Case study 2 non-financial assets

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International Financial Reporting Standards Case study 2 non-financial assets Vienna, 3 June 2013 Michael Wells, Director, IFRS Education Initiative, IASB The views expressed

1 International Financial Reporting Standards Case study 2 non-financial assets Vienna, 3 June 2013 Michael Wells, Director, IFRS Education Initiative, IASB The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation IFRS Foundation. 30 Cannon Street London EC4M 6XH UK.

2 The requirements are set out in International Financial Reporting Standards (IFRSs), as issued by the IASB at 1 January 2013 with an effective date after 1 January 2013 but not the IFRSs they will

2 2 The requirements are set out in International Financial Reporting Standards (IFRSs), as issued by the IASB at 1 January 2013 with an effective date after 1 January 2013 but not the IFRSs they will replace. Disclaimer: The IFRS Foundation, the authors, the presenters and the publishers do not accept responsibility for any loss caused by acting or refraining from acting in reliance on the material in this PowerPoint presentation, whether such loss is caused by negligence or otherwise. IFRS Foundation 30 Cannon Street London EC4M 6XH UK.

3 Framework-based approach for applying IFRS What are the economics of the phenomenon (eg transaction or event)? What information about the phenomenon is relevant for informing resource allocation decisions by existing and potential investors and lenders who cannot require information directly and that can be faithfully represented etc? Then consider IFRS requirements Make judgements to develop accounting policy Make judgements and estimates to apply the requirements with rigour and consistency 3 IFRS Foundation. 30 Cannon Street London EC4M 6XH UK.

4 Examples economics 4 For each acquisition below choose 1 of: (a) business combination; or (b) separate asset purchase? Freelands Sealands WoXy Safaris Is the expenditure on the medical research center: (a) donation to university; (b) joint arrangement with university; or (c) Open Safari s assets and Open Safari s research and development expenditure?

5 Examples economics continued 5 Is Open Safari s interest in Sealands casino hotel: (a) passive investment; or (b) operating a casino business? Sealands holiday homes is Open Safari: (a) selling goods; or (b) rendering construction services?

6 Examples economics continued 6 Is Open Safari s successful bid at auction in 20X9 for the black rhinos: (a) provision of a service; (b) purchase of inventory; or (c) purchase of biological asset for use in agricultural activity? Is Open Safari s successful bid at auction in 20X9 for the white rhinos (a) provision of a service; (b) purchase of inventory; or (c) purchase of biological asset for use in agricultural activity?

7 Examples identifying assets 7 Are the following items Open Safari s assets? For each item below choose 1 of: (a) yes; (b) no, no controlled resource; or (c) no, no expected FEBs. Sealands fish, whales etc in the sea Freelands pre-existing wild animals Open Safari assembled workforce Animals captured on Freelands and released on Sealands WoXy Safaris bees WoXy Safaris quaggas WoXy Safaris elephants

8 Examples identifying assets continued 8 Are the following items Open Safari s assets? For each item below choose 1 of: (a) yes; (b) no, no controlled resource; or (c) no, no expected FEBs. Auction 20X9 black rhino purchased Auction 20X9 white rhino purchased Open Safari brand WoXy brand Open Safari website

9 International Financial Reporting Standards Asset classification (which IFRS applies?) The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation IFRS Foundation 30 Cannon Street London EC4M 6XH UK

10 Examples asset classification 10 Which IFRS classification of asset? For each item below choose 1 of: (a) inventory; (b) PPE; (c) intangible; (d) investment property; (e) biological asset in agricultural activity; or (f) financial asset Freelands land WoXy land planted with plantation Sealands land WoXy bees WoXy quaggas

11 Examples asset classification continued Which IFRS classification of asset? For each item below choose 1 of: (a) inventory; (b)ppe; (c) intangible; (d) investment property; (e) biological asset in agricultural activity; or (f) financial asset Sealands introduced caged animals Sealands introduced fenced animals WoXy + Freelands tourist carrying elephants and horses Sealands casino equipment purchased customer list WoXy wax sheets 11

12 Judgements and estimates (IAS 40) It can be difficult to determine whether particular biological assets are engaged in agricultural activity and therefore in the scope of IAS 41 eg the animals of some zoos. Sometimes it is difficult to identify investment property (IAS 40). In such cases an entity develops criteria so that it can exercise that judgement consistently eg, owner of a hotel transfers some responsibilities to third parties under a management contract (PPE or investment property?) 12 IFRS Foundation 30 Cannon Street London EC4M 6XH UK.

13 International Financial Reporting Standards Asset recognition concepts The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation IFRS Foundation 30 Cannon Street London EC4M 6XH UK

14 Examples recognition 14 Recognise the asset? For each item below choose 1 of: (a) yes; (b) no, FEBs not probable; or (c) no, cannot measure with reliability Open Safari brand WoXy brand Goodwill on acquiring WoXy Expenditures to restore WoXy brand Sealands casino licence (government grant) Medical research centre PPE Medical research centre research expenditure Medical research centre development expenditure Contract to sell timber at a fixed price at specified future date (timber prices falling) IFRS IFRS Foundation Foundation Cannon Cannon Street Street London London EC4M EC4M 6XH 6XH UK. UK.

15 Examples unit of account 15 How many separate items for recognition? WoXy elephants (a) herd as a whole (b)individual elephants WoXy bees (a)all 500 swarms collectively (b)each swarm (c) individual bees

16 Examples unit of account continued 16 How many separate items for recognition? Sealands unsold beachfront homes (a)all unsold homes collectively (b)each unsold home separately (c) each unsold home as two separate items roofs separate from main structure

17 Examples unit of account continued 17 How many separate items for recognition? Sealands casino hotel (a) collectively (building, casino equipment and fittings) (b) separate building from casino equipment, from fittings (c) separate building, multiple separate items of casino equipment and multiple separate items of fittings (d) it depends

18 International Financial Reporting Standards Measurement The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation IFRS Foundation 30 Cannon Street London EC4M 6XH UK.

19 Examples measurement economics 19 Which currency is Open Safari s functional currency? Choose one of (a) to (f) below: (a) Euro (b) British pound (c) South African rand (d) Africanian Zollar (e) US dollar (f) Any currency that Open Safari chooses

20 Examples measurement economics continued 20 Why did the IASB conclude that it would be highly unlikely that an entity can justify a change in accounting policy for investment property from the fair value model to the cost model? Why did the IASB conclude that fair value measurement was most appropriate measurement attribute for biological assets in agricultural activity? What is the economics of depreciation?

21 Example measurement at initial recognition 21 At what amount are the animals released on Sealands (captured on Freelands) measured when first recognised? (a) nil (b) expenditure on capture and relocation (c) capture date fair value (d) capture date fair value less estimated costs to sell (e) it depends

22 Example depreciation 22 Residual value of spacecraft at 31/12/20Y0? (a) nil (b) CU10 million (c) CU10 million less expected costs of disposal (d) amount would get on 31/12/20Y0 less estimated costs of disposal, if already 5 years old and in the condition expected at the end of 20Y5. (e) amount would get on 31/12/20Y0 less estimated costs of disposal, if already flown 100 flights and in condition expected after 100 flights. (f) present value of CU10 million less estimated costs of disposal.

23 Example depreciation continued 23 Must any components of the spacecraft be depreciated separately? (a) no (b) yes, the inspection component must be depreciated separately from the other components of the spacecraft (ie 2 components). (c) yes, the inspection component and the soft furnishings component must each be depreciated separately from the other components (ie 3 components).

24 Example depreciation continued 24 Which depreciation method must be used for the spacecraft? (a) management choose depreciation method. (b) straight line method for both the inspection component and other component. (c) units of production method for both the inspection component and other component. (d) revenue-based depreciation for both the inspection component and other component. (e) straight line for the inspection component and units of production (based on the number of flights) for other component.

25 Example depreciation continued 25 At 31/12/20Y0 spacecraft s useful life is? (a) service component = 2 years; and other component = 150 voyages. (b) service component = 2 years; and other component = 100 voyages. (c) service component = 2 years; and other component = 4 years. (d) 100 voyages for entire spacecraft. (e) 150 voyages for entire spacecraft. (f) 4 years for entire spacecraft. (g) 5 years for entire spacecraft.

26 Examples measurement after recognition 26 How to measure fair value of 1. Sealands casino building? 2. WoXy plantation? 3. animals (eg buffaloes and rhinos on Sealands)?

27 Judgements and estimates, cost 27 Cost of some items includes significant estimates what is cost? costs allocations cost of dismantling, removal, restoration costs of self constructed assets Depreciation represents the consumption of the assets service potential in the period. Measuring requires: identifying significant components to be depreciated separately estimating useful life and residual value identifying the depreciation method that reflects most closely the consumption of the service potential of the item of PPE Determining the classes of assets (eg PPE) IFRS Foundation 30 Cannon Street London EC4M 6XH UK.

28 Judgements and estimates, fair value 28 When using the most recent market transaction price to measure fair value: identifying the most recent market transaction price and evaluating whether economic circumstances have changed significantly. When using market prices for similar assets: adjusting the prices to reflect differences. When using sector benchmarks (eg the value of cattle expressed per kilogram of meat): adjusting to reflect differences. When using DCF model: estimating the expected future net cash inflows and the discount rate. IFRS Foundation 30 Cannon Street London EC4M 6XH UK.

29 International Financial Reporting Standards Derecognition The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation

30 Derecognition of PPE 30 IAS specifies: the carrying amount of an item of PPE shall be derecognised: (a) on disposal; or (b) when no future economic benefits are expected from its use or disposal. Note: derecognition of PPE does not necessarily occur when the asset no longer satisfies the conditions specified for its initial recognition. In particular, derecognition of PPE does not necessarily coincide with the loss of control of the asset. IFRS Foundation. 30 Cannon Street London EC4M 6XH UK.

31 Examples derecognition 31 When does Open Safari derecognise the elephant bull released onto Freelands? (a)when the bull is released (b)when the bull first walks off Freelands (c)when the bull dies (d)never (e)it depends

32 International Financial Reporting Standards Presentation and disclosure The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation

33 Presentation and disclosure concepts 33 Objective of financial reporting Financial statements portray financial effects of transactions and events by: grouping into broad classes (the elements, eg asset) sub-classify elements (eg assets sub-classified by their nature or function in the business) IAS 1 need not provide a specific disclosure if the information is not material application of IFRSs with additional disclosures when necessary results in a fair presentation (faithful representation of transactions, events and conditions) do not offset assets & liabilities or income & expenses IFRS IFRS Foundation Foundation Cannon Cannon Street Street London London EC4M EC4M 6XH 6XH UK. UK.

34 Examples measurement economics 34 Which currency is Open Safari s presentation currency? Choose one of (a) to (f) below: (a) Any currency that Open Safari chooses (b) Euro (c) British pound (d) South African rand (e) Africanian Zollar (f) US dollar

35 Thank You 35

Understanding IFRSs. A Framework-based approach. International Financial Reporting Standards

Understanding IFRSs. A Framework-based approach. International Financial Reporting Standards #BkprsSMT October 2011 International Financial Reporting Standards Understanding IFRSs A Framework-based approach Michael Wells, Director, IFRS Education Initiative, IFRS Foundation The views expressed