BAW 4614 Advanced

Financial Accounting
Reporting
 • IFRS 16 Leases
• IAS 20 Accounting for Government Grants and disclosure of
Government Assistance
Agenda • IAS 16 Property, plant and equipment
• IAS 36 Asset Impairment
• IFRS 5 Non-current assets held for sale and discounted
operations

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IFRS16 Lease
Lease is a contract whereby the lessor conveys to the lessee in return for a payment
or series of payments the right to control the use of identified asset for a period of
time.

- Right to obtain substantial - Asset specified in the lease

- May be part of an asset
economic benefits from using the - Period of time
- But, if the supplier has practical ability to
asset; and - Amount of use
- Right to direct the use of the substitute the asset, the contract is not a
identified asset lease

Purpose of finance lease:

• To fulfil the accounting assumptions economic substance over form
• It is a principle of accounting that the commercial substance of a transaction should
be reflected in financial statements rather than the legal form.
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 •IFRS 16 has removed the differentiation between operating
and finance leases from the lessee’s point of view.

•From the perspective of lessor, there is a different between

IFRS16 Lease
operating and finance leases.

•Recognition exemptions [recognize as operating lease]

• Short team lease of less than twelve months that do not
contain a purchase option.
• Leases for low value assets.

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IFRS16 Lease

•Measurement by the lessee

• When a contract is a lease, the right-of-use (ROU) asset and lease liability are
recognized at the commencement date. (There is repayment to the lessor)

•Initial measurement of ROU

• At cost (Must be at cost) that includes:
• 1) initial measurement of the lease liability
• 2) lease payment before the commencement date, less any incentives
• 3) initial direct cost related to the asset
• 4) estimation of any costs or penalties to be incurred by the lessee
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IFRS16 Lease [ROU]

Subsequent measurement of ROU

- ROU is subsequently measured at cost less accumulated depreciation and

impairment loss. (Will be done every end of the year)

Depreciation of asset

Dr Depreciation expense/ Cr Accumulated Depreciation

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IFRS16 Lease [Lease Liability]
• Lease payments:
• Payments made by a lessee to use an underlying asset during the lease term, less any lease incentives.

• Initial measurement of lease liability

- At the commencement date, measured at the present value of future lease payments, including any payments expected at
the end of the lease. It includes:
• 1) Fixed payments less any lease incentives receivable
• 2) Variable lease payments
• 3) Amount expected to be payable by the lessee
• 4) Purchase options
• 5) Penalties for early termination
IFRS16 Lease [Lease Liability]
• Subsequent measurement of lease liability
- Lease liability is amortised
- Interest (record in finance cost) will accrue on the outstanding lease
- Payment (have to deduct first) made in respect of the lease by lessee
IFRS16 Lease
• Making the payment

Dr Payable (Lease liabilities)/ Cr Cash

• Finance charge

Dr Finance cost/ Cr Lease liabilities

Finance Lease
•Accounting treatment for finance lease: LESSOR
• Take up as receivable
Dr Bank
• Cr
Receivable
• Each instalment
received comprises of
• interest earned
(they will charge
interest, and it is
part of the income),
and
• part of the
receivable received 7
IFRS 16 Lease – Operating Lease
•Accounting treatment for operating lease: Lessor and Lessee
• Lessor – take up as an asset and asset depreciation (There is no control
by lessee, therefore lessor take the control as his asset)
• Lessee take up as month operating expense (Rental basis, eg. Photocopy
machine)

DEBIT Operating lease

CREDIT Bank / Account payable

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IFRS 16 Lease – Sale and Leaseback transactions
•The original owner of the asset selling it, and immediately leasing it back. (Still
control the ownership of the asset)

•Seller acquires cash in exchange for a commitment to make regular lease

payments (to the buyer).

•Is the transfer a genuine SALE? Will IFRS 15 be applicable?

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IAS 20 government grant
Government grants: Assistance by government in the form of transfers of resources
to an entity in return for past or future compliance with certain conditions relating to
the operating activities of the entity.

Recognition
•A government grant (including a non-monetary grant at fair value) should only be
recognised when there is reasonable assurance that:
• the entity will comply with any conditions attached to the grant; and
• the entity will actually receive the grant.

Measurement
•IAS 20 identifies two methods which could be used to account for government grants:
• Capital approach: recognise the grant outside profit or loss
• Income approach: the grant is recognised in profit or loss over one or more periods
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IAS 20 government grant
•IAS 20 requires grants to be recognised under the income approach, that is grants
should be recognised in profit or loss over the periods in which the entity recognises
as expenses the costs which the grants are intended to compensate.

Government grants can be classified as:

• Grant related to asset is a government grant whose primary condition is that an
enterprise qualifying for them should purchase, construct or otherwise acquire
long-term assets (Eg. Equipment, Property). Subsidiary conditions may also be
attached restricting the type or location of the assets or the periods during which
they are to be acquired or held.
• Grant related to income is a government grant other than those related to assets.

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IAS 20 government grant- Presentation of grants
Grants related to assets
•Government grants related to assets (including non-monetary grants at fair value)
should be presented in the statement of financial position either: (2 methods)
• by setting up the grant as deferred income (liability); or
• by deducting the grant in arriving at the carrying amount of the asset, that is
netting off.

Deferred income method

•The deferred income method sets up the grant as deferred income in the statement
of financial position (Liability),
•which is recognised in profit or loss (Transfer into P/L) on a systematic and rational
basis over the useful life of the asset. Normally this corresponds to the method of
depreciation on the related asset.

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IAS 20 government grant- Presentation of
grants
Netting-off method
•The netting-off method deducts the grant in arriving at the carrying amount of the asset
to which it relates. The grant is recognised in profit or loss over the life of a depreciable
asset by way of a reduced depreciation charge. (Carrying amount will be lesser,
depreciation will be lesser, if compare to using deferred income method)

Grants related to income

•Government grants related to income are defined as those not related to assets and can
be presented in two ways:
• a credit in profit or loss (either separately, or under a general heading such as 'other
income'); or
• a deduction from the related expense. (Eg. The company is doing welfare services and
they spend on it, they incur cleaning services, credited into their cleaning expense, the
company will not incur to high expense in P/L, help to improve profit)

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 Netting off method
1. Dr Cash, Cr Equipment (SOFP)
 Deferred income method
1. Dr Cash, Cr Deferred income (SOFP)
2. Dr Deferred income (SOFP), Credit Deferred income (SOPL)
IAS 20 government grant - Repayment of government grants
• A government grant that becomes repayable should be accounted for as a change
in an accounting estimate. (Initial stage, dunnid to pay back if they do not breach
the agreement of grant, but now change prospectively)
• Repayment of a grant related to income should be applied in the following order:
• Against any unamortised deferred credit set up in respect of the grant
• To the extent that the repayment exceeds any such deferred credit, or where no
deferred credit exists, the repayment should be recognised immediately as an
expense (Charged to SOPL)
• Repayment of a grant related to an asset should be recognised by either:
• increasing the carrying amount of the asset; or
• reducing the deferred income balance by the amount repayable.
• The cumulative additional depreciation that would have been recognised to date as
an expense in the absence of the grant should be recognised immediately as an
expense.
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 IAS 16 Property, plant and
equipment
Property, plant and equipment (PPE) is defined as tangible items that are both:
• held for use in the production or supply of goods or services, for rental to others or for
administrative purposes; and
• expected to be used during more than one period.
The recognition of PPE depends on two criteria both of which must be satisfied.
• It is probable that future economic benefits associated with the item will flow to the entity.
• The item's cost can be measured reliably.
Subsequent expenditure (depend on any improvement or maintenance of an asset)
• If the money spent to improve the existing capacity of the asset – capitalise as cost of the
asset in SOFP.
• If the money spent to maintain the existing capacity of the asset – charge to SOPL
as expense.
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 IAS 16 Property, plant and
equipment
Initial measurement (costs that allowed to capitalize)
• Purchase price, including all non-recoverable duties and taxes but net of discounts.
• Direct attributable costs, which occur for an asset initial working condition (i.e. cost of
preparation,
delivery and handling, installation, testing and professional fees).
• Estimated cost of dismantling and removing the asset and restoring the site (IAS 37)
• Finance cost (IAS 23)

Subsequent measurement (IAS16 allows two models)

• Cost model
Cost – no
of the asset
asset revaluation
= original cost–isaccumulated
allowed but impairment
depreciationis–needed.
impairment loss
• Revaluation model – asset revaluation is allowed thus must calculate revaluation gain and loss.
Revaluation gain is unrealized, thus credit to revaluation reserve (SOFP) and revaluation
(impairment) loss is foreseen thus charge to IS as expense.
Cost of the asset = FV at the date of revaluation– subsequent accumulated
depreciation – subsequent impairment loss
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IAS 16 Property, plant and
equipment
Revaluation model Fair value of an asset:

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If the revaluation model is adopted, four conditions MUST be complied:
• Revaluations must subsequently be made with sufficient regularity. (After 2years
they do again, in every 2 years)
• When an item of property, plant and equipment is revalued, the entire class of
assets to which the item belongs MUST be revalued. (Not only 1 assets within the
class, eg. Property, all 5 buildings need to be revalued)
• The revaluation must be carried out by an independent and qualified person.
(Valuer)
• On revaluation, the increase in carrying amount must be credited to equity
(Revaluation account). If revaluation loss* occur, then recognize as an expense in
the SOPL, unless there is a revaluation reserve (For particular asset) representing a
surplus on the same asset previously.
•When a revalued asset is disposed of, any revaluation surplus may be transferred
directly to retained earnings. (Revaluation account will be established) 26
 IAS 16 Property, plant and
equipment
Depreciation
• The depreciation charge after the revaluation must base on a revalued amount.
(Regularities)
• If the asset has been revalued upwards the depreciation charge will be higher than before
the revaluation. (Revaluation is higher, the numerator will be higher)
• The excess depreciation can be transferred to retained earnings from the revaluation
surplus (from equity to equity - SOCIE). This is because part of the surplus is being realised
as the asset is used.
• Asset depreciation is needed unless the asset has no limited useful life, then asset
impairment (Every year) is needed.
• The depreciation method should reflect the pattern in which the asset's economic benefits
are consumed by the entity.
• The residual value, useful life of an asset and the depreciation method must be reviewed at
least at each financial yearend (The asset can be used as per useful life). Changes are
change in accounting estimates and are accounted for prospectively with accordance to
IAS 8. 27
IAS 16 Property, plant and equipment
•Retirement of asset
• When the asset can no longer generate future economic benefits (Does not fufil the definition
anymore), the cost of the asset must write off from the statement of financial position (charge to
income statement). This is meeting the recognition of asset.
•UK GAAP Comparison
• Under FRS 101 entities do not have to present comparative information in respect of the
reconciliation of property, plant and equipment amounts at the beginning and end of the period.

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 IAS 36 Impairment of
Assets
• If an asset's value in the financial statements is higher than its realistic value, measured as
its 'recoverable amount', the asset is judged to have been impaired.
• The value of the asset should be reduced by the amount of the impairment loss. This loss should
be charged to profit immediately. This is to ensure the asset value is not overstated in order to fulfil
the prudent concept.
• Internal and external sources provide indications of possible impairment.

External indicators are: Internal indicators are:

• significant decline in market value, • obsolescence or physical damage,
• significant adverse changes in • internal evidence available that asset’s
technological, performance will be worse than
• market, economic or expected, (Maintainence cost is
legal environment, getting higher)
• increase in market interest rates • significant adverse changes to
or rates of return, and company including plans to
• carrying amount of company’s net discontinue or restructure an
assets exceeds market operation using the asset or to
capitalization. dispose of it earlier than planned.
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 IAS 36 Impairment of
Assets
• Even if there are no indications of impairment, the following assets must always be
tested (Does not mean that you recognizr it on the spot) for impairment annually:
• An intangible asset with an indefinite useful life (Should be tested every year)
• Goodwill acquired in a business combination
• The recoverable amount is the higher of:
 the asset's fair value less costs of disposal; and
 its value in use. (Present value if you continue to use it)

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 IAS 36 Impairment of
Assets
• Fair value less costs of disposal: The price that would be received to sell an asset in an
orderly transaction between market participants at the measurement date, less costs of
disposal.
FV less costs to sell = fair value less any sales transaction cost

• Value in use: It is measured by the present value of estimated future cash flow * (inflow minus
outflow) generated by the asset, including its estimated net disposal value (if any) at the end
of its expected useful life.
Value in use = present value of estimated future net cash flow to be derived from an asset

• Determination of fair value according to IFRS 13 Fair value measurement.

• Future cash flows should include
1. Projections of cash inflows from continuing use of the asset;
2. Projections of cash outflows necessarily incurred to generate the cash inflows
from continuing use of the asset;
3. Net cash flows received or paid on disposal of the asset at the end of its useful
life.
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 IAS 36 Impairment of
Assets
Accounting treatment of impairments
• An impairment loss for assets at a historical cost is treated as a decrease on
revaluation and is recognised as an expense in profit or loss.

• If the impairment loss relates to an asset that has previously been revalued,
then it is treated as a revaluation decrease and not as an impairment loss. So it
can first be set against any balance relating to the same asset standing on the
revaluation surplus, with any excess being recognised in profit or loss.

• Depreciation charges in future accounting periods will be set to write off the
revised carrying amount, less residual value, over its remaining useful life.

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 IFRS 5 Non-current assets held for sale and
discontinuing operating
• Non-current assets held for sale (NCAHFS) – those assets that will not be used on a continuing basis and
whose carrying value will be recovered principally through the sale of that asset.
• NCAHFS must fulfil these criteria for recognition:
• The asset must be available for immediate sale (Less than 12 months) in its present condition, and
• The sale must be highly probable

• For the sale to be highly probable, the following criteria are satisfied:
• management is committed to a plan to sell (When is the expected sales)
• an active program to locate a buyer is initiated
• the sale is highly probable, within 12 months of classification as held for sale (subject to limited
• exceptions)
• the asset is being actively marketed for sale at a sales price reasonable in relation to its fair value
• actions have been taken to complete the plan to sale indicate that it is unlikely that plan will be
significantly changed or withdrawn.

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 IFRS 5 Non-current assets held for sale and
discontinuing
Measurement of assets HFS operating
• NCAHFS should be measured at the lower of its:
a) carrying amount, and
b) fair value less cost to sell
• Any impairment loss charges to SOPL unless the asset had been
measured at revalued amount through IAS16 or 38.
• After classification, impairment loss must through P&L.
•They are not to be depreciated
Presentation of assets HFS
• Transfer from non-current
asset to Current asset.

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 IFRS 5 Non-current assets held for sale and
discontinuing
Discontinued operating
operations is a component of an entity that either has been disposed
of or is classified as held for sale, and:
• represents a separate major line of business or geographical area of operations,
• is part of a single coordinated plan to dispose of a separate major line of
business or geographical area of operations, or
•is a subsidiary acquired exclusively with a view to resale.
Presentation of discontinued operations on income statement
• The sum of the post-tax profit or loss of the discontinued operation AND the post-
tax gain or loss recognized on the measurement to fair value less cost to sell or
fair value adjustments on the disposal of the assets (or disposal group) should be
presented as a single amount on the face of the SOPL. Disclose the revenue,
expenses, assets and liabilities of the discontinued operations under the notes of
account. 35
Presentation
of NCAHFS

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