TOPIC ONE

 Accounting concepts and accounting theory:

What is a conceptual framework?

Conceptual Framework can be defined as “constitution, a coherent system of interrelated objectives and
fundamentals that can lead to consistent standards and that prescribes the nature, function and limits
of financial reporting and financial reporting statements.”

 Conceptual Framework

NOTE:

 The credibility of the conceptual framework rests upon its general recognition and acceptance
by preparers, auditors and other users of financial statements.

 The framework is concerned with general financial statements including the consolidated
financial statements.

 PURPOSE AND STATUS

 Assist the board of IASC in the development of future International Accounting Standards and in
its review of existing International Accounting Standards.

 Assist the board of IASC in promoting harmonization of regulations, accounting standards and
procedures relating to the presentation of financial statements by providing a basis for reducing
the number of alternative accounting treatments permitted by International Accounting
Standards.

 Assist national standard-setting bodies in developing national standards.

 Assist preparers of financial statements in applying International Accounting Standards and in

dealing with topics that have yet to form the subject of an International Accounting Standard.

 Assist auditors in forming an opinion as to whether financial statements conform to

International Accounting Standards.

 Assist users of financial statements in interpreting the information contained in financial

statements prepared in conformity with International Accounting Standards.

 Provide those who are interested in the work of IASC with information about its approach to the
formulation of International Accounting Standards.
  SCOPE

 The framework deals with:

a) The objective of financial statements.

b) The qualitative characteristics that determine the usefulness of information in financial

statements.

c) The definition, recognition and measurement of the elements from which financial statements are
constructed.

d) Concepts of capital and capital maintenance.

 THE OBJECTIVE OF FINANCIAL STATEMENTS

 The objective of financial statements is to provide information about the financial position,
performance and changes in financial position of an entity that is useful to a wide range of users
in making economic decisions.

 UNDERLYING ASSUMPTIONS

1. ACCRUAL BASIS

 In order to meet their objectives, financial statements are prepared on the accrual basis of
accounting.

 Under this basis, the effects of transactions and other events are recognized when they occur
(and not as cash or its equivalent are received or paid) and they are recorded in the accounting
records and reported in the financial statements of the periods to which they relate.

2. GOING CONCERN

 The financial statements are normally prepared on the assumption that an entity is a going
concern and will continue in operation for the foreseeable future. Hence, it is assumed that the
entity has neither the intention nor the need to liquidate or curtail materially the scale of its
operations.

 QUALITATIVE CHARACRTESTICS OF FINANCIAL STATEMENTS

 Qualitative characteristics are the attributes that make the information provided in financial
statements useful to users. The four principal qualitative characteristics are understandability,
relevance, reliability and comparability.

 1. UNDERSTANDABILITY

 An essential quality of the information provided in financial statements is that it is readily

understandable by users. For this purpose, users are assumed to have a reasonable knowledge
 of business and economic activities and accounting and a willingness to study the information
with reasonable diligence.

 2. RELEVANCE

 To be useful, information must be relevant to the decision making needs of users. Information
has the quality of relevance when it influences the economic decisions of users by helping them
evaluate past, present or future events or confirming, or correcting their past evaluations.

 The relevance of information is affected by its nature and materiality.

 3. RELIABILITY

 To be useful, information must also be reliable. Information has the quality of reliability when it
is free from material error and bias and can be depended upon by users to represent faithfully
that which it either purports to represent of could reasonably be expected to represent.

 CONT:

 For information to be reliable it must have the following attributes:

a) Faithful representation

b) Substance over form

c) Neutrality

d) Prudence

e) Completeness

 4. COMPARABILITY

 Users must be able to compare the financial statements of an entity through time in order to
identify trends in its financial position and performance. Users must also be able to compare the
financial statements of different entities in order to evaluate their relative financial position,
performance and changes in financial statements.

 CONSTRAINTS ON RELEVANT AND RELIABLE INFORMATION

1. Timeliness

 If there is undue delay in the reporting of information it may lose its relevance.

 To provide information on a timely basis it may often be necessary to report before all aspects
of a transaction or other event are known, thus impairing reliability.

 2. Balance between benefit and cost

 The benefits derived from information should exceed the cost of providing it.

 The evaluation of benefits and costs is however substantially a judgmental process.

 THE ELEMENTS OF FINANCIAL STATEMENTS

1. Assets

 An asset is a resource controlled by the entity as a result of past events and from which future
economic benefits are expected to flow to the entity.

 2. Liability

 A liability is a present obligation of the entity arising from past events, the settlement of which is
expected to result in an outflow from the entity of resources embodying economic benefits.

 3. Equity

 Equity is the residual interest in the assets of the entity after deducting all its liabilities.

 4. Income

 Income is increases in economic benefits during the accounting period in the form of inflows or
enhancements of assets or decreases of liabilities that result in increases in equity, other than
those relating to contributions from equity participants.

 5. Expenses

 Expenses are decreases in economic benefits during the accounting period in the form of
outflows or depletions of assets or incurrence of liabilities that result in decreases in equity,
other than those relating to distributions to equity participants.

 RECOGNITION OF THE ELEMENTS OF FINANCIAL STATEMENTS

 Recognition is the process of incorporating in the balance sheet and income statement an item
that meets the definition of an element and satisfies the criteria for recognition set below:

a) It is probable that any future economic benefits associated with the item will flow to or from the
entity.

b) The item has a cost or value that can be measured with reliability.

 MEASUREMENT OF THE ELEMENTS OF FINANCIAL STATEMENTS

1. Historical cost:

 Assets are recorded at the amount of cash or cash equivalents paid or the fair value of the
consideration given to acquire them at the time of their acquisition.
 Liabilities are recorded at the amount of proceeds received in exchange for the obligation, or
the amounts of cash or cash equivalents expected to be paid to satisfy the liability in the normal
course of business.

 2. Current cost

 Assets are carried at the amount of cash or cash equivalents that would have paid if the same or
an equivalent asset was acquired currently.

 Liabilities are carried at the undiscounted amount of cash or cash equivalents that would be
required to settle the obligation currently.

 3. Realizable (settlement) value

 Assets are carried at the amount of cash or cash equivalents that could currently be obtained by
selling the asset in an orderly disposal.

 Liabilities are carried at their settlement values; that is the, the undiscounted amounts of cash
or cash equivalents expected to be paid to satisfy the liabilities in the normal course of business.

 4. Present value

 Assets are carried at the present discounted value of the future net cash inflows that the item is
expected to generate in the normal course of business.

 Liabilities are carried at the present discounted value of the future net cash outflows that
expected to be required to settle the liabilities in the normal course of business.

 CONCEPTS OF CAPITAL AND CAPITAL MAINTENANCE

a) Financial capital maintenance: under this concept a profit is earned only if the financial (or
money) amount of the net assets at the end of the period exceeds the financial (or money)
amount of net assets at the beginning of the period, after excluding any distributions to, and
contributions from owners during the period. Financial capital maintenance can be measured in
either nominal monetary units or units of constant purchasing power.

 CONT:

 Physical capital maintenance: under this concept profit is earned only if the physical productive
capacity (or operating capability) of the entity (or the resources or funds needed to achieve that
capacity) at the end of the period exceeds the physical productive capacity at the beginning of
the period after excluding any distributions to, and contributions from, owners during the
period.

 INTERMEDIATE ACCOUNTING

 CONSTRUCTION CONTRACTS (IAS 11)

 Objective

 To prescribe the accounting treatment of revenue and costs associated with construction
contracts. The primary issue in accounting for construction contracts is the allocation of contract
revenue and contract costs to the accounting periods in which construction work is performed.

 Definitions:

 A construction contract: is a contract specifically negotiated for the construction of an asset or a

combination of assets that are closely interrelated or interdependent in terms of their design,
technology and function or their ultimate purpose or use.

 A fixed price contract: is a construction contract in which the contractor agrees to a fixed
contract price, or a fixed rate per unit of output, which in some cases is subject to cost
escalation clauses.

 Definitions:

 A cost plus contract: is a construction contract in which the contractor is reimbursed for
allowable or otherwise defined costs plus a percentage of these costs or a fixed fee.

 Note:

 under IAS 11, construction contracts include the following:

 Contracts for the rendering of services which are directly related to the construction of
the asset, e.g. those for the services of project managers and architects.

 Contracts for the destruction or restoration of assets and the restoration of the
environment following the demolition of assets.

 Types of construction contracts

 Short term contracts: are those contracts that are completed within one financial period and
therefore it is easy to determine the profit which is then reported in the period in which it is
earned.

 Long term contracts: are those contracts that take more than one financial period and therefore
create a problem in determining the amount of profit to be reported in each accounting period.

 Contract revenue

 Comprise the following:

 The initial amount of revenue agreed in the contract

 Variations in contract work, claims and incentive payments:

  To the extent that it is probable that they will result in revenue

 They are capable of being reliably measured.

 CONT’

 The amount of contract revenue may increase or decrease from one period to the next due to
the following:

a) In a fixed price contract may increase as a result of cost escalation clauses.

b) Decrease as a result of penalties arising from delays caused by the contractor in the completion
of the contract.

c) Fixed price contract involves a fixed price for unit of output which increases revenue as a result
of increase in the number of units

d) As a results of agreed variations.

 CONT’

 Variations are an instruction by the customer for a change in the scope of the work to be
performed under the contract. A variation is included in contract revenue when:

 It is probable that the customer will approve the variation and the amount of revenue arising
from the variation.

 The amount of revenue can be reliably measured.

 Contracts costs:

 Comprise the following:

 Costs that relate directly to the specific contract e.g. costs of materials; site labour costs
including supervision; depreciation of plant and equipment used on the contract; cost of moving
plant, equipment and materials to and from the contract site; costs of hiring plant and
equipment; cost of technical assistance, the estimated costs of rectification and guarantee work
including expected warranty costs and claims from third parties.

 Contracts costs:

 Costs that are attributable to contract activity in general and can be allocated to the contract
e.g. insurance; costs of design and technical assistance that are not directly related to a specific
contract; construction overheads.

 Such other costs as are specifically chargeable to the customer under the terms of the contract.

 Contracts costs:
 Costs that cannot be attributed or allocated to contract activity are excluded from the costs of a
construction contract e.g.

 General administration costs

 Selling and distribution costs

 Research and development expenses

 Depreciation of idle plant and equipment

 Recognition of contract revenue and expenses

 When the outcome of a construction contract can be estimated reliably, contract revenue and
costs associated with the construction contract shall be recognized as revenue and expenses
respectively by reference to the stage of completion of the contract activity at the balance sheet
date.

 CONT’

 In the case of a fixed price contract, the outcome of a construction contract can be estimated
reliably when all the following conditions are satisfied:

 Total contract revenue can be measured reliably.

 It is probable that the economic benefits associated with the contract will flow to the entity.

 Both the contract costs to complete the contract and the stage of contract completion at the
reporting period can be measured reliably.

 The contract costs attributable to the contract can be clearly identified and measured reliably.

 CONT’

 In the case of a cost plus contract, the outcome of a construction contract can be estimated
reliably when all the following conditions are satisfied.

 It is probable that the economic benefits associated with the contract will flow to the
entity.

 Contract costs attributable to the contract can be clearly identified and measured
reliably.

 Recognition of revenue and expenses by reference to the stage of completion of a contract.

 Is often referred to as the percentage of completion method. Contract revenue is matched with
the contract costs incurred in reaching the stage of completion, resulting in the reporting of
revenue, expenses and profit which can be attributed to the proportion of work completed.
 CONT’

 When a contractor incur contract costs that relate to future activities on the contract and is
probable that they will be recovered represent an amount due from the customer and are often
classified as contract work in progress.

 CONT’

 An entity is generally able to make reliable estimates after it has agreed to a contract which
establishes:

a) Each party’s enforceable rights regarding the asset to be constructed.

b) The consideration to be exchanged.

c) The manner and terms of settlement.

 Determination of stage of completion.

 The entity uses the method that measure reliably the work performed. Depending on the nature
of the contract, the methods may include:

 The preparation that contract costs incurred for work performed to date bear to the estimated
total contract costs.

 Surveys of work performed.

 Completion of a physical proportion of the contract work.

 CONT’

 When the outcome of a construction contract cannot be estimated reliably:

 Revenue shall be recognized only to the extent of contract costs incurred that it is
probable will be recoverable.

 Contract costs shall be recognized as an expense in the period in which they are
incurred.

 Recognition of expected losses

 When it is probable that total contract costs will exceed total contract revenue, the expected
loss shall be recognized as an expense immediately. The amount of such loss is determined
irrespective of:

a) Whether the work has commenced on the contract

b) The stage of completion of contract activity

c) The amount of profits expected to arise on other contracts which are not treated as a single
construction contract.

 Disclosure:

 The amount of contract revenue recognized as revenue in the period.

 The methods used to determine the contract revenue recognized in the period.

 The methods used to determine the stage of completion of contracts in progress.

 The aggregate amount of costs incurred and recognized profits (less recognized losses) to date.

 The amount of advances received.

 The amount of retentions.

 INTERMEDIATE ACCOUNTING

 PROPERTY, PLANT AND EQUIPMENT (IAS 16)

 Objective:

 To prescribe the accounting treatment for property, plant and equipment so that users of the
financial statements can discern information about an entity’s investment in its property, plant
and equipment and the changes in such investment.

 PPE are tangible items that:

1. Are held for use in the production or supply of goods or services, for rental to others or for
administrative purposes; and

2. Are expected to be used during more than one period.

 Classes of PPE include:

 Land

 Land and buildings

 Machinery

 Ships

 Aircraft

 Motor vehicles

 Furniture and fixtures

  Office equipment

 The principal issues in accounting for PPE are:

 Recognition of the assets

 The determination of their carrying amounts

 Depreciation charges

 Impairment losses

 Recognition of PPE:

 PPE shall be recognized as an asset if and only if:

a) The PPE meet the definition of an asset

b) It is probable that future economic benefits associated with the item will flow to the entity.

c) The cost of the item can be measured reliably.

 Measurement of PPE

 Classified into two

a) Initial measurement

b) Subsequent measurement

 Initial measurement

 Cost of an item of property, plant and equipment comprises:

1. Its purchase price including import duties and non-refundable purchase taxes after deducting
trade discounts and rebates.

 Initial measurement

2. Any costs directly attributable to bringing the asset to the location and condition necessary for it
to be capable of operating in the manner intended by management i.e.

 Costs of employee benefits (from construction or acquisition of the item)

 Costs of site preparation

 Initial delivery and handling costs.

 Installation and assembly costs

  Costs of testing whether the asset is functioning properly

 Professional fees

 Initial measurement

3. The initial estimate of the costs of dismantling and removing the item and restoring the site on
which it is located; this is done in accordance with IAS 2; IAS 16 and IAS 37

4. IAS 20: Government grant and disclosures of government assistance

5. IAS 23: Borrowing costs

 Costs that are excluded from PPE

 The following costs are excluded from PPE unless they can be traced directly in the acquisition of
the asset:

1. Administration and other general overheads

2. Start-up and pre-production costs

3. Initial operating losses before the asset reaches the planned or expected performances.

4. Costs of conducting a business in a new location or with a new class of customer (including costs
of staff training)

 Subsequent costs to be capitalized

 Once the initial costs of the asset has been determined, then any other subsequent expenditure
incurred on the property, plant and equipment should be expensed unless it improves the
condition of the asset beyond its previous performances i.e.

 Subsequent costs to be capitalized

a) Modification of an item of plant to extend its useful economic life.

b) Upgrading of machine parts to improve on the quality of output

c) Adoption of a new production process leading to large reductions in operating costs

 Subsequent measurement of PPE

1. Cost model

2. Revaluation model

 Cost Model
 After recognition as an asset, an item of property, plant and equipment shall be carried at its
cost less any accumulated depreciation and any accumulated impairment losses.

 Revaluation Model

 After recognition as an asset, an item of property, plant and equipment whose fair value can be
measured reliably shall be carried at a revalued amount, being its fair value at the date of the
revaluation less any subsequent accumulated depreciation and subsequent accumulated
impairment losses.

 Revaluations shall be made with sufficient regularity to ensure that the carrying amount does
not differ materially from that which would be determined using fair value at the end of the
reporting period.

 Depreciation:

 Is the systematic allocation of the depreciable amount of an asset over its useful life.

 The depreciation charge for each period shall be recognized in profit or loss unless it is included
in the carrying amount of another asset.

 Depreciation:

 Depreciation of an asset begins when it is available for use i.e. when it is in the location and
condition necessary for it to be capable of operating in the manner intended by management.

 Depreciation of an asset ceases at the earlier of the date that the asset is classified as held for
sale in accordance to IFRS 5 and the date the asset is derecognized

 Depreciation:

 Depreciation does not cease when the asset becomes idle or is retired from active use unless
the asset is fully depreciated. However, under usage methods of depreciation the depreciation
charge can be zero while there is no production.

 Useful life is:

a) The period over which an asset is expected to be available for use by an entity; or

b) The number or production or similar units expected to be obtained from the asset by an entity.

 Useful Life

 The following factors are considered in determining the useful life of an asset:

a) Expected usage of the asset ( i.e. asset’s expected capacity or physical output)

b) Expected physical wear and tear

c) Technical or commercial obsolescence arising from changes or improvements in production ( i.e.
change in market demand for the product or service)

d) Legal or similar limits on the use of the asset (e.g. expiry dates of related leases)

 Derecognition:

 The carrying amount of an item of property, plant and equipment shall be derecognized:

a) On disposal

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

 Derecognition:

 The gain or loss arising from the Derecognition of an item of property, plant and equipment
shall be determined as the difference between the net disposal proceeds if any and the carrying
amount of the item.

 Derecognition

 The gain or loss arising from the Derecognition of an item of property, plant and equipment
shall be included in profit or loss when the item is derecognized.

 Gains shall not be classified as revenue, but under the heading of other incomes.

 Disclosure Requirement:

 The measurement bases used for determining the gross carrying amount

 The depreciation methods used

 The useful lives or the depreciation rates used

 The gross carrying amount and the accumulated depreciation (aggregated with accumulated
impairment losses) at the beginning and the end of the period.

 A reconciliation of the movements of the items

 INTERMEDIATE ACCOUNTING

 IAS17: LEASES

 Objective

 Is to prescribe for lessees and lessors, the appropriate accounting policies and disclosures to
apply in relation to leases.

 Definitions
 1. A lease: is an agreement whereby the lessor conveys to the lessee in return for a payment or
series of payments, the right to use an asset for an agreed period of time.

 2. A finance lease: is a lease that transfer a substantially all the risks and rewards incidental to
ownership of an asset. Title may or may not eventually be transferred.

 3. An operating lease: is a lease other than a finance lease

 4. A non-cancelable lease:

 Is a lease that is cancelable only:

a) Upon the occurrence of some remote contingency.

b) With the permission of the lessor

c) If the lessee enters into a new lease for the same or an equivalent asset with the same lessor

d) Upon payment by the lessee of such an additional amount that at inception of the lease,
continuation of the lease is reasonably certain.

 5. The inception of the lease:

 Is the earlier of the date of the lease agreement and the date of commitment by the parties to
the principal provisions of the lease.

 6. The commencement of the lease term:

 Is the date from which the lessee is entitled to exercise its right to use the leased asset. It is the
date of initial recognition of the lease (i.e. the recognition of the assets, liabilities, income or
expenses resulting from the lease as appropriate)

 7. The lease term:

 Is the non-cancelable period for which the lessee has contracted to lease the asset together with
any further terms for which the lessee has the opinion to continue to lease the asset, with or
without further payment when at the inception of the lease it is reasonably certain that the will
exercise the option.

 8. Minimum lease payments:

 This is the sum of all installments payable by the lease to the lessor which excludes cost of
services and taxes to be paid by the lessee or lessor, and also exclude residual amounts
guaranteed by the lessee if the lessee had done so when entering into a lease agreement.

 Classification of leases

 1. Finance lease
  Is a lease that transfers substantially all the risks and rewards incidental to ownership of an
asset.

Risks involve:

 Possibilities of losses from idle capacity

 Technological obsolescence

 Variations in return because of changing economic conditions

 Classification of leases

Rewards include:

 Using the asset to generate economic benefits over the asset’s economic life

 Gain from appreciation in value or realization of a residual value

 Classification of leases

 The following are examples of situations that individually or in combinations would normally
lead to a lease being classified as a finance lease:

1. The lease transfers ownership of the asset to the lessee by the end of the lease term.

2. The lessee has the option to purchase the asset at a price that is expected to be sufficiently
lower than the fair value at the date the option becomes exercisable for it to be reasonably
certain, at the inception of the lease, that the option will be exercised.

 Classification of leases

3. The lease term is for the major part of the economic life of the asset even if title is not
transferred.

4. At the inception of the lease the present value of the minimum lease payments amounts to at
least substantially all of the fair value of the leased asset.

 Classification of leases

5. The leased assets are of such a specialized nature that only the lessee can use them without
major modifications.

6. It is a non-cancellable lease

 It is a non-cancellable lease

 If the lease can cancel the lease, the lessor’s losses associated with the cancellation are borne by
the lessee
  Gains or losses from the fluctuation in the fair value of the residual accrue to the lessee

 The lessee has the ability to continue the lease for a secondary period at a rent that is
substantially lower than market rent.

 2. Operating lease

 Is a lease that does not transfer substantially all the risks and rewards incidental to ownership

 CONT’

 Note: Leases of land and buildings are classified as operating or finance leases in the same
way as leases of other assets. However a characteristic of land is that it normally has an
indefinite economic life and if title is not expected to pass to the lessee by the end of the lease
term, the lessee normally does not receive substantially all of the risks and rewards incidental
to ownership, in which case the lease of land will be an operating lease.

 Leases in the financial statements of lessees

Finance leases

 Initial recognition

 At the commencement of the lease term, lessees shall recognize finance leases as assets and
liabilities in their statement of financial position at amounts equal to the fair value of the leased
property or if lower the present value of the minimum lease payments, each determined at the
inception of the lease.

 CONT’

 The discount rate to be used in calculating the present value of the minimum lease payments is
the interest rate implicit in the lease, if this is practicable to determine; if not, the lessee’s
incremental borrowing rate shall be used.

 CONT’

 Any initial direct costs of the lessee are added to the amount recognized as an asset; (initial
direct costs are often incurred in connection with specific leasing activities such as negotiating
and securing leasing arrangements).

 Note:

 In case of lessors they shall recognize assets held under a finance lease in their statements of
financial position and present them as a receivable at an amount equal to the net investment in
the lease.
 Initial direct costs are such as commissions, legal fees and internal costs that are incremental
and directly attributable to negotiating and arranging a lease should be included in the initial
measurement of the finance lease receivable and reduce the amount of income recognized over
the lease term.

 Subsequent measurement

 Minimum lease payments shall be apportioned between the finance charge and reduction of the
outstanding liability. The finance charge shall be allocated to each period during lease term so as
to produce a constant periodic rate of interest on the remaining balance of the liability.
Contingent rents shall be charged as expenses in the periods in which they are incurred.

 CONT’

 A finance lease gives rise to depreciation expense for depreciable assets as well as finance
expense for each accounting period. The depreciation policy should in consistent with the
relevant standards i.e. IAS 16 and IAS 38. If there is no reasonable certainty that the lessee will
obtain ownership by the end of the lease term, the asset shall be fully depreciated over the
shorter of the lease term and its useful life.

 Note:

 In case of lessor the recognition of finance income shall be based on a pattern reflecting a
constant periodic rate of return on the lessor’s net investment in the finance lease.

 Operating leases

 Lease payments under an operating lease shall be recognized as an expense on a straight-line

basis over the lease term unless another systematic basis is more representative of the pattern
of the user’s benefit.

 Lease payments (excluding costs for services such as insurance and maintenance) are recognized
as an expense on a straight-line basis unless another systematic basis is representative of the
time pattern of the user’s benefit, even if the payments are not on that basis.

 Note:

 In case of lessor lease income from operating leases shall be recognized in income on a straight-
line basis over the lease term, unless another systematic basis is more representative of the
time pattern in which use benefit derived from the leased asset is diminished.

 Sale and leaseback transactions:

 If a sale and leaseback transaction results in a finance lease any excess of sales proceeds over
the carrying amount shall not be immediately recognized as income by a seller-lessee. Instead it
shall be deferred and amortized over the lease term.
 CONT’

 If a sale and leaseback transaction results in an operating lease and is clear that the transaction
is established at a fair value, any profit or loss shall be recognized immediately.

 INTERMEDIATE ACCOUNTING

 IAS 36: IMPAIRMENT LOSS

 IAS 36 “Impairment of Assets”

 Objective

 The objective of IAS 36 is to prescribe the procedures that an entity applies to ensure that its
assets are carried at no more than their recoverable amount.

 An asset is carried at more than its recoverable amount if its carrying amount exceeds the
amount to be recovered through use or sale of the asset. If this is the case, the asset is described
as impaired and the Standard requires the entity to recognize an impairment loss.

 The Standard also specifies when an entity should reverse an impairment loss and prescribes
disclosures.

 CONT’

 Irrespective of whether there is any indication of impairment, an entity shall also:

a) Test an intangible asset with an indefinite useful life or an intangible asset not yet available for
use for impairment annually by comparing its carrying amount with its recoverable amount. This
impairment test may be performed at any time during an annual period, provided it is
performed at the same time every year.

b) Test goodwill acquired in a business combination for impairment annually

 External sources of information for impairment

1. During the period, an asset’s market value has declined significantly more than would be
expected as a result of the passage of time or normal use.

2. Significant changes with an adverse effect on the entity have taken place during the period, or
will take place in the near future, in the External sources of information technological, market,
economic or legal environment in which the entity operates or in the market to which an asset is
dedicated.

 CONT’
3. Market interest rates or other market rates of return on investments have increased during the
period, and those increases are likely to affect the discount rate used in calculating an asset’s
value in use and decrease the asset’s recoverable amount materially.

4. The carrying amount of the net assets of the entity is more than its market capitalization.

 Internal sources of information for impairment

1. Evidence is available of obsolescence or physical damage of an asset.

2. Significant changes with an adverse effect on the entity have taken place during the period, or
are expected to take place in the near future, in the extent to which, or manner in which, an
asset is used or is expected to be used.

 CONT’

3. Evidence is available from internal reporting that indicates that the economic performance of an
asset is, or will be, worse than expected.

 Measuring recoverable amount

 This Standard defines recoverable amount as the higher of an asset’s or cash-generating unit’s
fair value less costs to sell and its value in use.

 Fair value less costs to sell

 The best evidence of an asset’s fair value less costs to sell is a price in a binding sale agreement
in an arm’s length transaction, adjusted for incremental costs that would be directly attributable
to the disposal of the asset.

 Fair value less costs to sell

 If there is no binding sale agreement but an asset is traded in an active market, fair value less
costs to sell is the asset’s market price less the costs of disposal. The appropriate market price is
usually the current bid price. When current bid prices are unavailable, the price of the most
recent transaction may provide a basis from which to estimate fair value less costs to sell,
provided that there has not been a significant change in economic circumstances between the
transaction date and the date as at which the estimate is made.

 Fair value less costs to sell

 If there is no binding sale agreement or active market for an asset, fair value less costs to sell is
based on the best information available to reflect the amount that an entity could obtain, at the
end of the reporting period, from the disposal of the asset in an arm’s length transaction
between knowledgeable, willing parties, after deducting the costs of disposal. In determining
this amount, an entity considers the outcome of recent transactions for similar assets within the
 same industry. Fair value less costs to sell does not reflect a forced sale, unless management is
compelled to sell immediately.

 Value in use

 The following elements shall be reflected in the calculation of an asset’s value in use:

 An estimate of the future cash flows the entity expects to derive from the asset;

 Expectations about possible variations in the amount or timing of those future cash flows;

 The time value of money, represented by the current market risk-free rate of interest;

 The price for bearing the uncertainty inherent in the asset; and

 Other factors, such as illiquidity, that market participants would reflect in pricing the future cash
flows the entity expects to derive from the asset.

 Composition of estimates of future cash flows

 Estimates of future cash flows shall include:

 Projections of cash inflows from the continuing use of the asset;

 Projections of cash outflows that are necessarily incurred to generate the cash inflows from
continuing use of the asset (including cash outflows to prepare the asset for use) and can be
directly attributed, or allocated on a reasonable and consistent basis, to the asset; and

 Net cash flows, if any, to be received (or paid) for the disposal of the asset at the end of its
useful life.

 Discount rate

 The discount rate (rates) shall be a pre-tax rate (rates) that reflect(s) current market
assessments of:

 The time value of money; and

 The risks specific to the asset for which the future cash flow estimates have not been adjusted.

 Recognizing and measuring an impairment loss

 If and only if, the recoverable amount of an asset is less than its carrying amount, the carrying
amount of the asset shall be reduced to its recoverable amount. That reduction is an
impairment loss.

 CONT’
 An impairment loss shall be recognized immediately in profit or loss, unless the asset is carried
at revalued amount in accordance with another Standard (for example, in accordance with the
revaluation model in IAS 16). Any impairment loss of a revalued asset shall be treated as a
revaluation decrease in accordance with that other Standard.

 Cash-generating units

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

 Allocation of Impairment loss for a cash-generating unit

a) First, to the specific asset in which there is an indication of impairment

b) Second, to reduce the carrying amount of any goodwill allocated to the cash-generating unit
(group of units); and

c) Then, to the other assets of the unit (group of units) pro rata on the basis of the carrying
amount of each asset in the unit (group of units).

 CONT’

 These reductions in carrying amounts shall be treated as impairment losses on individual assets.
In allocating an impairment loss, an entity shall not reduce the carrying amount of an asset
below the highest of:

a) Its fair value less costs to sell (if determinable);

b) Its value in use (if determinable); and

c) Zero.

 Reversing an impairment loss for an individual asset

 A reversal of an impairment loss for an asset other than goodwill shall be recognized
immediately in profit or loss, unless the asset is carried at revalued amount in accordance with
another IFRS (for example, the revaluation model in IAS 16). Any reversal of an impairment loss
of a revalued asset shall be treated as a revaluation increase in accordance with that other IFRS.

 CONT’

 The increased carrying amount of an asset other than goodwill attributable to a reversal of an
impairment loss shall not exceed the carrying amount that would have been determined (net of
amortization or depreciation) had no impairment loss been recognized for the asset in prior
years.

 INTERMEDIATE ACCOUNTING
 IAS 38: Intangible Assets

 The objective of this Standard is to prescribe the accounting treatment for intangible assets.

 The attributes of intangible assets

1. Identifiability

2. Control

3. Future economic benefits

 Identifiability

 The definition of an intangible asset requires an intangible asset to be identifiable to distinguish

it from goodwill.

 An asset is identifiable if it either:

a) Is separable, i.e. is capable of being separated or divided from the entity and sold, transferred,
licensed, rented or exchanged, either individually or together with a related contract,
identifiable asset or liability, regardless of whether the entity intends to do so; or

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

 Control

 An entity controls an asset if the entity has the power to obtain the future economic benefits
flowing from the underlying resource and to restrict the access of others to those benefits.

 Future economic benefits

 The future economic benefits flowing from an intangible asset may include revenue from the
sale of products or services, cost savings, or other benefits resulting from the use of the asset by
the entity. For example, the use of intellectual property in a production process may reduce
future production costs rather than increase future revenues.

 Recognition

 IAS 38: INTANGIBLE ASSETS

 An intangible asset shall be recognized if it meets the definition of an asset and if:

a) It is probable that the expected future economic benefits that are attributable to the asset will
flow to the entity; and

b) The cost of the asset can be measured reliably.

 Initial measurement/ measurement at recognition

 For the purpose on initial measurement intangible assets are classified into the following
classes:

a) Separate acquisition

b) Acquisition as part of a business combination

c) Acquisition by way of a government grant

d) Exchanges of assets

e) Internally generated goodwill

f) Internally generated intangible assets

 Separate acquisition

 The cost of a separately acquired intangible asset comprises:

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

b) Any directly attributable cost of preparing the asset for its intended use.

 Acquisition as part of a business combination

 In accordance with IFRS 3 Business Combinations, if an intangible asset is acquired in a business

combination, the cost of that intangible asset is its fair value at the acquisition date. The fair
value of an intangible asset will reflect expectations about the probability that the expected
future economic benefits embodied in the asset will flow to the entity.

 Acquisition by way of a government grant

 In accordance with IAS 20 Accounting for Government Grants and Disclosure of Government
Assistance, an entity may choose to recognize both the intangible asset and the grant initially at
fair value. If an entity chooses not to recognize the asset initially at fair value, the entity
recognizes the asset initially at a nominal amount (the other treatment permitted by IAS 20) plus
any expenditure that is directly attributable to preparing the asset for its intended use.

 Exchanges of assets

 The cost of such an intangible asset is measured at fair value unless

 The exchange transaction lacks commercial substance or

 The fair value of neither the asset received nor the asset given up is reliably measurable.
 Internally generated goodwill

 Internally generated goodwill

 Internally generated goodwill shall not be recognized as an asset. In some cases, expenditure is
incurred to generate future economic benefits, but it does not result in the creation of an
intangible asset that meets the recognition criteria in this Standard. Such expenditure is often
described as contributing to internally generated goodwill.

 Internally generated goodwill

 Internally generated goodwill is not recognized as an asset because

a) It is not an identifiable resource

b) It is not controlled by the entity

c) And cannot be measured reliably at cost

 Internally generated intangible assets

 To assess whether an internally generated intangible asset meets the criteria for recognition, an
entity classifies the generation of the asset into:

1. Research phase; and

2. Development phase

 Research phase

 No intangible asset arising from research (or from the research phase of an internal project)
shall be recognized. Expenditure on research (or on the research phase of an internal project)
shall be recognized as an expense when it is incurred.

 Development phase

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

1. The technical feasibility of completing the intangible asset so that it will be available for use or
sale.

2. Its intention to complete the intangible asset and use or sell it.

3. Its ability to use or sell the intangible asset.

 Development phase
4. How the intangible asset will generate probable future economic benefits. Among other things,
the entity can demonstrate the existence of a market for the output of the intangible asset or
the intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset.

5. The availability of adequate technical, financial and other resources to complete the
development and to use or sell the intangible asset.

6. Its ability to measure reliably the expenditure attributable to the intangible asset during its
development.

 Measurement after recognition

 An entity shall choose either the cost model or the revaluation model as its accounting policy. If
an intangible asset is accounted for using the revaluation model, all the other assets in its class
shall also be accounted for using the same model, unless there is no active market for those
assets.

 Cost model

 After initial recognition, an intangible asset shall be carried at its cost less any accumulated
amortization and any accumulated impairment losses.

 Revaluation model

 After initial recognition, an intangible asset shall be carried at a revalued amount, being its fair
value at the date of the revaluation less any subsequent accumulated amortization and any
subsequent accumulated impairment losses. For the purpose of revaluations under this
Standard, fair value shall be determined by reference to an active market. Revaluations shall be
made with such regularity that at the end of the reporting period the carrying amount of the
asset does not differ materially from its fair value.

 Revaluation model

 The revaluation model does not allow:

a) The revaluation of intangible assets that have not previously been recognized as assets;

b) The initial recognition of intangible assets at amounts other than cost.

 Useful life

 An entity shall assess whether the useful life of an intangible asset is finite or indefinite and, if
finite, the length of, or number of production or similar units constituting, that useful life. An
intangible asset shall be regarded by the entity as having an indefinite useful life when, based on
an analysis of all of the relevant factors, there is no foreseeable limit to the period over which
the asset is expected to generate net cash inflows for the entity.
  Intangible assets with indefinite useful lives

 An intangible asset with an indefinite useful life shall not be amortized. In accordance with IAS
36, an entity is required to test an intangible asset with an indefinite useful life for impairment
by comparing its recoverable amount with its carrying amount

 Annually, and

 Whenever there is an indication that the intangible asset may be impaired.

 Retirements and disposals

 An intangible asset shall be derecognized:

a) On disposal; or

b) When no future economic benefits are expected +from its use or disposal.

 Retirements and disposals

 The gain or loss arising from the derecognition of an intangible asset shall be determined as the
difference between the net disposal proceeds, if any, and the carrying amount of the asset. It
shall be recognized in profit or loss when the asset is derecognized (unless IAS 17 requires
otherwise on a sale and leaseback). Gains shall not be classified as revenue.

 INTERMEDIATE ACCOUNTING

 IAS 40: Investment Property

 Objective

 The objective of this Standard is to prescribe the accounting treatment for investment property
and related disclosure requirements.

 Definition

Investment property

 Is property (land or a building—or part of a building—or both) held (by the owner or by the
lessee under a finance lease) to earn rentals or for capital appreciation or both, rather than for:

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

(b) Sale in the ordinary course of business.

 Definition

Owner-occupied property
 Is property held (by the owner or by the lessee under a finance lease) for use in the production
or supply of goods or services or for administrative purposes.

 Examples of investment property

 Land held for long-term capital appreciation rather than for short-term sale in the ordinary
course of business.

 Land held for a currently undetermined future use. (If an entity has not determined that it will
use the land as owner-occupied property or for short-term sale in the ordinary course of
business, the land is regarded as held for capital appreciation.)

 Examples of investment property

 A building owned by the entity (or held by the entity under a finance lease) and leased out
under one or more operating leases.

 A building that is vacant but is held to be leased out under one or more operating leases.

 Property that is being constructed or developed for future use as investment property.

 Recognition

 Investment property shall be recognized as an asset when and only when:

a) The investment property meets the definition of an asset

b) It is probable that the future economic benefits that are associated with the investment
property will flow to the entity; and

c) The cost of the investment property can be measured reliably.

 Measurement at recognition

 An investment property shall be measured initially at its cost. Transaction costs that are directly
attributable to the acquisition of the asset shall be included in the initial measurement.

 Measurement after recognition

 An entity shall choose as its accounting policy either the fair value model or the cost model in
and shall apply that policy to all of its investment property.

 Fair value model

 After initial recognition, an entity that chooses the fair value model shall measure all of its
investment property at fair value.
 When a property interest held by a lessee under an operating lease is classified as an investment
property, the fair value model shall be applied.

 Fair value model

 The fair value of investment property is the price at which the property could be exchanged
between knowledgeable, willing parties in an arm’s length transaction. Fair value specifically
excludes an estimated price inflated or deflated by special terms or circumstances such as a
typical financing, sale and leaseback arrangements, special considerations or concessions
granted by anyone associated with the sale.

 Fair value model

 An entity determines fair value without any deduction for transaction costs it may incur on sale
or other disposal.

 The fair value of investment property shall reflect market conditions at the end of the reporting
period.

 A gain or loss arising from a change in the fair value of investment property shall be recognized
in profit or loss for the period in which it arises.

 Cost model

 After initial recognition, an entity that chooses the cost model shall measure all of its investment
properties in accordance with IAS 16’s requirements for that model, other than those that meet
the criteria to be classified as held for sale (or are included in a disposal group that is classified
as held for sale) in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued
Operations.

 Transfers

 Commencement of owner-occupation, for a transfer from investment property to owner-

occupied property;

 Commencement of development with a view to sale, for a transfer from investment property to
inventories;

 Transfers

 End of owner-occupation, for a transfer from owner-occupied property to investment property;

or

 Commencement of an operating lease to another party, for a transfer from inventories to

investment property.

 Disposals
 An investment property shall be derecognized (eliminated from the statement of financial
position) on disposal or when the investment property is permanently withdrawn from use and
no future economic benefits are expected from its disposal.

 Disposals

 Gains or losses arising from the retirement or disposal of investment property shall be
determined as the difference between the net disposal proceeds and the carrying amount of the
asset and shall be recognized in profit or loss (unless IAS 17 requires otherwise on a sale and
leaseback) in the period of the retirement or disposal.