University of Economics, Prague

Transcription

1 University of Economics, Prague Faculty of Finance and Accounting Department of Financial Accounting and Auditing Lesson 6: Examples and Case studies Lecturer: David Procházka Contact: Web: 1FU486 IFRS

2 1 Examples Example 1: Non-current asset held for sale I At the end of May 2X08, the management of ABBA decided to put one of its less used buildings (reported under IAS 16 historical cost model) for immediate sale to raise funds for the launch of a new business line. Acquisition costs of the building are 240,000. Original useful life was 30 years and it was purchased on 1 January 2X01. All conditions for the reclassification to IFRS 5 are met on 30 June 2X08. On that date the building has a market value of 184,000, expected commission to the real estate broker is 5% off the selling price. The property tax to be paid on sale is 1% of the selling price. Determine the valuation of the building as at 30 June 2X08 What would be the comprehensive income for the year 2X08, if the building has not been sold yet? Example 2: Non-current asset held for sale II At the end of May 2X08, the management of ABBA decided to put one of its less occupied investment properties (reported under IAS 40 fair value model) for immediate sale to raise funds for the launch of a new business line. Acquisition costs of the building are 240,000. Original useful life was 30 years and it was purchased on 1 January 2X01. All conditions for the reclassification to IFRS 5 are met on 30 June 2X08. On that date the building has a market value of 184,000, expected commission to the real estate broker is 5% off the selling price. The last update of fair value of the investment property was reported on 31 December 2X06 at amount of 195,000. The property tax to be paid on sale is 1% of the selling price. Determine the valuation of the building as at 30 June 2X08 What would be the comprehensive income for the year 2X08, if the building has not been sold yet? David Procházka p. 2/15

3 Example 3: Non-current asset held for sale III At the end of May 2X08, the management of ABBA decided to put one of its less used buildings (reported under IAS 16 alternative fair value model) for immediate sale to raise funds for the launch of a new business line. Acquisition costs of the building are 240,000. Original useful life was 30 years and it was purchased on 1 January 2X01. All conditions for the reclassification to IFRS 5 are met on 30 June 2X08. On that date the building has a market value of 184,000, expected commission to the real estate broker is 5% off the selling price. The last update of fair value of the building was reported on 31 December 2X06 at amount of 198,000. The property tax to be paid on sale is 1% of the selling price. Determine the valuation of the building as at 30 June 2X08 What would be the comprehensive income for the year 2X08, if the building has not been sold yet? David Procházka p. 3/15

4 Example 4: Discontinued operations illustration XYZ Group Statement of profit and loss for the year ended 31 December 2X07 (in thousands ) 2X07 2X06 Revenue 390, ,000 Cost of sales (245,000) (230,000) Gross profit 145, ,000 Other income 20,667 11,300 Distribution costs (9,000) (8,700) Administrative expenses (20,000) (21,000) Other expenses (2,100) (1,200) Finance costs (8,000) (7,500) Share of profit of associates 35,100 30,100 Profit before tax 161, ,000 Income tax expense (40,417) (32,000) Profit for the year from continuing operations 121,250 96,000 Loss for the year from discontinued operations* (100,000) (30,500) PROFIT FOR THE YEAR 21,250 65,500 * Further analysis of the loss is disclosed in the notes Example 5: Identification of discontinued operations ASIA is a parent company to a group of companies operating in the hotel industry. Because of economic difficulties, ASIA is considering and implementing a plan to restructure the group s assets to meet the requirement of its major creditors. One of measures undertaken is to dispose the major loss-making or low-profitable branches, namely: MONGOLIA was sold on 30 March 2X02 On September 2X02, ASIA announced that an agreement with a competitor has been made on the sale of CAMBODIA; the deal is subject to the regulatory approval, which shall be given in April 2X03 The sale of subsidiary VIETNAM is also being considered. However, there were made some changes in operational structure recently, which shall boost revenues. Therefore, ASIA demands a relatively high premium during the negotiations, which have started in November 2X02. The counterparties have not accepted the contract price at all, as they do not believe the future prospects of the subsidiary. During the negotiations in February 2X03 on the sale of VIETNAM, one of the potential buyers made an unexpected offer for the NORTH KOREA branch. As the bid price was well above the ASIA s floor, the sale was immediately completed. On 15 March 2X03, the control was passed over to the buyer. Decide, which of above transactions meets the definition of discontinued operations as at the end of 2X02-period David Procházka p. 4/15

5 Example 6: Borrowing costs capitalisation rate PENNY has two debt finance instruments outstanding during the year 2X02: (a) obligations issued at par value of 2,000,000 yielding rate on return of 12%; (b) bank loan at amount of 5,000,000 with interest rate of 8.5%. No repayments of collaterals have appeared during the year. Calculate respective borrowing costs for each instrument Calculate the capitalisation rate Calculate the borrowing cost to be capitalised for a building with costs of 4,410,000, which construction started on 1 February 2X02 and finished on 1 October 2X02 How would your answer to the previous question change, if net realisable value of the building were 4,600,000? David Procházka p. 5/15

6 Example 7: Government grants related to assets CUBA LIBRE puts a new low-energy building into the use on 31 December 2X05. The cost of the plant is 1,000,000. On the same day, the company receives a government grant of 150,000 from the Programme on Nature Protection. The useful life is estimated for 10 years with no residual value. Straight-line depreciation method is applied. Prepare an extract from the balance sheet for the years 2X05 and 2X06 provided that: - deferred income method is applied for the presentation of the grant - netting-off method is applied for the presentation of the grant Alternative A: Deferred income method Balance sheet as at 31 December 2X06 (in 000) 2X06 2X05 2X06 2X05 Alternative B: Netting-off method Balance sheet as at 31 December 2X06 (in 000) 2X06 2X05 2X06 2X05 David Procházka p. 6/15

7 Example 8: Impairment of an individual asset I AALTO owns an old machine, which is barely used. Its value from continuing use is estimated at 5,000. However, there is a demand for the parts, which could be sold for 6,000. Finally, the machine contains precious metals, therefore the scrap after dismantling and selling parts could be cashed into 1,000. The carrying amount of the asset is 10,000. Decide, whether the asset is impair and if so, compute the impairment loss Example 9: Impairment of an individual asset II GIO owns a property classified as IAS 16 asset, which was originally purchased for 200,000. The entity applies alternative fair value model. Since the acquisition, the accumulated gain on revaluation of 150,000 has been credited in the revaluation surplus (without any excess depreciation transfer). At the end of actual period, the property has a current carrying value of 315,000 but the recoverable amount of the property dramatically fell to only 130,000 due to unexpected market development. Decide, whether the asset is impair If so, compute the impairment loss and explain its presentation in the financial statements Example 10: Impairment of an individual asset III GIO owns a property classified as IAS 16 asset, which was originally purchased for 200,000. The entity applies alternative fair value model. Since the acquisition, the accumulated gain on revaluation of 150,000 has been credited in the revaluation surplus (with 25,000 of excess depreciation already transferred into retained earnings). At the end of actual period, the property has a current carrying value of 315,000 but the recoverable amount of the property dramatically fell to only 130,000 due to unexpected market development. Decide, whether the asset is impair If so, compute the impairment loss and explain its presentation in the financial statements David Procházka p. 7/15

8 Example 11: Impairment of a cash generating unit VIDEO runs a stand-alone business unit that suffers a massive drop in income as a consequence of a change in customers preferences due to invention of new technology. The recoverable value of the CGU is estimated at 135 million. The current machinery and technology is worthless. The following carrying values were recorded in the books immediately prior to the impairment: Asset class Carrying amount ( m) Recoverable amount ( m) Goodwill 20? Machinery/technology 30 0 Property Licences 15? Brands 30? Inventory 25? Receivables 30? Cash Calculate the impairment loss and show the impact of impairment on each asset class David Procházka p. 8/15

9 Example 12: Impairment of operations (business) Four years ago, AUDIO acquired a part of business operations from its competitor recognising thus goodwill at amount of 150m and incorporated them into its four cash-generating units (CGU). However, there is no reasonable way how to allocate goodwill to them. At the end of the current period, the impairment test is carried out with following information. CGU A B C D Goodwill Total Carrying amount ( m) ,280 Recoverable amount ( m) xxx 1,120 Calculate the impairment loss and show the impact of impairment on each cash-generating unit David Procházka p. 9/15

10 2 Case studies Case 1: Multiple choice questions 1. RIO borrowed 1,000,000 at 8% pa on 1 January 2X03 to finance the construction of a new building. The construction has started on 1 January 2X03 and will be finished during April 2X04. As there were progress billings from the contractor, RIO managed to invest temporarily free cash into state bonds and to earn interest income of 25,000. What would be borrowing costs to be capitalised in acquisition cost of the building. a) 0 b) 80,000 c) 25,000 d) 55, SAO buys land of 1 December 2X02. The construction permission is applied for on 2 December 2X02. The permission is obtained on 31 January 2X03. Payment for the land is made on 20 February 2X03. The bank loan to cover the cost of the land and the construction of the building was obtained two days earlier on 18 February 2X03. The construction of the building starts on 25 February 2X03. When should capitalisation of borrowing costs commence? a) 1 December 2X02 b) 2 December 2X02 c) 31 January 2X03 d) 18 February 2X03 e) 20 February 2X03 f) 25 February 2X03 3. RIVER had two loans outstanding during the 2X04 (without any changes in principal), which are used for the construction of a piece of machinery. The balance of the first loan is 120m at 10%, the balance of the second one is 80m at 8%. The construction of the machinery began on 1 January 2X04. An expenditure of 30m was made on 1 January 2X04; an expenditure of 50m was made on 1 July 2X04. What are total borrowing costs together on both loans for 2X04? a) 12m b) 18.4m c) 6.4m d) 18m 4. RIVER had two loans outstanding during the 2X04 (without any changes in collateral), which are used for the construction of a piece of machinery. The balance of the first loan is 120m at 10%, the balance of the second one is 80m at 8%. The construction of the machinery began on 1 January 2X04. An expenditure of 30m was made on 1 January 2X04; an expenditure of 50m was made on 1 July 2X04. What is the capitalisation rate for 2X04? a) 10% b) 8% c) 9% d) 9.2% David Procházka p. 10/15

11 5. RIVER had two loans outstanding during the 2X04 (without any changes in collateral), which are used for the construction of a piece of machinery. The balance of the first loan is 120m at 10%, the balance of the second one is 80m at 8%. The construction of the machinery began on 1 January 2X04. An expenditure of 30m was made on 1 January 2X04; an expenditure of 50m was made on 1 July 2X04. What amount of the 2X04-borrowing costs shall be capitalised into the acquisition cost of the machinery? a) 2.76m b) 2.3m c) 5.06m d) 18.4m 6. IAS 20 allows for the recognition of government grants: a) capital approach, under which a grant is recognised outside P&L b) income approach, under which a grant is recognised through P&L c) both capital and income approach d) neither capital, nor income approach 7. IAS 20 distinguishes government grants related to: a) liabilities and expenses b) assets and income c) assets only d) to liabilities only 8. Recoverable amount is: a) equal to fair value less cost to sell b) equal to value in use c) higher of fair value less cost to sell and value in use d) lower of fair value less cost to sell and value in use 9. An impairment loss on an asset occurs, if: a) carrying amount is lower than recoverable amount b) carrying amount is higher than recoverable amount c) the asset is not traded at market, so that fair value does not exist d) the asset is not expected to be used any longer by the entity 10. Impairment losses: a) are always recognised in P&L b) are always recognised in OCI c) are usually recognised in P&L except for assets measured at fair value with its changes presented in OCI d) are presented only in the statement of changes in equity David Procházka p. 11/15

12 11. An impairment loss: a) can never be reversed b) may be reversed, if the previous conditions leading to impairment have improved c) may be reversed, only if the impairment loss is not tax-deductible d) may be reversed, only if the impairment loss is tax-deductible 12. To be classified as non-current asset held to sell, which characteristic shall be true? a) the sale is certain b) the sale has been already completed c) the sale is highly probable d) the sale is probable 13. A non-current asset held to sell: a) shall be depreciated based on original assumptions b) shall be depreciated over estimated time until the sale c) may be depreciated, if an entity decides d) shall not be depreciated 14. SANDU is inspecting three assets for impairment: A (in ) B (in ) C (in ) Acquisition cost Accumulated depreciation (30) (50) (40) Net realisable value Value in use The carrying amounts of the assets are: a) A = 130; B = 200; C = 160 b) A = 100; B = 150; C = 120 c) A = 110; B = 125; C = 100 d) A = 120; B = 130; C = SANDU is inspecting three assets for impairment: A (in ) B (in ) C (in ) Acquisition cost Accumulated depreciation (30) (50) (40) Net realisable value Value in use The recoverable amounts of the assets are: a) A = 100; B = 150; C = 120 b) A = 120; B = 150; C = 120 c) A = 120; B = 130; C = 100 d) A = 110; B = 125; C = 90 David Procházka p. 12/15

13 16. SANDU is inspecting three assets for impairment: A (in ) B (in ) C (in ) Acquisition cost Accumulated depreciation (30) (50) (40) Net realisable value Value in use The impairment loss for each asset is: a) A = 0; B = 20; C = 20 b) A = 20; B = 20; C = 20 c) A = 0; B = 25; C = 30 d) A = 0; B = 0; C = Which of the following statement/s regarding impairment of assets is/are true? a) an impairment review must be carried out annually on all intangible assets b) if the fair value less costs to sell of an asset exceeds the carrying value there is no need to calculate a value in use c) impairments are charged to the statement of profit or loss unless it reverses a gain that has been recognised in equity in which case it is offset against the revaluation reserve d) impairment tests shall be carried out only if going concern of the entity is in trouble David Procházka p. 13/15

14 Case 2: Non-current asset held for sale During October 2X08, the management of SLY decided to replace a piece of machinery by a new technology. The machine is classified and measured under IAS 16 historical cost model. Acquisition costs of the machine are 150,000. Original useful life was 15 years and it was purchased on 1 January 2X01. As the potential dismantling of machine is relatively uncomplicated, the machine is available for the sale immediately once a willing buyer bids acceptable market price. All conditions for the reclassification to IFRS 5 are met on 31 October 2X08. On that date the machinery is expected to be sold for 60,000 with 8% commission off the selling price. The machine was sold on 10 January 2X09 for 55,000 less 4,400 commission. From January 2X08 till the end of October 2X08, machine has generated 40,000 of revenue with cost of sales (excluding the depreciation on machine) of 20,000. The machine is also producing goods after the reclassification date to fulfil orders from customers, with revenue of 3,600 and 2,000 cost of sales (excluding the depreciation on machine). Determine the valuation of the building as at 31 October 2X08 What is P&L for the period 1 January till 31 October 2X08? What is P&L for the period 1 November till 31 December 2X08? David Procházka p. 14/15

15 Case 3: Impairment of an individual asset INDIAN purchased machinery valued at 50,000 on 1 January 2X02, with zero residual value and 10 years of expected useful life. During the 2X04, a new technology is invented reducing thus the demand for INDIAN s products. As at 31 December 2X04, the fair value of the machinery is 25,000 and its value in use is 28,000. At the beginning of 2X06, some research studies indicate that the new technology is harmful to human s health. The customers return back to INDIAN s products being manufactured using the old procedure. The recoverable amount of the machinery increases to 33,000 as at 31 December 2X06. Calculate the impairment loss for the 2X04 period. Calculate the amount of reversal of impairment loss for the 2X06 period, if any. David Procházka p. 15/15