Tangible & Intangible Non–Current Assets

IAS 16 Property, Plant and Equipment

IAS 40 Investment Property

IAS 23 Borrowing Costs

IAS 38 Intangible Non-Current Assets

IAS 36 Impairment of Asset

IAS 20 Government Grants

IFRS 5 Non-current asset held for sale and discontinued operation

Property, plant and equipment are tangible assets that: – Are held for use in the production or
supply of goods or services, for rental to others, or for administrative purposes – Are expected to be
used during more than one period

Recognition

The recognition of property, plant and equipment depends on two criteria:

(a) It is probable that future economic benefits associated with the asset will flow to the entity

(b) The cost of the asset to the entity can be measured reliably

Measurement criteria

Initial Measurement: on Cost

An item of property, plant and equipment should initially be measured at its cost:

Components of cost

 Purchase price, less any trade discount or rebate

 Import duties and non-refundable purchase taxes
 Directly attributable costs of bringing the asset to working condition for its intended use, eg:
– The cost of site preparation
– Initial delivery and handling costs
– Installation costs
– Testing (net of any proceeds on the sale of items produced)
– Professional fees (architects, engineers)
 Present value (initial estimate) of the unavoidable cost of dismantling and removing the
asset and restoring the site on which it is located (IAS 37)
 Borrowing cost capitalised for qualifying assets (IAS 23)
 Any subsequent expenditure, if it meets the recognition criteria

Subsequent expenditure
Subsequent expenditure on property, plant and equipment should only be treated as part of the cost
of the asset if:

 it enhances the economic benefits provided by the asset

 it relates to an overhaul or required major inspection of the asset
 it is replacing a component of a complex asset

All other subsequent expenditure should be recognised in the statement of profit or loss,
because it merely maintains the economic benefits originally expected

The following costs will not be part of the cost of property, plant or equipment
 Administration and other general overhead costs
 Start-up and similar pre-production costs
 Initial operating losses before the asset reaches planned performance
 Staff training costs
 Abnormal cost (wastage, idle time)
 Cost of relocating/reorganising an entity operations

Questions required

Question- Becker (IFRS)

Question- Kaplan (FR)

An entity started construction on a building for its own use on 1 April 20X7 and incurred the
following costs:

$000

Purchase price of land 250,000

Stamp duty 5,000

Legal fees 10,000

Site preparation and clearance 18,000

Materials 100,000

Labour (period 1 April 20X7 to 1 July 20X8) 150,000

Architect’s fees 20,000

General overheads 30,000

–––––––
 583,000
–––––––
The following information is also relevant:

 Material costs were greater than anticipated. On investigation, it was found that materials costing
$10 million had been spoiled and therefore wasted and a further $15 million was incurred on
materials as a result of faulty design work.

 As a result of these problems, work on the building ceased for a fortnight during October 20X7 and
it is estimated that approximately $9 million of the labour costs relate to this period.

 The building was completed on 1 July 20X8 and occupied on 1 September 20X8. You are required
to calculate the cost of the building that will be included in tangible non-current asset additions.

Safety and environmental equipment

These items may be necessary for the entity to obtain future economic benefits from its other
assets. For this reason, they are recognised as assets.

Exchanges of assets

IAS 16 specifies that exchange of items of property, plant and equipment, should be measured at fair
value, i.e., the fair value of the trade-in or part exchange asset plus any cash or cash equivalent
transferred to acquire the asset.

Journal entry

Debit: Asset a/c

Credit: Cash a/c

Credit: Disposal a/c (Trade-in asset)

If the exchange transaction lacks commercial substance or the fair value of neither of the assets
exchanged can be measured reliably, its cost is measured at the carrying amount of the asset given
up.

Question (BPP F3)

A business includes $110,000 worth of machinery at cost in its accounts. Its policy is to make a
provision for depreciation at 20% per annum straight line. The total provision now stands at $70,000.
A machine which cost $30,000 two years ago and has carrying value $19,000 was exchanged for a
new machine costing $60,000 with balance paid in cash. What are the relevant ledger account
entries?

Complex Asset

These are assets which are made up of separate components. Each component is separately
depreciated over its useful life.

Question (BPP FR)

An aircraft could be considered as having the following components.

 Cost Useful life

$'000

Fuselage 20,000 20 years

Undercarriage 5,000 500 Landings

landings Engines 8,000 1,600 flying hours

Depreciation at the end of the first year, in which 150 flights totalling 400 hours were made.
Calculate depreciable amount for each component of the asset.

Major inspection or overhaul costs

Inspection and overhaul costs are generally expensed as they are incurred. They are, however,
capitalised as a non-current asset to the extent that they satisfy the IAS 16 rules for separate
components. Where this is the case, they are then depreciated over their useful lives, i.e., until the
next inspection or overhaul is due.

Question (Kaplan FR)

An entity purchases an aircraft that has an expected useful life of 20 years with no residual value.
The aircraft requires substantial overhaul at the end of years 5, 10 and 15. The aircraft cost $25
million and $5 million of this figure is estimated to be attributable to the economic benefits that are
restored by the overhauls. In year 6, the cost of the overhaul is estimated to be $6 million.

Calculate the annual depreciation charge for the years 1–5 and years 6–10.

Depreciation

'Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life'

'Depreciable amount is the cost of an asset, or other amount substituted for cost, less its residual
value'

Useful life is either:

– the period over which a depreciable asset is expected to be used by the enterprise; or

– the number of production or similar units expected to be obtained from the asset by the
enterprise

The following factors should be considered when estimating the useful life of a depreciable asset.

 Expected physical wear and tear

 Obsolescence

 Legal or other limits on the use of the assets

Residual value
The residual value is the net amount which the entity expects to obtain for an asset at the end of its
useful life after deducting the expected costs of disposal.

Depreciation Methods

Depreciation is a means of spreading the cost of a non-current asset over its useful life, in order to
match the cost of the asset with the profits it earns for the business.

Methods

- Straight line method

- Reducing balance/written down method

Straight Line Method

The total depreciable amount is charged in equal instalments to each accounting period over the
expected useful life of the asset.

Formula

Cost−residual value
Depreciation amount =
Estimated useful life
Reducing Value Method

The reducing balance method of depreciation calculates the annual depreciation charge as a fixed
percentage of the carrying amount of the asset, as at the end of the previous accounting period until
it reaches to its residual value.

Note: Unlike the straight-line method, we do not deduct the residual value from the cost before
depreciating.

Formula

Depreciation amount = ( Carrying Value∗Depreciation % )

Question (BPP FA)

A lorry bought for a business cost $17,000. It is expected to last for five years and then be sold for
scrap for $2,000. Required Work out the depreciation to be charged each year under:

(a) The straight-line method

(b) The reducing balance method (using a rate of 35%)

Changes in Depreciation Method

The depreciation method should be reviewed at least annually and, if the pattern of consumption of
benefits has changed, the depreciation method should be changed prospectively as a change in
estimate under IAS 8.

Formula: Reducing value method to Straight line method

 Carrying value−residual value
New depreciation =
Remaining useful life

Formula: Straight line method to reducing value method

New deprecation = ( Carrying Value∗Depreciation % )

Question (BPP FA)

Jakob Co purchased an asset for $100,000 on 1.1.X1. It had an estimated useful life of 5 years and it
was depreciated using the reducing balance method at a rate of 40%. On 1.1.X3 it was decided to
change the method to straight line. Show the depreciation charge for each year (to 31 December) of
the asset's life.

Changes in estimated useful life of an asset

The residual value and the useful life of an asset should be reviewed at least at each financial year-
end and, if expectations differ from previous estimates, any change is accounted for prospectively as
a change in estimate under IAS 8.

Formula

Carrying value−residual value

New depreciation =
Revised useful life

Question (BPP FR)

Bashful Co acquired a non-current asset on 1 January 20X2 for $80,000. It had no residual value and
a useful life of ten years. On 1 January 20X5 the remaining useful life was reviewed and revised to
four years. What will be the depreciation charge for 20X5?

Depreciation: - Accounting Treatment

Journal Entry

Debit: Depreciation expense (income statement)

Credit: Accumulated depreciation (statement of financial position)

Presentation in the Financial Statements

Income Statement Statement of Financial Position

Particular Amount Particular Amount
Revenue Non- Current Asset
Less: COGS Property plant and equipment – on cost xxx
Gross Profit XXX Less: Accumulated Depreciation (xxx)
Depreciation expense (XX) Carrying value (XXX)
Other expenses Other non-current assets
PBIT XX Total non-current assets XX
Subsequent Measurement: on Cost or Revaluation Model

IAS 16 allows a choice of accounting treatment for property, plant and equipment:

 the cost model

 the revaluation model.

The cost model

Property, plant and equipment should be valued at cost less accumulated depreciation.

The revaluation model

Property, plant and equipment may be carried at a revalued amount less any subsequent
accumulated depreciation.

Impact of revaluation

 All assets in same class to be revalued

 Once revalued, revaluations must be kept up to date

 Subsequent depreciation will be based on the new value and remaining useful life

Accounting for Revaluation Upward

Journal entry

Debit: Asset (Increase: - Fair value – cost) -SOFP

Debit: Accumulated Depreciation (Removal of old depreciation a/c) - SOFP

Credit: Revaluation Surplus (Fair Value – Carrying Value) -OCI and SOCIE

Presentation in Financial Statements

Income Statement Statement of Financial Position

Particular Amount Particular Amount
Profit before tax Non- Current Asset
Less: Income tax Property plant and equipment – Fair Value xxx
Profit after tax XXX Less: New Accumulated Depreciation (xxx)
Other Comprehensive Income Carrying value on fair value (XXX)
Revaluation Surplus xxx Other non-current assets
Total income XXX Total non-current assets XX
Question (BPP FA) Equity and liability
Share Capital xx
Other equity components xx
Revaluation Surplus xx
Total Equity XXX
When Ira Vann commenced trading as a car hire dealer on 1 January 20X1, he purchased business
premises at a cost of $50,000. For the purpose of accounting for depreciation, he decided the
following.

(a) The land part of the business premises was worth $20,000; this would not be depreciated.

(b) The building part of the business premises was worth the remaining $30,000. This would be
depreciated by the straight-line method to a nil residual value over 30 years.

After five years of trading, on 1 January 20X6 Ira decides that his business premises are now worth
$150,000, divided into:

Land 75,000

Building 75,000

150,000

He estimates that the building still has a further 25 years of useful life remaining.

Required

(a) Calculate the annual charge for depreciation for the first five years of the building’s life and the
statement of financial position value of the land and building as at the end of each of the first five
years.

(b) Demonstrate the impact the revaluation will have on the depreciation charge and the statement
of financial position value of the land and building.

Excess depreciation

It’s a difference between new depreciation charged on revalued asset and the old depreciation
charged on the original cost

Excess depreciation = New Depreciation – Old Depreciation

IAS 16 allows entities to transfer an amount equal to the excess depreciation from the revaluation
surplus to retained earnings in the equity section of the statement of financial position, if they wish
to do so

Revaluation Downward

Any decrease in the value of asset should directly be recorded as an expense (loss) in the statement
of profit or loss a/c and not in the other comprehensive income (OCI) as per the prudence concept.

Journal Entry

Debit: Revaluation Loss (income statement)

Debit: Accumulated Depreciation (removal of old depreciation a/c) - SOFP

Credit: Asset (Cost – Fair Value) – SOFP

Presentation in the Financial Statements

Income Statement Statement of Financial Position

Particular Amount Particular Amount
Depreciation expense xxx Non- Current Asset
Revaluation Loss xxx Property plant and equipment – Fair Value xxx
Profit before interest & tax XXX Less: New Accumulated Depreciation (xxx)
Less: Income tax Carrying value on fair value (XXX)
Profit after tax xxx Other non-current assets
Other Comprehensive Income xxx Total non-current assets XX
Nil ---
Total Income XXX

Revaluation Downward: where revaluation surplus already exists

When a revaluation loss arises on a previously revalued asset it should be deducted first against the
previous revaluation gain and can therefore be taken to other comprehensive income in the year.
Any excess impairment will then be recorded as an impairment expense in the statement of profit or
loss.

Question (Kaplan FR)

On 1 April 20X8 the fair value of Xu's property was $100,000 with a remaining life of 20 years. Xu’s
policy is to revalue its property at each year end. At 31 March 20X9 the property was valued at
$86,000. The balance on the revaluation surplus at 1 April 20X8 was $20,000 which relates entirely
to the property. Xu does not make a transfer to realised profit in respect of excess depreciation.
Required:

1 Prepare extracts of Xu's financial statements for the year ended 31 March 20X9 reflecting the
above information.

2 State how the accounting would be different if the opening revaluation surplus did not exist.

Derecognition

An entity is required to derecognise the carrying amount of an item of property, plant or equipment
and reclassify the asset under IFRS 5 – Non-current asset held for sale. On the date of disposal, the
criteria for sale as per IFRS 15 - Revenue from contracts with customers should be met with any gain
or loss should be recognised in the statement of profit or loss.

Disposal of Non-Current Asset

An entity requires to move the cost and related accumulated depreciation of the disposable asset to
the asset disposal account. The gain or loss arising from the sale of the assets should be recorded in
the statement of profit or loss a/c.

Disposal A/C Journal Entries

Particular Amount Particular Amount
Original Cost xx Accumulated xx 1. Transfer of asset to disposal a/c
Depreciation Debit: Disposal a/c
Credit: Asset a/c (cost)
2. Transfer of accumulated dep.
Debit: Accumulated dep a/c
Credit: Disposal a/c
3. Proceeds from sale
 Cash (proceeds) xx

Profit on Bal fig. Loss on disposal Bal fig.

disposal
XXX XXX

Question (BPP FA)

A business purchased a machine on 1 July 20X1 at a cost of $35,000. The machine had an estimated
residual value of $3,000 and a life of eight years. The machine was sold for $18,600 on 31 December
20X4, the last day of the accounting year of the business. To make the sale, the business had to incur
dismantling costs and costs of transporting the machine to the buyer's premises. These amounted to
$1,200. The business uses the straight-line method of depreciation.

What was the profit or loss on disposal of the machine?

A business purchased two rivet-making machines on 1 January 20X5 at a cost of $15,000 each. Each
had an estimated life of five years and a nil residual value.

The straight-line method of depreciation is used. Owing to an unforeseen slump in market demand
for rivets, the business decided to reduce its output of rivets, and switch to making other products
instead.

On 31 March 20X7, one rivet-making machine was sold (on credit) to a buyer for $8,000. Later in the
year, however, it was decided to abandon production of rivets altogether, and the second machine
was sold on 1 December 20X7 for $2,500 cash.

Prepare the machinery account, depreciation of machinery account and disposal of machinery
account for the accounting year to 31 December 20X7.

Disposal of Revalued Asset

When a revalued asset is disposed of, IAS 16 says that 'the revaluation surplus included in equity in
respect of an item of property, plant and equipment may be transferred directly to retained earnings
when the asset is derecognised'

There are two steps to disposing of a revalued asset:

 Calculate gain on disposal by comparing sale proceeds to carrying amount

 Transfer balance on revaluation surplus to retained earnings

Debit: Revaluation surplus - SOCIE

Credit: Retained earnings - SOCIE

Question (Kaplan FR)

Derek purchased a property costing $750,000 on 1 January 20X4 with a useful life of 10 years. It has
no residual value. At 31 December 20X4 the property was valued at $810,000 resulting in a gain on
revaluation being recorded in other comprehensive income of $135,000. There was no change to its
useful life. Derek does not make a transfer to realised profits in respect of excess depreciation on
revalued assets. On 31 December 20X6 the property was sold for $900,000.

Required:

How should the disposal on the previously revalued asset be treated in the financial statements for
the year ended 31 December 20X6?

Disclosure in financial statements

IAS 16 requires a reconciliation of the opening and closing carrying amounts of non-current assets to
be given in the financial statements.

The reconciliation should show the movement on the non-current asset balance and include the
following:

 Additions

 Disposals

 Increases/decreases from revaluations

 Reductions in carrying amount

 Depreciation

 Any other movements.

the financial statements should also disclose the following

(a) Measurement bases for determining the gross carrying amount (if more than one, the gross
carrying amount for that basis in each category)

(b) Depreciation methods used

(c) Useful lives or depreciation rates used

(d) Gross carrying amount and accumulated depreciation (aggregated with accumulated impairment
losses) at the beginning and end of the period

For revalued assets:

 Basis used to revalue the assets

 Effective date of the revaluation

 Whether an independent valuer was involved

 Carrying amount of each class of property, plant and equipment that would have been included in
the financial statements had the assets been carried at cost less depreciation

 Revaluation surplus, indicating the movement for the period and any restrictions on the
distribution of the balance to shareholders.
IAS 23 Borrowing Costs

IAS 23 Borrowing Costs requires that borrowing costs directly attributable to the acquisition,
construction or production of a 'qualifying asset' (one that necessarily takes a substantial period of
time to get ready for its intended use or sale) are included in the cost of the asset.

Other borrowing costs are recognised as an expense.

Borrowing costs- Interest and other costs incurred by an entity in connection with the borrowing of
funds.

Borrowing cost may include:

interest expense calculated by the effective interest method under IAS 39,

finance charges in respect of finance leases recognised in accordance with IAS 17 Leases, and

exchange differences arising from foreign currency borrowings to the extent that they are regarded
as an adjustment to interest costs

Qualifying asset- An asset that necessarily takes a substantial period of time to get ready for its
intended use or sale.

Depending on the circumstances, any of the following may be qualifying assets.

 Inventories

 Manufacturing plants

 Power generation facilities

 Intangible assets

 Investment properties

 Bearer plants

Scope of IAS 23

Two types of assets that would otherwise be qualifying assets are excluded from the scope of IAS 23:

qualifying assets measured at fair value, such as biological assets accounted for under IAS 41
Agriculture

inventories that are manufactured, or otherwise produced, in large quantities on a repetitive basis
and that take a substantial period to get ready for sale (for example, maturing whisky)

Commencement of capitalisation
 IAS 23 states that capitalisation of borrowing costs should commence when all of the following
conditions are met:

 expenditure for the asset is being incurred

 borrowing costs are being incurred

 activities that are necessary to prepare the asset for its intended use or sale are in progress.

Accounting treatment

Recognition

Borrowing costs that are directly attributable to the acquisition, construction or production of a
qualifying asset form part of the cost of that asset and, therefore, should be capitalised.

Measurement

Specific borrowings

When an entity borrows funds specifically for the purpose of obtaining a qualifying asset, the
borrowing costs eligible for capitalisation are the actual borrowing costs incurred on that borrowing
during the period, less any investment income on the temporary investment of the borrowings
during the capitalisation period.

Borrowing Cost = Interest cost incurred – interest income earned on temporary income

Question (BPP FR)

On 1 January 20X6 Stremans Co borrowed $1.5m to finance the production of two assets, both of
which were expected to take a year to build. Work started during 20X6. The loan facility was drawn
down and incurred on 1 January 20X6, and was utilised as follows, with the remaining funds invested
temporarily.

Asset Alpha Asset Bravo

$'000 $'000

1 January 20X6 250 500

1 July 20X6 250 500

The loan rate was 9% and Stremans Co can invest surplus funds at 7%. Required Ignoring compound
interest, calculate the borrowing costs which may be capitalised for each of the assets and
consequently the cost of each asset as at 31 December 20X6.

General borrowings

where borrowings are obtained generally, but are applied in part to obtaining a qualifying asset,
then the amount of borrowing costs eligible for capitalisation is found by applying the 'capitalisation
rate' to the expenditure on the asset.

Capitalisation rate is the weighted average of the borrowing costs applicable to the borrowings of
the entity that are outstanding during the period.

Question (BPP FR)

Acruni Co had the following loans in place at the beginning and end of 20X6.

1 January 20X6 31 December 20X6

$m $m

10% Bank loan repayable 20X8 120 120

9.5% Bank loan repayable 20X9 80 80

8.9% debenture repayable 20X7 – 150

The 8.9% debenture was issued to fund the construction of a qualifying asset (a piece of mining
equipment), construction of which began on 1 July 20X6.

On 1 January 20X6, Acruni Co began construction of a qualifying asset, a piece of machinery for a
hydro-electric plant, using existing borrowings. Expenditure drawn down for the construction was:
$30m on 1 January 20X6, $20m on 1 October 20X6.

Required

Calculate the borrowing costs that can be capitalised for the hydro-electric plant machine.

Suspension of capitalisation

Capitalisation of borrowing costs should be suspended during extended periods in which active
development of a qualifying asset is suspended.

Cessation of capitalisation

Borrowing costs are no longer capitalised when substantially all the activities necessary to prepare
the qualifying asset for its intended use or sale are complete. This will normally be when physical
construction of the asset is completed, although minor modifications may still be outstanding.

Disclosure

The following should be disclosed in the financial statements in relation to borrowing costs.

(a) Amount of borrowing costs capitalised during the period

(b) Capitalisation rate used to determine the amount of borrowing costs eligible for capitalisation

IAS 40 Investment Property

Investment property is property (land or a building—or part of a building— or both) held (by the
owner or by the lessee as a right-of-use asset) to earn rentals or for capital appreciation or both,
rather than for:

(a) use in the production or supply of goods or services or for administrative purposes; or

(b) sale in the ordinary course of business

Examples of investment property include:

(a) Land held for long-term capital appreciation rather than for short-term sale in the ordinary
course of business

(b) A building owned by the reporting entity (or held by the entity as a right-of-use asset) and leased
out under an operating lease

(c) A building held by a parent and leased to a subsidiary. Note, however, in the consolidated
financial statements this property will be regarded as owner-occupied (because it is occupied by the
group) and will therefore be treated in accordance with IAS 16.

(d) Property that is being constructed or developed for future use as an investment property

Accounting Treatment

Recognition

An owned investment property shall be recognised as an asset when, and only when:

(a) it is probable that the future economic benefits that are associated with the investment property
will flow to the entity; and

(b) the cost of the investment property can be measured reliably

Measurement

Initial measurement

Investment property is initially measured at cost, including transaction costs (same as IAS 16).

cost should not include

start-up costs,

abnormal waste, or

initial operating losses incurred before the investment property achieves the planned level of
occupancy.

Subsequent Measurement

IAS 40 requires an entity to choose between two models:

 The fair value model

 The cost model

Whatever policy it chooses should be applied to all of its investment property

Fair value model

Under the fair value model:

 the asset is revalued to fair value at the end of each year

 the gain or loss is shown directly in the statement of profit or loss (not other comprehensive
income)

 no depreciation is charged on the asset.

Fair value is normally established by reference to current prices on an active market for properties in
the same location and condition.

Cost model

Under the cost model the asset should be accounted for in line with the cost model laid out in IAS
16.

Investment property should be measured at depreciated cost, less any accumulated impairment
losses.

An entity that chooses the cost model should disclose the fair value of its investment property.

Question (Kaplan FR)

Celine, a manufacturing entity, purchases a property for $1 million on 1 January 20X1 for its
investment potential. The land element of the cost is believed to be $400,000, and the buildings
element is expected to have a useful life of 50 years. At 31 December 20X1, local property indices
suggest that the fair value of the property has risen to $1.1 million.

Required:

Show how the property would be presented in the financial statements as at 31 December 20X1 if
Celine adopts: (a) the cost model (b) the fair value model.

Changing models

Once the entity has chosen the fair value or cost model, it should apply it to all its investment
property. It should not change from one model to the other unless the change will result in a more
appropriate presentation.

Transfers to or from investment property

An entity shall transfer a property to, or from, investment property when, and only when, there is a
change in use. A change in use occurs when the property meets, or ceases to meet, the definition of
investment property and there is evidence of the change in use.

Examples of evidence of a change in use include:

(a) commencement of owner-occupation, or of development with a view to owner-occupation,

(transfer from investment property to owner-occupied property) – (IAS 40 to IAS 16)

(b) commencement of development with a view to sale, (transfer from investment property to
inventories) – (IAS 40 to IAS 2)

(c) end of owner-occupation, (transfer from owner-occupied property to investment property) - (IAS
16 to IAS 40)

(d) inception of an operating lease to another party, (transfer from inventories to investment
property) - (IAS 2 to IAS 40)

Transfers to or from investment property under cost model

When an entity applies cost model to its investment property, a transfer does not change the
carrying amount of the property transferred and it does not change the cost of that property for
measurement or disclosure purposes and continues to be depreciated.

Transfers from investment property under fair value model

When a transfer from investment property carried at fair value to owner-occupied property or
inventories occurs, revalue the property first per IAS 40 (taking the gain or loss to the statement of
profit or loss) and then transfer to property, plant and equipment at fair value

Transfers to investment property under fair value model

When an owner-occupied property becomes an investment property, IAS 16 or IFRS 16 is applied up

to the date of the transfer.

 The asset must first be revalued per IAS 16 (creating a revaluation surplus in equity) and then
transferred into investment property at fair value.

When a property is transferred from inventory to investment property carried at fair value, any
difference between the fair value at the transfer date and its previous carrying amount is recognised
in P/L

Question (BPP FR)

Kapital Co owns a building which it has been using as a head office. In order to reduce costs, on 30
June 20X9 it moved its head office functions to one of its production centres and is now letting out
its head office. Company policy is to use the fair value model for investment property. The building
had an original cost on 1 January 20X0 of $250,000 and was being depreciated over 50 years. At 31
December 20X9 its fair value was judged to be $350,000. How will this appear in the financial
statements of Kapital Co at 31 December 20X9?

Question (Kaplan FR)

Kyle Co purchased an investment property some year ago and carries it under the fair value model.
At 1 January 20X1, the property had a fair value in Kyle Co's financial statements of $12 million. On 1
July 20X1 Kyle Co decided to move into the property and use it for its own business. At this date the
asset had a fair value of $14 million and a remaining useful life of 14 years. What amount should be
recorded in Kyle Co's statement of profit or loss for the year ended 31 December 20X1?

Disposals

Derecognise (eliminate from the statement of financial position) an investment property on disposal
or when it is permanently withdrawn from use and no future economic benefits are expected from
its disposal. Any gain or loss on disposal is the difference between the net disposal proceeds and the
carrying amount of the asset. It should generally be recognised as income or expense in profit or loss

Disclosure requirements

These relate to:

 Choice of fair value model or cost model

 Criteria for classification as investment property

 Assumptions in determining fair value

 Use of independent professional valuer (encouraged but not required)

 Rental income and expenses

 Any restrictions or obligations

Fair value model – additional disclosures

An entity that adopts this must also disclose a reconciliation of the carrying amount of the
investment property at the beginning and end of the period.

Cost model – additional disclosures

These relate mainly to the depreciation method. In addition, an entity which adopts the cost model
must disclose the fair value of the investment property.

IAS 38: Intangible Assets

The objectives

(a) To establish the criteria for when an intangible asset may or should be recognised

(b) To specify how intangible assets should be measured

(c) To specify the disclosure requirements for intangible assets

AS 38 applies to all intangible assets other than: [IAS 38.2-3]

 financial assets (see IAS 32 Financial Instruments: Presentation)

 exploration and evaluation assets (see IFRS 6 Exploration for and Evaluation of Mineral
Resources)
 expenditure on the development and extraction of minerals, oil, natural gas, and similar
resources
 intangible assets arising from insurance contracts issued by insurance companies

 intangible assets covered by another IFRS, such as

- intangibles held for sale (IFRS 5 Non-current Assets Held for Sale and Discontinued
Operations),
- deferred tax assets (IAS 12 Income Taxes),
- lease assets (IAS 17 Leases),
- assets arising from employee benefits (IAS 19 Employee Benefits (2011)), and
 - goodwill (IFRS 3 Business Combinations).

Definition of an intangible asset

An intangible asset is an identifiable non-monetary asset without physical substance The asset must
be:

o Identifiable
o Should be controlled (power to obtain benefits from the asset)
o Inflow of future economic benefits (such as revenues or reduced future costs)

Identifiability: an intangible asset is identifiable when it:

is separable (capable of being separated and sold, transferred, licensed, rented, or exchanged, either
individually or together with a related contract) or

arises from contractual or other legal rights, regardless of whether those rights are transferable or
separable from the entity or from other rights and obligations.

Examples of intangible assets

 patented technology, computer software, databases and trade secrets

 trademarks, trade dress, newspaper mastheads, internet domains
 video and audio-visual material (e.g. motion pictures, television programmes)
 customer lists
 mortgage servicing rights
 licensing, royalty and standstill agreements
 import quotas
 franchise agreements
 customer and supplier relationships (including customer lists)
 marketing rights

Recognition

Recognition criteria. IAS 38 requires an entity to recognise an intangible asset, whether purchased or
self-created (at cost) if, and only if: [IAS 38.21]

it is probable that the future economic benefits that are attributable to the asset will flow to the
entity; and the cost of the asset can be measured reliably.

Measurement criteria

Initial Measurement : on Cost

If an intangible asset is purchased separately (such as a licence, patent, brand name), it should be
recognised initially at cost.

The cost of a separately acquired intangible asset comprises:

(a) its purchase price, including import duties and non-refundable purchase taxes, after deducting
trade discounts and rebates; and

(b) any directly attributable cost of preparing the asset for its intended use

Examples of expenditures that are not part of cost of an intangible asset are:

a) Costs of introducing a new product or service (advertising cost)

b) Costs of conducting business in a new location or with a new class of customers (training cost of
staff)

c) Pre-operating losses, Administration and other general overheads

The capitalization of expenses ceases when the asset is ready for its intended use therefore; the
expenditures incurred afterwards are not capitalized.

Deferred payments

If the payment for an intangible asset is deferred beyond normal credit terms, its cost will be the
cash price equivalent. The difference between this amount and the total payments will be
recognized as interest expense or will be capitalized if meets the requirements of IAS-23.

Acquisition as part of business combination

When an intangible asset is acquired as part of a business combination (i.e., an acquisition or

takeover), the cost of the intangible asset is its fair value at the date of the acquisition (e.g.,
Goodwill)

Acquisition by way of a government grant

In accordance with IAS 20 Accounting for Government Grants and Disclosure of Government
Assistance, an entity may choose to recognise both the intangible asset and the grant initially at fair
value.

If an entity chooses not to recognise the asset initially at fair value, the entity recognises the asset
initially at a nominal amount (the other treatment permitted by IAS 20) plus any expenditure that is
directly attributable to preparing the asset for its intended use.

Exchanges of assets

If one intangible asset is exchanged for another, the cost of the intangible asset is measured at fair
value unless:

(a) The exchange transaction lacks commercial substance, or

(b) The fair value of neither the asset received nor the asset given up can be reliably measured.
Otherwise, its cost is measured at the carrying amount of the asset given up.

Question (Becker IFRS)

Doug Co is developing a new production process. During 20X3, expenditure incurred was $100,000,
of which $90,000 was incurred before 1 December 20X3 and $10,000 between 1 December 20X3
and 31 December 20X3. Doug Co can demonstrate that, at 1 December 20X3, the production process
met the criteria for recognition as an intangible asset. The recoverable amount of the know-how
embodied in the process is estimated to be $50,000. Required How should the expenditure be
treated?

Measurement after initial recognition

There is a choice between:

 the cost model

Applying the cost model, an intangible asset should be carried at its cost, less any
accumulated amortisation and less any accumulated impairment losses.
 the revaluation model
The revaluation model allows an intangible asset to be carried at a revalued amount, which
is its fair value at the date of revaluation, less any subsequent accumulated amortisation and
any subsequent accumulated impairment losses.
IAS 38 states that active markets for intangible assets are rare, and specifically prohibits the
revaluation of patents, brand names, trademarks and publishing rights.

Classification of intangible assets based on useful life

Intangible assets are classified as having:

 Indefinite life: no foreseeable limit to the period over which the asset is expected to generate net
cash inflows for the entity.

An intangible asset with an indefinite useful life:

 should not be amortised

 should be tested for impairment annually, and more often if there is an actual indication of
possible impairment.

 Finite life: a limited period of benefit to the entity

An intangible asset with a finite useful life must be amortised over that life, normally using the
straight-line method with a zero residual value.
Amortization

Amortisation is the systematic allocation of the depreciable amount of an intangible asset over its
useful life.

Method od Amortization

 Straight Line Method

 Written Down Method- (rare)

Amortisation period and amortisation method

 An intangible asset with a finite useful life should be amortised over its expected useful life.
 The residual value of an intangible asset with a finite useful life is assumed to be zero
 Amortisation should start when the asset is available for use.
 Amortisation should cease at the earlier of the date that the asset is classified as held for
sale in accordance with IFRS 5 and the date that the asset is derecognised.
 The amortisation method used should reflect the pattern in which the asset's future
economic benefits are consumed.
 The amortisation charge for each period should normally be recognised in profit or loss
 The amortization period and the amortization method for an intangible asset with a finite
useful life shall be reviewed at least at each financial year end.

Internally-generated intangible assets

Generally, internally-generated intangible assets cannot be capitalised, as the costs associated with
these cannot be identified separately from the costs associated with running the business. The
following internally-generated items may never be recognised:

 goodwill ('inherent goodwill')

 brands

 mastheads

 publishing titles

 customer lists

Goodwill

Internally Generated Purchased Goodwill

is also known as inherent goodwill arises when one business acquires another as a
going concern
has no identifiable value includes goodwill arising on the consolidation
of a subsidiary
is not recognised in the financial statements. will be recognised in the financial statements as
an asset as per IFRS 3 Business Combination

Research and Development Cost

Research Cost
Research is original and planned investigation undertaken with the prospect of gaining new scientific
or technical knowledge and understanding.

In the research phase

an entity cannot demonstrate that an intangible asset exists that will generate probable future
economic benefits.

Therefore, this expenditure is recognised as an expense when it is incurred.

Examples of research activities are:

(a) activities aimed at obtaining new knowledge;

(b) the search for, evaluation and final selection of, applications of research findings or other
knowledge;

(c) the search for alternatives for materials, devices, products, processes, systems or services; and
(d) the formulation, design, evaluation and final selection of possible alternatives for new or
improved materials, devices, products, processes, systems or services.

Development Cost

Development is the application of research findings or other knowledge to a plan or design for the
production of new or substantially improved materials, devices, products, processes, systems or
services before the start of commercial production or use

Development phase

An intangible asset arising from development (or from the development phase of an internal project)
shall be recognised if, and only if, an entity can demonstrate all of the following:

 Probable flow of economic benefit from the asset, whether through sale or internal cost savings.

 Intention to complete the intangible asset and use or sell it

 Reliable measure of development cost

 Adequate resources to complete the project

 Technical feasibility of completing the intangible asset so that it will be available for use or sale

 Expected to be profitable, i.e. the costs of the project will be exceeded by the benefits generated.

It is only expenditure incurred after the recognition criteria have been met which should be
recognised as an asset

Development expenditure recognised as an expense in profit or loss cannot subsequently be

reinstated as an asset

If an item of plant is used in the development process, the depreciation on the plant is added to the
development costs in intangible assets during the period that the project meets the development
criteria.

Amortisation

Development expenditure should be amortised over its useful life as soon as commercial production
begins.
Past expense not recognized as an asset (Reinstatement)

Expenditure on an intangible asset that was initially recognized as an expense shall not be
recognized as part of the cost of an intangible asset.

Retirements and disposals

An intangible asset shall be derecognised:

(a) on disposal; or

(b) when no future economic benefits are expected from its use or disposal.

The gain or loss arising from the derecognition of an intangible asset shall be determined as the
difference between the net disposal proceeds, if any, and the carrying amount of the asset.

The gain or loss shall be recognised in profit or loss when the asset is derecognised.

IAS 36- Impairment of Assets

Objective of IAS 36 Impairment of Assets

The objective is to set rules to ensure that the assets of an entity 'are carried at no more than their
recoverable amount' and to define how recoverable amount is determined.

Scope of IAS 36

IAS 36 applies to all assets other than:

 inventories (IAS 2)
 construction contracts (IAS 11)
 deferred tax assets (IAS 12)
 assets arising from employee benefits (IAS 19)
 financial assets included in the scope of IFRS 9
 investment property measured at fair value (IAS 40)
 non-current assets classified as held for sale (IFRS 5)

Therefore, IAS 36 applies to (among other assets):

 Land buildings
 Machinery and equipment
 Investment property carried at cost
 Intangible assets
 goodwill
 Investments in subsidiaries, associates, and joint ventures carried at cost
 Assets carried at revalued amounts under IAS 16 and IAS 38

DEFINITIONS

 An impairment loss is the amount by which the carrying amount of an asset or cash generating unit
exceeds its recoverable amount.

 Recoverable amount is the higher of an asset’s fair value less costs of disposal and its value in use.
 Fair value: the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date

 Value in use is the present value of the future cash flows expected to be derived from an asset or
cash generating unit.

 A cash-generating unit is the smallest identifiable group of assets that generates cash inflows from
continuing use that are largely independent of the cash inflows from other assets or groups of
assets.

 Corporate assets are assets other than goodwill that contribute to the future cash flows of both the
cash-generating unit under review and other cash-generating units.