Module 3:

Accounting for assets and

liabilities (P1)
 What you will learn?

 Property plant and equipment – IAS 16

 Intangible assets – IAS 38

 Investment property – IAS 40

 Impairment of assets – IAS 36

 Borrowing costs – IAS 23

 Accounting for government grants and disclosure of

government assistance – IAS 20

 Inventories – IAS 2

 Leases – IFRS 16

 Non-current assets held for sale and discontinued

operations – IFRS 5
 Introduction
Assets

Accounting
treatment

Definition
Determining whether
A present economic resource
an item meets
controlled by the entity as a result
definition
of past events

Recognition
Determining whether
Not all of an entity’s assets should
the assets should be
be recognised in the statement as
recognised in the
some cannot be measured with
SOFP
sufficient reliability

Measurement
Determining how the
Assets can be measured using
assets should be
depreciated cost or current market
measured
value
IAS 16: Property Plant and Equipment
Definition and recognition

Definition

expected to be used during more than one

period
PPE
Tangible
held for:
items that  production/supply goods or services
 rental
 administrative purpose

Recognition

future economic benefits associated with the

PPE is item will flow to the entity
recognised
if item’s cost can be measured reliably
IAS 16: Property Plant and Equipment
Initial measurement

Initial measurement
PPE is initially recognised at its cost

Purchase price
Estimated
(including duties Directly
cost of
& non- ± attributable ± dismantling
refundable cost
after use
taxes)
IAS 16: Property Plant and Equipment
Initial measurement

Directly attributable costs include

Employee benefits payable to staff installing, constructing, or

initially testing the asset

Site preparation

Professional fees directly associated with the installation,

construction, or initially testing of the asset

Any other overhead cost directedly associated with installation,

construction, or initially testing of the asset
IAS 16: Property Plant and Equipment
Subsequent measurement

REVALUATION
COST MODEL
MODEL

COST
or FAIR VALUE

− −
Subsequent
Accumulated
accumulated
depreciation
depreciation
− −
Subsequent
Accumulated
accumulated
Impairment loss
impairment loss
IAS 16: Property Plant and Equipment
Revaluation model

Requirements

Applied to all assets within the same class

Revaluation must be carried out with sufficient regularity

(the more volatile of fair value, the more frequently
revaluation varried out)

Revaluation amounts must represent fair value

IAS 16: Property Plant and Equipment
Revaluation model

 Increase – recognised in OCI

 Increase reverses a previous
decrease – first recognised in SPL

Differences
in Fair value

 Decrease – recognised in SPL

 Decrease reverses a previous
increase – first recognised in OCI
IAS 16: Property Plant and Equipment
Revaluation model

Revaluation gain and loss

Carrying value at the date of revaluation 4000 (A)

If the revalued amount 5000 (B)

If the revalued amount 3000 (C)

Revaluation gain: DR PPE 1,000

B>A CR OCI 1,000 OCI of
SPLOCI

DR OCI 1,000
Equity
CR Revaluation reserves 1,000 of
SOFP

DR Revaluation reserve  Retained earnings: Compensate for

annual depreciation for revalued
CR Retained earning asset
 Depend on the policy of the company
IAS 16: Property Plant and Equipment
Revaluation model

Revaluation loss:
C<A

DR Profit or Loss 1,000

CR PPE 1,000
 IAS 16: Property Plant and Equipment
Example: Revaluation model

Acorn Co bought land for $500,000 on 1 March 20X1, accounting

for it using the revaluation model.
The land had a fair value of $600,000 at 31 December 20X1,
however this had dropped to $450,000 at 31 December 20X2.

At 31 December 20X1 the revaluation increase is accounted for by:

DR Land $100,000
CR OCI (revaluation surplus) $100,000

At 31 December 20X2 the revaluation decrease is accounted for by:

DR OCI (revaluation surplus) $100,000

DR Profit or loss $50,000
CR Land $150,000
IAS 16: Property Plant and Equipment
Depreciation

Depreciation
All assets other than land must be depreciated

Cost less residual value expected at the end of

the useful life
Depreciable
amount
Recognised as an expense over its useful life

The residual value & the useful life & depreciation method should
be reviewed annually

A revalued asset is depreciated by spreading its fair value over its

remaining useful life
IAS 16: Property Plant and Equipment
Depreciation method

Straight line Cost – Residual value

method Expected useful life of the asset

Reducing balance
Carrying amount x %
method

(Original value – Salvage value) x Units

Units of production
per year
method
Estimated Production Capability

(Cost – Residual Value) x y/d

Sum of digits y: remaining useful life
method d: sums of digit = n(n+1)/2
n: useful life
IAS 16: Property Plant and Equipment
Example: Reducing balance method

ABC bought a new van for $5,000 on 1 January 20X9. The van’s
estimated useful life is 4 years, at the end of which it is expected
to have a scrap value of $1,000. ABC applied reducing balance
method in calculating depreciatio, with depreciation rate = 30%.

Annual depreciation = CA x %

Brought Depreciation Carried

Year Calculation
forward in year forward

1 5000 5000 x 30% 1500 3500

2 3500 3500 x 30% 1050 2450

3 2450 2450 x 30% 735 1715

4 1715 1715 - 1000 715 1000

IAS 16: Property Plant and Equipment
Example: Revaluation and depreciation

ABC bought an asset for $10,000 at the beginning of 20X6. It had

a useful life of 5 years. On 1 July 20X8 the asset was revalued to
$14,000. The expected useful life has remained unchanged (ie
2.5 years remain).
$10,000
1/7/20X8, [Link] = 2,5 x = $5,000
5
$10,000
1/7/20X8, CA = $10,000 – 2,5 x = $5,000
5
DR Asset value $9,000
CR Other comprehensive income (OCI) $9,000

DR OCI $9,000
CR Revaluation surplus $9,000
Depreciation each year for the next 3 years and 6 months =
$14,000
= $5,600
2,5
The extra depreciation = $5,600 - $2,000 = $3,600
DR Revaluation Reserve $3,600
CR Retained Earnings $3,600
(Depend on the policy of the company)
IAS 16: Property Plant and Equipment
Disposal

Gain/Loss on disposal
= difference between the proceeds and carrying amount

Revaluation surplus can transferred to RE

Disposal
of
revalued
asset
Disclosed in Statement of Changes in
Equity
IAS 16: Property Plant and Equipment
Example: Disposal of revalued asset

An asset owned by Delta which are depreciated on a straight

line basis with no estimated residual value

Estimated useful life at acquisition 6 years

$’000

Cost on 1/4/2010 120,000

Accumulated depreciation (2 years) (40,000)

Carrying amount at 31/3/2012 80,000

Revaluation on 1/4/2012:

Revalued amount 112,000

Revised estimated remaining useful life 5 years

Subsequent expenditure capitalized on 1/4/2013 14,400

Asset was sold on 31/3/2014 for $70,000

IAS 16: Property Plant and Equipment
Example: Disposal of revalued asset

$’000

Carrying amount at 31/3/2012 80,000

Balance = gain to revaluation surplus 32,000

Revaluation on 1/4/2012 112,000

Depreciation year ended 31/3/2013 ($112,000/5 years) (22,400)

Carrying amount at 31/3/2013 89,600

Subsequent expenditure capitalized on 1/4/2013 14,400

104,000

Depreciation year ended 31/3/2014 ($104,000/4 years) (26,000)

78,000

Sales proceed on 31/3/2014 (70,000)

Loss on sale (8,000)

Carrying amount at 31/3/2014 nil

IAS 16: Property Plant and Equipment
Example: Disposal of revalued asset

1.4.2012 Gain on revaluation surplus = 32,000

DR PPE 32,000
Revaluation
CR OCI 32,000
reserves
Year ends Compensate anually for increase of
31.03.2013 depreciation = 32,000/5 = 6,400
DR Revaluation reserves 6,400
CR Retained earnings 6,400

SOCI: OCI = 32,000

SOFP: Revaluation Reserves = 25,600
Year end Decrease P&L
Loss on sale = 8,000
31.03.2014 8,000
Sell assets
SOFP
DR Revaluation reserves 25,600
CR Retained earnings 25,600
 IAS 38: Intangible assets
Definition

An identifiable non-monetary asset without physical substance

The item must either be capable of being sold as a

Identifiable
single item or must arise from contractual rights

Non- The item must not be cash or an asset to be

monetary settled in a fixed amount of cash

The item must be controlled by the entity as a

An Asset result of past events and result in probable future
economic benefits
 IAS 38: Intangible assets
Recognition

Acquired externally
Intangible
asset
Generated internally

future economic benefits associated with

Intangible the item will flow to the entity
asset is
recognised if item’s cost can be measured reliably

IAS 38 prohibits the recognition of internally generated:

 Brands  Customer lists
 Mastheads  Goodwill
 Publishing titles
IAS 38: Intangible assets
Internally generated intangible assets

Research and Development Expenditure

Research

Work to gain new knowledge and

understanding

Must be recognised as expense in

profit or loss
 IAS 38: Intangible assets
Internally generated intangible assets

Research and Development Expenditure

Development

Application of research findings for commercial purpose

Must be capitalised if specific criteria met

 Probable future economic benefits

 Intention to complete and use/sell it
 Resources adaquate and available
 Ability to use or sell the asset
PIRATE
 Technical feasibility
 Expenditure reliably measurable
 IAS 38: Intangible assets
Measurement

Subsequent measurement
same as PPE

Revaluation model
Cost model or for identical items and
publicly available prices

Intangible assets cannot be revalued:

 Brands
 Copyrights
 Customer lists
 Patents
 Development costs
 IAS 38: Intangible assets
Amortisation

amortisation method reflect the pattern of benefits

If the pattern cannot be determined reliably, amortise

by straight line method
Asset
with a
amortisation charge is recognised in P&L unless
finite
included in the cost of another asset
useful
life
amortisation period be reviewed at least annually

be assessed for impairment

 IAS 38: Intangible assets
Amortisation

not amortised

useful life should be reviewed each reporting period

Asset
with
indefinite
useful life the change in the useful life assessment should be
accounted for as a change in an accounting estimate

be assessed for impairment annually

 IAS 38: Intangible assets
Exercise

At 1 January 20X5, Moor Labs Co has capitalised development costs with

an original cost of $10million and carrying amount of $5million.
The company started a new R&D project on 1 January 20X5, incurring
$1.6million costs during the research phase, which lasted until 31 August
20X5. From that date, average development costs incurred on the
project were $750.000 per month.
On 1 November 20X5, the management of Moor Labs Co became
confident that the project would be a commercial success and make
good profits. The project is still in development at 31 December 20X5.
Capitalised development expenditure is amortised at 25% per annum
using the straight line method.

What amount is recognised as an expense in terms of R&D in the year

ended 31 December 20X5?
 IAS 38: Intangible assets
Exercise

Expense in terms of R&D for the year ended 31 December 20X5:

$000
Amortisation of capitalised costs
2,500
($10m x 25%)
Research costs 1,600
Development costs before criteria met
1,500
($750,000 x 2months)
Total expense for y/e 31 December 20X5 5,600
 IAS 40: Investment property
Definition

land held for long term capital appreciation

land held for an undetermined use

A building leased out under one or more

Includes operating leases

A vacant building that is held to be leased out

under operating leases

Property that is being developed for use as an

investment property
 IAS 40: Investment property
Definition

Property intended to be sold in normal

course of the business

Owner-occupied property

Property held for future owner-occupation

Excludes
Property occupied by employees

Owner-occupied property awaiting disposal

Property leased to another entity under a

finance lease
 IAS 40: Investment property
Example

Spruce Co acquires a 5 storey property by way of a finance lease.

Each storey is a self-contained office space. Spruce Co had the
option of acquiring any number of storeys of the building,
however decided to acquire all 5, using one for its sales and
marketing function, and renting the remaining 4 to other
companies under operating leases.
 IAS 40: Investment property
Example

Spruce Co has acquired the property by way of a finance lease.

IAS 40 is clear that the definition of investment property includes
property that is owned and property held under a finance lease.
Spruce Co occupies 1/5 of the property and rent out 4/5 of the
property. In this case IAS 40 requires splitaccounting if each
portion could be sold or leased out separately under a finance
lease. It is clear that this is the case because Spruce Co had the
option of acquiring any number of story's of the building.
Therefore:
1/5 of the property is accounted for as owner-occupied property
in accordance with IAS 16
4/5 of the property is accounted for as investment property in
accordance with IAS 40.
 IAS 40: Investment property
Recognition

future economic benefits associated

with the item will flow to the entity
Investment
property is
recognised
if
item’s cost can be measured reliably
 IAS 40: Investment property
Measurement

Initial measurement
Investment property is initially measured at cost,
including transaction costs

Subsequent measurement
Accounting policy choice must be applied to all
investment property

Cost model Fair value model

Historical cost – Fair value at each
accumulated reporting date with
depreciation – gains/losses in profit
accumulated or loss.
impairment losses No depreciation
 IAS 40: Investment property
Transfers

Transfers
Transfers to or from investment property arise where
there is a change in use

Meet the definition of investment

There to be property
a change in
use Evidence of a change in use

 Transfer: from IP – to PPE/Inventories...

Subsequent accounting: under IAS 16/IAS 02 since the
date of change of use

 Transfer: from PPE/Inventories... – to IP

Subsequent accounting: under IAS 16/IAS 02 till the date
of change
 IAS 36: Impairment of assets
Definition

IMPAIRMENT = Carrying amount > Recoverable amount

a reduction in the recoverable amount

Impairment of an asset or cashgenerating unit below
its carrying amount

the amount at which an asset is

Carrying recognised in the balance sheet after
amount deducting accumulated depreciation and
accumulated impairment losses
 IAS 36: Impairment of assets
Testing for impairment

When to test for impairment?

For any asset when there is an Annually for

indication of impairment certain assets
Internal External
indicators indicators

 Goodwill
 Obsolescence
or damage to  Decline in  Intangibles
an asset
market value of with indefinite
 Current period
loss or net cash asset life
outflow from
 Adverse change  Intangibles not
operations
 Commitment to in commercial yet available
significant
environment of for use
reorganization
 Loss of key entity
employees
 IAS 36: Impairment of assets
Testing for impairment

Calculating an impairment loss

IMPAIRMENT = Carrying amount > Recoverable amount

RECOVERABLE AMOUNT = Higher of fair value less costs to

sell and value in use

Fair value less costs to sell Value in use

Amount obtainable in an The present value of
arm’s length transaction future cash flows from
less costs of disposal using an asset
 IAS 36: Impairment of assets
Testing for impairment

Accounting for impairment

IMPAIRMENT = Carrying amount > Recoverable amount

The loss is usually recognised immediately in profit or loss

If there is a revaluation surplus related to the impaired

asset, the loss is first recognised in OCI and any excess
recognised in profit or loss
 IAS 36: Impairment of assets
Testing for impairment

Example

An item of plant has a carrying amount (based on historical

cost) of $124,000 and a value in use of $117,000. The price
the asset could achieve at auction is expected to be $127,000
and fees of 10% would be incurred on a sale.

Recoverable amount = $117,000, being the higher of value in

use and fair value less costs to sell
($127,000 x 90% = $114,300).
The asset is impaired by $7,000 and the loss is recognised by:

DEBIT Profit or loss $7,000

CREDIT Plant property and equipment $7,000
 IAS 36: Impairment of assets
Impairment for cash generating units (CGUs)

generates cash inflows from continuing

use

Cash
generating
units are largely independent of the cash

the smallest inflows from other assets or groups of

identifiable assets

groups of
assets that Goodwill that has been acquired in a
business combination should be
allocated to CGU
 IAS 36: Impairment of assets
Impairment for cash generating units (CGUs)

Impairment loss is allocated

To any assets that are obviously damaged or destroyed

To the goodwill allocated to the CGUs

To all other assets in the CGUs, on a pro rata basis

 IAS 36: Impairment of assets
Example: Impairment of assets

ABC is currently undertaking impairment review. One of its

monitored CGU, X, contains an allocated goodwill of $5m in
accordance with IAS 36 for the purpose of impairment testing. The
required annual impairment test was conducted on 31/12/20X6.
The following is relevant to the individual assets of CGU X under
reviews:

1. Assuming that CGU, X’s recoverable amount is assessed at $81m

2. Assuming that CGU, X’s recoverable amount is assessed at $83m

and the fair value less cost to sell asset A is estimated at $22m

3. Assuming that CGU, X’s recoverable amount is assessed at $82m

and the fair value less cost to sell asset A is estimated at $19m
 IAS 36: Impairment of assets
Example: Impairment of assets

1. Assuming that CGU, X’s recoverable amount is assessed at $81m

Before Allocation of After

impairment impairment loss impairment
$m $m $m

Goodwill 5 5 nil

Asset A 20 2 (= 9x20/90) 18

Asset B 30 3 (= 9x30/90) 27

Asset C 40 4 (=9x40/90) 36

Carrying
95 14 81
value

DEBIT Impairment loss 14

CREDIT Goodwill 5
CREDIT Asset A 2
CREDIT Asset B 3
CREDIT Asset C 4
 IAS 36: Impairment of assets
Example: Impairment of assets
2. Assuming that CGU, X’s recoverable amount is assessed at $83m
and the fair value less cost to sell asset A is estimated at $22m

Before Allocation of After

impairment impairment loss impairment
$m $m $m

Goodwill 5 5 nil

Asset A 20 nil 20

Asset B 30 3 (= 7x30/70) 27

Asset C 40 4 (=7x40/70) 36

Carrying
95 12 83
value

DEBIT Impairment loss 12

CREDIT Goodwill 5
CREDIT Asset B 3
CREDIT Asset C 4
 IAS 36: Impairment of assets
Example: Impairment of assets
3. Assuming that CGU, X’s recoverable amount is assessed at $82m
and the fair value less cost to sell asset A is estimated at $19m

Before Allocation of After

impairment impairment loss impairment
$m $m $m

Goodwill 5 5 nil

Asset A 20 1 19

Asset B 30 3 (= 7x30/70) 27

Asset C 40 4 (=7x40/70) 36

Carrying
95 13 82
value

DEBIT Impairment loss 13

CREDIT Goodwill 5
CREDIT Asset A 1
CREDIT Asset B 3
CREDIT Asset C 4
 IAS 36: Impairment of assets
Example: Impairment of assets

Example

A CGU comprises:

 Goodwill with a carrying amount of $20,000

 PPE with a carrying amount of $150,000

 Intangible assets with a carrying amount of $50,000

 Net current assets with a carrying amount of $90,000

The recoverable amount of the CGU is $250,000 (net assets

included).

The recoverable amount of PPE is its value in use of $130,000.

 IAS 36: Impairment of assets
Example: Impairment of assets

Example

The impairment loss is allocated

 $20,000 to goodwill
 $40,000 to PPE and intangibles pro rata to their carrying amount
Carrying After
Impairment loss ($)
amount ($) impairment ($)
Goodwill 20,000 (20,000)
(20,000)
PPE 150,000 (150/200 x 40 = 30,000 but 130,000
restricted to $20,000)
(20,000)
(50/200 x 40 = 10,000
Intangibles 50,000 30,000
plus $10,000 not allocated to
PPE)
Net current
90,000 Outside scope 90,000
assets
310,000 250,000
 IAS 23: Borrowing costs
Definition

Borrowing costs

Interest and other costs incurred in connection with the

borrowing of funds

Interest – bank overdraft, short/long term borrowings

Amortisation of discounts/premiums relating to

borrowings

Amortisation of ancillary costs relating to borrowings

Finance charge on lease liabilities

Exchange differences arisng from foreign currency

borrowing
 IAS 23: Borrowing costs
Definition

Qualifying assets

An asset that necessarily takes a substantial period of

time to get ready for its intended use

Property

Plant and equipment

Intangible assets

Investment properties

Inventories
 IAS 23: Borrowing costs
Capitalisation period

 Expenditure for the asset are being incurred

Commences  Borrowing costs are being incurred
when  Activities to prepare the asset for intended
use are in progress

Substantially all of the activities necessary to

Ceases when prepare the asset for intended use or sale are
complete

Is suspended Active development of the asset is suspended

when for an extended period

Borrowing costs that are not capitalised are recognised in profit or

loss as incurred
 IAS 23: Borrowing costs
Calculation of borrowing costs

Capitalised borrowing costs =

Specific borrowing costs actually inccured –
borrowings investment income from the
temporary investment of the fund

Capitalised borrowing costs are

General calculated by applying the weighted
borrowings average cost of borrowing to the
expenditure on the asset
 IAS 23: Borrowing costs
Example

Hazlenut Co has the following borrowings outstanding

throughout the year ended 31 December 20X4:
 $1million 5% bank loan
 $3 million 7% loan notes
On 1 August 20X4 it drew down $1,500,000 borrowings for the
purpose of constructing a new warehouse. Architects began
designing the building on this date and construction began on 1
September 20X4.
The property was completed on 30 November 20X4

The weighted average cost of capital is calculated as:

($1m/$4m x 5%) + ($3m/$4m x 7%) = 6.5%
Borrowing costs are capitalised from 1 September 20X4 to 30
November 20X4. Therefore the amount to be capitalised is:
6.5% x $1,500,000 x 3/12 months = $24,375
 IAS 20: Government Grants
Definition

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 enitity

Types of grants

Capital Contribute to the acquisition of an asset

Revenue Grant for other purposes

 IAS 20: Government Grants
Recognition

Recognised in financial statements

There is reasonable assurance that:

The enterprise will comply with the conditions attaching to them

The grants will actually received

Recognised as income in profit or loss

For the periods, grants are intended to compensate for expenses

A capital grant is recognised as depreciation is recognised

A revenue grant is recognised when the costs of complying with

the grant are recognised
 IAS 20: Government Grants
Presentation

Recognise grant as a reduction in the

carrying amount of the asset
Capital or

Recognise grant as deferred income

Recognise grant as deferred income as a

seperate line of income
Revenue or
Recognise as deferred income netted off
against the related expenditure
 IAS 20: Government Grants
Presentation

Example

Sydney Co acquires an asset at a cost of $200,000 on 1 July

20X7. A government grant of $50,000 is received towards the
purchase on the same date. The asset has a useful life of 10
years.
The asset and grant may be recognised in the financial
statements in one of two ways:
OPTION 1 OPTION 2
Statement of PL – 30 Jun 20X8 $’000 Statement of PL – 30 Jun 20X8 $’000
Depreciation charge 15 Depreciation charge (200/10y) 20
(200 – 50)/10y
Grant income (50/10y) (5)
Statement of FP – 30 Jun 20X8 $’000 Statement of FP – 30 Jun 20X8 $’000
Non-current asset (200 – 50 – 135 Non-current asset (200 – 20) 180
15)
Deferred grant income (50 – 5) 45
 IAS 2: Inventories
Definition

Assets held for sale in the ordinary course

of business
(finished goods)

Assets in the process of production for

Inventories such sale
(Work in process)

Materials or supplies that are consumed in

the production
(Raw materials)
 IAS 2: Inventories
Measurement
Closing inventory is measured on a line-by basis at the
lower of

Cost

Includes: Excludes:
 Costs of purchase  Abnormal waste
 Costs of conversion  Storage costs
 Other costs incurred in  Admin overheads not
bringing the related to production
inventories to their  Selling costs
present location and  Interest cost
condition

Net realizable value

Estimated selling price in the ordinary course of business

−
Estimated costs of completion and sale
 IAS 2: Inventories
Measurement

For non-
Specific
interchangeable
identifications
items

For FIFO
Determining
costs interchangeable
items Weighted average
cost

Use of LIFO is
prohibited
 IAS 2: Inventories
Example: Measurement

Electronic equipment – coffee

Furniture – coffee table
makers

Opening
Opening inventory
1 Dec inventory 1 Dec
40@$250 each
40@$51 each
Purchased
12 Dec 4 Dec Sold 22
25@$53 each

Purchased
15 Dec Sold 30 9 Dec
30@$275 each
Purchased
18 Dec 18 Dec Sold 26
10@$55 each

Purchased
21 Dec Sold 20 28 Dec
40@$280 each

29 Dec Sold 18

What amount is closing inventory measured at 31 December 20X8?

 IAS 2: Inventories
Example: Measurement

Coffee tables
Units $

Opening 40 x51 2,040

12 Dec 25 x53 1,325

65 3,365

15 Dec (30) 30/65 x 3,365 (1,553)

35 1,812

18 Dec 10 x55 550

45 2,362

21 Dec (20) 20/45 x 2,326 (1,050)

25 1,312

Closing inventory amount = $1,312

 IAS 2: Inventories
Example: Measurement
Coffee makers
Units $

Opening 40 x250 10,000

4 Dec (22) 22 x $250 (5,500)

18 4,500

9 Dec 30 x275 8,250

18 Dec (26) 18 x $250 (4,500)

8 x $275 (2,200)

22 6,050

28 Dec 40 x280 11,200

29 Dec (18) 18 x $275 (4,950)

44 12,300
Closing inventory amount = $12,300
 IFRS 16: Leases
Overview

 Issued: In 2016
 Effective date: 1 January 2019

Lessees accounting Lessors accounting

Lessors need to classify the

Account for all the leases in
lease as either operating or
the same way
finance lease

Two exceptions for lessees

The lease term is 12

months or less
The underlying asset is of a
low value
 IFRS 16: Leases
Identify a lease

No
Is there an identified asset?

Does the customer have the right to

Customer obtain substantially all of the economic No
benefits from use of the asset
throughout the period of uses?
Neither; how and for what
purpose the asset will be used is
Yes predetermined
Does the customer have the right to operate
the asset throughout the period of use,
without the supplier having the right to
change those operating instructions?
No
Did the customer design the asset in a No
way that predetermines how and for
what purpose the asset will be used
throughout the period of use?

The contract contains a The contract does not

lease contain a lease
 IFRS 16: Leases
Definition

A contract or part of a contract, that

conveys the right to use an underlying
A lease
asset for a period of time in exchange for
consideration

The entity that provides the right-of-use

The lessor asset and, in exchange, receives
consideration

The entity that obtains use of the right-of-

The lessee use asset and, in exchange, transfers
consideration

A right-of-use the lessee's right to use an underlying

asset asset over the lease term
 IFRS 16: Leases
Lessees accounting

Initial measurement

Lease liability Right-of-use asset

Initial measurement of
lease liability
+
Lease payments made
Measured at the prior to commence
date
present value of future −
Lease incentives
lease payments,
received
discounted at the rate +
implicit in the lease Initial direct costs of
the lessee
+
Estimated dismantling
and restoration costs
 IFRS 16: Leases
Example: Leases with non-refundable deposit

1/01/20X6 Fellini Co hired a machine under a five year lease.

A non-refundable deposit of $700,000 was payable on 1/01/20X6.
The present value of the future lease payment was $2,426,000.
The remaining 4 instalments of $700,000 are payable annually in
advance with the first payment made on 1/01/20X6. The interest
rate implicit in the lease is 6%.
 IFRS 16: Leases
Example: Leases with non-refundable deposit

Right of use asset

$000

PV of future cashflows 2,426

Non-refundable deposit 700

Right of use asset 3,126

Lease liability

$000

Lease liability (3,126 – 700) b/d 1.1.X6 2,426

Interest at 6% 146

Balance of lease liability at 31.12.X6 2,572

 IFRS 16: Leases
Lessees accounting

Subsequent measurement

Lease liability
Right-of-use asset
(Amortised cost)

Increases due to
Cost – accumulated
interest at a constant
depreciation and
rate on the outstanding
impairment losses
obligation

Except:
 The underlying asset is PPE
Decreases to reflect and revaluation model is
payments made applied to that class
 The underlying asset is an
investment property and
the leese adopts the fair
value model
 IFRS 16: Leases
Example: Lessees accounting

Example:
Riyad enters into an agreement to lease an asset. The terms
of the lease are as follows.
1. Primary period is for four years from 1 January 20X2 with a
rental of $2,000 pa payable on 31 December each year.
2. The present value of the lease payments is $5,710
3. The interest rate implicit in the lease is 15%.
What figures will be shown in the financial statements for the
year ended 31 December 20X2?
 IFRS 16: Leases
Example: Lessees accounting

ANSWER:
 Non-current right-of-use asset = $5,710.
 Annual depreciation = 1/4 × $5,710 = $1,428.
 Initial liability = $5,710.
 The total finance charge for the lease is calculated as the
difference between the total payments of $8,000 and the initial
value of $5,710 = $2,290.

Interest
Period Liability b/f Payment Liability
@ 15%

20X2 5,710 857 (2000) 4,567

20X3 4,567 685 (2000) 3,252

20X4 3,252 488 (2000) 1,740

20X5 1,740 260 (2000)

2,290 8,000
 IFRS 16: Leases
Example: Lessees accounting

In the year to 31 December 20X2

Interest: $857 SOPL

$2000 of Payment
Liability: $1,143 SOFP

Decrease Right-of-use
SOFP
asset
$1,428 of
Depreciation
Increase Depreciation
SOPL
expense

Non-current liabilities:
$3,252
$4,567 of SOPL
Liability
Current liabilities:
$1,315 ($4,567-$3,252)
 IFRS 16: Leases
Example: Lessees accounting

Extracts from financial statements for the year to 31 December 20X2

Statement of profit or loss

Depreciation (1,428)

Finance cost (857)

Statement of financial position

Non-current assets
Right-of-use asset (5,710 – 1,428) (4,282)

Non-current liabilities

Lease 3,252
Current liabilities

Lease (4,567 – 3,252) 1,315

 IFRS 16: Leases
Impact of IFRS 16 on SOFP and SOPL in Vietnam

IFRS VAS

SOPL SOPL
Expense Expense

Total expense Total expense

Depreciation
expense

Finance
expense
Year Year
SOFP SOFP
Assets: Increase = Right of use asset Assets: No change
Liabilities: Increase = Lease liability Liability: No change
 IFRS 16: Leases
Lessor accounting

Finance lease Operating lease

A lease that transfers

substantially all the risks and Lease other than a finance
rewards incidental to lease
ownership of an asset

 The statement of financial

position shows a receivable  An asset in statement of
rather than a leased asset financial position
 Finance income is  Lease income is recognised
recognised as a constant as income on a straight line
return on the net basis
investment of the lease
 IFRS 16: Leases
Lessor accounting

Example

Roost Co leases plant and machinery to manufacturing

companies. It has a year-end of 30 September.
On 1 June 20X8 it leased a machine to a customer for a 6 year
period.
The agreed lease payments were $400 per calendar month
payable in arrears.
In addition, the customer was required to pay an initial non-
refundable amount of $1,200.
 IFRS 16: Leases
Lessor accounting

Example

The total lease payments over the 6-year term amount to:
$30,000 ($1,200 + (6 x 12 x $400))
The annual lease income recognised in profit or loss by Roost:
$5,000 ($30,000/6years)
The income recognised in the year ended 30 September 20X8
is: $1,667 (4/12m x $5,000)
 IFRS 16: Leases
Sale and leaseback transactions

The seller
The carrying amount of the transferred asset
= the right of use
Transfer is
a sale
The buyer
Accounting for the purchase of the asset by
applying relevant Standards

The seller
Continue recognise the asset. Proceeds
Transfer is recognised as a finance liability
not a sale
The buyer
Does not recognise a lease asset, but does
recognise a financial asset
 IFRS 16: Leases
Sale and leaseback transactions

Example

Cape Co sells a property to Banco Co on 1 June 20X8 for

$5million. The property has a carrying amount of $4.3million on
that date. Cape Co then leases the property back over a 20 year
term at $550,000 per annum. The transfer does not qualify as a
sale.
 IFRS 16: Leases
Sale and leaseback transactions

Example

 Cape Co continues recognise the property at its carrying

amount of $4.3million and depreciates it.
 It recognises the receipt of $5million as a financial liability
 Lease payments are treated as loan repayments including
capital and interest elements

 Banco Co does not recognise the property

 It recognises a financial asset at $5million and subsequently
recognises lease payments as receipt of capital and interest
IFRS 5: Non-current assets held for sale
and discontinued operation
Definition: Non-current assets held for sale

The asset must be available for immediate

sale in its present condition
Its sale must be highly probable
(ie significantly more likely than not)
Management must be committed to a plan to sell
A non- the asset

current asset
There must be an active program to locate a buyer
is classified
The asset must be marketed for sale at a price that
as HFS if
is reasonable in relation to its current fair value

The sale should be expected to take place within

one year from the date of classification

It is unlikely that significant changes to the plan will

be made or that the plan will be withdrawn
IFRS 5: Non-current assets held for sale
and discontinued operation
Question: Non-current assets held for sale

According to IFRS 5 Non-current assets held for sale and

discontinued operation which TWO of the following
relate to the criteria for an asset held for sale?

A. The item must be a major line of operation or

geographical area
B. The asset must
must be
be available
availablefor
forimmediate
immediatesale
sale
C. The sale is expected to be completed within the next
three months
D. A reasonable
reasonable price
pricehas
hasbeen
beenset
set
IFRS 5: Non-current assets held for sale
and discontinued operation
Measurement: Non-current asset held for sale

Before A non-current asset must be measured in

transfer to HFS accordance with applicable IFRS standards

 Lower of: carrying amount and fair value

less cost to sell
On transfer to  Any resulting impairment loss is
HFS recognised in profit or loss
 Depreciation ceases on classification as
HFS

At subsequent Remeasured to the lower of carrying

reporting
dates amount and fair value less costs to sell
IFRS 5: Non-current assets held for sale
and discontinued operation
Example: Non-current assets held for sale

Archway Co owns and occupies a property measured using the

IAS 16 Revaluation model.
Its carrying amount and fair value at 1 April 20X6 is $890,000.
At 31 March 20X7 its carrying amount after depreciation is
$845,500 and its fair value is $910,000.
Costs to sell are 10% of eventual selling price.
The property becomes classified as held for sale on 31 March
20X7.
IFRS 5: Non-current assets held for sale
and discontinued operation
Example

 On transfer to held for sale the property is measured at the

lower of carrying amount ($910,000) and fair value less cost
to sell ($910,000 x 90% = $819,000)
 An impairment loss of $91,000 ($910,000 - $819,000) is
therefore recognised in profit or loss transfer

 At 31 March 20X7, immediately prior to transfer to held for

sale the property is revalued to $910,000 in line with IAS 16
 A revaluation surplus of $64,500 ($910,000 - $845,500) is
recognised in other comprehensive income
IFRS 5: Non-current assets held for sale
and discontinued operation
Definition: Disposal groups

A disposal group

A group of assets, possibly with some associated liabilities,

which an entity intends to dispose of in a single transaction

Classified as HFS if it meets the same criteria as those for an

asset HFS

Acquired exclusively with a view to subsequent disposal is

classified as HFS if the sale is expected to take place within 12
months of acquisition and the other conditions are met within
3 months of the acquisition
IFRS 5: Non-current assets held for sale
and discontinued operation
Definition: Discontinued operations

A discontinued operation is a component of an entity that

either has been disposed of or is classified as HFS and:

Represents a separate major line of business or

geographical area of operations

Is part of a single co-ordinated plan to dispose of a

separate major line of business or geographical area of
operations

Is a subsidiary acquired exclusively with a view to resale

IFRS 5: Non-current assets held for sale
and discontinued operation
Disclosure: Discontinued operations

The main requirement is that in the statement of profit

or loss and other comprehensive income the result for

the discontinued operation, combined with any gain or

loss on disposal, or on remeasurement of assets HFS,

should be disclosed separately from the results of

continuing operations.