods To recognise expense DebitCash/ Accounts Receivable CreditSales DebitCost of Goods Sold (P&L) CreditFinished Goods 130 Naga Praveen

131 Disclosures accounting policies adopted in measuring inventories total carrying amount of inventories and carrying amount in classifications appropriate to the entity carrying amount of inventories carried at fair value less costs to sell amount of inventories recognised as an expense during the period 131 Naga Praveen

132 Disclosures amount of any write-down of inventories recognised as an expense in the period amount of any reversal of any write-down that is recognised as a reduction in the amount of inventories recognised as expense in the period circumstances or events that led to the reversal of a write-down of inventories the carrying amount of inventories pledged as security for liabilities 132 Naga Praveen

INTANGIBLE ASSETS IAS 38 Naga Praveen 133

134 Intangible Assets Refer Assets Definition in Conceptual Framework: An Asset is a resource controlled by an entity as a result of past events from which future economic benefits are expected to flow to the entity Are Intangibles assets? 134 Naga Praveen

135 Intangible asset An intangible asset is an identifiable non-monetary asset without physical substance. Monetary Asset - money held and assets to be received in fixed or determinable amounts of money. 135 Naga Praveen

136 Identifiability The definition of an intangible asset requires an intangible asset to be identifiable to distinguish it from goodwill An asset is identifiable if it either: is separable, ie is capable of being separated or divided from the entity and sold, transferred, licensed, rented or exchanged, either individually or together with a related contract, identifiable asset or liability, regardless of whether the entity intends to do so 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. 136 Naga Praveen

137 Identifiability Common examples of Intangible Assets are Computer software Patents Copyrights motion picture films customer lists mortgage servicing rights fishing licences import quotas franchises, customer or supplier relationships, customer loyalty, market share and marketing rights. 137 Naga Praveen

138 Control & Future economic benefits An entity controls an asset if the entity has the power to obtain the future economic benefits flowing from the underlying resource and to restrict the access of others to those benefits. The capacity of an entity to control the future economic benefits from an intangible asset would normally stem from legal rights that are enforceable in a court of law. In the absence of legal rights, it is more difficult to demonstrate control. 138 Naga Praveen

139 Control & Future economic benefits The future economic benefits flowing from an intangible asset may include revenue from the sale of products or services, cost savings, or other benefits resulting from the use of the asset by the entity. For example, the use of intellectual property in a production process may reduce future production costs rather than increase future revenues. 139 Naga Praveen

140 Recognition and measurement An intangible asset shall be recognised if, and only if: it is probable that the expected future economic benefits that are attributable to the asset will flow to the entity and the cost of the asset can be measured reliably. An entity shall assess the probability of expected future economic benefits using reasonable and supportable assumptions that represent managements best estimate of the set of economic conditions that will exist over the useful life of the asset. An intangible asset shall be measured initially at cost. 140 Naga Praveen

141 Acquired intangible assets The price an entity pays to acquire separately an intangible asset will reflect expectations about the probability that the expected future economic benefits embodied in the asset will flow to the entity The entity expects there to be an inflow of economic benefits, even if there is uncertainty about the timing or the amount of the inflow. Therefore, the probability recognition criterion is always considered to be satisfied for separately acquired intangible assets. 141 Naga Praveen

142 Cost of separately acquired IA The cost of a separately acquired intangible asset can usually be measured reliably when the purchase consideration is in the form of cash or other monetary assets. The cost of a separately acquired intangible asset comprises: its purchase price, including import duties and non- refundable purchase taxes, after deducting trade discounts and rebates any directly attributable cost of preparing the asset for its intended use. 142 Naga Praveen

143 Directly attributable costs Examples of directly attributable costs are: costs of employee benefits (as defined in IAS 19) arising directly from bringing the asset to its working condition professional fees arising directly from bringing the asset to its working condition costs of testing whether the asset is functioning properly. 143 Naga Praveen

144 Excluded costs Examples of expenditures that are not part of the cost of an intangible asset are: costs of introducing a new product or service (including costs of advertising and promotional activities) costs of conducting business in a new location or with a new class of customer (including costs of staff training) administration and other general overhead costs. 144 Naga Praveen

145 Cessation of costs Recognition of costs in the carrying amount of an intangible asset ceases when the asset is in the condition necessary for it to be capable of operating in the manner intended by management. Therefore, costs incurred in using or redeploying an intangible asset are not included in the carrying amount of that asset. 145 Naga Praveen

146 Deferred payment If payment for an intangible asset is deferred beyond normal credit terms, its cost is the cash price equivalent. The difference between this amount and the total payments is recognised as interest expense over the period of credit unless it is capitalised in accordance with IAS 23 Borrowing Costs. 146 Naga Praveen

147 Acquisition by way of government grants An intangible asset may be acquired free of charge, or for nominal consideration, by way of a government grant This may happen when a government transfers or allocates to an entity intangible assets such as airport landing rights, licences to operate radio or television stations, import licences or quotas or rights to access other restricted resources. 147 Naga Praveen

148 Acquisition by way of government grants In accordance with IAS 20, an entity may choose to recognise both the intangible asset and the grant initially at fair value or the asset initially at a nominal amount plus any expenditure that is directly attributable to preparing the asset for its intended use. 148 Naga Praveen

149 Exchanges of assets When an Intangible Asset is exchanged with another the asset acquired is measured at Fair Value unless The exchange transaction lacks commercial substance or The fair value of neither the asset received nor the asset given up is reliably measurable If the acquired asset is not measured at fair value, its cost is measured at the carrying amount of the asset given up. 149 Naga Praveen

150 Internally generated intangible assets It is sometimes difficult to assess whether an internally generated intangible asset qualifies for recognition because of problems in: identifying whether and when there is an identifiable asset that will generate expected future economic benefits determining the cost of the asset reliably 150 Naga Praveen

151 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: Research Phase Development Phase 151 Naga Praveen

152 Research phase Research is original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding. Examples of research activities are: activities aimed at obtaining new knowledge the search for, evaluation and final selection of, applications of research findings or other knowledge the search for alternatives for materials, devices, products, processes, systems or services the formulation, design, evaluation and final selection of possible alternatives for new or improved materials, devices, products, processes, systems or services. 152 Naga Praveen

153 Research phase 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. 153 Naga Praveen

154 Development phase Development is the application of research findings or other knowledge to a plan or design for the production of new or substantially improved Materials Devices Products Processes Systems or Services before the start of commercial production or use. 154 Naga Praveen

155 Development phase Examples of development activities are: the design, construction and testing of pre-production or pre-use prototypes and models the design of tools, jigs, moulds and dies involving new technology the design, construction and operation of a pilot plant that is not of a scale economically feasible for commercial production the design, construction and testing of a chosen alternative for new or improved materials, devices, products, processes, systems or services. 155 Naga Praveen

156 Development phase An intangible asset arising from development (or from the development phase of an internal project) shall be recognised if, and only if, an entity can demonstrate all of the following: the technical feasibility of completing the intangible asset so that it will be available for use or sale its intention to complete the intangible asset and use or sell it. its ability to use or sell the intangible asset 156 Naga Praveen

157 Development phase how the intangible asset will generate probable future economic benefits. 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 the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset its ability to measure reliably the expenditure attributable to the intangible asset during its development. 157 Naga Praveen

158 Development phase To demonstrate how an intangible asset will generate probable future economic benefits, an entity assesses the future economic benefits to be received from the asset using the principles in IAS 36 Impairment of Assets 158 Naga Praveen

159 Development phase Availability of resources to complete, use and obtain the benefits from an intangible asset can be demonstrated by, for example, a business plan showing the technical, financial and other resources needed and the entitys ability to secure those resources. In some cases, an entity demonstrates the availability of external finance by obtaining a lenders indication of its willingness to fund the plan. 159 Naga Praveen

160 Development phase An entitys costing systems can often measure reliably the cost of generating an intangible asset internally, such as salary and other expenditure incurred in securing copyrights or licences or developing computer software. 160 Naga Praveen

161 Internally generated brands, mastheads, publishing titles, customer lists and items similar in substance shall not be recognised as intangible assets. Expenditure on such items in substance cannot be distinguished from the cost of developing the business as a whole. Therefore, such items are not recognised as intangible assets. 161 Naga Praveen

162 Development phase If an entity cannot distinguish the research phase from the development phase of an internal project to create an intangible asset, the entity treats the expenditure on that project as if it were incurred in the research phase only. 162 Naga Praveen

163 Cost of an internally generated IA The cost of an internally generated intangible asset is the sum of expenditure incurred from the date when the intangible asset first meets the recognition criteria The cost comprises all directly attributable costs necessary to create, produce, and prepare the asset to be capable of operating in the manner intended by management. costs of materials and services used or consumed in generating the intangible asset costs of employee benefits arising from the generation of the intangible asset fees to register a legal right amortisation of patents and licences that are used to generate the intangible asset. 163 Naga Praveen

164 Exclusions The following are not components of the cost of an internally generated intangible asset: selling, administrative and other general overhead expenditure unless this expenditure can be directly attributed to preparing the asset for use identified inefficiencies and initial operating losses incurred before the asset achieves planned performance expenditure on training staff to operate the asset. 164 Naga Praveen

165 Example An entity is developing a new production process. During 2012-13, expenditure incurred was Rs 1,000, of which Rs 900 was incurred before 1 March2013 and Rs 100 was incurred between 1 March2013 and 31 March2013. The entity is able to demonstrate that, at 1 March2013, the production process met the criteria for recognition as an intangible asset. The recoverable amount of the know-how embodied in the process (including future cash outflows to complete the process before it is available for use) is estimated to be CU500. At the end of 2012-13, the production process is recognised as an intangible asset at a cost of Rs100 (expenditure incurred since the date when the recognition criteria were met, ie 1 March2013). The CU900 expenditure incurred before 1 March2013 is recognised as an expense because the recognition criteria were not met until that day. This expenditure does not form part of the cost of the production process recognised in the statement of financial position. 165 Naga Praveen

166 During 20X6, expenditure incurred is CU2,000. At the end of 20X6, the recoverable amount of the know-how embodied in the process (including future cash outflows to complete the process before it is available for use) is estimated to be CU1,900. At the end of 20X6, the cost of the production process is CU2,100 (CU100 expenditure recognised at the end of 20X5 plus CU2,000 expenditure recognised in 20X6). The entity recognises an impairment loss of CU200 to adjust the carrying amount of the process before impairment loss (CU2,100) to its recoverable amount (CU1,900). This impairment loss will be reversed in a subsequent period if the requirements for the reversal of an impairment loss in IAS 36 are met. 166 Naga Praveen

167 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 (ie 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. 167 Naga Praveen

168 Subsequent measurement An entity shall choose either the cost model or the revaluation model as its accounting policy. 168 Naga Praveen

169 Cost model After initial recognition, an intangible asset shall be carried at its Cost Less any accumulated amortisation Less any accumulated impairment losses. 169 Naga Praveen

170 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 Less any subsequent accumulated impairment losses 170 Naga Praveen

171 Revaluation model If an intangible asset in a class of revalued intangible assets cannot be revalued because there is no active market for this asset, the asset shall be carried at its cost less any accumulated amortisation and impairment losses If the fair value of a revalued intangible asset can no longer be measured by reference to an active market, the carrying amount of the asset shall be its revalued amount at the date of the last revaluation by reference to the active market less any subsequent accumulated amortisation and any subsequent accumulated impairment losses. 171 Naga Praveen

172 Naga Praveen

173 Amortisation Amortisation is the systematic allocation of the depreciable amount of an intangible asset over its useful life 173 Naga Praveen

174 Useful life Useful life is: the period over which an asset is expected to be available for use by an entity or the number of production or similar units expected to be obtained from the asset by an entity. 174 Naga Praveen

175 Useful life The accounting for an intangible asset is based on its useful life An intangible asset with a finite useful life is amortised An intangible asset with an indefinite useful life is not amortised 175 Naga Praveen

176 Factors considered in determining the useful life of an intangible asset is: the expected usage of the asset by the entity and whether the asset could be managed efficiently by another management team typical product life cycles for the asset and public information on estimates of useful lives of similar assets that are used in a similar way technical, technological, commercial or other types of obsolescence the stability of the industry in which the asset operates and changes in the market demand for the products or services output from the asset 176 Naga Praveen

177 Factors considered in determining the useful life of an intangible asset is: expected actions by competitors or potential competitors the level of maintenance expenditure required to obtain the expected future economic benefits from the asset and the entitys ability and intention to reach such a level the period of control over the asset and legal or similar limits on the use of the asset, such as the expiry dates of related leases whether the useful life of the asset is dependent on the useful life of other assets of the entity. 177 Naga Praveen

178 Useful life The useful life of an intangible asset that arises from contractual or other legal rights shall not exceed the period of the contractual or other legal rights, but may be shorter depending on the period over which the entity expects to use the asset. If the contractual or other legal rights are conveyed for a limited term that can be renewed, the useful life of the intangible asset shall include the renewal period(s) only if there is evidence to support renewal by the entity without significant cost. 178 Naga Praveen

179 Amortisation period and amortisation method The depreciable amount of an intangible asset with a finite useful life shall be allocated on a systematic basis over its useful life. Amortisation shall begin when the asset is available for use, ie when it is in the location and condition necessary for it to be capable of operating in the manner intended by management. 179 Naga Praveen

180 Amortisation period and amortisation method Amortisation shall cease at the earlier of the date that the asset is classified as held for sale in accordance with IFRS 5 and the date that the asset is derecognised. The amortisation method used shall reflect the pattern in which the assets future economic benefits are expected to be consumed by the entity. If that pattern cannot be determined reliably, the straight-line method shall be used. 180 Naga Praveen

181 Amortisation expense The amortisation charge for each period shall be recognised in profit or loss unless this or another Standard permits or requires it to be included in the carrying amount of another asset 181 Naga Praveen

182 Residual value The residual value of an intangible asset with a finite useful life shall be assumed to be zero unless: there is a commitment by a third party to purchase the asset at the end of its useful life there is an active market for the asset and residual value can be determined by reference to that market it is probable that such a market will exist at the end of the assets useful life 182 Naga Praveen

183 Residual value A residual value other than zero implies that an entity expects to dispose of the intangible asset before the end of its economic life 183 Naga Praveen

184 Review of amortisation period and amortisation method The amortisation period and the amortisation method for an intangible asset with a finite useful life shall be reviewed at least at each financial year- end. If there has been a change in the expected pattern of consumption of the future economic benefits embodied in the asset, the amortisation method shall be changed to reflect the changed pattern. Such changes shall be accounted for as changes in accounting estimates 184 Naga Praveen

185 Intangible assets with indefinite useful lives The term indefinite does not mean infinite. An intangible asset shall be regarded by the entity as having an indefinite useful life when, based on an analysis of all of the relevant factors, there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the entity. An intangible asset with an indefinite useful life shall not be amortised 185 Naga Praveen

186 Review of useful life assessment The useful life of an intangible asset that is not 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. It is indicator of impairment 186 Naga Praveen

187 Retirements and disposals An intangible asset shall be derecognised: on disposal; or when no future economic benefits are expected from its use or disposal 187 Naga Praveen

188 Example 1 An acquired customer list A direct-mail marketing company acquires a customer list and expects that it will be able to derive benefit from the information on the list for at least one year, but no more than three years. The customer list would be amortised over managements best estimate of its useful life, say 18 months. Although the direct-mail marketing company may intend to add customer names and other information to the list in the future, the expected benefits of the acquired customer list relate only to the customers on that list at the date it was acquired. The customer list also would be reviewed for impairment 188 Naga Praveen

189 Example 2 An acquired patent that expires in 15 years The product protected by the patented technology is expected to be a source of net cash inflows for at least 15 years. The entity has a commitment from a third party to purchase that patent in five years for 60 per cent of the fair value of the patent at the date it was acquired, and the entity intends to sell the patent in five years. 189 Naga Praveen

190 Example 2 An acquired patent that expires in 15 years The patent would be amortised over its five-year useful life to the entity, with a residual value equal to the present value of 60 per cent of the patents fair value at the date it was acquired. The patent would also be reviewed for impairment 190 Naga Praveen

IMPAIRMENT OF ASSETS IAS 36 191 Naga Praveen

192 Objective The objective of this Standard is to prescribe the procedures that an entity applies to ensure that its assets are carried at no more than their recoverable amount 192 Naga Praveen

193 Scope This standard doesnt apply to impairment of Inventories Assets arising from Construction Deferred Tax Assets Assets arising from Employee Benefits Financial Assets Investment Property at Fair Value Biological Assets Non Current Assets held for sale 193 Naga Praveen

194 Impairment An impairment loss is the amount by which the carrying amount of an asset or a cash- generating unit exceeds its recoverable amount Impairment Loss = Carrying Amount Recoverable Amount 194 Naga Praveen

195 Carrying amount Carrying amount is the amount at which an asset is recognised after deducting any accumulated depreciation (amortisation) and accumulated impairment losses thereon. 195 Naga Praveen

196 Recoverable amount The recoverable amount of an asset or a cash-generating unit is the higher of its fair value less costs of disposal and its value in use. 196 Naga Praveen

197 Fair value less costs of disposal Fair Value: Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. (IFRS 13) Costs of disposal are incremental costs directly attributable to the disposal of an asset or cash- generating unit, excluding finance costs and income tax expense 197 Naga Praveen

198 Value in use Value in use is the present value of the future cash flows expected to be derived from an asset or cash- generating unit 198 Naga Praveen

199 Identifying an asset that may be impaired An entity shall assess at the end of each reporting period whether there is any indication that an asset may be impaired. If any such indication exists, the entity shall estimate the recoverable amount of the asset. 199 Naga Praveen

200 Identifying an asset that may be impaired Irrespective of whether there is any indication of impairment, an entity shall also test for impairment an intangible asset with an indefinite life or an intangible asset not yet available for use goodwill acquired in a Business Combination annually 200 Naga Praveen

201 External sources of information there are observable indications that the assets value has declined during the period significantly more than would be expected as a result of the passage of time or normal use. significant changes with an adverse effect on the entity have taken place during the period, or will take place in the near future, in the technological, market, economic or legal environment in which the entity operates or in the market to which an asset is dedicated. 201 Naga Praveen

202 External sources of information market interest rates or other market rates of return on investments have increased during the period, and those increases are likely to affect the discount rate used in calculating assets value in use the carrying amount of the net assets of the entity is more than its market capitalization 202 Naga Praveen

203 Internal sources of information evidence is available of obsolescence or physical damage of an asset significant changes with an adverse effect on the entity have taken place during the period, or are expected to take place in the near future, in the extent to which, or manner in which, an asset is used or is expected to be used evidence is available from internal reporting that indicates that the economic performance of an asset is, or will be, worse than expected 203 Naga Praveen

204 Measuring recoverable amount It is not always necessary to determine both an assets fair value less costs of disposal and its value in use. If either of these amounts exceeds the assets carrying amount, the asset is not impaired and it is not necessary to estimate the other amount. 204 Naga Praveen

205 Fair value less costs Costs of disposal are deducted in measuring fair value less costs of disposal. Examples of such costs are legal costs, stamp duty and similar transaction taxes, costs of removing the asset, and direct incremental costs to bring an asset into condition for its sale. However, termination benefits and costs associated with reducing or reorganising a business following the disposal of an asset are not direct incremental costs to dispose of the asset. 205 Naga Praveen

206 Value in use The following elements shall be reflected in the calculation of an assets value in use an estimate of the future cash flows the entity expects to derive from the asset expectations about possible variations in the amount or timing of those future cash flows the time value of money, represented by the current market risk-free rate of interest the price for bearing the uncertainty inherent in the asset other factors, such as illiquidity, that market participants would reflect in pricing the future cash flows the entity expects to derive from the asset. 206 Naga Praveen

207 Steps in calculating Estimating the value in use of an asset involves the following steps estimating the future cash inflows and outflows to be derived from continuing use of the asset and from its ultimate disposal and applying the appropriate discount rate to those future cash flows. 207 Naga Praveen

208 Basis for estimates of future cash flows In measuring value in use an entity shall: base cash flow projections on reasonable and supportable assumptions that represent managements best estimate of the range of economic conditions that will exist over the remaining useful life of the asset. Greater weight shall be given to external evidence. base cash flow projections on the most recent financial budgets/forecasts approved by management.Maximum 5 years budget 208 Naga Praveen

209 Basis for estimates of future cash flows estimate cash flow projections beyond the period covered by the most recent budgets/forecasts by extrapolating the projections based on the budgets/forecasts using a steady or declining growth rate for subsequent years, unless an increasing rate can be justified. This growth rate shall not exceed the long-term average growth rate for the products, industries, or country or countries in which the entity operates, or for the market in which the asset is used, unless a higher rate can be justified. 209 Naga Praveen

210 Composition of estimates of future cash flows Estimates of future cash flows shall include: projections of cash inflows from the continuing use of the asset projections of cash outflows that are necessarily incurred to generate the cash inflows from continuing use of the asset (including cash outflows to prepare the asset for use) and can be directly attributed, or allocated on a reasonable and consistent basis, to the asset net cash flows, if any, to be received (or paid) for the disposal of the asset at the end of its useful life 210 Naga Praveen

211 Composition of estimates of future cash flows Future cash flows shall be estimated for the asset in its current condition. Estimates of future cash flows shall not include estimated future cash inflows or outflows that are expected to arise from: a future restructuring to which an entity is not yet committed improving or enhancing the assets performance. 211 Naga Praveen

212 Foreign currency cash flows Future cash flows are estimated in the currency in which they will be generated and then discounted using a discount rate appropriate for that currency. An entity translates the present value using the spot exchange rate at the date of the value in use calculation. 212 Naga Praveen

213 Discount rate The discount rate (rates) shall be a pre-tax rate (rates) that reflect(s) current market assessments of: the time value of money the risks specific to the asset for which the future cash flow estimates have not been adjusted. 213 Naga Praveen

214 Recognising and measuring an impairment loss If, and only if, the recoverable amount of an asset is less than its carrying amount, the carrying amount of the asset shall be reduced to its recoverable amount. That reduction is an impairment loss An Impairment loss shall be treated as a revaluation decrease. Depreciation shall be adjusted If IL>CA then a liability is recognised if required by another standard 214 Naga Praveen

215 Cash-generating units A cash-generating unit is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. If it is not possible to estimate the recoverable amount of the individual asset, an entity shall determine the recoverable amount of the cash- generating unit to which the asset belongs 215 Naga Praveen

216 Cash-generating units The recoverable amount of an individual asset cannot be determined if: the assets value in use cannot be estimated to be close to its fair value less costs of disposal (for example, when the future cash flows from continuing use of the asset cannot be estimated to be negligible) the asset does not generate cash inflows that are largely independent of those from other assets. In such cases, value in use can be determined only for the assets cash-generating unit 216 Naga Praveen

217 Example A mining entity owns a private railway to support its mining activities. The private railway could be sold only for scrap value and it does not generate cash inflows that are largely independent of the cash inflows from the other assets of the mine. It is not possible to estimate the recoverable amount of the private railway because its value in use cannot be determined and is probably different from scrap value. Therefore, the entity estimates the recoverable amount of the cash-generating unit to which the private railway belongs, ie the mine as a whole. 217 Naga Praveen

218 Example A bus company provides services under contract with a municipality that requires minimum service on each of five separate routes. Assets devoted to each route and the cash flows from each route can be identified separately. One of the routes operates at a significant loss. Because the entity does not have the option to curtail any one bus route, the lowest level of identifiable cash inflows that are largely independent of the cash inflows from other assets or groups of assets is the cash inflows generated by the five routes together. The cash- generating unit for each route is the bus company as a whole. 218 Naga Praveen

219 Cash-generating units If an active market exists for the output produced by an asset or group of assets, that asset or group of assets shall be identified as a cash-generating unit, even if some or all of the output is used internally. Cash-generating units shall be identified consistently from period to period for the same asset or types of assets, unless a change is justified. 219 Naga Praveen

220 Carrying amount of CGU includes the carrying amount of only those assets that can be attributed directly, or allocated on a reasonable and consistent basis, to the CGU and will generate the future cash inflows used in determining the CGUs value in use and does not include the carrying amount of any recognised liability, unless the recoverable amount of the cash-generating unit cannot be determined without consideration of this liability. 220 Naga Praveen

221 Goodwill For the purpose of impairment testing, goodwill acquired in a business combination shall, from the acquisition date, be allocated to each of the acquirers CGU, or groups of CGUs, that is expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units or groups of units. Each unit or group of units to which the goodwill is so allocated shall: represent the lowest level within the entity at which the goodwill is monitored for internal management purposes not be larger than an operating segment as 221 Naga Praveen

222 Corporate assets Corporate assets are assets other than goodwill that contribute to the future cash flows of both the CGU under review and other cash- generating units. Corporate assets include group or divisional assets such as the building of a headquarters or a division of the entity, EDP equipment or a research centre. 222 Naga Praveen

223 Corporate assets Because corporate assets do not generate separate cash inflows, the recoverable amount of an individual corporate asset cannot be determined unless management has decided to dispose of the asset. As a consequence, if there is an indication that a corporate asset may be impaired, recoverable amount is determined for the CGU or group of CGUs to which the corporate asset belongs, and is compared with the carrying amountof this cash- generating unit or group of cash-generating units. 223 Naga Praveen

224 Reversal of impairment An impairment loss recognised for goodwill shall not be reversed in a subsequent period. Asset or CGU Class Discussion 224 Naga Praveen

RIGHTS TO INTERESTS ARISING FROM DECOMMISSIONING, RESTORATION AND ENVIRONMENTAL REHABILITATION FUNDS IFRIC 5 Naga Praveen 225

226 IFRIC 5 Some entities have obligations to decommission assets or to perform environmental restoration or rehabilitation. Some such entities contribute to a fund established to reimburse the decommissioning, restoration or rehabilitation costs when they are incurred. The fund may be set up to meet the decommissioning costs of a single contributor or for many contributors. Naga Praveen 226

227 IFRIC 5 The issues addressed in IFRIC 5 are: How should a contributor account for its interest in a fund? When a contributor has an obligation to make additional contributions, how should that obligation be accounted for? Naga Praveen 227

228 IFRIC 5 If an entity recognises a decommissioning obligation under IFRSs and contributes to a fund to segregate assets to pay for the obligation, it should apply IFRS 10, IFRS 11 and IAS 28, to determine whether decommissioning funds should be consolidated, proportionately consolidated or accounted for under the equity method. Naga Praveen 228

229 IFRIC 5 When a fund is not consolidated, proportionately consolidated, or accounted for under the equity method, and that fund does not relieve the contributor of its obligation to pay decommissioning costs, the contributor should recognise: its obligation to pay decommissioning costs as a liability, and its rights to receive reimbursement from the fund as a reimbursement under IAS 37 Naga Praveen 229

230 IFRIC 5 A right to reimbursement should be measured at the lower of the amount of the decommissioning obligation recognized the contributor's share of the fair value of the net assets of the fund. Changes in the carrying amount of this right (other than contributions to and payments from the funds) should be recognised in profit or loss. Naga Praveen 230

231 IFRIC 5 When a contributor has an obligation to make potential additional contributions to the fund, that obligation is a contingent liability within the scope of IAS 37. When it becomes probable that the additional contributions will be made, a provision should be recognised. Naga Praveen 231

INTERIM FINANCIAL REPORTING AND IMPAIRMENT IFRIC 10 Naga Praveen 232

233 IFRIC 10 The Interpretation addresses an apparent conflict between the requirements of IAS 34 and those in other standards on the recognition and reversal in financial statements of impairment losses on goodwill and certain financial assets. Naga Praveen 233

234 IFRIC 10 IFRIC 10 concludes that: An entity shall not reverse an impairment loss recognised in a previous interim period in respect of goodwill or an investment in either an equity instrument or a financial asset carried at cost. An entity shall not extend this consensus by analogy to other areas of potential conflict between IAS 34 and other standards. Naga Praveen 234

INTANGIBLE ASSETS WEBSITE COSTS SIC 32 Naga Praveen 235

236 Website Development Planning Application and infrastructure development Graphical design development Content development Operating Naga Praveen 236

237 An entitys own web site that arises from development and is for internal or external access is an internally generated intangible asset that is subject to the requirements of IAS 38 A web site arising from development shall be recognised as an intangible asset if, and only if, in addition to complying with the general requirements described in IAS 38.21 for recognition and initial measurement, an entity can satisfy the requirements in IAS 38.57 Naga Praveen 237

238 Any internal expenditure on the development and operation of an entitys own web site shall be accounted for in accordance with IAS 38 The nature of each activity for which expenditure is incurred (eg training employees and maintaining the web site) and the web sites stage of development or post-development shall be evaluated to determine the appropriate accounting treatment Naga Praveen 238

239 Website Costs Planning The Planning stage is similar in nature to the research phase Expenditure incurred in this stage shall be recognised as an expense when it is incurred Na

RECOGNITION AND MEASUREMENT OF ASSETS Prepared by Naga Praveen Naga Praveen 1 IAS 2, 16, 40, 36, 38...

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