Distinctive Financial Reporting FAC3702

Transcription

1 Study unit 1 - Overview Objective Scope Definitions Recognition Measurement Derecognition Revaluation Disclosure Tax Objective Recognition as assets Depreciation Impairment Determining carrying amount Property, plant & equipment Definition Tangible assets Held for Use in production or supply of goods/services, Rental to others Administrative purposes Expected to be used > 1 period. (Tangible structure to generate income) Definitions Cost Amount of cash or cash equivalents paid, and Fair value of other consideration given To acquire asset At time of acquisition or construction. Depreciable amount Cost(or other substituted amount) Less: residual value Depreciation Systematic allocation Of the depreciable amount of an asset Over the asset s useful life Carrying amount Amount at which asset Recognised in statement of financial position After deducting accumulated depreciation & accumulated impairment losses. Fair value Amount for which asset could be exchanged between Knowledgeable, willing parties In arm s length transaction Residual value Estimated amount Entity currently obtain from disposal of asset After deducting estimated cost of disposal If assets already of age & condition - end useful life. Useful life of Period asset is expected to be available for by entity, or # production/similar units expected to be obtained from asset use Impairment loss Carrying amount > recoverable amount Recoverable amount Higher of: Asset s net selling price (Fair value costs to sell), or Value in use Entity-specific value Present value of cash flows Entity expects to arise from Continuing use of asset and end of asset s useful life Entity expects to incur When settling liability Recognition - asset Probable Future economic benefits associated with item Will flow to entity Cost can be measured reliably Initial cost Subsequent costs Servicing cost Repairs & maintenance (P&L) regular intervals Regular major inspections Aggregate individually insignificant items BUT account for significant components separately Example Skyfall Ltd bought a machine on 1 January 2012 for R 1.6 m The machine needs to be inspected every hours, i.e. it will have to undergo a major service every 2 years. The estimated cost of a major service is R The helicopter has an estimated useful life of 8 years. Required 1.Calculate the depreciation & carrying amount for 2012 & How would these amounts differ if: Inspection needs to be done after 20 months instead of planned 2 yrs, AND Actual cost of first inspection was R recognition PPE that qualifies for recognition as asset cost Cost components Purchase price Incl. import duties & non-refundable tax After deducting discounts & rebates Costs directly attributable location & condition necessary to operate Initial delivery & handling costs

2 Stops Installation& assembly cost Testing Professional fees Estimate of dismantling, removal and restoration cost NOT Cost of opening new facility, introduction of new product, overheads Asset is in location & condition necessary to be capable of operating Measurement of cost Abnormal credit terms Cost = cash date Total payments cash equivalent = interest Recognise over period of credit Except if capitalised (FAC3703) Exchange of PPE items Cost of acquired asset = fair value of asset given up Fair value of asset given up not reliably measured Fair value of asset acquired. Fair value of neither acquired/disposed asset reliably measured Carrying value of asset given up Exchange transaction lacks commercial substance Carrying value of asset given up Commercial substance Consider extent future cash flows expected to change as result of transaction Subsequent measurement Cost or Revaluation model Apply policy to entire class of PPE Cost Cost accumulated depreciation accumulated impairment losses. Revalue assets Only if: Fair value can be measured reliably Generally market-based evidence Carry asset at revalued amount less subsequent accumulated depreciation & impairment losses. Revaluation effectively replace carrying amount of revaluation date. Depreciation Each significant PPE item depreciated separately May be grouped Recognise in profit/loss Unless included in carrying amount of another asset Depreciate even if fair value > carrying amount Provided carrying value > residual value. Commence depreciation Asset available for use In location and condition necessary to be capable of operating in manner intended by management. Actual use not required. Cease depreciation Earlier of: Asset classified as held for sale Asset derecognised Useful life Factors to consider Expected usage of asset Capacity/physical output Expected physical wear & tear Number of shifts and repairs & maintenance program Technical/commercial obsolescence Changes/improvement in production Changes in market demand Legal or similar limits on use of asset Expiry dates of related leases Land & buildings account separately Land generally unlimited useful life Depreciation methods Straight-line Diminishing balance Units of production Choose method which reflects expected pattern of consumption best. Class example: Cost of equipment R Residual value R Useful life (yrs) 4 Impairment Carrying amount > recoverable amount Compensation from 3rd parties Include in profit/loss when receivable Can include: Indemnity payments from insurers Government payments, e.g. expropriation Physical replacement of impaired/lost asset Account separately Impairment/loss of PPE item Related compensation from 3rd party Subsequent purchase/construction of assets Revaluation First revaluation change in accounting policy (IAS8) Review residual values & estimated useful life every year Replacement value (RV) Gross replacement cost (market value) of similar asset Net fair market value of similar asset of same age/condition Treatment of accumulated depreciation Gross replacement value basis Restate proportionally with changes in gross RV New carrying amount = revalued amount General use: Revalue using an index Net replacement value basis

3 Eliminate against gross carrying amount Net amount = revalued amount General use: Buildings Surplus: Carrying amount Other comprehensive income, equity Revaluation surplus Non-distributable reserve Only used for subsequent write-downs or a capitalisation share issue Can transfer directly to retained earnings if asset is derecognised Carrying amount Profit/loss Other comprehensive income to extent of any credit balance in revaluation surplus of that asset Non-depreciable assets No decision to sell asset Tax rate (28%) x total revaluation surplus Decision to sell asset Revaluation surplus up to original cost x 28%, and Revaluation surplus excess above base cost at 18.6% (28% x 66.6%) [Example 14 & 15] Disclosure: STUDY Page 36 & 37 of Study Guide Derecognition When? Disposal No future economic benefits expected to arise from use/disposal Gain/loss on derecognition Profit/loss Net disposal proceeds less carrying amount Date when ALL of the following satisfied: Significant risks & rewards of ownership transferred to buyer Not continuous managerial involvement nor effective control over goods sold Amount can be measured reliably Probable economic benefits will flow to enterprise Costs incurred iro transaction can be measured reliably [IAS18] CGT Capital gain/loss Disposal of asset Sale, donation, loss or destruction Proceeds less base cost Base cost Incl: acquisition cost, improvements & costs incurred directly in the acquisition, creation or disposal of the asset Excl: holding costs (interest, repairs & maintenance), recoverable expenses (deductible for income tax) adjustments for inflation. Framework page 38 of Study Guide Inclusion rate for companies 66% Deferred tax [FAC3701] Revaluation Temporary difference Deferred tax Carrying value (accounting) and Tax base differs Depreciable assets Study unit 2 - Overview Recognition Recognition Subsequently Cost model Fair value model Transfers Derecognition Disclosure Tax Definitions Carrying amount Amount at which asset is recognised in SFP Property Land and/or building or part thereof Investment property Property held by owner (or lessee under finance lease) To earn rentals and/or capital appreciation OTHER than Use in production/supply of goods/services Use for administrative purposes Sale in the ordinary course of business Owner-occupied property Property held by owner (or lessee under finance lease) For use in production/supply of goods/services or admin purposes Other same definition as PPE Cost and Fair value Investment v owner-occupied property Investment property Rentals & capital appreciation Cash flows largely independent from other assets held by entity. Insignificant ancillary services IAS 40

4 Owner-occupied property Integrated part of entity s business IAS 16 PPE Partly investment & partly owner-occupied Can units be sold separately? Yes account for portions separately No Is insignificant portion used for production/admin? Yes Recognise as investment property Group property leased to parent or subsidiary company: Individual company investment property Consolidation owner-occupied property Recognition Probable Future economic benefits associated with item will flow to entity Cost can be measured reliably Initial cost to acquire investment property Subsequent costs to add to, replace or service property NOT day to day servicing of property (e.g. repairs) Apply criteria at time cost is incurred recognition Cost acquired property Purchase price Directly attributable expenditure, incl. transaction costs NB: VAT/Transfer duty if not recoverable Cost self-constructed investment property date construction/development completed Do not include: Start-up cost (unless necessary to bring property in operation) Operating losses before planned level of occupancy is achieved Abnormal amounts of wasted material, labour & other resources in constructing/developing the property Abnormal credit terms Asset: Recognise cash value (Present value of selling price) Excess = interest (Selling price Cash value) Exchanging/swapping investment properties Cost: fair value of asset given up unless: Fair value of neither acquired/disposed asset reliably measured Carrying value of asset given up Exchange transaction lacks commercial substance Carrying value of asset given up Commercial substance Consider extent future cash flows expected to change as result of transaction. Cash flows differ from previous cash flows of asset given up; or Entity-specific portion of operation affected by transaction changes; AND Difference is significant relative to fair value of exchanged assets. Subsequent recognition Entity may choose: Fair value model Cost model Apply to ALL investment properties Determine fair value, irrespective of which model used. Measurement if fair value model is used, or Disclosure if cost model is used Fair Value Model Fair value Price at which property could be exchanged Between knowledgeable, willing partners In arm s length transaction. Ignore: transaction costs Reflect market conditions at end of reporting period Current prices for similar property in same location & condition Prices for different properties adjust Discounted cash flow projections Exclude separately recognised assets/liabilities E.g. lifts, air conditioners, prepaid rental income etc. Fair value measurement through profit/loss No depreciation Cost model Fair value not reliably determinable Property under construction If compelled to use cost model for this reason, may use fair value model for other investment properties Depreciation Over useful life of investment property Transfers Change in use When? Commencement of owner-occupation Investment property owner-occupied property End of owner-occupation Owner-occupied property investment property Commencement of development with view to sell Investment property inventory Commencement of operating lease to another person Inventory investment property

5 Transfers - Value Cost model: no change to carrying amount or cost of transferred property Fair value model Investment property owner-occupied property/inventory Fair date of transfer Owner-occupied property investment property Carrying transfer date Calculate depreciation/impairments until date of transfer Difference between fair value & carrying amount revalua on [IAS16] Inventory investment property Fair value carrying amount = profit/loss Investment property inventory Completes development Fair value carrying amount = profit/loss (NOT as revaluation) Derecognition When? Disposal Sale or finance lease Permanently withdrawn from use & no future economic benefits expected from disposal Replaced parts of investment properties Cost model Carrying value of replaced part or Cost of replacement Fair value model Fair value may have already been adjusted for replaced part Include cost of replacement in carrying value & reassess fair value Gains or losses on disposal Calculation Net disposal proceeds Adjust for deferred payment terms cash equivalent & interest Less: Asset s carrying amount Recognise as profit/loss 3rd Party compensation Compensation from 3rd parties E.g. insurance indemnity payments Investment property impaired, lost or given up Recognise as profit/loss Separately account for: Impairment of investment property [IAS 36 & SU 3] Retirement/disposal of investment property Compensation received from 3rd party Cost to restore, construct or purchase assets CGT Capital gain/loss Disposal of asset Sale, donation, loss or destruction Proceeds less base cost Base cost Incl: acquisition cost, improvements & costs incurred directly in the acquisition, creation or disposal of the asset Excl: holding costs (interest, repairs & maintenance), recoverable expenses (deductible for income tax) adjustments for inflation. Framework page 38 of Study Guide Inclusion rate for companies 66% Deferred tax [FAC3701] Cost model same as PPE Fair value Assume carrying value recovered through sale No depreciation Capital allowance SARS does not distinguish between investment & owner-occupied property. Tax treatment depends on use Capital allowances Manufacturing buildings Hotels, commercial buildings, buildings let to employees None on land and general residential buildings Deferred tax on fair value adjustments Fair value adjustment x CGT inclusion rate (66.6%) x tax rate (28%) Presumption rebutted depreciate property Deferred tax = Fair value adjustment x tax rate (28%) Disclosure: STUDY Page of Study Guide Study unit 3 Impairment of assets Overview What is impairment? When? Calculation Reversal Goodwill Tax Disclosure Definition Impairment loss arises when: Carrying amount of asset/cash generating unit EXCEEDS Recoverable amount Higher of: Asset/cash generating unit s fair value less cost of disposal, or Value in use

6 Fair value less disposal cost Fair value IFRS 13 Binding sale agreement Value in active market Best available information Cost of disposal Includes Legal costs Costs of removing asset Excludes Amounts recognised as liabilities Termination benefits Reorganisation costs Value in use Cash flows from use disposal Net (Attributed inflow less outflow) Base on: Budgets covering 5 yrs max, extrapolate thereafter Include Day-to-day servicing Overheads directly attributable or reasonably allocated Exclude Future improvements or restructuring not yet committed Financing activities Income Tax At appropriate discount rate Pre-tax rate Same rate as cash flows nominal or real Reflect risks specific to asset for which cash flows were not adjusted When? Assess at end of each reporting period Intangible assets Indefinite useful life Not yet available for use Goodwill Consider: External sources of information Internal sources of information Evidence from internal reporting Calculation 1.Calculate asset s carrying amount Cost/revalued amount Less accumulated depreciation/amortisation 2.Calculate asset s recoverable amount Higher of Face value less cost to sell Value in use Apply appropriate discount rate 3.Recognise impairment if (1) > (2) Accounting for impairment loss Cost model Recognise immediately in P/L: Dr Impairment loss (P/L) Cr Accumulated impairment loss (SFP) Use new carrying amount for basis of depreciation calculation. Revaluation model Treat as reduction of asset s revaluation surplus. Excess recognise immediately in P/L Dr Revaluation Surplus (OCI) Dr Impairment loss (P/L) Cr Accumulated impairment loss (SFP) Use new carrying amount for basis of depreciation calculation. Reversal of impairment loss Asset impaired in previous period now worth much more CHANGE IN ESTIMATE Calculation of recoverable amount Change in calculation basis fair value or value in use Estimated timing of cash flows Discount rate Estimate of components of fair value Reversal limited to amount impaired in prior periods New carrying amount may not exceed original carrying amount UNLESS policy to revaluate Excess revaluation surplus Accounting for reversal of impairment loss Cost model o Recognise immediately in P/L: o Dr Accumulated impairment loss (SFP) o Cr Reversal of impairment loss (P/L) o Use new carrying amount for basis of depreciation calculation. Revaluation model o Recognise in other comprehensive income to extent of asset s previous impairment. o Excess recognise immediately in P/L o Dr Accumulated impairment loss (SFP) o CR Revaluation Surplus (OCI) o Cr Reversal of impairment loss (P/L) o Use new carrying amount for basis of depreciation calculation. Goodwill Represent anticipated future economic benefits from assets Not capable individually identified or separately recognised Acquired in business combination Allocate to each cash-generating unit/group Test impairment annually Impairment loss iro goodwill may NOT be reversed in subsequent periods

7 Tax Only deduct costs actually incurred in year of assessment Impairment actually incurred Temporary difference Deferred tax Impairment losses Reversal of impairment losses Depreciation/amortisation Tax allowance Disclosure STUDY Page of Study Guide Study unit 4 Intangible assets Overview Terminology Recognition & initial measurement of intangible assets Cost of internally generated intangible asset Recognition of an expense Measurement after recognition Useful life Recoverability of the carrying amount Retirements and disposals Disclosure Tax Definitions Intangible asset Identifiable non-monetary asset Without physical substance Research Original & planned investigation Prospect to gain new scientific /technical knowledge and understanding Development Application of research findings or other knowledge To plan/design new/substantially improved materials, devices, products, processes, systems or services Prior to commencement of commercial production/use. Amortisation Systematic allocation of depreciable amount of an intangible asset over its estimated useful life. (Similar to depreciation refer to SU1) Intangible asset Intangible Identifiable Recognition & Initial measurement Recognition Meet definition of intangible asset Probable expected future economic benefits attributable to asset will flow to entity Cost of asset can be measured reliably. Measurement cost Cost Separate acquisition Purchase price (incl. import duties, nonrefundable taxes, discounts and trade rebates) Directly attributable costs of preparing asset for intended use E.g. cost of employee benefits, professional fees, testing NOT general overheads, extended credit terms cash value) Part of business combination Fair value at date of acquisition (IFRS3) Distinguish from goodwill In-process research & development Government grants Exchange of assets (use Example 1 Company acquires the right to a certain patent and incur various costs. Purchase price will be settled in shares. Need to calculate cost. 1.Calculate the fair value of shares in the settlement date trading price x # shares. 2.Add the VAT exclusive amounts of directly attributed expenses. (Assuming the company is registered for VAT and entitled to input tax deductions) Internally generated goodwill Not recognised as asset Not identifiable resource Non-monetary asset Without physical substance Asset Controlled as result of past event expected inflow of future economic benefits Definition not met expense

8 Internally generated intangible assets Research Not recognised as asset expense costs Economic benefits not yet probable Development - Need to demonstrate ALL of the following Technical feasibility - completion Intention to complete use/dispose Ability to use or sell Generation of probable future economic benefits. Existence of a market, or if it is to be used internally, the usefulness of the intangible asset. Adequate technical, financial and other resources to complete the development, and to use or sell the intangible asset. Ability to measure the expenditure attributable to the intangible asset during its development reliably. Internally generated intangible assets 1) Research 2) Development 3) Initial recognition 4) Subsequent measurement Internally generated intangible assets Cost All directly attributable costs NECESSARY to create, produce & prepare asset To be capable of operating Manner intended by management Examples Material & services used in generating asset Employee benefits (salaries etc) Fees to register legal right Amortisation of patents/licences used to generate asset NOT General overheads Training expenses Clearly identifies inefficiencies Initial operating losses before asset achieves planned performance Example 3 Recognition as expense Expense costs when incurred, UNLESS Forms part of intangible asset s cost Business acquisition goodwill Examples Research costs Start up activities Training Advertising & promotions Relocation & re-organisation costs Expenses item CANNOT form part of intangible asset cost at later date Measurement AFTER recognition Cost Cost less accumulated amortisation Revaluation Fair value less subsequent accumulated amortisation Fair value active market Not allow Revalue intangible assets not previously recognised as assets Initial value other than cost Accumulated date of revaluation Restate proportionately with change in gross carrying amount Carrying amount of asset = revalued amount OR Eliminated against gross carrying amount of asset Net amount restates to revalued amount of asset [Example 4] Useful life Contractual or other legal right Limited to period of right Renewable Include renewal periods only if renewal without significant cost Finite useful life Allocate depreciable amount over this period From date available for use Cease Classified as held for sale Asset derecognised Amortisation per period Pattern of economic benefits or straight line Recognise in profit/loss Residual value Assumed to be NIL, unless Commitment by 3rd party to end of life Active market for asset Residual value determinable Probable that market will exist at end of useful life Residual value > carrying amount Amortisation = nil

9 Indefinite useful life Test for impairment Annually Whenever indication of possible impairment Review useful life each period Indefinite definite : indica on of possible impairment Retirement and disposals Derecognise Disposal No future economic benefits expected from disposal or use of asset Disclosure REVALUATION Revaluation Effective date of revaluation Carrying amount of revalued intangible assets Carrying amount if asset was not revalued Revaluation surplus Begin, end, movement & restrictions Method & significant assumptions RESEARCH & DEVELOPMENT EXPENDITURE Total R&D expense recognised during period [Example 6] TAX Disclosure - General Study guide p NB!!!! General Useful life indefinite or definite (useful life & amortisation rate) Finite amortisation method Gross carrying amount & accumulated amortisation (Beg & End) P/L amortisation Reconciliation carrying amount begin & end Additions Held for sale Increases/decreases revaluation and impairments Impairment losses P/L Impairment reversals P/L Amortisation recognised in period Net exchange differences Other changes in carrying amount Information re impaired intangible assets Nature & amount of change in accounting estimate Assessment of useful life Amortisation limit Residual values Indefinite useful life Carrying amount Reasons why useful life is regarded as indefinite Material intangible assets Description, carrying amount & remaining amortisation period Restricted intangible assets Grants Contractual commitments acquisition of intangible asset Tax calculation Profit before tax Exempt differences Temporary differences Amortisation Impairment loss Tax allowance on intangible asset Taxable income Tax (TI x tax rate) Patents, designs, copyrights, knowledge S11(gC) Deduct expenditure actually incurred to acquire Invention/patent Design Copyrights Other property of similar nature (other than trade marks) Knowledge re above Deduction < R deduct immediately > R % pa 10% pa Not proportioned for part of year Acquired from connected person Deduction based on lesser of cost for CP or market value

10 Research & development S11B R&D conducted in RSA Result/potentially result identifiable intangible asset Exclude Social sciences, arts, humanities or management Market research, sales or marketing promotion Deduction Expenditure actually incurred in year of assessment Iro R&D undertaken directly by taxpayer, or Payment to other person for R&D obo taxpayer Registration of invention etc Obtaining extension of period of legal protection/registration period etc. Allowance Building/machinery/plant/implement/utensil/ other capital used for purposes of R&D 40% of cost of that asset in year brought into use 20% in subsequent years Scientific/technological R&D S11D 150% expenditure actually incurred Activities in SA Discovery novel/practical & non-obvious information Devising/developing/creation of any invention (patent), design, computer program or knowledge essential to the use thereof Assets Scientific/technological nature Intended to be used in production of income 50/30/20 of cost from year brought into use Owned by taxpayer Brought into use solely for purpose above Not previously used by anyone else Intended to be used in production of income Exclusions listed p 148 Registration of intellectual property S11(gB) Obtaining, restoration, extension, registration or renewal Deductible Expense in year actually incurred If in production of income Also exp incurred under similar laws in other country Deduction iro registration/renewal of trademark NOT acquisition thereof Comprehensive example p149 Approaching the question 1)READ REQUIRED 2)Time line 1/1/05 28/2/05 (Research motor engine electronic component) 1/3/05 30/8/05 (Develop MEEC) 1/6/05 31/12/05 (Research swimming pool component) 3)Identify costs to be allocated 3)Laboratory maintenance 4)Water, electricity and service 4)Calculate costs to R@D Engineers : #, time spent (p149) Laboratory technicians (p150) Consumables based on number of months Costs identified in (3) Depreciation on R&D equipment used 5)Amortisation of development cost Development cost/expected # unit sales x period 6)Employee benefit cost Total employee benefit cost (salaries) Less: allocated to research cost Less: allocated to development cost 7)Depreciation of R&D Equipment Total provision (Cost x ratio) Less: Allocated amount (calc 4) 8)Depreciation plant & machinery [(Cost residual value)/useful life] x period used 9)Allocation of depreciation Provided for the year (Calc 7+8) Less: allocated to research costs (calc 4) Less: Capitalises as development cost (calc 4) 10)Impairment loss Recoverable amount value in use (given) Carrying amount on 31/12/05 Development cost (calc 4) amortisation (calc 5) DISCLOSURE 11)Notes accounting policy 11)Internal generated intangible assets development costs 12)Research costs 13)PPE 14)Impairment of non-financial assets 12)Profit before tax (know format) 13)PPE 14)Internal generated intangible asset

11 Study unit 5 Assets held for sale & discontinued operations Overview General definitions Non-current assets held for sale Discontinued operations GENERAL DEFINITIONS Component of an entity Operations & cash flows Clearly distinguished Operations Financial reporting Cost to sell Incremental costs directly attributed to dispose of asset or disposal group EXCLUDING Finance cost Income tax expense Discontinued operations Component disposed of held for sale Separate major line of business/geographical area of business Expected to be realised within 12 months after y/e, or Subsidiary acquired exclusively to resell Disposal group (DG) Group of assets to be disposed In single transaction, AND Liabilities directly associated with those assets Will be transferred in transaction Includes: Goodwill acquired in business combination if cash-generating unit Firm purchase commitment Agreement with unrelated party binding on both Usually legally enforceable Specifies all significant terns incl. price and timing Disincentive for non-performance, make performance highly probable Recoverable amount Higher of Value in use, or Fair value less cost to sell ASSETS HELD FOR SALE Overview Scope Classification Criteria Measurement Recognition of impairments & reversals Non-current assets to be abandoned Changes in plan of sale Tax Presentation Scope IFRS 5 ALL recognised non-current assets and DG s of entity DG as a whole Exclude from measuring assets already fair value Financial assets Investment property Agricultural non-current assets Also excludes Current assets (e.g. inventory) Classification Classify as non-current asset held for sale if Carrying amount will be recovered Through sale transaction RATHER than through continuing use Distinguish from Abandonment End of useful life or decide to close down rather than sell NOT classified as non-current asset held for NOT include asset temporarily taken out of Criteria ALL Asset/disposal group available for immediate sale In present condition May be subject to usual & customary sales terms Sale must be highly probable Highly probable Appropriate level of management committed to plan to sell asset/dg sale use Active plan to find buyer & complete plan to sell Asset actively market at reasonable price Expect sale to be completed within 1 year from y/e (*) Actions required to complete plan indicate unlikely Significant changes to plan Withdrawal

12 Extension of sale period (*) Delay caused - Circumstances beyond entity s control Significant evidence remains committed to sell Examples Other parties impose conditions on transfer asset Selling entity cannot respond until purchaser commitment obtained Firm purchase commitment highly probable within 1 yr Obtains firm purchase commitment Buyer unexpectedly impose conditions on transfer Favourable solution expected Circumstances arise that were previously regarded as unlikely Tried to respond to changes Non-current assets actively reasonable price Acquired to resell Acquire non-current asset EXCLUSIVELY to resell Classify as non-current asset held for sale ONLY if: 1 year (or permitted extended period) is met, and Highly probable that other criteria not met will be met within short period Usually within 3 months Criteria met AFTER reporting date Do NOT classify as non-current asset held for sale Criteria met BEFORE authorisation of AFS Disclose in Notes: Description of Non-current asset/dg Facts & circumstances of sale or leading to expected sale disposal Segment Expected manner and timing of Time line Acquire non-current assets & use in business Classify as non-current asset held for sale End of financial period Sell asset held for sale of Measurement Immediately before reclassification Carrying value ito other IFRS Cost or revaluation model Depreciation & amortisation Determine carrying value immediately before reclassification On date of reclassification Only IFRS5 assets restated Lower of: Carrying value before reclassification Fair value less cost to sell Examples 4 & 5 Impairment Dispose IFRS5 and non-ifrs5 items Can form part of 1 disposal group Example 3 DG Initial classification HfS New asset acquired to resell Lower of carrying amount as if not HfS OR Fair value less cost to sell (Example 8) If acquired as business combination fair value less cost to sell Other: Method 1.Calculate carrying value of individual assets on reclassification date 2.Determine fair value less cost to sell of DG on reclassification date 3.Determine lower of (1) and (2) 4.If (1)>(2), recognise impairment loss on reclassification date Allocate impairment loss to: Goodwill(if any), then IFRS5 assets in proportion to carrying amounts. Example 6 Subsequent remeasurement If y/e between date of initial classification & date of disposal Non IFRS5 assets Remeasure carrying value before applying new fair value less cost to sell IFRS5 assets Fair value less cost to sell Less impairment loss determined at initial classification as HfS If Fair value less cost to sell change Determine whether additional impairment or reversal thereof loss

13 Recognition Impairment loss Individual non-current asset Cr Carrying amount of asset Dr Impairment loss (P/L) Disposal group Allocate impairment to Goodwill, then IFRS5 assets in proportion to their carrying amounts Example 9 Reversal of impairment loss/gain Remeasurement of individual asset Increase in fair value less cost to sell Recognise gain Limited to cumulative impairment loss previously recognised IFRS7 and IAS36 Date of derecognition date: Recognise gain/loss not previously recognised at Initial or subsequent classification Derecognition requirements - PPE Date of disposal Apply IAS18 criteria Consideration receivable fair value Deferred payment: cash price equivalent + interest Gain/loss = Net disposal proceeds carrying amount Include gain/loss arising from derecognition P/L (not Revenue) (Example 10) Changes to plan of sale HfS criteria no longer met - cease to classify asset as HfS Measure Lower of Adjusted carrying value (as if asset were never classified as HfS) Recoverable amount at date of decision not sell Individual asset Adjustment P/L gain/loss If revaluation model : adjustment = revaluation in/(de)crease in to 2.Calculate adjustment. (Fair value less cost to sell) (1) 3.Depending on model (cost/revaluation) disclose as other income or revaluation in/decrease Individual item part of disposal group Split group assets meeting HfS criteria and others Reclassify assets no longer HfS refer to previous slide Example 12 Tax Individual asset (cost model) HfS Carrying amount>tax base Deferred tax liability Carrying amount<tax base Deferred tax asset Adjustments iro classification HfS only accounting Result in deferred tax Example Individual asset (revaluation model) HfS Example Presentation Non-current assets held for sale Separate from other assets in SFP NOT offset HfS assets & liabilities Disclose major classes of assets & liabilities seperately Cumulative income/expense from HfS assets separately in P/L Newly acquired subsidiary Major classes of assets & liabilities not required NOT re-classify or re-present HfS for prior periods in SFP Disclosure NOTES Description of Non-current asset (or DG) Facts & circumstances of sale or leading to expected sale Expected manner & timing of disposal Gain/loss recognises Segment (P181 SG) DISCONTINUED OPERATIONS Overview Classification as discontinued operations Presentation & disclosure Gains/losses relating to discontinued operations Tax Model for disclosure Example 11 1.Calculate carrying value if asset had never been classified as HfS

14 Classification Meets definition At date Meets criteria to be classified as held for sale, or Entity disposed of operation Tax Expenses directly related to decision to discontinue Not incurred in the production of income Therefore not deductible Include operating profits/losses from discontinued operations to date of disposal Tax allowances on non-current assets Until date asset no longer used for business activities/date of disposal Scrapping allowance Recoupments CGT inclusion rate 66.6% Deferred tax Temporary differences: Carrying amount & Tax base Disclosure P/L Single amount total of Post-tax profit/loss of discontinued operations, and Post-tax gain/loss recognised on measurement to fair value less cost to sell/ disposal of assets/dg Analysis - P/L or Notes Revenue, expenses and pre-tax profit/loss of discontinued operations Related income tax expense Gain/loss recognised on reclassification & related income tax Re-present disclosure for prior period Adjustments in current period Disposals in prior periods Study unit 6 Financial Instruments Overview Definitions Classification Recognition & derecognition Measurement Presentation DEFINITIONS Instruments Financial instrument Any contract Gives rise to Financial asset of one entity, and Financial asset or equity instrument in another entity. Equity instrument Any contract NOTE: Financial asset Any asset that is: Cash Evidence residual interest in assets of entity After deducting all of its liabilities. Entity s own equity instruments NOT financial asset/liability Obligation to deliver/re-acquire own equity instruments Form of equity instrument. Equity instrument of another entity Contractual right To receive cash/financial asset from another entity, or To exchange financial assets/liabilities with another entity Potentially favourable conditions (e.g. purchased options) Contract that will be settled with entity s own equity instruments Non-derivative instrument Obliged to receive variable number of own equity instruments Derivative Settled other than by fixed amount of cash or another financial asset for fixed # of entity s own equity instruments (Excludes own equity instrument that are contracts for future receipt/delivery of own equity instruments) Financial liability Contractual obligation To deliver cash/other financial asset to another entity, or To exchange financial assets/liabilities with another entity Potentially unfavourable conditions (e.g. written options) Contract settled in entity s own equity, and is Non-derivative instrument Obliged to deliver variable number of own equity instruments Derivative

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16 Settled other than by fixed amount of cash or another financial asset for fixed # of entity s equity instruments (Excludes own equity instrument that are contracts for future receipt/delivery of own equity instruments) Derivative Value change Change in interest rate Financial instrument price Commodity price Foreign exchange rate Index or prices/rates Credit rating or credit index, or Other variable Requires no initial investment or Initial net investment < required for other types of contract with similar response to changes in market factors future date Have to meet all 3 of above. own Amortised cost Amount initial recognition of financial asset/liability Less: principal repayments +/- cumulative amortisation Effective interest method Difference between initial amount & maturity amount Less: Reductions for impairment/uncollectibility Effective interest method Method to Calculate amortised cost of financial asset/liability Allocate interest income/expense over relevant period. Effective interest rate Rate Discounts estimated future cash payments/receipts Through expected life of financial instrument Or shorter more appropriate period To net carrying amount of financial asset/liability Calculating effective interest rate Estimate cash flows considering all contractual terms of financial instrument Exclude future credit losses Include: All fees & points paid/received between contract parties that are integral part of effective interest rate Transaction cost All other premiums/discounts Class example 1 Other definitions Derecognition Removal of previously recognised financial assets/liabilities From entities statement of financial position Regular of purchase/sale Purchase/sale of financial instrument Contract terms require delivery of asset Within time frame established generally by regulation or convention in market place. Transaction costs Incremental cost Directly attributable to acquisition, issue or disposal of financial asset/liability. Common financial instruments Cash and cash deposits Trade accounts - receivable & payable Notes, loans and bonds receivable & payable Perpetual debt instruments Debentures, capital notes and perpetual bonds Financial guarantee Finance lease NOT Financial assets Physical assets Inventory PPE Intangible assets Leased assets Prepaid expenses Deferred revenue & most warranty obligations Income tax and other taxes imposed by statutory requirements CLASSIFICATION Financial assets Classify based on business model & contractual terms Measure financial assets at fair value, unless amortised cost Measure at amortised cost if: Business model: hold asset to collect contractual cash flows, AND Contractual terms specified dates for cash flows Payments of principal debt & interest on outstanding debt Initial recognition irrevocable choice Instrument by instrument basis Amounts included in other comprehensive income cannot be transferred to P/L May transfer cumulative gain/loss within entity

17 Dividends on investments recognised in P/L unless clearly cost recovery. Financial liabilities amortised cost using effective interest method UNLESS: Liability is held for trading fair value) Designated upon initial fair value in P/L Arise when transfer of financial asset does not qualify for derecognition Financial guarantee contracts Commitments to provide loans at below market interest rate Held for trading Acquired/incurred mainly to sell/repurchase in near term, Initial recognition- part of portfolio managed together shortterm profit taking Derivative (excl financial guarantee contract or designated & effective hedging instrument) RECOGNITION & DERECOGNITION Initial recognition Recognise in statement of financial position When entity becomes party to contractual provisions of instrument Examples (TL104 -p15) Unconditional receivables and payables Assets to be acquired & liabilities to be incurred as a result of a firm commitment to sell goods/services Forward contract Financial options Planned future transactions Trade date Apply method consistently all financial assets in same category Mandatory fair value through P/L Assets fair value through P/L Investments in equity instruments with irrevocable election to present changes in fair value Trade date Date entity commits itself to purchase/sell asset Recognise asset to be received & liability for it on trade date Derecognise asset Sold Gain/loss on disposal Recognise receivable from buyer Settlement date Date asset is delivered to or by entity Recognise asset on date received Derecognition (p20) Derecognise financial asset when: Contractual rights to cash flows from financial asset expires, AND Transfers financial asset & transfer qualifies for derecognition Transfer financial asset Transfer contractual right to receive cash flows from asset, or Retains contractual rights BUT Assumes contractual obligation to pay cash flows to another person Only treat as transfer if: No obligation to pay amounts to eventual recipient unless amount collected from original asset, Entity prohibited from selling, pledging asset, AND Obligation to remit collected cash flows without material delay (not allowed to reinvest) Consider extent to which risks & rewards are retained Transfers Qualify for derecognition Transfer asset but retains right to service asset for fee Recognise servicing asset or servicing liability If fee More than adequate compensation Servicing amount based on allocation of carrying amount of larger financial asset not expected to compensate adequately Servicing fair value On derecognition recognise P/L Carrying amount Less: Consideration received + new asset obtained new liability assumed Non-qualifying transfers Entity retain substantially all risks & rewards of ownership Continue to recognise transferred asset in entirety Recognise financial liability for consideration received. Subsequent periods - Recognise Income on transferred asset & Expenses incurred on financial liability Continuing involvement in transferred assets Retains control of transferred asset & risks/rewards of ownership Continues to recognise asset to extent of involvement Extent exposed to changed in value of transferred asset Derecognise portion of asset & associated liability Forms of continuing involvement (p18) Guaranteeing transferred asset Written/purchased option Written put option Cash-settled option or similar provision Derecognise asset & gain/loss on disposal Mostly use settlement date accounting not trade accounting

18 Non-cash collateral Transferee right to contract to sell Transferor reclassify asset separate from other assets Transferee sells collateral pledged to it Recognise proceeds from sale, and fair value for obligation to return collateral Transferor defaults & no longer entitled to redeem collateral Derecognise collateral Transferee recognise collateral as asset Example 6 (p21) Derecognition of financial liability Derecognise from statement of financial position when Discharged, cancelled or expired. Extinguished when debtor Discharges liability by paying creditor, or Is legally released from primary responsibility of loan By process of law or creditor Exchanging debt instruments with substantially different terms Extinguish old and recognise new Difference P/L Carrying amount of financial liability Less: consideration paid Repurchasing portion of financial liability Apportion MEASUREMENT Initial measurement Financial assets Fair value (if asset not at fair value) Plus transaction cost directly attributed to acquisition of asset. Financial liabilities Fair value (if liability not at fair value) Plus transaction cost directly attributed to acquisition of liability. Fair value on initial recognition Normally transaction price If entity use settlement date accounting Initial recognition at fair value at trade date Subsequent measurement - Assets See Attached page Subsequent measurement Liabilities Reclassification Only when entity change business model for managing financial instruments Change: significant, infrequent & demonstrable to external parties Prospective reclassification date DO NOT restate previously recognised gains, losses or interest First day of first reporting period after change Asset Reclassified to be carried at fair value Determine fair value at reclassification date Gains/loss resulting from reclassification P/L Liabilities NO reclassification Gains & losses Financial assets Fair value (not part of hedging) P/L unless asset is investment in equity & elected to treat as other comprehensive income Amortised cost P/L when asset is Derecognised, impaired, reclassified & amortisation process Financial liability Change in fair value P/L Resulting from changes in credit risk Comprehensive income Measured in amortised cost Amortisation process Impairment Financial amortised cost At end of each reporting period Objective evidence of potential loss events: Significant financial difficulty of issuer or obligor Breach in contract Disappearance of active market Observable data indicating measurable decrease in estimated future cash flows Assets carried at amortised cost Loss = carrying amount less present value of future cash flows (discounted at asset s original effective interest rate) Dr Impairment loss in P/L Cr Asset/ Allowance account Assets fair value Not separately tested for impairment Part of fair value adjustment Reversal Subsequent decrease in impairment amount Decrease previously recognised impairment amount See attached page

19 Subsequent measurement - Assets Class example 2 Class example 2

20 Subsequent measurement Liabilities

21 PRESENTATION Equity No contractual obligation To deliver cash or other financial asset to other entity To exchange financial assets with potential favourable conditions Example Settlement in own equity instruments Contingent settlement provisions Settlement options Other considerations Compound instruments Class example 3 Treasury shares Acquire own shares Deduct from equity Do NOT recognise gain/loss on purchase, sale, issue or cancellation Consideration received/paid recognise directly in equity Interest, dividends, losses & gains Offsetting financial assets and liabilities Study unit 7 Changes in foreign exchange rates Overview Definitions Uncovered foreign currency transactions Hedge accounting Tax Definitions Functional currency Primary economic environment in which entity operates Primary indicators Currency Mainly influences sales prices Country competitive forces & regulations determine sales prices Mainly influences labour, material & other costs Secondary indicators Raise financing Retain receipts from operating activities If not obvious Management judgement Currency & exchange Presentation currency Currency in which financial statements are presented Foreign currency Currency other than functional currency of entity Exchange rate Ratio of exchange for two currencies Exchange differences Difference from translating given # of units to another currency at different exchange rates Other definitions Spot rate Exchange rate for immediate delivery Closing rate Spot end of reporting period Monetary items Units of currency held Assets to be received Liabilities to be paid In fixed/determinable number of units in currency E.g. bank accounts, debtors, creditors, loans, cash dividends, provisions Non-monetary items Other items E.g. Inventory, PPE, prepaid amounts, intangible assets Uncovered transactions Initial recognition Functional spot date of transaction Date transaction qualifies for recognition Party to contractual provisions & legal right to receive/ liability to pay cash Firm commitment