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All notesAll notes
count!n" st#nd#rds need to bu!lt on # rel!#ble set of concepts
!s !n !ttempt to def"ne the n!ture !nd purpose of !ccount"n#
! coherent !nd cons"stent found!t"on th!t w"ll underp"n the development of !ccount"n# st!nd!rds
! st!tement of #ener!ll$ !ccepted !ccount"n# pr"nc"ples (GAAP) for ev!lu!t"n# ex"st"n# pr!ct"ces !nd develop"n# new ones
! theoret"c!l b!s"s for determ"n"n# how tr!ns!ct"ons should be me!sured (h"stor"c!l v!lue or current v!lue) !nd reported
! b!s"s for econom"c dec"s"on m!%"n#
summr t's
! fr!mewor% for sett"n# !ccount"n# st!nd!rds
! b!s"s for resolv"n# !ccount"n# d"sputes
fund!ment!l pr"nc"ples wh"ch then do not h!ve to be repe!ted "n !ccount"n# st!nd!rds
ho else s the frmewor useful to
Aud!tors
Users of #ccounts
An%one !nterested !n how IFRS's #re formul#ted
onceptu!l Fr!mewor"
he need for ! fr!mewor"
!t #s me!nt b$ ! conceptu!l fr!mewor" of !ccount#n%
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Fr!mewor% "s NOT !n !ccount"n# st!nd!rd, !nd "f there's ! confl"ct between the two then the IFRS w"ns
mpl%, Yes$ A rules-b#sed s%stem
THOUT prncples bsed conceptul frmewor
follow"n# h!ppens&&
ncons!stent st#nd#rds
St#nd#rds produced on # "f!re f!"ht!n"" b#s!s
Be!n" re#ct!ve r#ther th#n pro#ct!ve)
St#nd#rd sett!n" bod!es were b!#sed !n the!r membersh!p
S#me theoret!c#l !ssues repe#ted e#ch t!me # problem comes up
n# no fr!mewor% led to ‘rules- b!sed’ !ccount"n# s$stems
h ! s$stem "s ver$ prescr"pt"ve !nd "nflex"ble, thou#h !lso the !ccounts !re then more comp!r!ble !nd cons"stent&
here !n !ltern!t#ve s$stem&
he fund!ment!l concepts!t #s me!nt b$ relev!nce !nd f!#thful represent!t#on&
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e Fr#mewor& d!fferent!#tes between fund#ment#l #nd enh#nc!n"
form#t!on ch#r#cter!st!cs
h' Wh!t('
ndmentl qulttve chrcterstcs
nform!t"on to be useful, "t must be both relev!nt !nd f!"thfull$ represented
Relev!nce
F!"thful represent!t"on
hncn qulttve chrcterstcs
Comp!r!b"l"t$ ("nclud"n# cons"stenc$)
T"mel"ness
Ver"f"!b"l"t$
Underst!nd!b"l"t$
counts must represent f#!thfull% the phenomen# !t purports to
present
thful Represent!t#on
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thful Representton mens
Subst!nce over form
F!"thful represent!t"on me!ns c!ptur"n# the re!l subst!nce of the m!tter
Represents the econom#c phenomen!
F!"thful me!ns !n !#reement between the !ccount"n# tre!tment !nd the econom"c phenomen! the$ represent
The !ccounts !re ver"f"!ble !nd neutr!l
Completeness, Neutr!l#t$ & Ver#f#!b#l#t$
xmples
ell nd bu bc = Lon
nt"t$ m!$ sell some "nventor$ to ! f"n!nce house !nd l!ter bu$ "t b!c% !t ! pr"ce b!sed on the or"#"n!l sell"n# pr"ce plus ! prerm"ned percent!#e& Such ! tr!ns!ct"on "s re!ll$ ! secured lo!n plus "nterest& To show "t !s ! s!le would not be ! f!"thful
esent!t"on of the tr!ns!ct"on&
onvertble Lons
ther ex!mple "s th!t !n ent"t$ m!$ "ssue convert"ble lo!n notes& M!n!#ement m!$ !r#ue th!t, !s the$ expect the lo!n note
e converted "nto equ"t$, the lo!n should be tre!ted !s equ"t$& The$ would tr$ to !r#ue th"s !s the"r #e!r"n# r!t"o would then
ove& However, "t "s recorded !s ! lo!n !s pr"m!r"l$ th"s "s wh!t "t "s&
oted prev"ousl$, s"mpl$ follow"n# rules "n !ccount"n# st!nd!rds c!n prov"de for tre!tment wh"ch "s essent"!ll$ form over
t!nce& Where!s, users of !ccounts w!nt the subst!nce over form&
concept beh"nd f!"thful represent!t"on should en!ble cre!tors of f"n!nc"!l st!tements to f!"thfull$ represent ever$th"n#
u#h me!sures !nd descr"pt"ons !bove !nd be$ond th!t "n the !ccount"n# st!nd!rd "f necess!r$&
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mttons to Fthful Representton
nherent uncert#!nt!es
Est!m#tes
Assumpt!ons
lev#nt !nform#t!on !nfluences the econom!c dec!s!ons of the user
s Predctve vlue nd/or Confrmtor vlue
sers c!n !ssess the ent"t$ !b"l"t$ to&&
T#&e #dv#nt#"e of opportun!t!es
Re#ct to #dverse s!tu#t!ons
e"$ D!scont!nued oper#t!ons sep#r#ted from cont!nu!n" on the !ncome st#tement
terlt
Th"s "s not ! m!tter to be cons"dered b$ st!nd!rd-setters but b$ prep!rers of !ccounts !nd the"r !ud"tors
compl!#nce w!th #n IFRS would be m!sle#d!n", then compl!#nce not
ev!nce
rue !nd f!#r’ overr#de
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eded
"s c!lled the "true & f!"r" overr"de - b$ not follow"n# st!nd!rds the !ccounts !re true !nd f!"r
would onl$ h!ppen "n extremel$ r!re c"rcumst!nces
e entt should dsclose
IFRSs compl"ed w"th except where "t h!s dep!rted "n order to !ch"eve ! f!"r present!t"on
The IFRS dep!rted from
An expl!n!t"on !nd f"n!nc"!l effect
mp#r#b!l!t% !s fund#ment#l to #ssess!n" the perform#nce of #n ent!t%
$s"n# trends needs the !ccounts to h!ve been prep!red on ! comp!r!ble (cons"stent) b!s"s
mprblt s mproved b
Cons#stent !ccount#n% pol#c#es
D"fferent pol"c"es m!$ be necess!r$ thou#h to be more relev!nt !nd rel"!ble
nh!nc#n$ Qu!l#t!t#ve Ch!r!cter#st#cs
mp!r!b#l#t$
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ese should be m#x!m!sed both !nd!v!du#ll% #nd !n comb!n#t!on
's loo n more detl
Ver#f#!ble
Th"s !llows "ndependent observers to !#ree th!t ! tr!ns!ct"on "s f!"thfull$ represented
T#mel$
T"mel"ness me!ns th!t "nform!t"on "s !v!"l!ble to dec"s"on-m!%ers "n t"me to be c!p!ble of "nfluenc"n# the"r dec"s"ons
Underst!nd!ble
Underst!nd!b"l"t$ "s enh!nced when the "nform!t"on "s)
1& cl!ss"f"ed
2& ch!r!cter"sed
3& presented cle!rl$ !nd conc"sel$
plex "nfo "s not left out *ust bec!use "t "s h!rd to underst!nd
"s relev!nt&&"t's relev!nt'
nc"!l reports !re prep!red for users who h!ve ! re!son!ble %nowled#e of bus"ness !nd econom"c !ct"v"t"es !nd who rev"ew
!n!l$se the "nform!t"on w"th d"l"#ence
mp#r#t!ves #re ch#n"ed for #ccount!n" POLICY ch#n"es onl%
#f#!b#l#t$, T#mel#ness & Underst!nd!b#l#t$
!n%es #n !ccount#n% pol#c#es !nd !ccount#n% est#m!tes
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n#es "n !ccount"n# est"m!tes h!ve no effect on the comp!r!t"ve
n#es "n !ccount"n# pol"c$ me!ns we must ch!n#e the comp!r!t"ve too to ensure we %eep the !ccounts comp!r!ble for trend
$s"s
count!n" Pol!c%
n#t#on
spec"f"c pr"nc"ples, b!ses, convent"ons, rules !nd pr!ct"ces !ppl"ed b$ !n ent"t$ "n prep!r"n# !nd present"n# the f"n!nc"!l
ements”
nt"t$ should follow !ccount"n# st!nd!rds when dec"d"n# "ts !ccount"n# pol"c"es
ere "s no #u"d!nce "n the st!nd!rds, m!n!#ement should use the most relev!nt !nd rel"!ble pol"c$
nes to Accountn Polc
se !re onl$ m!de "f)
requ"red b$ ! St!nd!rd or Interpret!t"on+ or
ould #"ve more relev!nt !nd rel"!ble "nform!t"on
Ad 'ust the comp!r!t#ve !mounts for the #ffected !tem
#s !f the pol!c% h#d #lw#%s been #ppl!ed)
Ad 'ust Open#n% ret!#ned e!rn#n%s
Show th!s !n st#tement of ch#n"es !n Equ!t% too)
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count!n" st!m#tes
n#t#on
!d *ustment of the c!rr$"n# !mount of !n !sset or l"!b"l"t$, or rel!ted expense, result"n# from re!ssess"n# the expected futureef"ts !nd obl"#!t"ons !ssoc"!ted w"th th!t !sset or l"!b"l"t$”
mples
w!nces for doubtful debts+ntor$ obsolescence+
#e the useful econom"c l"fe of propert$, pl!nt !nd equ"pment
nes n Accountn Estmte
S#mpl$ ch!n%e the current $e!r
No ch!n%e to comp!r!t#ves
or Per!od Errors
se !re !ccounted for "n the s!me w!$ !s ch!n#es "n !ccount"n# pol"c$
ountn tretment
Ad 'ust the comp!r!t#ve !mounts for the #ffected !tem
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Show th!s !n st#tement of ch#n"es !n Equ!t% too)
eco"n!sed" me#ns brou"ht !nto the #ccounts
hen cn somethn be reconsed n the ccounts
tests must be p!ssed
Meet the def#n#t#on of !n !sset/l"!b"l"t$ or "ncome/expense or equ"t$
It #s prob!ble th!t !n$ future econom"c benef"t w"ll flow to or from the ent"t$
The "tem h!s ! cost o rv!lue th!t c!n be rel#!bl$ me!sured
co"n!s!n" #n Asset
n#t#on
source controlled b$ the enterpr"se !s ! result of p!st events !nd from wh"ch future econom"c benef"ts !re expected to flow
eco$n#t#on !nd me!surementer#! for reco%n#t#on
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sets cn be reconsed when
t !s controlled (def!n!t!on)
Prob#ble benef!ts
Rel!#ble me#sure of cost & benef!ts
co"n!s!n" # L!#b!l!t%
n#t#on
esent obl"#!t"on of the enterpr"se !r"s"n# from p!st events, expected to result "n !n outflow of resources
bltes cn be reconsed when
There's # present obl!"#t!on (def!n!t!on)
t's prob#ble
There's # rel!#ble me#sure
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co"n!s!n" Income
n#t#on
e!ses "n !ssets (or decre!ses of l"!b"l"t"es)
t result "n "ncre!ses "n equ"t$, other th!n contr"but"ons from equ"t$ p!rt"c"p!nts)
me from norm!l !ct#v#t#es
o#n"sed "n the St!tement of Prof"t or Loss !nd other Comprehens"ve Income
me #tems reco%n#sed d#rectl$ #n Equ#t$
ev!lu!t"on #!"ns on !ssets
ese c"rcumst!nces the "ncome (#!"n) "s then !lso reported "n the OCI& (Other Comprehens"ve Income sect"on of the St!tement
rof"t or Loss !nd other Comprehens"ve Income)
co"n!s!n" Expenses
n#t#on
e!ses "n !ssets or ("ncurrences of l"!b"l"t"es)
t result "n decre!ses "n equ"t$, other th!n d"str"but"ons to equ"t$ p!rt"c"p!nts)
m!ll$ reco%n#sed #n the Income st!tement
t expenses !re reco#n"sed "n the St!tement of Prof"t or Loss sect"on of the St!tement of Prof"t or Loss !nd Comprehens"ve
me
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me expenses !re reported d#rectl$ #n Equ#t$ !nd OCI
!n "mp!"rment loss, on ! prev"ousl$ rev!lued !sset, th!t does not exceed the b!l!nce of "ts Rev!lu!t"on Reserve
"ht, the f!rst th!n" %ou need to worr% #bout when "!ven # quest!on
out revenue !s WHEN do we #ctu#ll% show th!s revenue !n the
counts'
when we "nvo"ce( When we del"ver( When we rece"ve the c!sh(
, f"rstl$ (!nd th"s comes from the ‘reco#n"t"on’ ch!pter of the conceptu!l fr!mewor%) $ou need to ensure th!t)
ests need to be pssed s norml
t !s prob!ble th#t future econom!c benef!ts w!ll flow to the ent!t% #nd
These benef!ts c#n be me!sured rel#!bl$
e of Goods
dd"t"on to 1 !nd 2 !bove, revenue from s!le of #oods c!n onl$ be reco#n"sed when the m!*or"t$ of the r"s%s !nd rew!rds h!ve
n tr!nsferred !nd $ou h!ve no more m!n!#er"!l control
ce how $ou onl$ need control not ownersh"p to be tr!nsferred - th"s "s !n ex!mple of subst!nce over form
You need to pss 4 tests to reconse revenue from the sle of oods
1& Prob!ble Future Benef"ts
venue Reco%n#t#on - When
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Bre!"#n% Down ! tr!ns!ct#on
These reco#n"t"on cr"ter"! "n th"s St!nd!rd !re usu!ll$ !ppl"ed sep!r!tel$ to e!ch tr!ns!ct"on&
However, "n cert!"n c"rcumst!nces, "t "s necess!r$ to !ppl$ the reco#n"t"on cr"ter"! to the sep!r!tel$ "dent"f"!ble components
of ! s"n#le tr!ns!ct"on "n order to reflect the subst!nce of the tr!ns!ct"on&
For ex!mple, when the sell"n# pr"ce of ! product "ncludes !n "dent"f"!ble !mount for subsequent serv"c"n#, th!t !mount "sdeferred !nd reco#n"sed !s revenue over the per"od dur"n# wh"ch the serv"ce "s performed&
A%%re%!t#n% sep!r!te tr!ns!ct#ons
Conversel$, the reco#n"t"on cr"ter"! !re !ppl"ed to two or more tr!ns!ct"ons to#ether when the$ !re l"n%ed "n such ! w!$th!t the commerc"!l effect c!nnot be understood w"thout reference to the ser"es of tr!ns!ct"ons !s ! whole&
For ex!mple, !n ent"t$ m!$ sell #oods !nd, !t the s!me t"me, enter "nto ! sep!r!te !#reement to repurch!se the #oods !t !
l!ter d!te, thus ne#!t"n# the subst!nt"ve effect of the tr!ns!ct"on+ "n such ! c!se, the two tr!ns!ct"ons !re de!lt w"th
to#ether&
&
3& (M!*or"t$ of) R"s%s !nd rew!rds tr!nsferred
4& No m!n!#er"!l control
e of Servces
se !re reco#n"sed !s the serv"ce completes !nd !#!"n onl$ when the revenue "s prob!ble !nd rel"!bl$ me!sur!ble)
So the revenue from servce s reconsed when
1& Percent!#e Complete
2& Prob!ble Econom"c Benef"ts
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The reco#n"t"on of revenue b$ reference to the st!#e of complet"on of ! tr!ns!ct"on "s often referred to !s the percent!#e
of complet"on method& Under th"s method, revenue "s reco#n"sed "n the !ccount"n# per"ods "n wh"ch the serv"ces !re
rendered& The reco#n"t"on of revenue on th"s b!s"s prov"des useful "nform!t"on on the extent of serv"ce !ct"v"t$ !nd perform!nce
dur"n# ! per"od&
When the outcome of the tr!ns!ct"on "nvolv"n# the render"n# of serv"ces c!nnot be est"m!ted rel"!bl$, revenue sh!ll be
reco#n"sed onl$ to the extent of the expenses reco#n"sed th!t !re recover!ble
3& Rel"!ble Me!sure of Econom"c Benef"ts
erest, Roltes, nd Dvdends
nterest, ro$!lt"es !nd d"v"dends, prov"ded th!t "t "s prob!ble th!t the econom"c benef"ts w"ll flow to the enterpr"se !nd the
unt of revenue c!n be me!sured rel"!bl$, revenue should be reco#n"sed !s follows)
Interest
Use the effect"ve "nterest method !s set out "n IAS 39
Roltes
On !n !ccru!ls b!s"s "n !ccord!nce w"th the subst!nce of the relev!nt !#reement
Dvdends
When the sh!reholder’s r"#ht to rece"ve p!$ment "s est!bl"shed
venue reco%n#t#on - how much
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e should reco"n!se revenue #t !ts FAIR VALUE
"s norm!ll$ the !mount rece#ved, !nd th"s "s #ener!ll$ the c!se
v!lue
e !mount for wh"ch !n !sset could be exch!n#ed, or ! l"!b"l"t$ settled, between %nowled#e!ble, w"ll"n# p!rt"es "n !n !rms
th tr!ns!ct"on
nerl Rule
Sell!n" Pr!ce less
Tr#de d!scounts less
Volume d!scounts
mm#ss#on
u're !n !#ent then *ust show the comm"ss"on $ou rece"ve not the full sell"n# pr"ce
ferred Consderton
e the F!"r v!lue "s the Present V!lue
b!s"c "de! here "s th!t $ou d"scount the future c!sh down to tod!$s present v!lue !nd th"s "s the !mount th!t #oes to s!les
p 1)
2) Th"s rece"v!ble "s ! d"scounted f"#ure& All d"scounted f"#ures need to be unwound& We do th"s throu#h "nterest !lw!$s
d or rece"ved)
Dr Rece!v#ble (PV of future c#sh to be rece!ved)
Cr S#les (PV of future c#sh)
Dr Rece!v#bles
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I l I
E#ch %e#r
erest Free Credt
revenue rece"v!ble h!s two sep!r!te elements)
e f!"r v!lue of the #oods on the d!te of s!le
!nc"n# "ncome
Dr Rece!v#ble (Sell!n" pr!ce of !tem)
Cr S#les
Dr Rece!v#bles
Cr Interest Rece!v#ble (I/S)
E#ch %e#r w!th the !mputed !nterest r#te
tr!t#on
rmer sh!mefull$ sells cows, oh the p!"n- He !s%s for ! 20% depos"t !t the st!rt !nd the full b!l!nce "s due !fter two $e!rs&
pr"ce of the cow "s c!lcul!ted us"n# ! 10% per !nnum f"n!nce ch!r#e&
w "s sold to ! customer for £10,000& (So ver$ che!p for the %"n# of !ll !n"m!ls)
w should the revenue should be reco%n#sed&
of Cow (£2,000 + £6,611) (W))
nc"n# "ncome (£6,611 (W) . 10%)
$"n# !mount of rece"v!ble (£6,611 (W) . 1&10)
R/ING
depos"t "s £2,000 (£10,000 . 20%), so the !mount rece"v!ble "n two $e!rs "s £8,000& Th"s "s d"scounted !t 10% for two $e!rs to
11 (£8,000 . 1/1&10^2)&
oods nd servces provded n one contrct
ex!mple $ou could bu$ ! c!r w"th free serv"c"n# thrown "n for ! couple of $e!rs
e - $ou need to spl"t the v!lue of the sell"n# pr"ce "nto the 2 components - then tre!t then l"%e the$ !re be"n# sold sep!r!tel$)
tr!t#on
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r de!ler sells ! new c!r, to#ether w"th one $e!r’s serv"c"n#, for £20,000& The f!"r v!lues of these components !re) c!r £18,000,
"c"n# 4,000
ere "t seems th!t ! 10% d"scount h!s been offered so the c!r s!le becomes - 16,400 !nd the serv"c"n# 3,600
c!r s!le "s then reco#n"sed "mmed"!tel$ !nd the serv"c"n# !s the $e!r pro#resses
torc Cost
The !mount p!"d or f!"r v!lue of the cons"der!t"on #"ven
r Vlue
The pr"ce th!t would be rece"ved to sell !n !sset or p!"d to tr!nsfer ! l"!b"l"t$ "n !n orderl$ tr!ns!ct"on between m!r%et
p!rt"c"p!nts !t the me!surement d!te
rrent Cost
The !mount th!t would h!ve to be p!"d "f the s!me or !n equ"v!lent !sset w!s !cqu"red currentl$
t relsble vlue
The !mount th!t could currentl$ be obt!"ned b$ sell"n# the !sset, net of the est"m!ted sell"n# !nd complet"on costs
esent vlue of future csh flows
The present d"scounted v!lue of the future net c!sh "nflows th!t the "tem "s expected to #ener!te
her Me!sures
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!se m!"e sure $ou tr$ the qu#z on th#s b!d bo$ - #t w#ll m!"e ! lot more sense !fterw!rds ((( ))
r v#lue cons!ders the ch#r#cter!st!cs of the #sset
exmple
The cond"t"on !nd loc!t"on of !n !sset
An$ restr"ct"ons on the s!le or use of !n !sset
me!ns th!t when rev!lu"n# "ts propert$, pl!nt !nd equ"pment, !n ent"t$ should cons"der)
h#%hest !nd best use of the !ssets
r vlue ssumes the sles tes plce n
The Pr#nc#p!l m!r"et
the m!r%et w"th #re!test volume !nd level of !ct"v"t$ for the !sset or l"!b"l"t$
The most !dv!nt!%eous m!r"et
The m!r%et th!t m!x"m"ses the !mount th!t would be rece"ved p!"d for the !sset
uton Technques
M!r"et !ppro!ch
Pr"ces from s"m"l!r m!r%et tr!ns!ct"ons
r V!lue
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e& quoted pr"ces of l"sted equ"t$, debt secur"t"es or futures, or m!r%et "nterest r!tes
Income !ppro!ch
Th"s converts future c!sh flows to ! s"n#le d"scounted !mount+ e& d"scounted c!sh flow models !nd opt"on pr"c"n# models
Cost !ppro!ch
Th"s reflects the !mount requ"red currentl$ to repl!ce the serv"ce c!p!c"t$ of !n !sset, "&e& the current repl!cement cost
n me!sur"n# f!"r v!lue, !n ent"t$ "s requ"red to m!x"m"se the use of relev!nt observ!ble "nputs !nd m"n"m"se the use of
bserv!ble "nputs
Level 1 Level 2 Level 3
ef#n#t#on Quoted pr"ces "n !ct"ve
m!r%ets for "dent"c!l
!ssets or l"!b"l"t"es
Observ!ble "nputs Unobserv!ble "nputs
x!mple Sh!re pr"ces on ! stoc%
exch!n#e
Current m!r%et rents for s"m"l!r propert"es
!nd m!r%et "nterest r!tes for the FV of !n
"nvestment propert$
Pro *ected c!sh flows
used to v!lue ! none
publ"c bus"ness
w does !ll th#s wor" #n pr!ct#ce&
An ent"t$ owns 10,000 ord"n!r$ sh!res "n M & S
e there "s !n !ct"ve m!r%et for these sh!res throu#h the London stoc% exch!n#e, the ent"t$ must use ! m!r%et !ppro!ch (level
ut)&
wever, the me!surement of the f!"r v!lue of !n unl"sted debt secur"t$ m!$ requ"re the use of !n "ncome !ppro!ch, e& !
ounted c!sh flow model us"n# m!r%et "nterest r!te for s"m"l!r debt secur"t"es (level 2 "nput) !nd m!r%et cred"t spre!ds
sted for ent"t$-spec"f"c cred"t r"s% (level 2 or 3 "nputs)&
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counts should show # f#!thful #nd rel!#ble represent#t!on
o th"s somet"mes $ou need to show the subst!nce of ! tr!ns!ct"on r!ther th!n "ts le#!l form
ex!mple, "f $ou ‘sell’ !n !sset but st"ll en *o$ "ts benef"ts, then th"s prob!bl$ "sn't ! true s!le "n re!l"t$ ("n !ll prob!b"l"t$ th"s "s
!n - see l!ter)&
w do ou now f substnce s not the sme s form
"t usu!ll$ "s - but loo% for&&
Where control d"ffers from ownersh"p of !n !sset
Where "tems !re sold !t NOT f!"r v!lue
Where there's !n extr! "opt"on" "n the !#reement
Where th"s "s !n$ "extr!" !tt!chment to !n !#reement
Th"s "s c!lled ! l"n%ed tr!ns!ct"on
ns!"nment Stoc&
he le$!l versus the commerc#!l v#ew ofccount#n$
thful !nd Rel#!ble !ccounts
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%nown !s #oods on s!le or return b!s"s
"ssue here "s who CONTROLS the stoc% "n subst!nce - $ou need to %now whose stoc% "t "s
d out who tes the mort of the follown rss
If the stoc% becomes obsolete
If stoc% "s slow to sell
tr!t#on
sell #oods to me&
on't sell the #oods I return them to $ou for ! refund
ut#on
stoc% "s $ours bec!use $ou t!%e the r"s%s)
bsolescence - If the$ don't sell I send them b!c% to $ou for ! refund
ctor!n" of Rece!v#bles
e we sell our debtors to ! f!ctor "n return for c!sh
!#!"n we need to loo% to see whose debtors the$ re!ll$ !re (h!ve " re!ll$ sold them "n subst!nce) b$ loo%"n# !t who %eeps
m!*or"t$ of the r"s%s&&&
cevbles Rss
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R"s% of b!d debt
R"s% of slow p!$"n# debtors
tr!t#on
sell me $our debtors but we h!ve the follow"n# !#reement)
the debts #o b!d - I return them to $ou for ! refund
ou p!$ me 2% "nterest ! month on !ll debtors who don't p!$ me "mmed"!tel$
ut#on
h!ve not sold the debtors bec!use $ou %eep both the b!d debt r"s% !nd slow p!$"n# r"s% ($ou p!$ me "nterest on o/S
tors)
efore $ou do not h!ve ! s!le $ou h!ve ! p!$!ble lo!n to me
lo!n #ets rep!"d !s the debtors p!$ me
le #nd Bu% b#c&
! s!le of #oods $ou need to h!ve tr!nsferred the m!*or"t$ of the r"s%s !nd rew!rds
loo% !t the rew!rds&& who #ets the m!*or"t$ of the benef"ts of the !sset
u m!%e th"s s!le !nd then bu$ "t b!c% - then $ou h!ve prob!bl$ %ept the m!*or"t$ of the rew!rds !nd so not sold the !sset
e!d, !#!"n, "t "s ! lo!n
ltern!t#ve models !nd pr!ct#ces
v!nt!%es !nd d#s!dv!nt!%es of h#stor#c!l cost !ccount#n%
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v#nt#"es of H!stor!c#l Cost Account!n"
vntes
Cost !s &nown #nd c#n be chec&ed to #n !nvo!ce
Enh#nces comp#r#b!l!t%
Le#ds to st#ble, non-vol#t!le pr!c!n"
s#dv#nt#"es of H!stor!c#l Cost Account!n"
dvnte
Non-current #sset v#lues become qu!c&l% out of d#te
Deprec!#t!on ch#r"e !s unre#l!st!c#ll% low
Lower costs le#d to h!"her prof!ts - wh!ch m#% le#d to too h!"h d!v!dends !n re#l terms
Comp#r!sons over t!me #re !mposs!ble
Users #re often !nterested !n current v#lues not p#st e$"$ secur!t% on lo#n
ov!des more re#l!st!c boo& v#lues b% v#lu!n" #ssets #t current
pl#cement cost
rent Cost !ccount#n%
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usu!ll$ c!lcul!ted b$ !d *ust"n# the h"stor"c!l cost for "nfl!t"on&
current oper!t"n# prof"t "s cons"dered to be more relev!nt to m!n$ dec"s"ons such !s d"v"dend d"str"but"on, emplo$ee w!#e
ms !nd even !s ! b!s"s for t!x!t"on
problems th!t current cost !ccount"n# (!nd other !ppro!ches to !ccount"n# for "nfl!t"on) !ttempt to solve !re obv"ousl$
ed to "nfl!t"on&
!ct"c!l terms, "t c!n be ver$ d"ff"cult to determ"ne the current v!lue of !ssets& It "s often sub *ect"ve !nd complex&
ese 2 loo& #t m#!nt#!n!n" f!n#nc!#l or oper#t!n" b#l#nces
ncl cptl mntennce
"t "s when&&
Mone% net #ssets #t end > Mone% net #ssets #t st#rt
C#n be me#sured us!n" purch#s!n" power
T#&es !nto #ccount !nfl#t!on
scl cptl mntennce
"t "s when&&
Ph%s!c#l oper#t!n" c#p#b!l!t% #t end > Ph%s!c#l oper#t!n" c#p#b!l!t% #t st#rt
!nc#!l !nd Ph$s#c!l c!p#t!l m!#nten!nce
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re"ul#tor% fr#mewor& !s needed to ensure relev#nt #nd rel!#ble
form#t!on !s "!ven to users
#ul!tor$ fr!mewor% re#ul!tes the beh!v"our of comp!n"es tow!rds the"r "nvestors
$ "ncre!se users’ underst!nd"n# of, !nd the"r conf"dence, "n f"n!nc"!l st!tements
nefts of doptn IFRS
The$ !re h"#h-qu!l"t$ !nd tr!nsp!rent #lob!l st!nd!rds th!t !re "ntended to !ch"eve cons"stenc$ !nd comp!r!b"l"t$
Comp!n"es th!t use IFRS !nd h!ve the"r f"n!nc"!l st!tements !ud"ted "n !ccord!nce w"th Intern!t"on!l St!nd!rds on
Aud"t"n# (ISA) w"ll h!ve !n enh!nced st!tus !nd reput!t"on
The Intern!t"on!l Or#!n"s!t"on of Secur"t"es Comm"ss"ons (IOSCO) reco#n"se IFRS for l"st"n# purposes
Thus comp!n"es th!t use IFRS need produce onl$ one set of f"n!nc"!l st!tements for !n$ secur"t"es l"st"n# for countr"es th!t
!re members of IOSCO&
Comp!n"es th!t own fore"#n subs"d"!r"es w"ll f"nd the process of consol"d!t"on s"mpl"f"ed "f !ll the"r subs"d"!r"es use IFRS
Comp!n"es th!t use IFRS w"ll f"nd the"r results !re more e!s"l$ comp!red w"th those of other comp!n"es th!t use IFRS
Th"s would help the comp!n$ to better !ssess !nd r!n% prospect"ve "nvestments "n "ts fore"#n tr!d"n# p!rtners
ht re the chllenes of doptn IFRS to ntonl stndrds
L#ws #nd re"ul#t!ons
e%ul!tor$ Fr!mewor"
Wh% h!ve ! re$ul!tor% fr!mewor"&
$ re%ul!t#on #s needed
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FRS tr#!n!n" to f!n#nce st#ff #nd re"ul#tors
Gre#ter complex!t% !n the f!n#nc!#l report!n" process
ot-for-prof!t or"#n!s#t!ons #re d!st!n"u!shed from prof!t m#x!m!s!n"
"#n!s#t!ons b% three ch#r#cter!st!cs
ese re
The$ don't h!ve sh!reholders #"v"n# them mone$
F"n!nce "s m!"nl$ l"m"ted to don!t"ons !nd #overnment subs"d"es
An$ prof"ts !re %ept "n the bus"ness (not #"ven !w!$ !s ! d"v"dend)
The"r !"ms h!ve ! #re!ter soc"!l, cultur!l, ph"l!nthrop"c, welf!re or env"ronment!l d"mens"on
ount"n# st!nd!rds !re requ"red to me!sure the f"n!nc"!l pos"t"on !nd perform!nce of or#!n"s!t"ons
-for-prof"t !nd publ"c sector ent"t"es do not h!ve to produce f"n!nc"!l st!tements for the publ"c but the$ w"ll h!ve to !ccount
he"r "ncome !nd costs&
rtculr ttenton s pd to
Effect#veness
Are the ob (ect!ves re#ched'
Econom$
Opt!m#l use of resources
t for prof#t ent#t#es
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eep!n" t e cost o !nput resources #s low #s poss! le, ut to # "!ven st#n #r
Eff#c#enc$
he ‘output’ per un!t of resource consumed
e st!nd!rds w"ll be relev!nt such !s those rel!t"n# to non-current !ssets, "nventor"es, le!s"n#, etc& but others, e& e!rn"n#s
sh!re, !re not so relev!nt
e IFRS Found#t!on
IFRS Found!t"on, formerl$ %nown !s IASC Found!t"on, "s !n "ndependent, not-for prof"t pr"v!te sector or#!n"s!t"on wor%"n#
e publ"c "nterest
prncpl ob ectves re
to develop ! s"n#le set of h"#h qu!l"t$, underst!nd!ble, enforce!ble !nd #lob!ll$ !ccepted "ntern!t"on!l f"n!nc"!l report"n#
st!nd!rds (IFRSs) throu#h "ts st!nd!rd-sett"n# bod$, the IASB+
to promote the use !nd r"#orous !ppl"c!t"on of those st!nd!rds+
to t!%e !ccount of the f"n!nc"!l report"n# needs of emer#"n# econom"es !nd sm!ll !nd med"um-s"zed ent"t"es (SMEs)+ !nd
to br"n# !bout conver#ence of n!t"on!l !ccount"n# st!nd!rds !nd IFRSs to h"#h qu!l"t$ solut"ons
t!nd!rd Sett#n$S, IASB etc
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e Intern#t!on#l Account!n" St#nd#rds Bo#rd (IASB)
ectves
ts the !ccount"n# st!nd!rds
m!de up of 15 full-t"me members of d"fferent n!t"on!l"t"es !nd b!c%#rounds (!ud"tors, users of !ccounts !nd !c!dem"cs)
It "s respons"ble for the development !nd publ"c!t"on of IFRSs, "nclud"n# the IFRS for SMEs !nd for !pprov"n# Interpret!t"ons
of IFRSs !s developed b$ the IFRS Interpret!t"ons Comm"ttee
e IFRS Adv!sor% Counc!l (IFRS AC)
IFRS AC, wh"ch w!s prev"ousl$ c!lled the St!nd!rds Adv"sor$ Counc"l, "s the form!l !dv"sor$ bod$ to the IASB !nd the
tees of the IFRS Found!t"on
ectves
to !dv"se the IASB on r!n#e of "ssues, "nclud"n# the IASB’s !#end! !nd wor% pro#r!mme
to prov"de !dv"ce on s"n#le pro *ects w"th ! p!rt"cul!r emph!s"s on pr!ct"c!l !ppl"c!t"on !nd "mplement!t"on "ssues
ucture
compr"sed of ! w"de r!n#e of represent!t"ves from user #roups, prep!rers, f"n!nc"!l !n!l$sts, !c!dem"cs, !ud"tors, re#ul!tors,
profess"on!l !ccount"n# bod"es !nd "nvestor #roups th!t !re !ffected b$ !nd "nterested "n the IASB's wor%
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e IFRS Interpret#t!ons Comm!ttee (IFRS IC)
IFRS IC, prev"ousl$ %nown !s the Intern!t"on!l F"n!nc"!l Report"n# Interpret!t"ons Comm"ttee, "s the "nterpret!t"ve bod$ of
ASB
ectves
to rev"ew on ! t"mel$ b!s"s w"despre!d !ccount"n# "ssues th!t h!ve !r"sen w"th"n the context of current IFRSs
to rev"ew on ! t"mel$ b!s"s w"despre!d !ccount"n# "ssues th!t h!ve !r"sen w"th"n the context of current IFRSs
ucture
compr"ses 14 vot"n# members dr!wn from ! v!r"et$ of countr"es !nd profess"on!l b!c%#rounds
!re !ppo"nted b$ the Trustees !nd !re selected for the"r !b"l"t$ to m!"nt!"n !n !w!reness of current "ssues !s the$ !r"se !nd
the techn"c!l !b"l"t$ to resolve them
tern#t!on#l F!n#nc!#l Report!n" St#nd#rds (IFRSs) #re developedrou"h #n !ntern#t!on#l consult#t!on process, the "due process"$
nd!rd Sett#n% Process
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e due process comprses sx stes
Sett#n% the !%end!
The IASB !dent!f!es # sub (ect (m#!nl% b% reference to the needs of the !nvestors)
Pl!nn#n% the pro 'ect
After cons!der!n" the n#ture of the !ssues #nd the level of !nterest #mon" const!tuents, the IASB m#% est#bl!sh # wor&!n" "roup #t
h!s st#"e
Develop#n% !nd publ#sh#n% the d#scuss#on p!per
Develop#n% !nd publ#sh#n% the exposure dr!ft
or publ!c comment, wh!ch !s # dr#ft vers!on of the !ntended st#nd#rd
Develop#n% !nd publ#sh#n% the st!nd!rd
After the st#nd#rd !s !ssued, the st#ff #nd the IASB members hold re%ul!r meet#n%s w#th #nterested p!rt#es, to help
underst#nd un#nt!c!p#ted !ssues rel#ted to the pr#ct!c#l !mplement#t!on #nd potent!#l !mp#ct of !ts propos#ls
e IASB wor&s !n p#rtnersh!p w!th the m#(or n#t!on#l st#nd#rd-sett!n"
d!es)-
e do ths b
Co-ord"n!t"n# e!ch others wor% pl!ns
Rev"ew e!ch others st!nd!rds
N!t"on!l st!nd!rd setters c!n "ssue IASB d"scuss"on p!pers !nd exposure dr!ft for comments "n the"r own countr"es
N!t"on!l st!nd!rd setters m!$ "nclude more #u"d!nce "n the"r exposure dr!fts on relev!nt "ssues to them
#on!l st!nd!rd setters !nd the IASB
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hen should we br!n" PPE !nto the #ccounts'
hen the follown 3 tests re pssed
When we control the #sset
When !t’s prob#ble th#t we w!ll "et future econom!c benef!ts
When the #sset’s cost c#n be me#sured rel!#bl%
ht ets ncluded n 'Cost'
D#rectl$ !ttr#but!ble costs to "et !t to wor& #nd where !t needs to be
e"$ s!te prep#r#t!on, del!ver% #nd h#ndl!n", !nst#ll#t!on
Est#m!ted cost of obl#%!tor$ d#sm!ntl#n% the !sset !t the end
Th!s !s)
Dr PPE
Cr L!#b!l!t%
All #t present v#lue
Borrow#n% costs
f !t !s #n #sset th#t t#&es # wh!le to construct
t's loo& #t the l#st 2 !n further det#!l$$
ture oblted costs
n!nc ! ! emen s
!n$#ble non-current !ssets
#!l Cost of PPE
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PE
!b"l"t$
resent v!lue
The present v!lue "s c!lcul!ted b$ d"scount"n# down !t the r!te #"ven "n the ex!m
e#& 100 "n 2 $e!rs t"me !t 10% = 100/1&10/1&10 = 82&6
So the double entr$ would be)
Dr PPE 82(6
Cr L#!b#l#t$ 82(6
However the LIABILITY needs unw"nd"n#&&
Unw#nd#n% of d#scount
Dr InterestCr L"!b"l"t$
Use the or"#"n!l d"scount r!te (so here 10%)
10% x 82&6 = 8&26
Dr Interest 8&26
Cr L"!b"l"t$ 8&26
rrown costs
t be ! qu!l"f$"n# !sset - th!t me!ns the !sset t!%es ! “subst!nt"!l per"od to bu"ld”
rest"n#l$ "f the lo!n !nd !sset "s b"# enou#h th"s m!$ onl$ be ! few months
So "nste!d of t!%"n# "nterest to the I/S !s !n expense $ou !dd "t to the cost of the qu!l"f$"n# !sset
e !re 2 scen!r"os here to worr$ !bout)
u use current borrow#n%s to p!$ for the !ssetou %et ! spec#f#c lo!n for the !sset
loo% !t these 2 now&&
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e current borrowns
e $ou need then to #et the we"#hted !ver!#e of those borrow"n#s !nd use th"s !s the "nterest r!te
ow $ou're th"n%"n# - how the cow"n#'ec% do I wor% out the we"#hted !ver!#e of borrow"n#s&&& !!!rr##hh')
rel!x m$ l"ttle mon%e$ !rmp"t - here's how $ou do "t&&
C#lcul#te the tot#l #mount of borrow!n"s
C#lcul#te the !nterest p#%#ble on these !n tot#l
D!v!de the !nterest b% the borrow!n" - et vo!l#*
tr!t#on
Overdr!ft 1,000
Lo!n 3,000
Lo!n 2,000
bu$ !n !sset w"th ! cost of 5,000 !nd "t t!%es one $e!r to bu"ld - how much #nterest %oes to the cost of the !sset&
ul!te the WA cost of the borrow"n#s)t!l Borrow"n# = (1,000+3,000+2,000) = 6,000
terest p!$!ble = (50+240+200) = 490
90/6,000 = 8&17%
he tot!l "nterest to be !dded to the !sset "s 8&17% x 5,000 = 408
t specfc lon
the spec"f"c "nterest r!te - but be c!reful of !n$ "nterest rece"ved too
must onl$ !dd to the cost the net "nterest
C!lcul!te the "nterest p!"d on the spec"f"c lo!n
C!lcul!te !n$ "nterest rece"ved on lo!ns proceeds not used
Add the net of these 2 to 'cost of the !sset'
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tr!t#on
!sset for 2,000 - t!%es 2 $e!rs to bu"ld& Get ! 2,000 10% lo!n& We re"nvest !n$ mone$ not used "n !n 8% depos"t !ccount& In
1 we spend 1,200& How much "nterest "s !dded to the cost of the !sset(
rest P!"d = 2,000 x 10% = 200
rest rece"ved = ((2,000-1,200) x 8%) = 64
Cost (200-64) = 136
rest Accru!l
ow"n# costs c!n onl$ st!rt to be !dded to the cost !fter the follow"n# 3 cond"t"ons !re met)
row#n% costs !ctu!ll$ "ncurred
v#t#es st!rted (e& pl!nn"n# perm"ss"on etc)
enses on !sset st!rted
"nterest must stop be"n# !dded to the !sset when there "s ! subst!nt"!l del!$ "n wor% !nd !lso when the !sset "s
t!nt"!ll$ complete
he specl cse of n sset wth component
cluded wth totll dfferent UEL
could be someth"n# l"%e L!nd !nd bu"ld"n#s - b!s"c!ll$ $ou should t!%e the l!nd v!lue !w!$ from the tot!l cost !nd then
rec"!te the rem!"nder over the UEL of the bu"ld"n#
tr!t#on
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House for 100,000& The l!nd h!s ! v!lue of 40,000& UEL of bu"ld"n# "s 10 $e!rs
rec"!t"on would be)
d 40,000 - zero deprec"!t"on
d"n# 60,000 - 6,000 deprec"!t"on
ter the !n!t!#l reco"n!t!on there #re 2 cho!ces$$
st model
Cost less !ccumul!ted deprec"!t"on !nd "mp!"rment
Deprec"!t"on should be#"n when re!d$ for use not w!"t unt"l !ctu!ll$ used
vluton model
F!"r v!lue !t the d!te of rev!lu!t"on less deprec"!t"on
Rev!lu!t"ons should be c!rr"ed out re#ul!rl$
For vol!t"le "tems th"s w"ll be !nnu!ll$
For others between 3-5 $e!rs or less "f deemed necess!r$&
If !n "tem "s rev!lued, "ts ent"re cl!ss of !ssets should be rev!lued
M!r%et v!lue norm!ll$ "s f!"r v!lue&
Spec"!l"sed propert"es w"ll be rev!lued to the"r deprec"!ted repl!cement cost
E - After In#t#!l reco%n#t#on
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count!n" tre#tment of # Rev#lu#t!on
Increse (bove deprected hstorc cost)
sset
Cred!t equ!t% - “rev#lu#t!on surplus”
Also show !n the OCI
ecrese down to Hstorc cost
"t !sset
Deb!t equ!t% - “rev#lu#t!on surplus”
Also show !n the OCI
ecrese below hstorc cost
"t !sset
Deb!t Income st#tement
posl of Revlued Asset
rev!lu!t"on surplus "n equ"t$ - IS NOT tr!nsferred to the "ncome st!tement - "t *ust drops "nto RE
ll, therefore, onl$ show up "n the st!tement of ch!n#es "n equ"t$
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m!%e no m"st!%e !bout th"s - the rev!lu!t"on !d *ustments c!n be ver$ tr"c%$& Th"s "s bec!use, when $ou rev!lue upw!rds, the
t w"ll "ncre!se !nd hence the deprec"!t"on w"ll "ncre!se& Th"s me!ns sm!ller prof"ts !nd sm!ller ret!"ned e!rn"n#s *ust bec!use
he rev!lu!t"on'
eholders w"ll not be "mpressed b$ th"s !s ret!"ned e!rn"n#s "s where the$ !re le#!ll$ !llowed to #et the"r d"v"dends from&
!use of th"s, ! tr!nsfer "s m!de out of the rev!lu!t"on reserve !nd "nto ret!"ned e!rn"n#s ever$ $e!r w"th the extr!
rec"!t"on c!used b$ the prev"ous rev!lu!t"on
thou#h, then c!uses more problems "f the !sset "s subsequentl$ "mp!"red etc - but worr$ not - the COW h!s the !nswer'
"s wh!t $ou do "n ! tr"c%$ loo%"n# rev!lu!t"on quest"on)
!lcul!te the Deprec#!ted H#stor#c Cost
"s b!s"c!ll$ wh!t the !sset would h!ve been worth h!d noth"n# (rev!lu!t"ons/"mp!"rments) occurred "n the p!st& We do th"s
!use !n$th"n# !bove th"s f"#ure "s ! #enu"ne rev!lu!t"on !nd so #oes to the RR& S"m"l!rl$ !n$th"n# below th"s "s ! #enu"ne
!"rment !nd #oes to the "ncome st!tement
!lcul!te the NBV 'ust before the Rev!lu!t#on or Imp!#rment #n quest#on
ow c!lcul!te the d#fference between step 2 !nd the new NBV (the !mount to be rev!lued or "mp!"red to)&
w"ll be the deb"t or cred"t to the !sset& The other s"de of the entr$ w"ll depend on the deprec"!ted h"stor"c cost c!lcul!ted "n
1
ow !ll th!t sounds tr"c%$ - so let’s loo% !t !n "llustr!t"on
ustr!t#on
sset "s bou#ht for 1,000 (10$r UEL)& 2 $e!rs l!ter "t "s rev!lued to 1,000& One $e!r !fter th!t "t "s "mp!"red to 400&
!t #s the double entr$ for th#s #mp!#rment&
1) DHC would be 1,000 less 3 $e!rs of deprec"!t"on = 700
2) NBV !t d!te of "mp!"rment = 1000 NBV one $e!r e!rl"er& So 1,000 less deprec"!t"on of (1,000 / 8) = 125 = 875
3) Imp!"r to 400&
rom 875 to 400 - cred"t Asset 475
R w"th !n$ !mount !bove the DHC of 700& So 875-700 = 175
S w"th !n$ !mount below DHC of 700& So 700-400 = 300
/S 300
R 175
PE 475
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r!ous components of #n #sset to be !dent!f!ed #nd deprec!#ted
p#r#tel% !f the% h#ve d!ffer!n" p#tterns of benef!ts
s"#n"f"c!nt component "s expected to we!r out qu"c%er th!n the over!ll !sset, "t "s deprec"!ted over ! shorter per"od
n !n$ restor"n# or repl!c"n# "s c!p"t!l"sed
!ppro!ch me!ns d"fferent deprec"!t"on per"ods for d"fferent components
mples !re l!nd, roof, w!lls, bo"lers !nd l"fts&
he deprec"!t"on reflects the effect of ! future restor!t"on or repl!cement
hllenn process
to&&
Dffcultes vlun components
bec!use "t "s unusu!l for the v!r"ous component p!rts to be v!lued, so&&
Involve comp!n$ personnel "n the !n!l$s"s
Appl$"n# component !ccount"n# to !ll !ssets
How f!r the !sset should be bro%en down "nto components
An$ me!sure used to determ"ne components "s sub *ect"ve
mponent#s!t#on
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Asset re#"sters m!$ need to be rewr"tten
Bre!%"n# down !ssets needs ‘m!ter"!l"t$', sett"n# ! de m"n"m"s l"m"t
When component s replced or restored
The old component "s dereco#n"sed to !vo"d double-count"n# !nd the new component reco#n"sed
Where t s not possble to determne the crrn mount of the replced prt of ntem of PPE
best est"m!tes !re requ"red
A poss"b"l"t$ "s&&
Use the repl!cement cost of the component, !d *usted for !n$ subsequent deprec"!t"on !nd "mp!"rment
A revluton
!pport"on over the s"#n"f"c!nt components
When component s replced
1& The c!rr$"n# v!lue of the component repl!ced should be ch!r#ed to the "ncome st!tement
2& The cost of the new component reco#n"sed "n the st!tement of f"n!nc"!l pos"t"on
nston to IFRS
the ‘f!"r v!lue !s deemed cost’ for the !sset
The f!"r v!lue "s then !lloc!ted to the d"fferent s"#n"f"c!nt p!rts of the !sset
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ponent"s!t"on !dds to sub *ect"v"t$
!dd"t"on!l deprec"!t"on ch!r#e c!n be s"#n"f"c!nt&
ount!nts !nd other profess"on!ls must use the"r profess"on!l *ud#ment when est!bl"sh"n# s"#n"f"c!nce levels, !ssess"n# the
ul l"ves of components !nd !pport"on"n# !sset v!lues over reco#n"sed components&
uss"ons w"th extern!l !ud"tors w"ll be %e$ dur"n# th"s process&
overnment "r#nts #re # form of "overnment #ss!st#nce
wever, IAS 20 does not !ppl$ to the follow"n# s"tu!t"ons)
‘t!x bre!"s
ernment !ct"n# !s p!rt-owner
he ent"t$
techn"c!l or m!r%et"n# !dv#ce
hen cn ou reconse overnment rnt
n there "s re!son!ble !ssur!nce th!t)
The ent"t$ w"ll compl$ w"th !n$ cond"t"ons !tt!ched to the #r!nt
The ent"t$ w"ll compl$ w"th !n$ cond"t"ons !tt!ched to the #r!nt
vernment Gr!nts P!rt 1
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coun n" re# men o "overnmen "r#n s
ere re 2 pproches - dependn on wht the rnt s ven for
C!p#t!l Gr!nt !ppro!ch)
(For Assets)
Reco#n"se the #r!nt outs"de prof"t or loss "n"t"!ll$
Income Gr!nt !ppro!ch)
(For expenses)
Reco#n"se the #r!nt "n prof"t or loss
ptl Grnt pproch
e !re 2 methods for th"s !ppro!ch&&
!sh
Cr Asset Cost or&&&
Cr Deferred Income
Then t!%e th"s deferred "ncome to the "ncome st!tement !s the !sset deprec"!tes !nd "n the s!me proport"on (Dr Deferred
Income Cr Income st!tement)
's !ll I'll s!$ here !s "t "s best seen v"su!ll$ !nd pr!ct"c!ll$ "n the v"deo ))
ome Grnt pproch
!sh
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Cr Ot er "ncome or
Cr the expense to wh"ch "t rel!tes
bu!ld!n" (or l#nd) owned but not used - (ust #n !nvestment
bu"ld"n# "s not used "t *ust m!%es c!sh b$)
FV #o"n# up (c!p"t!l !pprec"!t"on) or
om rent!l "ncome
ountn tretment for the Rentl Income
Add !t to the !ncome st#tement
E#s%* (Even for # "on& l!&e %ou*) )p
ountn tretment for the FV ncrese
The d"fference "n FV e!ch $e!r #oes to the I/S
Double e!s$ - double #on%$
deprec#!t#on "s needed bec!use "t's not used ))
estment propert$ P!rt 1
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ve me exmples of wht cn be Investment Propertes cow
ou !s%ed for "t&&
L!nd held for lon%-term c!p#t!l !pprec#!t#on r!ther th!n short-term s!le
L!nd held for ! currentl$ undeterm#ned future use
Th"s b!s"c!ll$ me!ns the$ h!ven't $et dec"ded wh!t to do w"th the l!nd
A bu"ld"n# owned but le!sed to ! th"rd p!rt$ under !n oper!t"n# le!se
A bu"ld"n# wh"ch "s v!c!nt but "s held to be le!sed out under !n oper!t"n# le!se
Propert$ be"n# constructed or developed for future use !s !n "nvestment propert$
smrt pnts - wht ISN'T n Investment propert
Propert$ "ntended for s!le "n the ord#n!r$ course of bus"ness
(It's stoc%')
Owner-occup"ed propert$
Propert$ le!sed to !nother ent"t$ under ! f"n!nce le!se
n propert be prt IAS 40 Investment propert
nd prt norml IAS 16 propert
s ou", mons"er/m!d!me - For ex!mple, he!d off"ce on one floor !nd rent out the rest& If the rest c!n b" sold s" p!r !t"l # then
c!n be tre!ted !s !n "nvestment propert$&
n t stll be n IAS 40 Investment propert f we re
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!ro hombre/mu *er - It’s st"ll !n IAS 40 Investment propert$ "f the suppl$ #s sm!ll !nd #ns#%n#f#c!nt( If "t’s ! s"#n"f"c!nt p!rt
he de!l w"th the ten!nt then the propert$ becomes !n IAS 16 propert$
Wht f m subsdr uses t but I don’t
t o% - now $our quest"ons !re #ett"n# on m$ nerves- but st"ll - "t’s !n IAS 40 Investment propert$ "n $our own "nd"v"du!l
unts - bec!use $ou person!ll$ !re not us"n# "t&
wever, "n the #roup !ccounts "ts !n IAS 16 propert$ bec!use someone "n the #roup "s us"n# "t&&
w enou#h of the quest"ons !lre!d$&& #et b!c% to f!ceboo% &&
#sset !s !mp#!red when boo& v#lue !s h!"her th#n recover#ble #mount
ht s Recoverble Amount
$ou h!ve to cho"ces w"th !n !sset - $ou c!n e"ther)
or Use&&
$ou'll choose the h"#her of the follow"n#
FV-CTS
(F!"r v!lue less costs to sell)
VIU
(V!lue "n use)
36 Imp!#rments
http://www.facebook.com/pages/ACOWtancy/179451068794041
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e's some bor"n# def"n"t"ons for $ou&&
v!lue
!mount obt!"n!ble from the s!le of !n !sset "n ! b!r#!"ned tr!ns!ct"on between %nowled#e!ble, w"ll"n# p!rt"es&
ue #n used"scounted present v!lue of est"m!ted future c!sh flows expected to !r"se from)
cont"nu"n# use of !n !sset, !nd from
"spos!l !t the end of "ts useful l"fe
ent!f%!n" #n Asset Th#t M#% Be Imp#!red
ere "s !n "nd"c!t"on th!t !n !sset m!$ be "mp!"red, then $ou must c!lcul!te the !sset’s recover!ble !mount&&& to see "f "t "s
w c!rr$"n# v!lue
s - then $ou must "mp!"r "t
tr!t#on
t h!s c!rr$"n# v!lue of 100
s ! FV-CTS of 90
s ! VIU of 95
ecover!ble !mount "s therefore the h"#her of the 2 = 95 !nd th"s "s below the c!rr$"n# v!lue "n the boo%s !nd so needs
!"rment of 5
ht re the ndctors of mprment
Losses / worse econom"c perform!nce
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M!r%et v!lue decl"nes
Obsolescence or ph$s"c!l d!m!#e
Ch!n#es "n technolo#$, m!r%ets, econom$, or l!ws
Incre!ses "n m!r%et "nterest r!tes
Loss of %e$ emplo$ees
Restructur"n# / re-or#!n"s!t"on
to confuse $ou ! l"ttle b"t more, we do not JUST chec% for "mp!"rment when there h!s been !n "nd"c!tor (l"sted !bove)& We
chec% the follow"n# ANNUALLY re#!rdless of whether there h!s been !n "mp!"rment "nd"c!tor or not-
nt!n#"ble !sset w"th !n "ndef"n"te useful l"fe&
nt!n#"ble !sset not $et !v!"l!ble for use&
dw"ll !cqu"red "n ! bus"ness comb"n!t"on
's loo t VIU n more detl
future c!sh flows&&
Must be b!sed on support!ble !ssumpt"ons
Should norm!ll$ not #o be$ond f"ve $e!rs
Rel!te to the !sset "n "ts current cond"t"on
Should not "nclude c!sh from f"n!nc"n# !ct"v"t"es, or "ncome t!x
The d"scount r!te used should be the pre-t!x r!te th!t reflects current m!r%et !ssessments of the t"me v!lue of mone$ !nd
the r"s%s spec"f"c to the !sset
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mp!#rment of !n #nd#v#du!l !sset
d"scount r!te "s the r!te the comp!n$ would p!$ "n ! current m!r%et tr!ns!ct"on to borrow mone$ to bu$ th!t spec"f"c !sset
ortfol"o&
m!r%et-determ"ned !sset-spec"f"c r!te "s not !v!"l!ble, ! surro#!te must be used th!t reflects the t"me v!lue of mone$ over
!sset’s l"fe !s well !s countr$ r"s%, currenc$ r"s%, pr"ce r"s%, !nd c!sh flow r"s%&
eversl of Imprments
se !re !llow!ble up to the deprec"!ted h"stor"c cost
wever, IAS 36 requ"res !n !ssessment !t e!ch b!l!nce sheet d!te whether there "s !n "nd"c!t"on th!t !n "mp!"rment loss m!$
e decre!sed& Th"s does not !ppl$ to #oodw"ll or to the unw"nd"n# of the d"scount&
GU !s the sm#llest !dent!f!#ble "roup of #ssets th#t "ener#tes c#sh
flows
the ex!mple of ! rest!ur!nt, the !ssets on the"r own do not #ener!te c!sh, but !ll to#ether the$ do& We c!ll the rest!ur!nt
whole ! CGU
h Gener!t#n% Un#ts
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re !n !sset forms p!rt of ! CGU, !n$ "mp!"rment rev"ew must be m!de on the GROUP of !ssets !s ! whole
w should th"s "mp!"rment loss be !lloc!ted( Th"s w"ll be descr"bed "n the follow"n# sect"on&& so be p!t"ent $ou
w should n mprment loss be llocted
"mp!"rment loss "s !lloc!ted to reduce the c!rr$"n# !mount of the !ssets of the un"t "n the follow"n# order)
Reduce the c!rr$"n# !mount of #oodw"ll (!lloc!ted to the CGU)
Reduce the c!rr$"n# !mounts of the other !ssets of the un"t pro r!t!
tr!t#on
follow"n# c!rr$"n# !mounts were recorded "n the boo%s of ! rest!ur!nt "mmed"!tel$ pr"or to the "mp!"rment) -
oodw"ll 100
opert$, pl!nt !nd equ"pment 100
urn"ture !nd f"xtures 100
f!"r v!lue less costs to sell of these !ssets "s $260m where!s the v!lue "n use "s $270m
u"red)- Show the "mp!ct of the "mp!"rment
ut#on
over!ble !mount "s 270 - so the CV of the CGU needs to be reduced from 300 to 270 = 30
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(The "nt!n#"ble doesn’t h!ve to be sep!r!ble AND !r"se from ! le#!l r"#ht, *ust one or the other "s enou#h)
ell !t's the old rel!#bl% me#sur#ble #nd prob#ble #"#!n*
posher terms
When !t !s prob#ble th#t future econom!c benef!ts #ttr!but#ble to the #sset w!ll flow to the ent!t%
The cost of the #sset c#n be me#sured rel!#bl%
thwh"le po"nt"n# out here th!t the prob!b"l"t$ cr"ter"! ment"oned !bove "s ALWAYS s!t"sf"ed for ! sep!r!tel$ !cqu"red
n#"ble, bec!use the cost w"ll reflect th!t prob!b"l"t$ the more prob!ble the benef"ts, the h"#her the cost
t how much should we show the sset t ntll
th"c% p!nts - "t’s obv"ousl$ brou#ht "n !t cost'' A!!rh but wh!t "s cost I he!r $ou wh"sper "n m$ b"# flopp$ cow-l"%e e!rs&&
"t’s
Purchse prce plus drectl ttrbutble costs
en c!n $ou reco%n#se !n IA !nd for how much&
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,
excluded
If the ntnble cme wth subsdr we bouht
Well th"s t"me, the "nt!n#"ble !sset (other th!n #oodw"ll ) should "n"t"!ll$ be reco#n"sed !t "ts f!"r v!lue
If the FV c!nnot be !scert!"ned then "t "s not rel"!bl$ me!sur!ble !nd so c!nnot be shown "n the !ccounts&
In th"s c!se b$ not show"n# "t, th"s me!ns th!t #oodw"ll becomes h"#her
se#rch !s expensed, Development !s often #n #sset
serch
!rch "s "nvest"#!t"on to #et new %nowled#e !nd underst!nd"n#
All #oes to I/S
velopment
er IAS 38, !n "nt!n#"ble !sset must demonstr!te !ll of the follow"n# cr"ter"!)
p"r!te !s ! memor$ *o##er)
Prob#ble future econom!c benef!ts
ntent!on to complete #nd use or sell the #sset
Resources (techn!c#l, f!n#nc!#l #nd other resources) #re #dequ#te #nd #v#!l#ble
o complete #nd use the #sset
e!rch !nd development
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Techn"c!l expert"se
Possess"on of f!vour!ble contr!cts
Good m!n!#ement !nd st!ff
e"#t!ve "oodw!ll
e d"fference !bove "s ne#!t"ve, the result"n# #!"n "s reco#n"sed !s ! b!r#!"n purch!se "n the st!tement of prof"t or loss
oodw!ll v Other !nt#n"!bles
n dfferences
It c!nnot be v!lued on "ts own
Goodw"ll c!nnot be d"sposed of !s ! sep!r!te !sset
The f!ctors contr"but"n# to the v!lue of #oodw"ll c!nnot be v!lued
The v!lue of #oodw"ll "s vol!t"le
p!#rment of Goodw#ll
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oodw!ll !s rev!ewed for !mp#!rment not #mort!sed
mp!"rment occurs when the subs recover!ble !mount "s less th!n the subs c!rr$"n# v!lue + #oodw"ll
w th"s wor%s "n pr!ct"ce depends on how NCI "s me!sured&& Proport"on!te or F!"r V!lue method
oportonte NCI
e, NCI onl$ rece"ves % of S's net !ssets
DOES NOT h!ve !n$ sh!re of the #oodw"ll
Comp#re the recover#ble #mount of S (100%) to$$
NET ASSETS of S (100%) +
Goodw!ll (100%)
The problem !s th#t "oodw!ll on the SFP !s for the p#rent onl% - so th!s needs "ross!n" up f!rst
Then f!nd the d!fference - th!s !s the !mp#!rment - but onl% show the p#rent % of the !mp#!rment
mple
wns 80% of S& Proport"on!te NCI
dw"ll "s 80 !nd NA !re 200
over!ble !mount "s 240
w much "s the "mp!"rment(
ut#on
240
= 200 + G/W (80 x 100/80) = 100 = 300
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!"rment "s therefore 60
"mp!"rment shown "n the !ccounts thou#h "s 80% x 60 = 48&
"s bec!use the #oodw"ll "n the proport"on!te method "s p!rent #oodw"ll onl$& Therefore onl$ p!rent "mp!"rment "s shown
r Vlue NCI
e, NCI rece"ves % of S's net !ssets AND #oodw"ll
DOES now own some #oodw"ll
Comp#re the recover#ble #mount of S (100%) to$$
NET ASSETS of S (100%) +
Goodw!ll (100%)
As, here, "oodw!ll on the SFP !s 100% (p#rent & NCI) - so NO "ross!n" up needed
Then f!nd the d!fference - th!s !s the !mp#!rment - th!s !s spl!t between the p#rent #nd NCI sh#re
mple
wns 80% of S& F!"r V!lue NCI
dw"ll "s 80 !nd NA !re 200
over!ble !mount "s 240
w much "s the "mp!"rment(
ut#on
240
= 200 + G/W 80 = 280
!"rment "s therefore 40
"mp!"rment shown "n P's RE !s 80% x 40 = 32
"mp!"rment shown "n NCI "s 20% x 40 = 8
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prment d ustment on the Income Sttement
Proport#on!te NCI
Add !t to P's expenses
F!#r V!lue NCI
Add !t to S's expenses
Th!s reduces S's PAT so reduces NCI when !t t#&es !ts sh#re of S's PAT)
ventor!es should be me#sured #t the lower of cost #nd net re#l!s#ble
lue
ht oes nto 'cost'
Purch#se pr!ce
Convers!on costs
Costs to br!n" !nto current loc#t!on & cond!t!on
ht does NOT o nto 'cost'
Abnorm!l !mounts
Stor!#e costs
Adm"n"str!t"on overhe!ds
nventor%
#c Inventor$
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net re!l"s!ble v!lue of !n "tem "s essent"!ll$ "ts net sell"n# proceeds !fter !ll costs h!ve been deducted
c!lcul!ted !s follows&&
t"m!ted sell"n# pr"ce X
ss) est"m!ted costs of complet"on (X)
ss) est"m!ted sell"n# !nd d"str"but"on costs (X)
X
S 11 def!nes # construct!on contr#ct #s)
ntr!ct spec"f"c!ll$ ne#ot"!ted for the construct"on of !n !sset or ! comb"n!t"on of !ssets th!t !re closel$ "nterrel!ted or
rdependent "n terms of the"r des"#n, technolo#$, !nd funct"on for the"r ult"m!te purpose or use
ountn tretment
c!ll$ uses the !ccru!ls concept
S!les - % complete
Costs - % complete
nstruct#on Contr!cts - % complete
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w do ou clculte % complete
e !re 2 w!$s - !nd $ou w"ll be told wh"ch to use ))
A%reed v!lue of wor" method
Wor% done so f!r / Contr!ct pr"ce tot!l
Cost Method
Costs to d!te / Tot!l costs
tr!t#on of % complete
ontr!ct Pr"ce 1,000
t"m!ted tot!l costs 800
osts to d!te 600
#reed v!lue of wor% done 700
o#ress b"ll"n#s "nvo"ced 600
ul!te the st!#e of complet"on us"n#)- !& the !#reed v!lue of wor% method b& the cost method
ut#on - !%reed v!lue of wor" done
/ 1,000 = 70%
!les would be 700
s would be (70% x 800) = 560
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ut#on - Costs method
/ 800 = 75%
!les would be (75% x 1000) = 750
s would be 600
member the I/S shows the wor& done not the #mounts !nvo!ced
s loo" !t th!t ex!mple !%!#n
ontr!ct Pr"ce 1,000
t"m!ted tot!l costs 800
osts to d!te 600
#reed v!lue of wor% done 700
o#ress b"ll"n#s "nvo"ced & rece"ved 600
Income st!tement pro form! for ! prof#t m!"#n% contr!ct
!les on I/S % Complete
OS on I/S % Complete
nstruct#on contr!cts - !ccount#n%
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s"n# !#reed v!lue of wor% done method the Income st!tement would l"%e th"s&&
!les 700
OS (70% x 800) 560
form! for SFP
!les on I/S - Amounts "nvo"ced If + #oes to rece"v!bles+ "f - #oes to p!$!bles
OS on I/S - Costs to d!te "f + #oes to p!$!bles+ "f - #oes to rece"v!bles
mounts "nvo"ced - Amounts rece"ved #oes to tr!de rece"v!bles
00-600 = 100 Show "n Rece"v!bles
60 - 600 = 40 Show "n Rece"v!bles
rudent #nd show the whole loss !mmed!#tel
nstruct#on contr!cts - Loss m!"#n%
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proform! for ! loss-m!"#n% contr!ct
!les % Complete
OS B!l!nc"n# f"#ure
oss Tot!l Loss
tr!t#on
ontr!ct Pr"ce 1,000
t"m!ted tot!l costs !t the st!rt 800
osts to d!te 600
#reed v!lue of wor% done 700
o#ress b"ll"n#s "nvo"ced & rece"ved 600
t"m!ted tot!l costs now 1,100
!#reed v!lue of wor% done method to c!lcul!te percent!#e complete
u"red)- C!lcul!te the effect of the !bove contr!ct on the f"n!nc"!l st!tements
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s"n# !#reed v!lue of wor% done method the Income st!tement would l"%e th"s&&
!les 700
OS (B!l!nc"n# f"#ure) 800
oss 100
form! for SFP
!les on I/S - Amounts "nvo"ced If + #oes to rece"v!bles+ "f - #oes to p!$!bles
OS on I/S - Costs to d!te "f + #oes to p!$!bles+ "f - #oes to rece"v!bles
mounts "nvo"ced - Amounts rece"ved #oes to tr!de rece"v!bles
00-600 = 100 Show "n Rece"v!bles
00 - 600 = 200 Show "n P!$!bles
ro prof!t !s shown here
nstruct#on Contr!cts - Unrel#!ble outcome
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enue m!de to equ!l the recover!ble contr!ct costs
tr!t#on
v"l le!ther m!%"n# comp!n$ ne#ot"!ted ! two-$e!r pro *ect th!t commenced "n the l!tter h!lf of the $e!r
pro *ect m!n!#er (dev"l) h!s been rev"ew"n# the contr!ct !nd, !t the $e!r end, "s unsure whether the contr!ct w"ll m!%e !
"t or ! loss !s there !re uncert!"nt"es surround"n# the pro *ect’s complet"on (Good')
pro *ect m!n!#er’s records show th!t costs dur"n# the $e!r !mount to $700,000 !nd no c!sh h!d $et been rece"ved
t should the !ccount"n# entr"es be re#!rd"n# the contr!ct !t the $e!r end(
ut#on
!les 700
OS 700
h#t costs #re !n contr#ct costs'
lude tems such s
An$ d"rectl$ !ttr"but!ble costs "n"t"!ll$
An$ costs wh"ch c!n be spec"f"c!ll$ ch!r#ed to the customer under the terms of the contr!ct
t#f#c!t#on costs
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"f"c!t"on costs must be ch!r#ed to the per"od "n wh"ch the$ were "ncurred, !nd not spre!d over the rem!"nder of the contr!ct
efore, such costs should not be !dded "n when c!lcul!t"n# the prof"t or loss to be shown on ! contr!ct
!s #ffects the I/S not SFP wor&!n"s
re ! contr!ct "s !lre!d$ p!rt w!$ throu#h, "&e& "n "ts second $e!r, some revenue !nd costs h!ve prev"ousl$ been reco#n"sed
efore, "t "s "mport!nt to t!%e th"s "nto !ccount "n the c!lcul!t"ons to m!%e sure the$ show the current $e!r revenue !nd costs
proch to te
Do contr#ct for %e#r 2 #s norm#l
T#&e #w#% Ye#r 1's S#les #nd COS f!"ures (#nd then %ou're left w!th %e#r 2 - perfect*
&, o&, rel#x #t the b#c& - th!s !s not #s b#d #s !t seems+ trust me
n#t#on
nstruct#on Contr!cts - !lre!d$ be%un((
n!nc#!l Assets !nd L#!b#l#t#es
!nc#!l Instruments - Introduct#on
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&
mples
, tr!de rece"v!bles, "nvestments, tr!de p!$!bles !nd lo!ns-&
the tr#c"#er stuff*((
so !ppl"es to der"v!t"ves f"n!nc"!l such !s c!ll !nd put opt"ons, forw!rds, futures, !nd sw!ps
the 'ust pl!#n we#rd*(
so !ppl"es to some contr!cts th!t do not meet the def"n"t"on of ! f"n!nc"!l "nstrument, but h!ve ch!r!cter"st"cs s"m"l!r to
v!t"ve f"n!nc"!l "nstruments, such !s prec"ous met!ls !t ! future d!te when the follow"n# !ppl"es)contr!ct "s sub *ect to poss"ble settlement "n c!sh r!ther th!n b$ del"ver"n# the prec"ous met!l
purch!se of the prec"ous met!l w!s not norm!l for the ent"t$
follow#n% !re NOT f#n!nc#!l #nstruments)
th"n# w"thout ! contr!ct
Prep!$ments
th"n# not "nvolv"n# the tr!nsfer of ! f"n!nc"!l !sset
Deferred "ncome !nd W!rr!nt"es
conton
"mport!nt th"n# to underst!nd here "s th!t $ou br"n# ! FI "nto the !ccounts when $ou enter "nto the contr!ct NOT when the
r!ct "s settled& Therefore der"v!t"ves !re reco#n"sed "n"t"!ll$ even "f noth"n# "s p!"d for "t "n"t"!ll$
Subst!nce over form
Form (le#!ll$) me!ns ! preference sh!re "s ! sh!re !nd so p!rt of equ"t$& HOWEVER, ! subst!nce over form model "s !ppl"ed
to debt/equ"t$ cl!ss"f"c!t"on& An$ "tem w"th !n obl"#!t"on, such !s redeem!ble preference sh!res, w"ll be shown !s l"!b"l"t"es
reconton
b!s"c!ll$ me!ns when to #et r"d of "t / t!%e "t out of the !ccounts
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The contr!ctu!l r"#hts $ou used to h!ve h!ve exp"red/#one
For Ex!mple
You sell !n !sset !nd "ts benef"ts now #o to someone else (no cond"t"ons !tt!ched)
You DONT dereconse when
You sell !n !sset but !#ree to bu$ "t b!c% l!ter (th"s me!ns $ou st"ll h!ve !n "nterest "n the r"s% !nd rew!rds l!ter)
ere #re 3 c#te"or!es to remember
!te%or$ In#t#!l Me!surement Ye!r-end Me!surement D#fference %oes where&
VTPL FV FV Prof"t !nd Loss
VTOCI FV FV OCI
mort"sed Cost FV Amort"sed Cost -
IFRS 9 b!s"c!ll$ s!$s th!t "t must be ! rece"v!ble lo!n "n the norm!l sense of the term th!t #oes "nto !mort"sed cost&
So, ! norm!l rece"v!ble lo!n h!s ONLY c!p"t!l !nd "nterest to be rece"ved, !nd we don’t norm!ll$ sell "t before the lo!n
ht sort of thns o nto the mortsed cost cteor
!nc#!l Assets - In#t#!l Me!surement
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&
So there !re !ctu!ll$ 2 tests to help us dec"de "f !n "tem should #o to !mort"sed cost)
The 2 Tests !re
1& Bus"ness model test - do we norm!ll$ %eep our rece"v!ble lo!ns unt"l the end r!ther th!n sell them on(
2& C!shflows test - !re the ONLY c!shflows com"n# "n c!p"t!l !nd "nterest(
wht sort of thns o nto the FVTPL cteor
If one of the tests !bove !re not p!ssed then the$ !re deemed to f!ll "nto the FVTPL c!te#or$
Th"s w"ll "nclude !n$th"n# held for tr!d"n# !nd der"v!t"ves
TIAL mesurement
Good news' In"t"!ll$ both !re me!sured !t FV&
E!s$ pe!s$ to remember
The FV "s c!lcul!ted, !s usu!l, !s !ll c!sh "nflows d"scounted down !t the m!r%et r!te
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!te%or$ In#t#!l Me!surement Ye!r-end Me!surement D#fference %oes where&
VTPL FV FV Prof"t !nd Loss
VTOCI FV FV OCI
mort"sed Cost FV Amort"sed Cost -
!ll$ both !re me!sured !t FV
w let's loo% !t wh!t h!ppens !t the $e!r-end&&
TPL ccountn tretment
Rev#lue to FV
D!fference to I/S
TOCI ccountn tretment
Rev#lue to FV
D!fference to OCI
ortsed cost ccountn tretment
Re-c#lcul#te us!n" the #mort!sed cost t#ble
see below)
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ort#sed Cost T!ble
00 rece"v!ble lo!n (effect"ve r!te 10% due to ! prem"um on redempt"on)
pen#n% B!l!nce Interest (effect#ve r!te) (C!shRece#ved) Clos#n% b!l!nce
0 10 (8) 102
ere's onl% 2 c#te"or!es, FVTPL #nd Amort!sed cost$$ Y#%*
t-$-o, we’ve loo%ed !t reco#n"s"n# (br"n# "nto the !ccounts for those of $ou who !re ! s!ndw"ch short of ! p"cn"c*) - now we
t to loo% !t HOW MUCH to br"n# the l"!b"l"t"es "n !t&
!lre!d$ de!lt w"th th"s on ! tr"c%$ convert"ble lo!n&
t me th"s sect"on "s much e!s"er& B!s"c!ll$ there !re 2 c!te#or"es of F"n!nc"!l L"!b"l"t$&&&
teores
F!#r V!lue Throu%h Prof#t !nd Loss
Th!s !ncludes f!n#nc!#l l!#b!l!t!es !ncurred for tr#d!n" purposes #nd #lso der!v#t!ves
Amort#sed Cost
f f!n#nc!#l l!#b!l!t!es #re not me#sured #t FVTPL (see below), the% #re me#sured #t #mort!sed cost
!nc#!l l#!b#l#t#es - C!te%or#es
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#ood news "s th!t wh!tever the c!te#or$ the f"n!nc"!l l"!b"l"t$ f!lls "nto - we !lw!$s reco#n"se "t !t F!"r V!lue INITIALLY&
how we tre!t them !fterw!rds where the c!te#or$ m!tters (!nd remember here we !re *ust de!l"n# w"th the "n"t"!l
surement)
ccount#n$ Tre!tment of F#n!nc#!l L#!b#l#t#esOverv#ew)
In#t#!ll$ At Ye!r-End An$ %!#n/loss
VTPL F!"r V!lue F!"r V!lue Income St!tement
mort#sed Cost F!"r V!lue Amort"sed Cost
o - the quest#on #s - how do %ou me!sure the FVf ! lo!n&&
!#!"n the !nswer "s s"mple - !nd $ou’ve done "t !lre!d$ w"th compound "nstruments& All $ou do "s those 2 steps)
TEP 1) T!%e !ll $our !ctu!l future c!sh p!$ments
TEP 2) DIscount them down !t the m!r%et r!te
e m!r%et r!te "s the s!me !s the r!te $ou !ctu!ll$ p!$ then th"s "s no problem !nd $ou don’t re!ll$ h!ve to follow those 2
s !s $ou w"ll *ust come b!c% to the c!p"t!l !mount-let me expl!"n
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1,000 P!$!ble Lo!n 3 $e!rs
t!l 1,000 x 0&751 751
rest 100 x 2&486 249
l 1,000
he conclus"on "s - WHERE THE EFFECTIVE RATE YOU PAY IS THE SAME AS THE MAR/ET RATE THEN THE FV IS THE PRINCIPAL -
o need to do the 2 steps&
!$s presume the m!r%et r!te "s the s!me !s the effect"ve r!te $ou’re p!$"n# unless told otherw"se b$ El Ex!m"nero&
oss#ble N!u$ht% B#ts
rem#um on redempt#on
"s *ust !nother w!$ of p!$"n# "nterest& Except $ou p!$ "t !t the end (on redempt"on)
% 1,000 p!$!ble lo!n - w"th ! 10% prem"um on redempt"on&
me!ns th!t the EFFECTIVE "nterest r!te "s more th!n 4% - bec!use we h!ven’t $et t!%en "nto !ccount the extr! 100 (10% x
0) p!$!ble !t the end& So the ex!m"ner w"ll tell $ou wh!t the effect"ve r!te !ctu!ll$ "s - let’s s!$ 8% (not enou#h "nfo "n the
st"on to c!lcul!te th"s)
cruc"!l po"nt here "s th!t $ou presume the effect"ve r!te "s the s!me !s the m!r%et r!te so the "n"t"!l FV "s st"ll 1,000
#scount on Issue
tl$ the s!me !s !bove - "t "s *ust !nother w!$ of p!$"n# "nterest - except th"s t"me $ou p!$ "t !t the st!rt
% 1,000 p!$!ble lo!n w"th ! 5% d"scount on "ssue
#!"n the "nterest r!te "s not 4%, bec!use "t "#nores the extr! "nterest $ou p!$ !t the be#"nn"n# of 50 (5% x 1,000)& So the
ct"ve r!te "s let’s s!$ 7% (!#!"n we c!nnot c!lcul!te th"s !nd w"ll *ust be #"ven "n the ex!m)
cruc"!l po"nt here "s th!t the d"scount "s p!"d "mmed"!tel$& So, !lthou#h $ou presume th!t the effect"ve r!te "s the s!me !s
m!r%et r!te (7% s!$), the INITIAL FV of the lo!n w!s 1,000 but "s "mmed"!tel$ reduced b$ the 50 d"scount - so "s !ctu!ll$ 950
You st"ll p!$ "nterest of 4% x 1,000 not 4% x 950
u!"nt old En#l"sh s!$"n# - me!n"n# $ou’re !n "d"ot )p
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, we’ve (ust loo&ed #t !n!t!#l me#surement (#t FV) Now let’s loo& #t
w we me#sure !t from then onw#rds+$
"s where the c!te#or"es of f"n!nc"!l l"!b"l"t"es !re "mport!nt - so let’s rem"nd ourselves wh!t the$ !re)
In#t#!ll$ At Ye!r-End An$ %!#n/loss
VTPL F!"r V!lue F!"r V!lue Income St!tement
mort#sed Cost F!"r V!lue Amort"sed Cost -
ou onl$ h!ve 2 rules to remember - cool-
PL - s"mple *ust %eep the "tem !t "ts FV (remember th"s "s those 2 steps) !nd put the d"fference to the "ncome st!tementort#sed Cost - Amort"sed Cost "s the me!surement once the "n"t"!l me!surement !t FV "s done
mort#sed Cost
"s s"mpl$ spre!d"n# ALL "nterest over the len#th of the lo!n b$ ch!r#"n# the effect#ve "nterest r!te to the "ncome st!tement
$e!r&
ere’s noth"n# str!n#e (prem"ums etc) then th"s "s s"mple& For ex!mple
1,000 P!$!ble Lo!n
pen"n# Interest to I/S Interest !ctu!ll$ P!"d Clos"n# Lo!n on SFP
000 100 (100) 1,000
w let’s m!"e #t tr#c"#er
!nc#!l L#!bl#t#es - Amort#sed Cost
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1,000 Lo!n w"th ! 10% prem"um on redempt"on & Effect"ve r!te "s 12%
pen"n# Interest to I/S Interest !ctu!ll$ P!"d Clos"n# Lo!n on SFP
000 120 (100) 1,020
n $e!r 1 the "ncome st!tement would show !n "nterest ch!r#e of 120 !nd the lo!n would be under l"!b"l"t"es on the SFP !t
0& Th"s SFP f"#ure w"ll %eep on "ncre!s"n# unt"l the end of the lo!n where "t w"ll equ!l the Lo!n + prem"um on redempt"on
tr#c"#er st#ll*
1,000 lo!n w"th ! 10% d"scount on "ssue& Effect"ve r!te "s 12%
pen"n# Interest to I/S Interest !ctu!ll$ P!"d Clos"n# Lo!n on SFP
00 108 (100) 908
r FVTPL - these "o to the !ncome st#tement
!nc#!l Instruments - Tr!ns!ct#ons costs
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"t "s !n !sset - "t w"ll "ncre!se the open"n# b!l!nce
"s ! l"!b"l"t$ - "t w"ll decre!se the open"n# b!l!nce
strton Trnscton costs
nt"t$ !cqu"res ! f"n!nc"!l !sset for "ts offer pr"ce of £100 (b"d pr"ce £98)
9 tre!ts the b"d-offer spre!d !s ! tr!ns!ct"on cost)
f the #sset !s FVTPL
The tr#ns#ct!on cost of £2 !s reco"n!sed #s #n expense !n prof!t or loss #nd the f!n#nc!#l #sset !n!t!#ll% reco"n!sed #t the b!d pr!ce of
£98$
f the #sset !s cl#ss!f!ed #s !mort#sed cost
The tr#ns#ct!on cost should be #dded to the f#!r v#lue #nd the f!n#nc!#l #sset !n!t!#ll% reco"n!sed #t the offer pr!ce (the pr!ce
#ctu#ll% p#!d) of £100$
hen we reco"n!se # f!n#nc!#l !nstruments we loo& #t subst#nce r#ther
#n form
th"n# w"th !n obl"#!t"on "s ! l"!b"l"t$ (debt)&
wever we now h!ve ! problem when we cons"der convert"ble p!$!ble lo!ns& The ‘convert"ble’ b"t me!ns th!t the comp!n$
not h!ve to p!$ the b!n% b!c% w"th c!sh, but perh!ps sh!res&
th"s !n obl"#!t"on to p!$ c!sh (debt) or !n equ"t$ "nstrument(
ct "t "s both' It "s therefore c!lled ! Compound Instrument
!nc#!l L#!b#l#t#es - convert#ble lo!ns
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These cont!"n both ! l"!b"l"t$ !nd !n equ"t$ component so e!ch h!s to be shown sep!r!tel$& Th"s "s best shown b$ ex!mple)
2% Convert"ble P!$!ble Lo!n 01,000
Th"s b!s"c!ll$ me!ns the comp!n$ h!s offered the b!n% the opt"on to convert the lo!n !t the end "nto sh!res "nste!d of
s"mpl$ t!%"n# 01,000
The "mport!nt th"n# to not"ce "s th!t th!t the b!n% h!s the opt"on to do th"s&
Should the sh!re pr"ce not prove f!vour!ble then "t w"ll s"mpl$ t!%e the 01,000 !s norm!l&
nvertble Pble Lons
Fe!tures of ! convert#ble p!%!ble lo!n
Better Interest r!te
The b!n% l"%es to h!ve the opt"on& Therefore, "n return, "t w"ll offer the comp!n$ ! f!vour!ble "nterest r!te comp!red
to norm!l lo!ns
H#%her F!#r V!lue of lo!n
Th"s lower "nterest r!te h!s effect"vel$ "ncre!sed the f!"r v!lue of the lo!n to the comp!n$ (we !ll l"%e to p!$ less
"nterest +-))
We need to show !ll p!$!ble lo!ns !t the"r f!"r v!lue !t the be#"nn"n#&
Lower lo!n f#%ure #n SFP
Import!nt) If the f!"r v!lue of ! l"!b"l"t$ h!s "ncre!sed the !mount p!$!ble (l"!b"l"t$) shown "n the !ccounts w"ll be
lower&
After !ll, f!"r v!lue "ncre!ses !re #ood news !nd we !ll prefer lower l"!b"l"t"es'
w to Clculte the Fr Vlue of Lon
ow "s th"s new f!"r v!lue, th!t we need !t the st!rt of the lo!n, c!lcul!ted(
"t "s b!s"c!ll$ the present v!lue of "ts future c!shflows-
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C!p"t!l 01,000
Interest (2%) 020 p!&
Now let’s suppose th"s "s ! 4 $e!r lo!n !nd th!t norm!l (non-convert"ble) lo!ns c!rr$ !n "nterest r!te of 5%&
Step 2) D#scount the p!$ments #n step 1 !t the m!r"et r!te for norm!l lo!ns (Get the c!shflows PV)
T!%e wh!t the comp!n$ p!$s !nd d"scount them us"n# the f"#ures !bove !s follows)
C!p"t!l 01,000 d"scounted @ 5% (4 $e!rs SINGLE d"scount f"#ure) = 1,000 x 0&823 = 823
Interest 020 d"scounted @ 5% (4 $e!rs CUMULATIVE)= 20 x 3&465 = 69
Tot!l = 892
Th"s 0892 represents the f!"r v!lue of the lo!n !nd th"s "s the f"#ure we use "n the b!l!nce sheet "n"t"!ll$&
The rem!"n"n# 0108 (1,000-892) #oes to equ"t$&
clus#on
n $ou see ! convert"ble lo!n !ll $ou need to do "s t!%e the c!p"t!l !nd "nterest PAYABLE&
n d"scount these f"#ures down !t the r!te used for other non convert"ble lo!ns&
result"n# f"#ure "s the f!"r v!lue of the convert"ble lo!n !nd the rem!"nder s"ts "n equ"t$&
do th"s !t the START of e!ch lo!n - th!t’s !ll&
t h!ppens !fter the st!rt we w"ll see l!ter-
vert#ble P!$!ble Lo!n w#th tr!ns!ct#on costs - ee"+
well remember our 2 step process for de!l"n# w"th ! norm!l convert"ble lo!n( No(( Well $ou’re !n "d"ot& However, luc%"l$ for
I’m not so I w"ll rem"nd $ou )p
p 1) Wr"te down the c!p"t!l !nd "nterest to be PAID
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-
n the tot!l w"ll be the FV of the lo!n !nd the rem!"nder *ust #oes to equ"t$& Remember we do th"s !t the st!rt of the lo!n
Y&
t then let’s now de!l w"th tr!ns!ct"on or "ssue costs& These !re p!"d !t the st!rt&
m!ll$ $ou s"mpl$ *ust reduce the Lo!n !mount w"th the full tr!ns!ct"on costs& However, here we w"ll h!ve ! lo!n !nd equ"t$ -
we spl"t the tr!ns!ct"on costs pro-r!t!
ow, I %now - $ou w!nt !n ex!mple-& bo$, $ou’re slow - luc%$ $ou’re #or#eous
% 1,000 3 $r Convert#ble Lo!n( Tr!ns!ct#on costs of £100 !lso to be p!#d( Non convert#ble lo!n r!te 10%
p 1 !nd 2
t!l 1,000 x 0&751 = 751
rest 40 x 2&486 = 99 ("sh)
l = 850
V of lo!n = 850, Equ"t$ = 150 (1,000-850)
w the tr!ns!ct"on costs (100) need to be deducted from these !mounts pro-r!t!
o!n = (850-85) = 765
t$ (150-15) = 135
rel!x-&
#ns "o to debt (l!#b!l!t!es), ord!n#r% sh#res "o to equ!t%$ Wh%'
b!c% to the conceptu!l fr!mewor% !#!"n !nd !lso to the "mport!nt concept of subst!nce over form
bt !nd Equ#t$
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def"n"t"on of l"!b"l"t$ "ncludes the need for ! present obl#%!t#on&
nterest MUST be p!"d but d"v"dends m!$ not, onl$ lo!ns h!ve th"s obl"#!t"on !nd so #o to l"!b"l"t"es&
rml Pble lons
se h!ve !n obl"#!t"on to p!$ "nterest !nd c!p"t!l
Debt
deemble Preference shres
se h!ve !n obl"#!t"on to p!$ d"v"dends !nd c!p"t!l
Debt
edeemble Preference shres
e do NOT h!ve !n obl"#!t"on to p!$ d"v"dends !nd c!p"t!l
Equ"t$
r own shres
e do NOT h!ve !n obl"#!t"on to p!$ d"v"dends or c!p"t!l
Equ"t$
nvertble lons
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se do h!ve !n obl"#!t"on but !re !lso potent"!l sh!res
Debt !nd Equ"t$
ere #re 2 t%pes of le#se - #n Oper#t!n" #nd # F!n#nce le#se
mple terms, ! f"n!nce le!se "s where the LESSEE t!%es the m!*or"t$ of the r"s%s !nd rew!rds of the underl$"n# !sset
efore w"th ! f"n!nce le!se the lessee would show the !sset on the"r SFP (!nd the rel!ted f"n!nce le!se l"!b"l"t$)
n cl!ss"f$"n# loo% for subst!nce r!ther th!n the form
nce Lese Indctors
The lessee #ets ownersh"p of the !sset !t the end of the le!se term
The lessee c!n bu$ the !sset !t such ! low pr"ce th!t "t "s re!son!bl$ cert!"n th!t the opt"on w"ll be exerc"sed+
The le!se term "s for the m!*or p!rt of the econom"c l"fe
The PV of the le!se p!$ments "s subst!nt"!ll$ the f!"r v!lue of the le!sed !sset+ !nd
Onl$ the lessee c!n use the !sset !s "t "s so spec"!l"sed
e!s#n$
ses - Introduct#on
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her possble fnnce lese ndctors
If the lessee c!ncels the le!se, he h!s to p!$ the lessor’s losses
The lessee #ets !n$ res"du!l v!lue #!"ns/losses !nd
The lessee c!n le!se for ! second!r$ per"od !t ! che!p rent
nd & Bu!ld!n"s
rmll seprtel clssfed
m"n"mum le!se p!$ments !re !lloc!ted between the l!nd !nd bu"ld"n#s elements "n proport"on to the"r rel!t"ve f!"r v!lues&
L!nd = Oper!t"n# le!se (unless t"tle p!sses to the lessee !t the end of the le!se term)
Bu"ld"n#s = Oper!t"n# or f"n!nce le!se (b$ !ppl$"n# the cl!ss"f"c!t"on cr"ter"! "n IAS 17)
cl!ss"f"c!t"on of le!ses "s ! %e$ "ssue "n corpor!te report"n#& From ! lessees po"nt of v"ew, cl!ss"f$"n# !s ! f"n!nce le!se w"ll
e!se #e!r"n# !nd decre!se ROCE (!s there’s more c!p"t!l emplo$ed due to the f"n!nce le!se l"!b"l"t$)& Interest cover w"ll !lso
e!se
he SFP shows more l"!b"l"t$, future borrow"n# w"ll be h!rder to come b$ !nd current lo!n coven!nts m!$ be bre!ched& The
of perce"ved r"s% m!$ "ncre!se, lo!n coven!nts m!$ be comprom"sed !nd !n ent"t$’s future borrow"n# c!p!c"t$ m!$ be
"cted&
stud#es h!ve reve!led th!t !ver!%e oper!t#n% le!se comm#tments !re over ten t#mes th!t of reported f#n!nce le!se
%!t#ons(
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!s "!ves #n #sset on the SFP (#nd # rel#ted l!#b!l!t%)
efore we !lso need to show the rel!ted deprec"!t"on !nd "nterest on the I/S
ncome st!tement SFP
eprec"!t"on (10) Asset 100
terest (8) L"!b"l"t$ 100
ountn steps
Enter the Asset !nd L#!b#l#t$
At the F#!r v#lue of the #sset)
C!lcul!te deprec#!t#on
Th!s w!ll depend on whether the #sset "oes b#c& to the lessor #t the %e#r end or not
C!lcul!te #nterest !nd F#n!nce Le!se l#!b#l#t$ !t Y/E
Th!s !s done b% the #mort!sed cost t#ble (below)
ort#sed cost t!ble for ! F#n!nce le!se w#th p!$ments #n !rre!rs
pen"n# FL l"!b"l"t$ Interest to I/S Le!se rent!l P!"d Clos"n# L"!b"l"t$ on SFP
!nce Le!se !ccount#n%
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000 120 (100) 1,020
ort#sed cost t!ble for ! F#n!nce le!se w#th p!$ments #n !dv!nce
pen"n# FL l"!b"l"t$ Le!se rent!l p!"d B!l!nce Interest to I/S Clos"n# L"!b"l"t$ on SFP
000 (100) 900 90 990
t of le!se term
sset
n!nce Le!se l"!b"l"t$
wer of FV of the !sset !nd Present v!lue of the m"n"mum le!se p!$ments
n$ d"rect costs !dded to cost of !sset)
!$ments !re m!de
nce le!se p!$ments should be !pport"oned between the f"n!nce ch!r#e !nd p!$"n# off the l"!b"l"t$
nterest
n!nce Le!se l"!b"l"t$
!sh
"nterest "s !pport"oned us"n# the effect"ve r!te #"ven "n the quest"on
tr!t#on – F#n!nce Le!se) P!$ment #n Arre!rs
t Cost $10,000
e) 5 $e!rs x $3,000 p&!& "n !rre!rs
ct"ve/"mpl"c"t "nterest r!te "s 8%
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pen"n# FL l"!b"l"t$ Interest to I/S Le!se rent!l P!"d Clos"n# L"!b"l"t$ on SFP
,000 800 (3,000) 7,800
!ble w#th#n one $e!r !nd !fter more th!n one $e!r
f"n!nce le!se l"!b"l"t$ must be spl"t between the !mount th!t "s to be p!"d w"th"n ! $e!r !nd the rem!"nder wh"ch "s p!$!ble
ore th!n one $e!r
pen#n% FL l#!b#l#t$ Interest to I/S Le!se rent!l P!#d Clos#n% L#!b#l#t$ on SFP
& 1 10,000 800 (3,000) 7,800
& 2 7,800 624 (3,000) 5,424
efore, the !mount p!$!ble "n less th!n ! $e!r ($e!r 2) "s (7,800 – 5,424) = $2,376 The rem!"n"n# $5,424 "s p!$!ble "n more th!n
$e!r
tr!t#on – F#n!nce Le!se) P!$ment #n Adv!nce
onl$ d"fference "s how the t!ble loo%s !nd the spl"t between p!$!ble w"th"n 1$r !nd !fter more th!n 1$r&
s"der the prev"ous ex!mple !#!"n& Th"s t"me the p!$ment comes before the "nterest !s "t "s p!"d "n !dv!nce)
pen#n% FL l#!b#l#t$ Le!se rent!l p!#d B!l!nce Interest to I/S Clos#n% L#!b#l#t$ on SFP
1 10,000 (3,000) 7,000 560 7,560
2 7,560 (3,000) 4,560
!mount p!$!ble < 1$r "s (7,560 – 4,560) = 3,000
$3,000 should "de!ll$ be further spl"t down between)
rest $560
t!l $2,440
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here the lessee does not t#&e the r!s&s #nd rew#rds of the #sset, so no
set !s shown on the SFP
h!t h!ppens "s the le!se p!$ments !re reco#n"sed !s !n expense "n the "ncome st!tement over the le!se term on ! str!"#ht-
b!s"s
per!t"n# le!se s"mpl$ shows the rent!l p!$ments "n the Income st!tement& Remember to do th"s on !n !ccru!ls b!s"s !nd not
$ment b!s"s
ustrton
mp!n$ p!$s !n "n"t"!l prem"um of 1,000 + 4 qu!rterl$ "nst!lments of 1,500& The le!se w!s !cqu"red h!lf w!$ throu#h the $e!r&
!t #s the #ncome st!tement ch!r%e #n the per#od&
wer) 1,000 + (4x1,500) = 7,000 "n tot!l for the $e!r
$ h!lf ! $e!r to be ch!r#ed re#!rdless of p!$ments - so 7,000 / 2 = 3,500
pertn Lese Incentves
lessee norm!ll$ reco#n"ses the tot!l "ncent"ves !s ! reduct"on of rent!l expense over the le!se term, on ! str!"#ht-l"ne b!s"s
er!t#n% Le!se !ccount#n%
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n#nce Le#ses #re # "ood ex#mple of subst#nce over form
bstnce over Form
p!n"es do not l"%e to h!ve m!n$ l"!b"l"t"es on the"r SFP
therefore "n the"r "nterests to record ! le!se !s !n oper!t"n# le!se "nste!d of ! f"n!nce le!se
wever&&
The subst#nce of the le#se must be followed not the le"#l form
Therefore !f !ts # f!n#nce le#se - #n #sset should be recorded even thou"h not le"#ll% owned
set Defnton
ost f"n!nce le!ses, the !sset "tself "s never owned b$ the comp!n$
Conceptu#l fr#mewor& def!nes #n #sset b% "control" not ownersh!p
Show!n" the #sset !s #n ex#mple of subst#nce over form
f blnce sheet fnncn
"s tre!t"n# ! f"n!nce le!se !s !n oper!t"n# le!se
ember w"th ! f"n!nce le!se $ou show the !sset AND the l"!b"l"t$
ses - Subst!nce over form
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l l l
But th!s !s not the true p!cture
W!ll d!stort r#t!os such #s ROCE
"n the st!tement of prof"t or loss, the oper!t"n# le!se would show *ust the le!se p!$ments, where!s the f"n!nce le!se would
w "nterest (from the l"!b"l"t$) !nd deprec"!t"on (from the !sset)
ss these two !re c!lcul!ted on ! str!"#ht l"ne b!s"s, "t would prob!bl$ be the c!se th!t "nterest + deprec"!t"on would be
er th!n le!se p!$ments "n the e!rl$ $e!rs !nd lower !s t"me moves on
prov!s!on !s # l!#b!l!t% of uncert#!n t!m!n" or #mount
h"s me!ns "s th!t "t "s not ! cred"tor, !s $ou %now ex!ctl$ how much th!t "s !nd when "t "s to be p!"d
wever "t "s st"ll ! potent"!l l"!b"l"t$
re!te ! prov"s"on thou#h
xpense
rov#s#on
potent"!l l"!b"l"t$ must be prob!bl "
fct 3 tests need to be pssed
s there # present obl#%!t#on (le"#l or construct!ve) #s # result of # p#st event
s !t prob!ble th#t #n outflow of resources embod%!n" econom!c benef!ts w!ll be requ!red to settle the obl!"#t!on
C#n # rel#!ble est#m!te c#n be m#de of the #mount of the obl! #t!on
rov#s#ons !nd Cont#n$enc#es
v#s#ons