Class 1

Download as pptx, pdf, or txt
Download as pptx, pdf, or txt
You are on page 1of 108

ACCA F7

Advanced Financial Management

For exams from 1 September 2016 to 31


August 2017

BPP LEARNING MEDIA


• Conceptual framework and GAAP
Chapter 1
• The IASB's Conceptual Framework
The conceptual
• The objective of general purpose
framework financial reporting
• Underlying assumption
• Qualitative characteristics of useful
financial information
• The elements of financial statements
• Recognition of the elements of
financial statements
• Measurement of the elements of
financial statements
• Fair presentation and compliance
with IFRS

BPP LEARNING MEDIA


What is a conceptual framework

• Conceptual framework – a statement of generally


accepted theoretical principles which form the frame of
reference for financial reporting.

BPP LEARNING MEDIA


Advantages of having a CF

• Provides a standardised framework for the development if


accounting practice
• Avoids political interference into accounting practice to
ensure financial statements are credible

BPP LEARNING MEDIA


Disadvantages

• Results in general-purpose accounting information not


specifically meant for a particular user
• No one acceptable framework to cater for all the users of
FS
• Open to different interpretations hence may result in many
different standards from the same framework

BPP LEARNING MEDIA


What makes up a country or regional GAAP

• National company law


• National accounting standards
• Local stock exchange requirements
• International accounting standards
• Statutory requirements in other countries

• GAAP is dynamic and changes everyday

BPP LEARNING MEDIA


Alternative to the CF

• Rules-based – prescriptions of all accounting matters


word-for-work
• Similar to civil and criminal law in that everything is
prescribed and no room for individual interpretations
• Ensure uniformity, but
• Its difficult to prescribe the treatment of all accounting
transactions

BPP LEARNING MEDIA


IASB's Conceptual Framework for Financial Reporting 1

The Conceptual Framework for Financial Reporting is


divided into Chapters:
The objective of general purpose financial reporting
• 'The objective of general purpose financial reporting is
to provide financial information about the reporting entity
that is useful to existing and potential investors, lenders
and other creditors in making decisions about providing
resources to the entity. Those decisions involve buying,
selling or holding equity and debt instruments, and
providing or settling loans and other forms of credit.'

BPP LEARNING MEDIA


IASB's Conceptual Framework for Financial Reporting 2

The reporting entity


• This section is to be added by the IASB at a later date
Qualitative characteristics of financial information
Fundamental qualitative characteristics
• Relevance: predictive value, confirmatory value and
materiality
• Faithful representation: financial information should be
complete, neutral and free from error

BPP LEARNING MEDIA


IASB's Conceptual Framework for Financial Reporting 3

Enhancing qualitative characteristics


• Comparability: enables users to understand similarities
in and differences among items. Consistency helps
achieve comparability
• Verifiability: helps assure users that information
faithfully represents the economic phenomena it purports
to represent
• Timeliness: having information available to decision-
makers in time to be capable of influencing their
decisions

BPP LEARNING MEDIA


IASB's Conceptual Framework for Financial Reporting 4

• Understandability: classifying, characterising and


presenting information clearly and concisely. Inherently
complex phenomena should not however be excluded as
the reports would be incomplete and potentially
misleading
The cost constraint on useful financial reporting. Benefits
should justify costs.

BPP LEARNING MEDIA


1989 Framework (remaining text)

These sections will be replaced as the IASB develops


the new Conceptual Framework.

Underlying assumption

Entity will continue


Going concern in operation for the
foreseeable future

BPP LEARNING MEDIA


1989 Framework: Elements

Asset A resource controlled by an entity as a result of past events and


from which future economic benefits are expected to flow to the
entity
Liability A present obligation of the entity arising from past events, the
settlement of which is expected to result in an outflow of
resources embodying economic benefits
Equity The residual interest in the assets of an entity after deducting its
liabilities
Income Increases in economic benefits during the period other than
contributions from equity participants
Expenses Decreases in economic benefits during the period other than
distributions to equity participants

BPP LEARNING MEDIA


1989 Framework: Recognition of elements

(1) Is the item one of the elements?

(2) Is it probable future economic benefits


will flow to or from the entity?

(3) Can the item be measured ALL


with reliability? required

BPP LEARNING MEDIA


1989 Framework: Measurement

Possible measurement bases:


(i) Historical cost
(ii) Current cost
(iii) Realisable value
(iv) Present value

BPP LEARNING MEDIA


Strengths of an accounting framework

• Allows Standards to be developed on a consistent basis


• Can protect Standard-setters from political interference

BPP LEARNING MEDIA


Weaknesses of an accounting framework

• It is open to question whether a single framework can be


appropriate to the needs of all users of financial
statements.
• It is not clear that the existence of a framework makes the
task of preparing and implementing standards any easier
than it would be without a framework.

BPP LEARNING MEDIA


Revised conceptual framework: need and issues
Need for an international framework Use in resolving practical
accounting issues
• Basis for 'principles-based'
accounting standards • A framework cannot resolve all
accounting issues nor remove
• Convergence with other national
need for judgement
standards
• Greater consistency of financial • Concepts are very general and
statements theoretical  alternative
• Need to reflect changes in markets. conclusions can be drawn
business practices and economic • A framework narrows the range
environment of acceptable alternatives, but
• To eliminate inconsistencies does not provide one specific
– between accounting standards answer
– within accounting standards • Following concepts does not
• Reduce the influence of personal always provide practical
bias in accounting decisions solutions

BPP LEARNING MEDIA


Current developments 1

Discussion Paper Review of the Conceptual Framework


(July 2013) deals with:
• Definitions of assets and liabilities. The current
definitions of assets and liabilities require a probable
expectation of future economic benefits or resource
outflow. The new definitions emphasise asset as a
resource and liability as an obligation.
• Recognition and derecognition of assets and
liabilities. Generally all assets and liabilities are to be
recognised unless recognising an asset or a liability is
considered irrelevant or not sufficiently relevant
• Guidance on derecognition for the first time

BPP LEARNING MEDIA


Current developments 2
• Measurement. The use of only one measurement basis
for all assets and liabilities would not be appropriate. The
measurement basis selected must provide the most
relevant information in the SFP or SPLOCI.
• Equity. Still defined as a residual but entities will be
required to provide further information about the claims of
different classes of equity in order to show dilution effects.
• SPLOCI. This section tackles the distinction between profit
or loss and other comprehensive income.
• Presentation and disclosure. New section, aiming to
ensure that the information disclosed is relevant to
investors. In the short term, this will result in amendments
to IAS 1 and a new focus on materiality.
BPP LEARNING MEDIA
Current developments 3

• Other matters. This section includes a review of issues


raised in the 2010 ED The Reporting Entity. It also
includes a summary of concerns raised in the feedback on
the existing document with regard to stewardship,
reliability and prudence.

BPP LEARNING MEDIA


A topical issue

The Conceptual Framework Discussion Paper is a topical


issue, as flagged by the examining team. A key member of
the team has written an article, which you are strongly
advised to read. The article can be found on the ACCA's
website by clicking on the snapshot on the next slide, or by
following the link here:

http://www.accaglobal.com/gb/en/discover/cpd-
articles/corporate-reporting/realigning-framework.html

BPP LEARNING MEDIA


A topical issue

The key quote to take away from this article is:

'These proposals are an attempt to make the conceptual


framework a blueprint for developing consistent, high-quality,
principles-based accounting standards. It is important that
there is dialogue about the whole of IFRS and for the IASB
to achieve buy-in to its core principles by enabling
constituents to help shape the future of IFRS.'

http://www.accaglobal.com/gb/en/discover/cpd-articles/corporate-reporting/realigning-framework.html

BPP LEARNING MEDIA


The elements of financial statements

BPP LEARNING MEDIA


Financial position

• Asset. A resource controlled by an entity as a result of


past events and from which future economic benefits are
expected to flow to the entity.
• Liability. 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.
• Equity. The residual interest in the assets of the entity
after deducting all its liabilities.
(Conceptual Framework)

BPP LEARNING MEDIA


Provisions – Liability?

• Provision. A present obligation which satisfies the rest of


the definition of a liability but amount is uncertain
• Thus a provision is a liability of uncertain amount

BPP LEARNING MEDIA


Performance

• Income. 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.
• Expenses. Decreases in economic benefits during the
accounting period in the form of outflows or depletions of
assets or incurrences of liabilities that result in
decreases in equity, other than those relating to
distributions to equity participants.
• Gains. Increases in economic benefits. As such they are
no different in nature from revenue.

BPP LEARNING MEDIA


Recognition of the elements of financial statements

Recognition criteria:
• Meet the definition
• It is probable (certainty) that any future economic benefit
associated with the item will flow to or from the entity
• The item has a cost or value that can be measured with
reliability

BPP LEARNING MEDIA


Assets not recognised

• Skilled work force


• Brand name
• Reputable leadership

BPP LEARNING MEDIA


Recognition - Summary

BPP LEARNING MEDIA


Measurement of the elements of financial statements

• Measurement – giving a value to elements of financial


statements
• A number of different measurement bases are used in
financial statements. They include:
Historical cost
Current cost
Realisable (settlement) value
Present value of future cash flows

BPP LEARNING MEDIA


Current cost

• Current cost. Assets are carried at the amount of cash or


cash equivalents that would have to be paid if the same or
an equivalent asset was acquired currently.
• Liabilities – carried at the undiscounted amount of cash
or cash equivalents that would be required to settle the
obligation currently.

BPP LEARNING MEDIA


Realisable (settlement) value.

• Realisable value. The amount of cash or cash


equivalents that could currently be obtained by selling an
asset in an orderly disposal.
• Settlement value. The undiscounted amounts of cash or
cash equivalents expected to be paid to satisfy the
liabilities in the normal course of business.

BPP LEARNING MEDIA


Present Value

• Present value. A current estimate of the present


discounted value of the future net cash flows in the normal
course of business.

BPP LEARNING MEDIA


Fair presentation and compliance with IFRS

• Selection and application of accounting policies


• Presentation of information in a manner which provides
relevant, reliable, comparable and understandable
information
• Additional disclosures where required

BPP LEARNING MEDIA


Chapter 2 • The need for a regulatory
framework
The regulatory
• Setting of International Financial
framework Reporting Standards

BPP LEARNING MEDIA


The need for a regulatory framework

• The regulatory framework ensures relevant and faithfully


presented financial information and thus meeting the
needs of shareholders and other users.
• Provides a means of enforcing compliance with GAAP.
• Helps GAAP evolvement in any structured way in
response to changes in economic conditions.

BPP LEARNING MEDIA


Principles-based system

Advantage Disadvantages
A business can present its financial The cost of implementing IFRS
statements on the same basis as its foreign
competitors,
making comparison easier
Cross-border listing will be facilitated, The lower level of detail in IFRS
making it easier to raise capital abroad

Companies with foreign subsidiaries will


have a common, company-wide accounting
language

Foreign companies which are targets for


takeovers or mergers can be more easily
appraised

BPP LEARNING MEDIA


Harmonisation

• Process of converging all accounting practice towards


international GAAP
• Advantages?

BPP LEARNING MEDIA


Setting of International Financial Reporting Standards

• IFRSs are developed through a formal system of due


process and broad international consultation involving
accountants, financial analysts and other users and
regulatory bodies from around the world.

BPP LEARNING MEDIA


Due process

Step 1 the IASB establish an Advisory Committee to give


advice on issues arising in the project. Consultation with the
Advisory Committee and the IFRS Advisory Council occurs
throughout the project.
Step 2 IASB may develop and publish Discussion Papers
for public comment.
Step 3 Following the receipt and review of comments, the
IASB would develop and publish an Exposure Draft for
public comment.
Step 4 Following the receipt and review of comments, the
IASB would issue a final International Financial Reporting
Standard.

BPP LEARNING MEDIA


Due process

• Co-ordination between national and the IASB’s due


processes is important

BPP LEARNING MEDIA


IASB liaison members

• Seven of the full-time members of the IASB have formal


liaison responsibilities with national standard setters in
order to promote the convergence of national accounting
standards and International Financial Reporting Standards
• The IASB envisages a partnership between the IASB and
these national standard setters
• IASB members have contact responsibility with national
standard setters not having liaison members and many
countries are also represented on the IFRS Advisory
Council.

BPP LEARNING MEDIA


Current IFRSs/IASs

• From study text

BPP LEARNING MEDIA


Alternative treatments

• No longer permitted

BPP LEARNING MEDIA


IFRS Interpretations Committee (IFRSIC)

• Interprets the application of International Financial Reporting


Standards and provide timely guidance on financial reporting issues
not specifically addressed in IFRSs or IASs in the context of the
IASB's Framework
• Have regard to the Board's objective of working actively with national
standard setters to bring about convergence of national accounting
standards and IFRSs to high quality solutions
• To publish, after clearance by the Board, Draft Interpretations for
public comment and consider comments made within a reasonable
period before finalising an Interpretation.
• To report to the Board and obtain Board approval for final
Interpretations.

BPP LEARNING MEDIA


Scope and application of IFRSs

• IFRSs are not intended to be applied to immaterial


items, nor are they retrospective
• Each individual IFRS lays out its scope at the beginning of
the standard.
• Cannot override national standards

BPP LEARNING MEDIA


Criticisms of the IASB – advantages

• They reduce or eliminate confusing variations in the


methods used to prepare accounts.
• They provide a focal point for debate and discussions
about accounting practice.
• They oblige companies to disclose the accounting policies
used in the preparation of accounts.
• They are a less rigid alternative to enforcing conformity by
means of legislation.
• They have obliged companies to disclose more
accounting information than they would otherwise have
done if accounting standards did not exist, for example
IAS 33 Earnings per share.

BPP LEARNING MEDIA


Criticisms of the IASB – disadvantages

• A set of rules which give backing to one method of


preparing accounts might be inappropriate in
• some circumstances. For example, IAS 16 on
depreciation is inappropriate for investment properties
• Standards may be subject to lobbying or government
pressure (in the case of national standards).
• Many national standards are not based on a conceptual
framework of accounting, although IFRSs are.
• There may be a trend towards rigidity, and away from
flexibility in applying the rules.

BPP LEARNING MEDIA


Question areas

• You must keep up to date with the IASB's progress and


the problems it encounters in the financial press.
• You should also be able to discuss:
Due process of the IASB
Use and application of IFRSs
Future work of the IASB
Criticisms of the IASB

BPP LEARNING MEDIA


Chapter 3 • IAS 16 Property, plant and
equipment
Tangible non-current
• Depreciation accounting
assets
• IAS 40 Investment property
• IAS 23 Borrowing costs

BPP LEARNING MEDIA


IAS 16 Property, plant and equipment (PPE)

• IAS 16 covers all aspects of accounting for property, plant and


equipment. This represents the bulk of items which are 'tangible'
non-current assets.

BPP LEARNING MEDIA


Definitions 1

Property, plant and equipment are tangible assets that:


• Are held for use in the production or supply of goods or services, for
rental to others, or for administrative purposes
• Are expected to be used during more than one period

BPP LEARNING MEDIA


Definitions 2

• Cost is the amount of cash or cash equivalents paid or the fair value
of the other consideration given to acquire an asset at the time of its
acquisition or construction.
• Residual value is the net amount which the entity expects to obtain
for an asset at the end of its useful life after deducting the expected
costs of disposal.
• Entity specific value is the present value of the cash flows an entity
expects to arise from the continuing use of an asset and from its
disposal at the end of its useful life, or expects to incur when settling a
liability.
• Fair value is the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market
participants at the measurement date. (IFRS 13)

BPP LEARNING MEDIA


Definitions 3

• Carrying amount is the amount at which an asset is recognised in


the statement of financial position after deducting any accumulated
depreciation and accumulated impairment losses.
• An impairment loss is the amount by which the carrying amount of
an asset exceeds its recoverable amount.

BPP LEARNING MEDIA


Initial Recognition

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


a) It is probable that future economic benefits associated with the
asset will flow to the entity
b) The cost of the asset to the entity can be measured reliably
NB: Applies to subsequent expenditure recognition also

BPP LEARNING MEDIA


Future economic benefits

• Normally depends on evidence available at the date of initial


recognition (usually the date of purchase)
• Risks and rewards should have been passed to the entity

BPP LEARNING MEDIA


Cost measured reliably

• Easy to measure at the transfer amount on purchase


• Self-constructed assets can also be measured easily by adding
together the purchase price of all the constituent parts (labour,
material etc) paid to external parties.

BPP LEARNING MEDIA


Separate items

• E.g. tools, dies and moulds are sometimes classified as inventory and
written off as an expense
• Major components or spare parts, however, should be recognised
as PPE.

BPP LEARNING MEDIA


Safety and environmental equipment

• Necessary for the entity to obtain future economic benefits from its
other assets
• Are recognised as assets
• Original assets plus the safety equipment should be reviewed for
impairment regularly

BPP LEARNING MEDIA


Initial measurement

• Initial measurement should be at cost

BPP LEARNING MEDIA


Components of cost

• Purchase price, less any trade discount or rebate


• Import duties and non-refundable purchase taxes
• Directly attributable costs of bringing the asset to working condition
for its intended use, eg:
– The cost of site preparation
– Initial delivery and handling costs
– Installation costs
– Testing
– Professional fees (architects, engineers)
• Initial estimate of the unavoidable cost of dismantling and removing
the asset and restoring the site on which it is located
• This also applies for self-constructed assets

BPP LEARNING MEDIA


Subsequent expenditure

• The cost of additional expenditure and replacement cost is recognised


in full when it is incurred and added to the carrying amount of the
asset.
• It will be depreciated over its expected life, which may be different
from the expected life of the other components of the asset

• E.g. relining of a blast furnace

• Expenditure incurred in replacing or renewing a component of an


item of property, plant and equipment must be recognised in the
carrying amount of the item
• The carrying amount of the replaced or renewed component must be
derecognised

BPP LEARNING MEDIA


Measurement subsequent to initial recognition

• Cost model
• Revaluation model

BPP LEARNING MEDIA


Revaluations

• In the case of plant and equipment, fair value can also be taken as
market value
• When an item of property, plant and equipment is revalued, the
whole class of assets to which it belongs should be revalued
• All the items within a class should be revalued at the same time, to
prevent selective revaluation of certain assets and to avoid
disclosing a mixture of costs and values from different dates in the
financial statements.

BPP LEARNING MEDIA


Example: revaluation surplus

• Binkie Co has an item of land carried in its books at $13,000. Two


years ago a slump in land values led the company to reduce the
carrying value from $15,000. This was taken as an expense in profit
or loss. There has been a surge in land prices in the current year,
however, and the land is now worth $20,000.
Required
Account for the revaluation in the current year.
DEBIT -----------------------------------?
CREDIT-------------------?
CREDIT-------------------?
Note. The credit to the revaluation surplus will be shown under 'other
comprehensive income'.

BPP LEARNING MEDIA


Example: revaluation decrease

The original cost was $15,000, revalued upwards to $20,000 two years
ago. The value has now fallen to $13,000

DEBIT -----------------------------------?
DEBIT -----------------------------------?
CREDIT-------------------?

BPP LEARNING MEDIA


The original cost was $15,000, revalued upwards to $20,000 two years
ago. The value has now fallen to $17,000

DEBIT -----------------------------------?
DEBIT -----------------------------------?
CREDIT-------------------?

BPP LEARNING MEDIA


Example: revaluation and depreciation

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


useful life of five years. On 1 January 20X8 the asset was revalued to
$12,000. The expected useful life has remained unchanged (ie three
years remain).
Required
Account for the revaluation and state the treatment for depreciation from
20X8 onwards

BPP LEARNING MEDIA


Depreciation

The standard states:


• The depreciable amount of an item of property, plant and equipment
should be allocated on a systematic basis over its useful life.
• The depreciation method used should reflect the pattern in which
the asset's economic benefits are consumed by the entity.
• The depreciation charge for each period should be recognised as an
expense unless it is included in the carrying amount of another asset.

BPP LEARNING MEDIA


Depreciation

• Land and buildings are dealt with separately even when they are
acquired together
• Land normally has an unlimited life and is therefore not depreciated
• In contrast buildings do have a limited life and must be depreciated
• Any increase in the value of land on which a building is standing
will have no impact on the determination of the building's useful life

BPP LEARNING MEDIA


Review of useful life

• should be carried out at least at each financial year end and the
depreciation charge for the current
• Future periods should be adjusted if expectations have changed
significantly from previous estimates
• Changes are changes in accounting estimates and are accounted
for prospectively as adjustments to future depreciation.

BPP LEARNING MEDIA


Example: review of useful life

B Co acquired a non-current asset on 1 January 20X2 for $80,000. It had


no residual value and a useful life of ten years. On 1 January 20X5 the
remaining useful life was reviewed and revised to four years.
Required
What will be the depreciation charge for 20X5?

BPP LEARNING MEDIA


Review of depreciation method

• Should be reviewed at least at each financial year end


• If there has been a significant change in the expected pattern of
economic benefits from those assets, the method should be
changed to suit this changed pattern.
• The change should be accounted for as a change in accounting
estimate and the depreciation charge for the current and future
periods should be adjusted.

BPP LEARNING MEDIA


Impairment of asset values

• Impairment loss should be treated in the same way as a revaluation


decrease ie the decrease should be recognised as an expense
• An revaluation decrease (or impairment loss) should be charged
directly against any related revaluation surplus to the extent that the
decrease does not exceed the amount held in the revaluation
surplus in respect of that same asset.
• A reversal of an impairment loss should be treated in the same way
as a revaluation increase, ie a revaluation increase should be
recognised as income to the extent that it reverses a revaluation
decrease or an impairment loss of the same asset previously
recognised as an expense.

BPP LEARNING MEDIA


Complex assets

These are assets which are made up of separate components. Each


component is separately depreciated over their useful life. An example
which appeared in a recent examination was that of an aircraft. An
aircraft could be considered as having the following components.

Component Cost ($'000) Useful life


Fuselage 20,000 20 years
Undercarriage 5,000 500 landings
Engines 8,000 1,600 flying hours

Required
Calculate depreciation at the end of the first year, in which 150 flights
totalling 400 hours were made

BPP LEARNING MEDIA


Overhauls (fundamental renovation)

• Where an asset requires regular overhauls in order to continue to


operate, the cost of the overhaul is treated as an additional
component and depreciated over the period to the next overhaul.
• If, in the case of the aircraft above, an overhaul was required at the
end of year 3 and every third year thereafter at a cost of $1.2m this
would be capitalised as a separate component. $1.2m would be
added to the cost and the depreciation (assuming 150 flights again)
would therefore be:
• $4500 + $400 (Overhaul ($1,200,000/3)) = $4900

BPP LEARNING MEDIA


Retirements and disposals

When an asset is permanently withdrawn from use, or sold or


scrapped, and no future economic benefits are expected from its
disposal, it should be withdrawn from the statement of financial position
• Gains or losses are the difference between the estimated net
disposal proceeds and the carrying amount of the asset.
• They should be recognised as income or expense in profit or loss.
• Disposal should meet IFRS 15 Revenue from contracts with
customers
NB: An entity cannot classify as revenue a gain it realises on the
disposal of an item of PPE

BPP LEARNING MEDIA


IAS 16 disclosure

• Measurement bases
• Depreciation methods
• Useful lives or depreciation rates
• Gross carrying amount and accumulated depreciation (aggregated
with accumulated impairment losses) at the beginning and end of the
period
• Reconciliation of the carrying amount at the beginning and end of
the period

BPP LEARNING MEDIA


Depreciation accounting

• A charge made in profit or loss to reflect the use of an asset by the


business.

BPP LEARNING MEDIA


Depreciation accounting – Key terms

• Depreciation
• Depreciable assets (used for more than one accounting period,
limited useful life and value derived from use rather than sell)
• Useful life (time-based or unit-based)
• Depreciable amount (cost/revaluation amount less residual value)

BPP LEARNING MEDIA


Depreciation purpose

• Spreading the cost of a non-current asset over its useful life, and so
matching the cost against the full period during which it earns profits
for the business.
• Depreciation charges are an example of the application of the accrual
assumption to calculate profits.

BPP LEARNING MEDIA


Disclosure

• IAS 16 also requires the following to be disclosed for each major class
of depreciable asset.
• Depreciation methods used
• Useful lives or the depreciation rates used
• Total depreciation allocated for the period
• Gross amount of depreciable assets and the related accumulated
depreciation

BPP LEARNING MEDIA


Depreciation methods

BPP LEARNING MEDIA


Depreciation methods (cont.)

Required
Work out the depreciation to be charged each year under:
(a) The straight line method
(b) The reducing balance method (using a rate of 35%)
(c) The machine hour method
(d) The sum-of-the digits method

BPP LEARNING MEDIA


Technical articles

Measurement and depreciation Part 1 and Part 2


Found on ACCA website

BPP LEARNING MEDIA


Depreciation and disposal of assets

A business purchased two rivet-making machines on 1 January 20X5


at a cost of $15,000 each. Each had an estimated life of five years
and a nil residual value. The straight line method of depreciation is
used.
Owing to an unforeseen slump in market demand for rivets, the
business decided to reduce its output of rivets, and switch to making
other products instead. On 31 March 20X7, one rivet-making
machine was sold (on credit) to a buyer for $8,000.
Later in the year, however, it was decided to abandon production of
rivets altogether, and the second machine was sold on 1 December
20X7 for $2,500 cash.
Required
Prepare the machinery account, provision for depreciation of
machinery account and disposal of machinery account for the
accounting year to 31 December 20X7.
BPP LEARNING MEDIA
IAS 40 Investment property

Property that would be classified as PPE but is held to earn rentals or for
capital appreciation or both rather than:
a) Use in the production or supply of goods or services or for
administrative purposes, or
b) Sale in the ordinary course of business
• Fair value is the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market
participants at the measurement date
• 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.

BPP LEARNING MEDIA


Example

Rich Co owns a piece of land. The directors have not yet decided
whether to build a factory on it for use in its business or to keep it and
sell it when its value has risen.
Required:
Would this be classified as an investment property under IAS 40?

BPP LEARNING MEDIA


Excluded property

BPP LEARNING MEDIA


Recognition

Investment property should be recognised as an asset when two


conditions are met:
a) It is probable that the future economic benefits that are associated
with the investment property will flow to the entity.
b) The cost of the investment property can be measured reliably.

BPP LEARNING MEDIA


Initial measurement

• An investment property should be measured initially at its cost,


including transaction costs.
• A property interest held under a lease and classified as an investment
property shall be accounted for as if it were a finance lease.
• The asset is recognised at the lower of the fair value of the property
and the present value of the minimum lease payments.
• An equivalent amount is recognised as a liability.

BPP LEARNING MEDIA


Measurement subsequent to initial recognition

Choice between:
• The fair value model
• A gain or loss arising from a change in the fair
value of an investment property should be
recognised in net P/L for the period in which it
arises.
• The cost model – Same as IAS 16, PPE

BPP LEARNING MEDIA


Transfers

• Transfers to or from investment property should only be made when


there is a change in use

BPP LEARNING MEDIA


Example

A business owns a building which it has been using as a head office.


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

BPP LEARNING MEDIA


Disposals

Derecognise on disposal or when it is permanently withdrawn from


use and no future economic benefits are expected from its disposal
Gain or loss should be recognised as income or expense in profit or
loss

BPP LEARNING MEDIA


Disclosure requirements

• These relate to:


• Choice of fair value model or cost model
• Whether property interests held as operating
leases are included in investment property
• Criteria for classification as investment property
• Assumptions in determining fair value
• Use of independent professional valuer
(encouraged but not required)
• Rental income and expenses
• Any restrictions or obligations

BPP LEARNING MEDIA


IAS 23 Borrowing costs

• Borrowing costs. Interest and other costs incurred by an entity in


connection with the borrowing of funds.
• Qualifying asset. An asset that necessarily takes a substantial period
of time to get ready for its intended use or sale

BPP LEARNING MEDIA


Capitalisation

• Capitalisation – all eligible borrowing costs must be capitalised

BPP LEARNING MEDIA


Borrowing costs eligible for capitalisation

• Borrowing costs directly attributable to the acquisition, construction or


production of a qualifying asset
• Borrowing costs that would have been avoided had the expenditure
on the qualifying asset not been made
• The amount of borrowing costs available for capitalisation will be
the actual borrowing costs incurred on those borrowings during the
period, less any investment income on the temporary investment of
those borrowings

BPP LEARNING MEDIA


Example

On 1 January 20X6 Stremans Co borrowed $1.5m to finance the production


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

Asset A Asset B
$000 $000
1 January 2006 250 500
1 July 2006 250 500

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

• Necessary where borrowings are obtained generally, but are


applied in part to obtaining a qualifying asset
• Capitalisation rate is the weighted average of the borrowing
costs applicable to the entity's borrowings that are outstanding during
the period, excluding borrowings made specifically to obtain a
qualifying asset
• There is a cap on the amount of borrowing costs calculated in this
way: it must not exceed actual borrowing costs incurred
• one overall weighted average can be calculated for a group or entity,
but in some situations it may be more appropriate to use a weighted
average for borrowing costs for individual parts of the group or
entity (Shoprite – Usave, Computicket, Checkers etc.).

BPP LEARNING MEDIA


Example

Acruni Co had the following loans in place at the beginning and end
of 20X6.
1 January 31 December
2016 2016
$m $m
8.9% Bank Loan payable 2017 120 120
10% Bank Loan payable 2018 80 80
9.5% Bank Loan payable 2019 – 150
The 8.9% debenture was issued to fund the construction of a
qualifying asset (a piece of mining equipment), construction of which
began on 1 July 20X6.

BPP LEARNING MEDIA


Example (cont.)

On 1 January 20X6, Acruni Co began construction of a qualifying


asset, a piece of machinery for a hydroelectric plant, using existing
borrowings. Expenditure drawn down for the construction was: $30m
on 1 January 20X6, $20m on 1 October 20X6.
Required:
Calculate the borrowing costs that can be capitalised for the hydro-
electric plant machine

BPP LEARNING MEDIA


Commencement of capitalisation – key events

(a) Expenditure on the asset is being incurred


(b) Borrowing costs are being incurred
(c) Activities are in progress that are necessary to prepare the asset for
its intended use or sale

BPP LEARNING MEDIA


Suspension of capitalisation

• If active development is interrupted for any extended periods


• Not necessary for temporary delays or for periods when substantial
technical or administrative work is taking place

BPP LEARNING MEDIA


Stoppage of capitalisation

• When substantially all the activities necessary to prepare the


qualifying asset for its intended use or sale are complete
• Physical construction of the asset is completed, although minor
modifications may still be outstanding
• Where the asset is completed in parts or stages, where each part
can be used while construction is still taking place on the other parts,
capitalisation of borrowing costs should cease for each part as it is
completed

BPP LEARNING MEDIA


Disclosure

• The following should be disclosed in the financial statements in


relation to borrowing costs.
(a) Amount of borrowing costs capitalised during the period
(b) Capitalisation rate used to determine the amount of borrowing costs
eligible for capitalisation

BPP LEARNING MEDIA

You might also like