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All notesAll notes

count!n" st#nd#rds need to bu!lt on # rel!#ble set of concepts

!s !n !ttempt to def"ne the n!ture !nd purpose of !ccount"n#

! coherent !nd cons"stent found!t"on th!t w"ll underp"n the development of !ccount"n# st!nd!rds

! st!tement of #ener!ll$ !ccepted !ccount"n# pr"nc"ples (GAAP) for ev!lu!t"n# ex"st"n# pr!ct"ces !nd develop"n# new ones

! theoret"c!l b!s"s for determ"n"n# how tr!ns!ct"ons should be me!sured (h"stor"c!l v!lue or current v!lue) !nd reported

! b!s"s for econom"c dec"s"on m!%"n#

summr t's

! fr!mewor% for sett"n# !ccount"n# st!nd!rds

! b!s"s for resolv"n# !ccount"n# d"sputes

fund!ment!l pr"nc"ples wh"ch then do not h!ve to be repe!ted "n !ccount"n# st!nd!rds

ho else s the frmewor useful to

Aud!tors

Users of #ccounts

An%one !nterested !n how IFRS's #re formul#ted

onceptu!l Fr!mewor"

he need for ! fr!mewor"

!t #s me!nt b$ ! conceptu!l fr!mewor" of !ccount#n%


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Fr!mewor% "s NOT !n !ccount"n# st!nd!rd, !nd "f there's ! confl"ct between the two then the IFRS w"ns

mpl%, Yes$ A rules-b#sed s%stem

THOUT prncples bsed conceptul frmewor

follow"n# h!ppens&&

ncons!stent st#nd#rds

St#nd#rds produced on # "f!re f!"ht!n"" b#s!s

Be!n" re#ct!ve r#ther th#n pro#ct!ve)

St#nd#rd sett!n" bod!es were b!#sed !n the!r membersh!p

S#me theoret!c#l !ssues repe#ted e#ch t!me # problem comes up

n# no fr!mewor% led to ‘rules- b!sed’ !ccount"n# s$stems

h ! s$stem "s ver$ prescr"pt"ve !nd "nflex"ble, thou#h !lso the !ccounts !re then more comp!r!ble !nd cons"stent&

here !n !ltern!t#ve s$stem&

he fund!ment!l concepts!t #s me!nt b$ relev!nce !nd f!#thful represent!t#on&


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e Fr#mewor& d!fferent!#tes between fund#ment#l #nd enh#nc!n"

form#t!on ch#r#cter!st!cs

h' Wh!t('

ndmentl qulttve chrcterstcs

nform!t"on to be useful, "t must be both relev!nt !nd f!"thfull$ represented

Relev!nce

F!"thful represent!t"on

hncn qulttve chrcterstcs

Comp!r!b"l"t$ ("nclud"n# cons"stenc$)

T"mel"ness

Ver"f"!b"l"t$

Underst!nd!b"l"t$

counts must represent f#!thfull% the phenomen# !t purports to

present

thful Represent!t#on


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thful Representton mens

Subst!nce over form

F!"thful represent!t"on me!ns c!ptur"n# the re!l subst!nce of the m!tter

Represents the econom#c phenomen!

F!"thful me!ns !n !#reement between the !ccount"n# tre!tment !nd the econom"c phenomen! the$ represent

The !ccounts !re ver"f"!ble !nd neutr!l

Completeness, Neutr!l#t$ & Ver#f#!b#l#t$

xmples

ell nd bu bc = Lon

nt"t$ m!$ sell some "nventor$ to ! f"n!nce house !nd l!ter bu$ "t b!c% !t ! pr"ce b!sed on the or"#"n!l sell"n# pr"ce plus ! prerm"ned percent!#e& Such ! tr!ns!ct"on "s re!ll$ ! secured lo!n plus "nterest& To show "t !s ! s!le would not be ! f!"thful

esent!t"on of the tr!ns!ct"on&

onvertble Lons

ther ex!mple "s th!t !n ent"t$ m!$ "ssue convert"ble lo!n notes& M!n!#ement m!$ !r#ue th!t, !s the$ expect the lo!n note

e converted "nto equ"t$, the lo!n should be tre!ted !s equ"t$& The$ would tr$ to !r#ue th"s !s the"r #e!r"n# r!t"o would then

ove& However, "t "s recorded !s ! lo!n !s pr"m!r"l$ th"s "s wh!t "t "s&

oted prev"ousl$, s"mpl$ follow"n# rules "n !ccount"n# st!nd!rds c!n prov"de for tre!tment wh"ch "s essent"!ll$ form over

t!nce& Where!s, users of !ccounts w!nt the subst!nce over form&

concept beh"nd f!"thful represent!t"on should en!ble cre!tors of f"n!nc"!l st!tements to f!"thfull$ represent ever$th"n#

u#h me!sures !nd descr"pt"ons !bove !nd be$ond th!t "n the !ccount"n# st!nd!rd "f necess!r$&


5/183

mttons to Fthful Representton

nherent uncert#!nt!es

Est!m#tes

Assumpt!ons

lev#nt !nform#t!on !nfluences the econom!c dec!s!ons of the user

s Predctve vlue nd/or Confrmtor vlue

sers c!n !ssess the ent"t$ !b"l"t$ to&&

T#&e #dv#nt#"e of opportun!t!es

Re#ct to #dverse s!tu#t!ons

e"$ D!scont!nued oper#t!ons sep#r#ted from cont!nu!n" on the !ncome st#tement

terlt

Th"s "s not ! m!tter to be cons"dered b$ st!nd!rd-setters but b$ prep!rers of !ccounts !nd the"r !ud"tors

compl!#nce w!th #n IFRS would be m!sle#d!n", then compl!#nce not

ev!nce

rue !nd f!#r’ overr#de


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eded

"s c!lled the "true & f!"r" overr"de - b$ not follow"n# st!nd!rds the !ccounts !re true !nd f!"r

would onl$ h!ppen "n extremel$ r!re c"rcumst!nces

e entt should dsclose

IFRSs compl"ed w"th except where "t h!s dep!rted "n order to !ch"eve ! f!"r present!t"on

The IFRS dep!rted from

An expl!n!t"on !nd f"n!nc"!l effect

mp#r#b!l!t% !s fund#ment#l to #ssess!n" the perform#nce of #n ent!t%

$s"n# trends needs the !ccounts to h!ve been prep!red on ! comp!r!ble (cons"stent) b!s"s

mprblt s mproved b

Cons#stent !ccount#n% pol#c#es

D"fferent pol"c"es m!$ be necess!r$ thou#h to be more relev!nt !nd rel"!ble

nh!nc#n$ Qu!l#t!t#ve Ch!r!cter#st#cs

mp!r!b#l#t$


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ese should be m#x!m!sed both !nd!v!du#ll% #nd !n comb!n#t!on

's loo n more detl

Ver#f#!ble

Th"s !llows "ndependent observers to !#ree th!t ! tr!ns!ct"on "s f!"thfull$ represented

T#mel$

T"mel"ness me!ns th!t "nform!t"on "s !v!"l!ble to dec"s"on-m!%ers "n t"me to be c!p!ble of "nfluenc"n# the"r dec"s"ons

Underst!nd!ble

Underst!nd!b"l"t$ "s enh!nced when the "nform!t"on "s)

1& cl!ss"f"ed

2& ch!r!cter"sed

3& presented cle!rl$ !nd conc"sel$

plex "nfo "s not left out *ust bec!use "t "s h!rd to underst!nd

"s relev!nt&&"t's relev!nt'

nc"!l reports !re prep!red for users who h!ve ! re!son!ble %nowled#e of bus"ness !nd econom"c !ct"v"t"es !nd who rev"ew

!n!l$se the "nform!t"on w"th d"l"#ence

mp#r#t!ves #re ch#n"ed for #ccount!n" POLICY ch#n"es onl%

#f#!b#l#t$, T#mel#ness & Underst!nd!b#l#t$

!n%es #n !ccount#n% pol#c#es !nd !ccount#n% est#m!tes


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n#es "n !ccount"n# est"m!tes h!ve no effect on the comp!r!t"ve

n#es "n !ccount"n# pol"c$ me!ns we must ch!n#e the comp!r!t"ve too to ensure we %eep the !ccounts comp!r!ble for trend

$s"s

count!n" Pol!c%

n#t#on

spec"f"c pr"nc"ples, b!ses, convent"ons, rules !nd pr!ct"ces !ppl"ed b$ !n ent"t$ "n prep!r"n# !nd present"n# the f"n!nc"!l

ements”

nt"t$ should follow !ccount"n# st!nd!rds when dec"d"n# "ts !ccount"n# pol"c"es

ere "s no #u"d!nce "n the st!nd!rds, m!n!#ement should use the most relev!nt !nd rel"!ble pol"c$

nes to Accountn Polc

se !re onl$ m!de "f)

requ"red b$ ! St!nd!rd or Interpret!t"on+ or

ould #"ve more relev!nt !nd rel"!ble "nform!t"on

Ad 'ust the comp!r!t#ve !mounts for the #ffected !tem

#s !f the pol!c% h#d #lw#%s been #ppl!ed)

Ad 'ust Open#n% ret!#ned e!rn#n%s

Show th!s !n st#tement of ch#n"es !n Equ!t% too)


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count!n" st!m#tes

n#t#on

!d *ustment of the c!rr$"n# !mount of !n !sset or l"!b"l"t$, or rel!ted expense, result"n# from re!ssess"n# the expected futureef"ts !nd obl"#!t"ons !ssoc"!ted w"th th!t !sset or l"!b"l"t$”

mples

w!nces for doubtful debts+ntor$ obsolescence+

#e the useful econom"c l"fe of propert$, pl!nt !nd equ"pment

nes n Accountn Estmte

S#mpl$ ch!n%e the current $e!r

No ch!n%e to comp!r!t#ves

or Per!od Errors

se !re !ccounted for "n the s!me w!$ !s ch!n#es "n !ccount"n# pol"c$

ountn tretment

Ad 'ust the comp!r!t#ve !mounts for the #ffected !tem


10/183

Show th!s !n st#tement of ch#n"es !n Equ!t% too)

eco"n!sed" me#ns brou"ht !nto the #ccounts

hen cn somethn be reconsed n the ccounts

tests must be p!ssed

Meet the def#n#t#on of !n !sset/l"!b"l"t$ or "ncome/expense or equ"t$

It #s prob!ble th!t !n$ future econom"c benef"t w"ll flow to or from the ent"t$

The "tem h!s ! cost o rv!lue th!t c!n be rel#!bl$ me!sured

co"n!s!n" #n Asset

n#t#on

source controlled b$ the enterpr"se !s ! result of p!st events !nd from wh"ch future econom"c benef"ts !re expected to flow

eco$n#t#on !nd me!surementer#! for reco%n#t#on


11/183

sets cn be reconsed when

t !s controlled (def!n!t!on)

Prob#ble benef!ts

Rel!#ble me#sure of cost & benef!ts

co"n!s!n" # L!#b!l!t%

n#t#on

esent obl"#!t"on of the enterpr"se !r"s"n# from p!st events, expected to result "n !n outflow of resources

bltes cn be reconsed when

There's # present obl!"#t!on (def!n!t!on)

t's prob#ble

There's # rel!#ble me#sure


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co"n!s!n" Income

n#t#on

e!ses "n !ssets (or decre!ses of l"!b"l"t"es)

t result "n "ncre!ses "n equ"t$, other th!n contr"but"ons from equ"t$ p!rt"c"p!nts)

me from norm!l !ct#v#t#es

o#n"sed "n the St!tement of Prof"t or Loss !nd other Comprehens"ve Income

me #tems reco%n#sed d#rectl$ #n Equ#t$

ev!lu!t"on #!"ns on !ssets

ese c"rcumst!nces the "ncome (#!"n) "s then !lso reported "n the OCI& (Other Comprehens"ve Income sect"on of the St!tement

rof"t or Loss !nd other Comprehens"ve Income)

co"n!s!n" Expenses

n#t#on

e!ses "n !ssets or ("ncurrences of l"!b"l"t"es)

t result "n decre!ses "n equ"t$, other th!n d"str"but"ons to equ"t$ p!rt"c"p!nts)

m!ll$ reco%n#sed #n the Income st!tement

t expenses !re reco#n"sed "n the St!tement of Prof"t or Loss sect"on of the St!tement of Prof"t or Loss !nd Comprehens"ve

me


13/183

me expenses !re reported d#rectl$ #n Equ#t$ !nd OCI

!n "mp!"rment loss, on ! prev"ousl$ rev!lued !sset, th!t does not exceed the b!l!nce of "ts Rev!lu!t"on Reserve

"ht, the f!rst th!n" %ou need to worr% #bout when "!ven # quest!on

out revenue !s WHEN do we #ctu#ll% show th!s revenue !n the

counts'

when we "nvo"ce( When we del"ver( When we rece"ve the c!sh(

, f"rstl$ (!nd th"s comes from the ‘reco#n"t"on’ ch!pter of the conceptu!l fr!mewor%) $ou need to ensure th!t)

ests need to be pssed s norml

t !s prob!ble th#t future econom!c benef!ts w!ll flow to the ent!t% #nd

These benef!ts c#n be me!sured rel#!bl$

e of Goods

dd"t"on to 1 !nd 2 !bove, revenue from s!le of #oods c!n onl$ be reco#n"sed when the m!*or"t$ of the r"s%s !nd rew!rds h!ve

n tr!nsferred !nd $ou h!ve no more m!n!#er"!l control

ce how $ou onl$ need control not ownersh"p to be tr!nsferred - th"s "s !n ex!mple of subst!nce over form

You need to pss 4 tests to reconse revenue from the sle of oods

1& Prob!ble Future Benef"ts

venue Reco%n#t#on - When


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Bre!"#n% Down ! tr!ns!ct#on

These reco#n"t"on cr"ter"! "n th"s St!nd!rd !re usu!ll$ !ppl"ed sep!r!tel$ to e!ch tr!ns!ct"on&

However, "n cert!"n c"rcumst!nces, "t "s necess!r$ to !ppl$ the reco#n"t"on cr"ter"! to the sep!r!tel$ "dent"f"!ble components

of ! s"n#le tr!ns!ct"on "n order to reflect the subst!nce of the tr!ns!ct"on&

For ex!mple, when the sell"n# pr"ce of ! product "ncludes !n "dent"f"!ble !mount for subsequent serv"c"n#, th!t !mount "sdeferred !nd reco#n"sed !s revenue over the per"od dur"n# wh"ch the serv"ce "s performed&

A%%re%!t#n% sep!r!te tr!ns!ct#ons

Conversel$, the reco#n"t"on cr"ter"! !re !ppl"ed to two or more tr!ns!ct"ons to#ether when the$ !re l"n%ed "n such ! w!$th!t the commerc"!l effect c!nnot be understood w"thout reference to the ser"es of tr!ns!ct"ons !s ! whole&

For ex!mple, !n ent"t$ m!$ sell #oods !nd, !t the s!me t"me, enter "nto ! sep!r!te !#reement to repurch!se the #oods !t !

l!ter d!te, thus ne#!t"n# the subst!nt"ve effect of the tr!ns!ct"on+ "n such ! c!se, the two tr!ns!ct"ons !re de!lt w"th

to#ether&

&

3& (M!*or"t$ of) R"s%s !nd rew!rds tr!nsferred

4& No m!n!#er"!l control

e of Servces

se !re reco#n"sed !s the serv"ce completes !nd !#!"n onl$ when the revenue "s prob!ble !nd rel"!bl$ me!sur!ble)

So the revenue from servce s reconsed when

1& Percent!#e Complete

2& Prob!ble Econom"c Benef"ts


15/183

The reco#n"t"on of revenue b$ reference to the st!#e of complet"on of ! tr!ns!ct"on "s often referred to !s the percent!#e

of complet"on method& Under th"s method, revenue "s reco#n"sed "n the !ccount"n# per"ods "n wh"ch the serv"ces !re

rendered& The reco#n"t"on of revenue on th"s b!s"s prov"des useful "nform!t"on on the extent of serv"ce !ct"v"t$ !nd perform!nce

dur"n# ! per"od&

When the outcome of the tr!ns!ct"on "nvolv"n# the render"n# of serv"ces c!nnot be est"m!ted rel"!bl$, revenue sh!ll be

reco#n"sed onl$ to the extent of the expenses reco#n"sed th!t !re recover!ble

3& Rel"!ble Me!sure of Econom"c Benef"ts

erest, Roltes, nd Dvdends

nterest, ro$!lt"es !nd d"v"dends, prov"ded th!t "t "s prob!ble th!t the econom"c benef"ts w"ll flow to the enterpr"se !nd the

unt of revenue c!n be me!sured rel"!bl$, revenue should be reco#n"sed !s follows)

Interest

Use the effect"ve "nterest method !s set out "n IAS 39

Roltes

On !n !ccru!ls b!s"s "n !ccord!nce w"th the subst!nce of the relev!nt !#reement

Dvdends

When the sh!reholder’s r"#ht to rece"ve p!$ment "s est!bl"shed

venue reco%n#t#on - how much


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e should reco"n!se revenue #t !ts FAIR VALUE

"s norm!ll$ the !mount rece#ved, !nd th"s "s #ener!ll$ the c!se

v!lue

e !mount for wh"ch !n !sset could be exch!n#ed, or ! l"!b"l"t$ settled, between %nowled#e!ble, w"ll"n# p!rt"es "n !n !rms

th tr!ns!ct"on

nerl Rule

Sell!n" Pr!ce less

Tr#de d!scounts less

Volume d!scounts

mm#ss#on

u're !n !#ent then *ust show the comm"ss"on $ou rece"ve not the full sell"n# pr"ce

ferred Consderton

e the F!"r v!lue "s the Present V!lue

b!s"c "de! here "s th!t $ou d"scount the future c!sh down to tod!$s present v!lue !nd th"s "s the !mount th!t #oes to s!les

p 1)

2) Th"s rece"v!ble "s ! d"scounted f"#ure& All d"scounted f"#ures need to be unwound& We do th"s throu#h "nterest !lw!$s

d or rece"ved)

Dr Rece!v#ble (PV of future c#sh to be rece!ved)

Cr S#les (PV of future c#sh)

Dr Rece!v#bles


17/183

I l I

E#ch %e#r

erest Free Credt

revenue rece"v!ble h!s two sep!r!te elements)

e f!"r v!lue of the #oods on the d!te of s!le

!nc"n# "ncome

Dr Rece!v#ble (Sell!n" pr!ce of !tem)

Cr S#les

Dr Rece!v#bles

Cr Interest Rece!v#ble (I/S)

E#ch %e#r w!th the !mputed !nterest r#te

tr!t#on

rmer sh!mefull$ sells cows, oh the p!"n- He !s%s for ! 20% depos"t !t the st!rt !nd the full b!l!nce "s due !fter two $e!rs&

pr"ce of the cow "s c!lcul!ted us"n# ! 10% per !nnum f"n!nce ch!r#e&

w "s sold to ! customer for £10,000& (So ver$ che!p for the %"n# of !ll !n"m!ls)

w should the revenue should be reco%n#sed&

of Cow (£2,000 + £6,611) (W))

nc"n# "ncome (£6,611 (W) . 10%)

$"n# !mount of rece"v!ble (£6,611 (W) . 1&10)

R/ING

depos"t "s £2,000 (£10,000 . 20%), so the !mount rece"v!ble "n two $e!rs "s £8,000& Th"s "s d"scounted !t 10% for two $e!rs to

11 (£8,000 . 1/1&10^2)&

oods nd servces provded n one contrct

ex!mple $ou could bu$ ! c!r w"th free serv"c"n# thrown "n for ! couple of $e!rs

e - $ou need to spl"t the v!lue of the sell"n# pr"ce "nto the 2 components - then tre!t then l"%e the$ !re be"n# sold sep!r!tel$)

tr!t#on


18/183

r de!ler sells ! new c!r, to#ether w"th one $e!r’s serv"c"n#, for £20,000& The f!"r v!lues of these components !re) c!r £18,000,

"c"n# 4,000

ere "t seems th!t ! 10% d"scount h!s been offered so the c!r s!le becomes - 16,400 !nd the serv"c"n# 3,600

c!r s!le "s then reco#n"sed "mmed"!tel$ !nd the serv"c"n# !s the $e!r pro#resses

torc Cost

The !mount p!"d or f!"r v!lue of the cons"der!t"on #"ven

r Vlue

The pr"ce th!t would be rece"ved to sell !n !sset or p!"d to tr!nsfer ! l"!b"l"t$ "n !n orderl$ tr!ns!ct"on between m!r%et

p!rt"c"p!nts !t the me!surement d!te

rrent Cost

The !mount th!t would h!ve to be p!"d "f the s!me or !n equ"v!lent !sset w!s !cqu"red currentl$

t relsble vlue

The !mount th!t could currentl$ be obt!"ned b$ sell"n# the !sset, net of the est"m!ted sell"n# !nd complet"on costs

esent vlue of future csh flows

The present d"scounted v!lue of the future net c!sh "nflows th!t the "tem "s expected to #ener!te

her Me!sures


19/183

!se m!"e sure $ou tr$ the qu#z on th#s b!d bo$ - #t w#ll m!"e ! lot more sense !fterw!rds ((( ))

r v#lue cons!ders the ch#r#cter!st!cs of the #sset

exmple

The cond"t"on !nd loc!t"on of !n !sset

An$ restr"ct"ons on the s!le or use of !n !sset

me!ns th!t when rev!lu"n# "ts propert$, pl!nt !nd equ"pment, !n ent"t$ should cons"der)

h#%hest !nd best use of the !ssets

r vlue ssumes the sles tes plce n

The Pr#nc#p!l m!r"et

the m!r%et w"th #re!test volume !nd level of !ct"v"t$ for the !sset or l"!b"l"t$

The most !dv!nt!%eous m!r"et

The m!r%et th!t m!x"m"ses the !mount th!t would be rece"ved p!"d for the !sset

uton Technques

M!r"et !ppro!ch

Pr"ces from s"m"l!r m!r%et tr!ns!ct"ons

r V!lue


20/183

e& quoted pr"ces of l"sted equ"t$, debt secur"t"es or futures, or m!r%et "nterest r!tes

Income !ppro!ch

Th"s converts future c!sh flows to ! s"n#le d"scounted !mount+ e& d"scounted c!sh flow models !nd opt"on pr"c"n# models

Cost !ppro!ch

Th"s reflects the !mount requ"red currentl$ to repl!ce the serv"ce c!p!c"t$ of !n !sset, "&e& the current repl!cement cost

n me!sur"n# f!"r v!lue, !n ent"t$ "s requ"red to m!x"m"se the use of relev!nt observ!ble "nputs !nd m"n"m"se the use of

bserv!ble "nputs

Level 1 Level 2 Level 3

ef#n#t#on Quoted pr"ces "n !ct"ve

m!r%ets for "dent"c!l

!ssets or l"!b"l"t"es

Observ!ble "nputs Unobserv!ble "nputs

x!mple Sh!re pr"ces on ! stoc%

exch!n#e

Current m!r%et rents for s"m"l!r propert"es

!nd m!r%et "nterest r!tes for the FV of !n

"nvestment propert$

Pro *ected c!sh flows

used to v!lue ! none

publ"c bus"ness

w does !ll th#s wor" #n pr!ct#ce&

An ent"t$ owns 10,000 ord"n!r$ sh!res "n M & S

e there "s !n !ct"ve m!r%et for these sh!res throu#h the London stoc% exch!n#e, the ent"t$ must use ! m!r%et !ppro!ch (level

ut)&

wever, the me!surement of the f!"r v!lue of !n unl"sted debt secur"t$ m!$ requ"re the use of !n "ncome !ppro!ch, e& !

ounted c!sh flow model us"n# m!r%et "nterest r!te for s"m"l!r debt secur"t"es (level 2 "nput) !nd m!r%et cred"t spre!ds

sted for ent"t$-spec"f"c cred"t r"s% (level 2 or 3 "nputs)&


21/183

counts should show # f#!thful #nd rel!#ble represent#t!on

o th"s somet"mes $ou need to show the subst!nce of ! tr!ns!ct"on r!ther th!n "ts le#!l form

ex!mple, "f $ou ‘sell’ !n !sset but st"ll en *o$ "ts benef"ts, then th"s prob!bl$ "sn't ! true s!le "n re!l"t$ ("n !ll prob!b"l"t$ th"s "s

!n - see l!ter)&

w do ou now f substnce s not the sme s form

"t usu!ll$ "s - but loo% for&&

Where control d"ffers from ownersh"p of !n !sset

Where "tems !re sold !t NOT f!"r v!lue

Where there's !n extr! "opt"on" "n the !#reement

Where th"s "s !n$ "extr!" !tt!chment to !n !#reement

Th"s "s c!lled ! l"n%ed tr!ns!ct"on

ns!"nment Stoc&

he le$!l versus the commerc#!l v#ew ofccount#n$

thful !nd Rel#!ble !ccounts


22/183

%nown !s #oods on s!le or return b!s"s

"ssue here "s who CONTROLS the stoc% "n subst!nce - $ou need to %now whose stoc% "t "s

d out who tes the mort of the follown rss

If the stoc% becomes obsolete

If stoc% "s slow to sell

tr!t#on

sell #oods to me&

on't sell the #oods I return them to $ou for ! refund

ut#on

stoc% "s $ours bec!use $ou t!%e the r"s%s)

bsolescence - If the$ don't sell I send them b!c% to $ou for ! refund

ctor!n" of Rece!v#bles

e we sell our debtors to ! f!ctor "n return for c!sh

!#!"n we need to loo% to see whose debtors the$ re!ll$ !re (h!ve " re!ll$ sold them "n subst!nce) b$ loo%"n# !t who %eeps

m!*or"t$ of the r"s%s&&&

cevbles Rss


23/183

R"s% of b!d debt

R"s% of slow p!$"n# debtors

tr!t#on

sell me $our debtors but we h!ve the follow"n# !#reement)

the debts #o b!d - I return them to $ou for ! refund

ou p!$ me 2% "nterest ! month on !ll debtors who don't p!$ me "mmed"!tel$

ut#on

h!ve not sold the debtors bec!use $ou %eep both the b!d debt r"s% !nd slow p!$"n# r"s% ($ou p!$ me "nterest on o/S

tors)

efore $ou do not h!ve ! s!le $ou h!ve ! p!$!ble lo!n to me

lo!n #ets rep!"d !s the debtors p!$ me

le #nd Bu% b#c&

! s!le of #oods $ou need to h!ve tr!nsferred the m!*or"t$ of the r"s%s !nd rew!rds

loo% !t the rew!rds&& who #ets the m!*or"t$ of the benef"ts of the !sset

u m!%e th"s s!le !nd then bu$ "t b!c% - then $ou h!ve prob!bl$ %ept the m!*or"t$ of the rew!rds !nd so not sold the !sset

e!d, !#!"n, "t "s ! lo!n

ltern!t#ve models !nd pr!ct#ces

v!nt!%es !nd d#s!dv!nt!%es of h#stor#c!l cost !ccount#n%


24/183

v#nt#"es of H!stor!c#l Cost Account!n"

vntes

Cost !s &nown #nd c#n be chec&ed to #n !nvo!ce

Enh#nces comp#r#b!l!t%

Le#ds to st#ble, non-vol#t!le pr!c!n"

s#dv#nt#"es of H!stor!c#l Cost Account!n"

dvnte

Non-current #sset v#lues become qu!c&l% out of d#te

Deprec!#t!on ch#r"e !s unre#l!st!c#ll% low

Lower costs le#d to h!"her prof!ts - wh!ch m#% le#d to too h!"h d!v!dends !n re#l terms

Comp#r!sons over t!me #re !mposs!ble

Users #re often !nterested !n current v#lues not p#st e$"$ secur!t% on lo#n

ov!des more re#l!st!c boo& v#lues b% v#lu!n" #ssets #t current

pl#cement cost

rent Cost !ccount#n%


25/183

usu!ll$ c!lcul!ted b$ !d *ust"n# the h"stor"c!l cost for "nfl!t"on&

current oper!t"n# prof"t "s cons"dered to be more relev!nt to m!n$ dec"s"ons such !s d"v"dend d"str"but"on, emplo$ee w!#e

ms !nd even !s ! b!s"s for t!x!t"on

problems th!t current cost !ccount"n# (!nd other !ppro!ches to !ccount"n# for "nfl!t"on) !ttempt to solve !re obv"ousl$

ed to "nfl!t"on&

!ct"c!l terms, "t c!n be ver$ d"ff"cult to determ"ne the current v!lue of !ssets& It "s often sub *ect"ve !nd complex&

ese 2 loo& #t m#!nt#!n!n" f!n#nc!#l or oper#t!n" b#l#nces

ncl cptl mntennce

"t "s when&&

Mone% net #ssets #t end > Mone% net #ssets #t st#rt

C#n be me#sured us!n" purch#s!n" power

T#&es !nto #ccount !nfl#t!on

scl cptl mntennce

"t "s when&&

Ph%s!c#l oper#t!n" c#p#b!l!t% #t end > Ph%s!c#l oper#t!n" c#p#b!l!t% #t st#rt

!nc#!l !nd Ph$s#c!l c!p#t!l m!#nten!nce


26/183

re"ul#tor% fr#mewor& !s needed to ensure relev#nt #nd rel!#ble

form#t!on !s "!ven to users

#ul!tor$ fr!mewor% re#ul!tes the beh!v"our of comp!n"es tow!rds the"r "nvestors

$ "ncre!se users’ underst!nd"n# of, !nd the"r conf"dence, "n f"n!nc"!l st!tements

nefts of doptn IFRS

The$ !re h"#h-qu!l"t$ !nd tr!nsp!rent #lob!l st!nd!rds th!t !re "ntended to !ch"eve cons"stenc$ !nd comp!r!b"l"t$

Comp!n"es th!t use IFRS !nd h!ve the"r f"n!nc"!l st!tements !ud"ted "n !ccord!nce w"th Intern!t"on!l St!nd!rds on

Aud"t"n# (ISA) w"ll h!ve !n enh!nced st!tus !nd reput!t"on

The Intern!t"on!l Or#!n"s!t"on of Secur"t"es Comm"ss"ons (IOSCO) reco#n"se IFRS for l"st"n# purposes

Thus comp!n"es th!t use IFRS need produce onl$ one set of f"n!nc"!l st!tements for !n$ secur"t"es l"st"n# for countr"es th!t

!re members of IOSCO&

Comp!n"es th!t own fore"#n subs"d"!r"es w"ll f"nd the process of consol"d!t"on s"mpl"f"ed "f !ll the"r subs"d"!r"es use IFRS

Comp!n"es th!t use IFRS w"ll f"nd the"r results !re more e!s"l$ comp!red w"th those of other comp!n"es th!t use IFRS

Th"s would help the comp!n$ to better !ssess !nd r!n% prospect"ve "nvestments "n "ts fore"#n tr!d"n# p!rtners

ht re the chllenes of doptn IFRS to ntonl stndrds

L#ws #nd re"ul#t!ons

e%ul!tor$ Fr!mewor"

Wh% h!ve ! re$ul!tor% fr!mewor"&

$ re%ul!t#on #s needed


27/183

FRS tr#!n!n" to f!n#nce st#ff #nd re"ul#tors

Gre#ter complex!t% !n the f!n#nc!#l report!n" process

ot-for-prof!t or"#n!s#t!ons #re d!st!n"u!shed from prof!t m#x!m!s!n"

"#n!s#t!ons b% three ch#r#cter!st!cs

ese re

The$ don't h!ve sh!reholders #"v"n# them mone$

F"n!nce "s m!"nl$ l"m"ted to don!t"ons !nd #overnment subs"d"es

An$ prof"ts !re %ept "n the bus"ness (not #"ven !w!$ !s ! d"v"dend)

The"r !"ms h!ve ! #re!ter soc"!l, cultur!l, ph"l!nthrop"c, welf!re or env"ronment!l d"mens"on

ount"n# st!nd!rds !re requ"red to me!sure the f"n!nc"!l pos"t"on !nd perform!nce of or#!n"s!t"ons

-for-prof"t !nd publ"c sector ent"t"es do not h!ve to produce f"n!nc"!l st!tements for the publ"c but the$ w"ll h!ve to !ccount

he"r "ncome !nd costs&

rtculr ttenton s pd to

Effect#veness

Are the ob (ect!ves re#ched'

Econom$

Opt!m#l use of resources

t for prof#t ent#t#es


28/183

eep!n" t e cost o !nput resources #s low #s poss! le, ut to # "!ven st#n #r

Eff#c#enc$

he ‘output’ per un!t of resource consumed

e st!nd!rds w"ll be relev!nt such !s those rel!t"n# to non-current !ssets, "nventor"es, le!s"n#, etc& but others, e& e!rn"n#s

sh!re, !re not so relev!nt

e IFRS Found#t!on

IFRS Found!t"on, formerl$ %nown !s IASC Found!t"on, "s !n "ndependent, not-for prof"t pr"v!te sector or#!n"s!t"on wor%"n#

e publ"c "nterest

prncpl ob ectves re

to develop ! s"n#le set of h"#h qu!l"t$, underst!nd!ble, enforce!ble !nd #lob!ll$ !ccepted "ntern!t"on!l f"n!nc"!l report"n#

st!nd!rds (IFRSs) throu#h "ts st!nd!rd-sett"n# bod$, the IASB+

to promote the use !nd r"#orous !ppl"c!t"on of those st!nd!rds+

to t!%e !ccount of the f"n!nc"!l report"n# needs of emer#"n# econom"es !nd sm!ll !nd med"um-s"zed ent"t"es (SMEs)+ !nd

to br"n# !bout conver#ence of n!t"on!l !ccount"n# st!nd!rds !nd IFRSs to h"#h qu!l"t$ solut"ons

t!nd!rd Sett#n$S, IASB etc


29/183

e Intern#t!on#l Account!n" St#nd#rds Bo#rd (IASB)

ectves

ts the !ccount"n# st!nd!rds

m!de up of 15 full-t"me members of d"fferent n!t"on!l"t"es !nd b!c%#rounds (!ud"tors, users of !ccounts !nd !c!dem"cs)

It "s respons"ble for the development !nd publ"c!t"on of IFRSs, "nclud"n# the IFRS for SMEs !nd for !pprov"n# Interpret!t"ons

of IFRSs !s developed b$ the IFRS Interpret!t"ons Comm"ttee

e IFRS Adv!sor% Counc!l (IFRS AC)

IFRS AC, wh"ch w!s prev"ousl$ c!lled the St!nd!rds Adv"sor$ Counc"l, "s the form!l !dv"sor$ bod$ to the IASB !nd the

tees of the IFRS Found!t"on

ectves

to !dv"se the IASB on r!n#e of "ssues, "nclud"n# the IASB’s !#end! !nd wor% pro#r!mme

to prov"de !dv"ce on s"n#le pro *ects w"th ! p!rt"cul!r emph!s"s on pr!ct"c!l !ppl"c!t"on !nd "mplement!t"on "ssues

ucture

compr"sed of ! w"de r!n#e of represent!t"ves from user #roups, prep!rers, f"n!nc"!l !n!l$sts, !c!dem"cs, !ud"tors, re#ul!tors,

profess"on!l !ccount"n# bod"es !nd "nvestor #roups th!t !re !ffected b$ !nd "nterested "n the IASB's wor%


30/183

e IFRS Interpret#t!ons Comm!ttee (IFRS IC)

IFRS IC, prev"ousl$ %nown !s the Intern!t"on!l F"n!nc"!l Report"n# Interpret!t"ons Comm"ttee, "s the "nterpret!t"ve bod$ of

ASB

ectves

to rev"ew on ! t"mel$ b!s"s w"despre!d !ccount"n# "ssues th!t h!ve !r"sen w"th"n the context of current IFRSs

to rev"ew on ! t"mel$ b!s"s w"despre!d !ccount"n# "ssues th!t h!ve !r"sen w"th"n the context of current IFRSs

ucture

compr"ses 14 vot"n# members dr!wn from ! v!r"et$ of countr"es !nd profess"on!l b!c%#rounds

!re !ppo"nted b$ the Trustees !nd !re selected for the"r !b"l"t$ to m!"nt!"n !n !w!reness of current "ssues !s the$ !r"se !nd

the techn"c!l !b"l"t$ to resolve them

tern#t!on#l F!n#nc!#l Report!n" St#nd#rds (IFRSs) #re developedrou"h #n !ntern#t!on#l consult#t!on process, the "due process"$

nd!rd Sett#n% Process


31/183

e due process comprses sx stes

Sett#n% the !%end!

The IASB !dent!f!es # sub (ect (m#!nl% b% reference to the needs of the !nvestors)

Pl!nn#n% the pro 'ect

After cons!der!n" the n#ture of the !ssues #nd the level of !nterest #mon" const!tuents, the IASB m#% est#bl!sh # wor&!n" "roup #t

h!s st#"e

Develop#n% !nd publ#sh#n% the d#scuss#on p!per

Develop#n% !nd publ#sh#n% the exposure dr!ft

or publ!c comment, wh!ch !s # dr#ft vers!on of the !ntended st#nd#rd

Develop#n% !nd publ#sh#n% the st!nd!rd

After the st#nd#rd !s !ssued, the st#ff #nd the IASB members hold re%ul!r meet#n%s w#th #nterested p!rt#es, to help

underst#nd un#nt!c!p#ted !ssues rel#ted to the pr#ct!c#l !mplement#t!on #nd potent!#l !mp#ct of !ts propos#ls

e IASB wor&s !n p#rtnersh!p w!th the m#(or n#t!on#l st#nd#rd-sett!n"

d!es)-

e do ths b

Co-ord"n!t"n# e!ch others wor% pl!ns

Rev"ew e!ch others st!nd!rds

N!t"on!l st!nd!rd setters c!n "ssue IASB d"scuss"on p!pers !nd exposure dr!ft for comments "n the"r own countr"es

N!t"on!l st!nd!rd setters m!$ "nclude more #u"d!nce "n the"r exposure dr!fts on relev!nt "ssues to them

#on!l st!nd!rd setters !nd the IASB


32/183

hen should we br!n" PPE !nto the #ccounts'

hen the follown 3 tests re pssed

When we control the #sset

When !t’s prob#ble th#t we w!ll "et future econom!c benef!ts

When the #sset’s cost c#n be me#sured rel!#bl%

ht ets ncluded n 'Cost'

D#rectl$ !ttr#but!ble costs to "et !t to wor& #nd where !t needs to be

e"$ s!te prep#r#t!on, del!ver% #nd h#ndl!n", !nst#ll#t!on

Est#m!ted cost of obl#%!tor$ d#sm!ntl#n% the !sset !t the end

Th!s !s)

Dr PPE

Cr L!#b!l!t%

All #t present v#lue

Borrow#n% costs

f !t !s #n #sset th#t t#&es # wh!le to construct

t's loo& #t the l#st 2 !n further det#!l$$

ture oblted costs

n!nc ! ! emen s

!n$#ble non-current !ssets

#!l Cost of PPE


33/183

PE

!b"l"t$

resent v!lue

The present v!lue "s c!lcul!ted b$ d"scount"n# down !t the r!te #"ven "n the ex!m

e#& 100 "n 2 $e!rs t"me !t 10% = 100/1&10/1&10 = 82&6

So the double entr$ would be)

Dr PPE 82(6

Cr L#!b#l#t$ 82(6

However the LIABILITY needs unw"nd"n#&&

Unw#nd#n% of d#scount

Dr InterestCr L"!b"l"t$

Use the or"#"n!l d"scount r!te (so here 10%)

10% x 82&6 = 8&26

Dr Interest 8&26

Cr L"!b"l"t$ 8&26

rrown costs

t be ! qu!l"f$"n# !sset - th!t me!ns the !sset t!%es ! “subst!nt"!l per"od to bu"ld”

rest"n#l$ "f the lo!n !nd !sset "s b"# enou#h th"s m!$ onl$ be ! few months

So "nste!d of t!%"n# "nterest to the I/S !s !n expense $ou !dd "t to the cost of the qu!l"f$"n# !sset

e !re 2 scen!r"os here to worr$ !bout)

u use current borrow#n%s to p!$ for the !ssetou %et ! spec#f#c lo!n for the !sset

loo% !t these 2 now&&


34/183

e current borrowns

e $ou need then to #et the we"#hted !ver!#e of those borrow"n#s !nd use th"s !s the "nterest r!te

ow $ou're th"n%"n# - how the cow"n#'ec% do I wor% out the we"#hted !ver!#e of borrow"n#s&&& !!!rr##hh')

rel!x m$ l"ttle mon%e$ !rmp"t - here's how $ou do "t&&

C#lcul#te the tot#l #mount of borrow!n"s

C#lcul#te the !nterest p#%#ble on these !n tot#l

D!v!de the !nterest b% the borrow!n" - et vo!l#*

tr!t#on

Overdr!ft 1,000

Lo!n 3,000

Lo!n 2,000

bu$ !n !sset w"th ! cost of 5,000 !nd "t t!%es one $e!r to bu"ld - how much #nterest %oes to the cost of the !sset&

ul!te the WA cost of the borrow"n#s)t!l Borrow"n# = (1,000+3,000+2,000) = 6,000

terest p!$!ble = (50+240+200) = 490

90/6,000 = 8&17%

he tot!l "nterest to be !dded to the !sset "s 8&17% x 5,000 = 408

t specfc lon

the spec"f"c "nterest r!te - but be c!reful of !n$ "nterest rece"ved too

must onl$ !dd to the cost the net "nterest

C!lcul!te the "nterest p!"d on the spec"f"c lo!n

C!lcul!te !n$ "nterest rece"ved on lo!ns proceeds not used

Add the net of these 2 to 'cost of the !sset'


35/183

tr!t#on

!sset for 2,000 - t!%es 2 $e!rs to bu"ld& Get ! 2,000 10% lo!n& We re"nvest !n$ mone$ not used "n !n 8% depos"t !ccount& In

1 we spend 1,200& How much "nterest "s !dded to the cost of the !sset(

rest P!"d = 2,000 x 10% = 200

rest rece"ved = ((2,000-1,200) x 8%) = 64

Cost (200-64) = 136

rest Accru!l

ow"n# costs c!n onl$ st!rt to be !dded to the cost !fter the follow"n# 3 cond"t"ons !re met)

row#n% costs !ctu!ll$ "ncurred

v#t#es st!rted (e& pl!nn"n# perm"ss"on etc)

enses on !sset st!rted

"nterest must stop be"n# !dded to the !sset when there "s ! subst!nt"!l del!$ "n wor% !nd !lso when the !sset "s

t!nt"!ll$ complete

he specl cse of n sset wth component

cluded wth totll dfferent UEL

could be someth"n# l"%e L!nd !nd bu"ld"n#s - b!s"c!ll$ $ou should t!%e the l!nd v!lue !w!$ from the tot!l cost !nd then

rec"!te the rem!"nder over the UEL of the bu"ld"n#

tr!t#on


36/183

House for 100,000& The l!nd h!s ! v!lue of 40,000& UEL of bu"ld"n# "s 10 $e!rs

rec"!t"on would be)

d 40,000 - zero deprec"!t"on

d"n# 60,000 - 6,000 deprec"!t"on

ter the !n!t!#l reco"n!t!on there #re 2 cho!ces$$

st model

Cost less !ccumul!ted deprec"!t"on !nd "mp!"rment

Deprec"!t"on should be#"n when re!d$ for use not w!"t unt"l !ctu!ll$ used

vluton model

F!"r v!lue !t the d!te of rev!lu!t"on less deprec"!t"on

Rev!lu!t"ons should be c!rr"ed out re#ul!rl$

For vol!t"le "tems th"s w"ll be !nnu!ll$

For others between 3-5 $e!rs or less "f deemed necess!r$&

If !n "tem "s rev!lued, "ts ent"re cl!ss of !ssets should be rev!lued

M!r%et v!lue norm!ll$ "s f!"r v!lue&

Spec"!l"sed propert"es w"ll be rev!lued to the"r deprec"!ted repl!cement cost

E - After In#t#!l reco%n#t#on


37/183

count!n" tre#tment of # Rev#lu#t!on

Increse (bove deprected hstorc cost)

sset

Cred!t equ!t% - “rev#lu#t!on surplus”

Also show !n the OCI

ecrese down to Hstorc cost

"t !sset

Deb!t equ!t% - “rev#lu#t!on surplus”

Also show !n the OCI

ecrese below hstorc cost

"t !sset

Deb!t Income st#tement

posl of Revlued Asset

rev!lu!t"on surplus "n equ"t$ - IS NOT tr!nsferred to the "ncome st!tement - "t *ust drops "nto RE

ll, therefore, onl$ show up "n the st!tement of ch!n#es "n equ"t$


38/183

m!%e no m"st!%e !bout th"s - the rev!lu!t"on !d *ustments c!n be ver$ tr"c%$& Th"s "s bec!use, when $ou rev!lue upw!rds, the

t w"ll "ncre!se !nd hence the deprec"!t"on w"ll "ncre!se& Th"s me!ns sm!ller prof"ts !nd sm!ller ret!"ned e!rn"n#s *ust bec!use

he rev!lu!t"on'

eholders w"ll not be "mpressed b$ th"s !s ret!"ned e!rn"n#s "s where the$ !re le#!ll$ !llowed to #et the"r d"v"dends from&

!use of th"s, ! tr!nsfer "s m!de out of the rev!lu!t"on reserve !nd "nto ret!"ned e!rn"n#s ever$ $e!r w"th the extr!

rec"!t"on c!used b$ the prev"ous rev!lu!t"on

thou#h, then c!uses more problems "f the !sset "s subsequentl$ "mp!"red etc - but worr$ not - the COW h!s the !nswer'

"s wh!t $ou do "n ! tr"c%$ loo%"n# rev!lu!t"on quest"on)

!lcul!te the Deprec#!ted H#stor#c Cost

"s b!s"c!ll$ wh!t the !sset would h!ve been worth h!d noth"n# (rev!lu!t"ons/"mp!"rments) occurred "n the p!st& We do th"s

!use !n$th"n# !bove th"s f"#ure "s ! #enu"ne rev!lu!t"on !nd so #oes to the RR& S"m"l!rl$ !n$th"n# below th"s "s ! #enu"ne

!"rment !nd #oes to the "ncome st!tement

!lcul!te the NBV 'ust before the Rev!lu!t#on or Imp!#rment #n quest#on

ow c!lcul!te the d#fference between step 2 !nd the new NBV (the !mount to be rev!lued or "mp!"red to)&

w"ll be the deb"t or cred"t to the !sset& The other s"de of the entr$ w"ll depend on the deprec"!ted h"stor"c cost c!lcul!ted "n

1

ow !ll th!t sounds tr"c%$ - so let’s loo% !t !n "llustr!t"on

ustr!t#on

sset "s bou#ht for 1,000 (10$r UEL)& 2 $e!rs l!ter "t "s rev!lued to 1,000& One $e!r !fter th!t "t "s "mp!"red to 400&

!t #s the double entr$ for th#s #mp!#rment&

1) DHC would be 1,000 less 3 $e!rs of deprec"!t"on = 700

2) NBV !t d!te of "mp!"rment = 1000 NBV one $e!r e!rl"er& So 1,000 less deprec"!t"on of (1,000 / 8) = 125 = 875

3) Imp!"r to 400&

rom 875 to 400 - cred"t Asset 475

R w"th !n$ !mount !bove the DHC of 700& So 875-700 = 175

S w"th !n$ !mount below DHC of 700& So 700-400 = 300

/S 300

R 175

PE 475


39/183

r!ous components of #n #sset to be !dent!f!ed #nd deprec!#ted

p#r#tel% !f the% h#ve d!ffer!n" p#tterns of benef!ts

s"#n"f"c!nt component "s expected to we!r out qu"c%er th!n the over!ll !sset, "t "s deprec"!ted over ! shorter per"od

n !n$ restor"n# or repl!c"n# "s c!p"t!l"sed

!ppro!ch me!ns d"fferent deprec"!t"on per"ods for d"fferent components

mples !re l!nd, roof, w!lls, bo"lers !nd l"fts&

he deprec"!t"on reflects the effect of ! future restor!t"on or repl!cement

hllenn process

to&&

Dffcultes vlun components

bec!use "t "s unusu!l for the v!r"ous component p!rts to be v!lued, so&&

Involve comp!n$ personnel "n the !n!l$s"s

Appl$"n# component !ccount"n# to !ll !ssets

How f!r the !sset should be bro%en down "nto components

An$ me!sure used to determ"ne components "s sub *ect"ve

mponent#s!t#on


40/183

Asset re#"sters m!$ need to be rewr"tten

Bre!%"n# down !ssets needs ‘m!ter"!l"t$', sett"n# ! de m"n"m"s l"m"t

When component s replced or restored

The old component "s dereco#n"sed to !vo"d double-count"n# !nd the new component reco#n"sed

Where t s not possble to determne the crrn mount of the replced prt of ntem of PPE

best est"m!tes !re requ"red

A poss"b"l"t$ "s&&

Use the repl!cement cost of the component, !d *usted for !n$ subsequent deprec"!t"on !nd "mp!"rment

A revluton

!pport"on over the s"#n"f"c!nt components

When component s replced

1& The c!rr$"n# v!lue of the component repl!ced should be ch!r#ed to the "ncome st!tement

2& The cost of the new component reco#n"sed "n the st!tement of f"n!nc"!l pos"t"on

nston to IFRS

the ‘f!"r v!lue !s deemed cost’ for the !sset

The f!"r v!lue "s then !lloc!ted to the d"fferent s"#n"f"c!nt p!rts of the !sset


41/183

ponent"s!t"on !dds to sub *ect"v"t$

!dd"t"on!l deprec"!t"on ch!r#e c!n be s"#n"f"c!nt&

ount!nts !nd other profess"on!ls must use the"r profess"on!l *ud#ment when est!bl"sh"n# s"#n"f"c!nce levels, !ssess"n# the

ul l"ves of components !nd !pport"on"n# !sset v!lues over reco#n"sed components&

uss"ons w"th extern!l !ud"tors w"ll be %e$ dur"n# th"s process&

overnment "r#nts #re # form of "overnment #ss!st#nce

wever, IAS 20 does not !ppl$ to the follow"n# s"tu!t"ons)

‘t!x bre!"s

ernment !ct"n# !s p!rt-owner

he ent"t$

techn"c!l or m!r%et"n# !dv#ce

hen cn ou reconse overnment rnt

n there "s re!son!ble !ssur!nce th!t)

The ent"t$ w"ll compl$ w"th !n$ cond"t"ons !tt!ched to the #r!nt

The ent"t$ w"ll compl$ w"th !n$ cond"t"ons !tt!ched to the #r!nt

vernment Gr!nts P!rt 1


42/183

coun n" re# men o "overnmen "r#n s

ere re 2 pproches - dependn on wht the rnt s ven for

C!p#t!l Gr!nt !ppro!ch)

(For Assets)

Reco#n"se the #r!nt outs"de prof"t or loss "n"t"!ll$

Income Gr!nt !ppro!ch)

(For expenses)

Reco#n"se the #r!nt "n prof"t or loss

ptl Grnt pproch

e !re 2 methods for th"s !ppro!ch&&

!sh

Cr Asset Cost or&&&

Cr Deferred Income

Then t!%e th"s deferred "ncome to the "ncome st!tement !s the !sset deprec"!tes !nd "n the s!me proport"on (Dr Deferred

Income Cr Income st!tement)

's !ll I'll s!$ here !s "t "s best seen v"su!ll$ !nd pr!ct"c!ll$ "n the v"deo ))

ome Grnt pproch

!sh


43/183

Cr Ot er "ncome or

Cr the expense to wh"ch "t rel!tes

bu!ld!n" (or l#nd) owned but not used - (ust #n !nvestment

bu"ld"n# "s not used "t *ust m!%es c!sh b$)

FV #o"n# up (c!p"t!l !pprec"!t"on) or

om rent!l "ncome

ountn tretment for the Rentl Income

Add !t to the !ncome st#tement

E#s%* (Even for # "on& l!&e %ou*) )p

ountn tretment for the FV ncrese

The d"fference "n FV e!ch $e!r #oes to the I/S

Double e!s$ - double #on%$

deprec#!t#on "s needed bec!use "t's not used ))

estment propert$ P!rt 1


44/183

ve me exmples of wht cn be Investment Propertes cow

ou !s%ed for "t&&

L!nd held for lon%-term c!p#t!l !pprec#!t#on r!ther th!n short-term s!le

L!nd held for ! currentl$ undeterm#ned future use

Th"s b!s"c!ll$ me!ns the$ h!ven't $et dec"ded wh!t to do w"th the l!nd

A bu"ld"n# owned but le!sed to ! th"rd p!rt$ under !n oper!t"n# le!se

A bu"ld"n# wh"ch "s v!c!nt but "s held to be le!sed out under !n oper!t"n# le!se

Propert$ be"n# constructed or developed for future use !s !n "nvestment propert$

smrt pnts - wht ISN'T n Investment propert

Propert$ "ntended for s!le "n the ord#n!r$ course of bus"ness

(It's stoc%')

Owner-occup"ed propert$

Propert$ le!sed to !nother ent"t$ under ! f"n!nce le!se

n propert be prt IAS 40 Investment propert

nd prt norml IAS 16 propert

s ou", mons"er/m!d!me - For ex!mple, he!d off"ce on one floor !nd rent out the rest& If the rest c!n b" sold s" p!r !t"l # then

c!n be tre!ted !s !n "nvestment propert$&

n t stll be n IAS 40 Investment propert f we re


45/183

!ro hombre/mu *er - It’s st"ll !n IAS 40 Investment propert$ "f the suppl$ #s sm!ll !nd #ns#%n#f#c!nt( If "t’s ! s"#n"f"c!nt p!rt

he de!l w"th the ten!nt then the propert$ becomes !n IAS 16 propert$

Wht f m subsdr uses t but I don’t

t o% - now $our quest"ons !re #ett"n# on m$ nerves- but st"ll - "t’s !n IAS 40 Investment propert$ "n $our own "nd"v"du!l

unts - bec!use $ou person!ll$ !re not us"n# "t&

wever, "n the #roup !ccounts "ts !n IAS 16 propert$ bec!use someone "n the #roup "s us"n# "t&&

w enou#h of the quest"ons !lre!d$&& #et b!c% to f!ceboo% &&

#sset !s !mp#!red when boo& v#lue !s h!"her th#n recover#ble #mount

ht s Recoverble Amount

$ou h!ve to cho"ces w"th !n !sset - $ou c!n e"ther)

or Use&&

$ou'll choose the h"#her of the follow"n#

FV-CTS

(F!"r v!lue less costs to sell)

VIU

(V!lue "n use)

36 Imp!#rments

http://www.facebook.com/pages/ACOWtancy/179451068794041


46/183

e's some bor"n# def"n"t"ons for $ou&&

v!lue

!mount obt!"n!ble from the s!le of !n !sset "n ! b!r#!"ned tr!ns!ct"on between %nowled#e!ble, w"ll"n# p!rt"es&

ue #n used"scounted present v!lue of est"m!ted future c!sh flows expected to !r"se from)

cont"nu"n# use of !n !sset, !nd from

"spos!l !t the end of "ts useful l"fe

ent!f%!n" #n Asset Th#t M#% Be Imp#!red

ere "s !n "nd"c!t"on th!t !n !sset m!$ be "mp!"red, then $ou must c!lcul!te the !sset’s recover!ble !mount&&& to see "f "t "s

w c!rr$"n# v!lue

s - then $ou must "mp!"r "t

tr!t#on

t h!s c!rr$"n# v!lue of 100

s ! FV-CTS of 90

s ! VIU of 95

ecover!ble !mount "s therefore the h"#her of the 2 = 95 !nd th"s "s below the c!rr$"n# v!lue "n the boo%s !nd so needs

!"rment of 5

ht re the ndctors of mprment

Losses / worse econom"c perform!nce


47/183

M!r%et v!lue decl"nes

Obsolescence or ph$s"c!l d!m!#e

Ch!n#es "n technolo#$, m!r%ets, econom$, or l!ws

Incre!ses "n m!r%et "nterest r!tes

Loss of %e$ emplo$ees

Restructur"n# / re-or#!n"s!t"on

to confuse $ou ! l"ttle b"t more, we do not JUST chec% for "mp!"rment when there h!s been !n "nd"c!tor (l"sted !bove)& We

chec% the follow"n# ANNUALLY re#!rdless of whether there h!s been !n "mp!"rment "nd"c!tor or not-

nt!n#"ble !sset w"th !n "ndef"n"te useful l"fe&

nt!n#"ble !sset not $et !v!"l!ble for use&

dw"ll !cqu"red "n ! bus"ness comb"n!t"on

's loo t VIU n more detl

future c!sh flows&&

Must be b!sed on support!ble !ssumpt"ons

Should norm!ll$ not #o be$ond f"ve $e!rs

Rel!te to the !sset "n "ts current cond"t"on

Should not "nclude c!sh from f"n!nc"n# !ct"v"t"es, or "ncome t!x

The d"scount r!te used should be the pre-t!x r!te th!t reflects current m!r%et !ssessments of the t"me v!lue of mone$ !nd

the r"s%s spec"f"c to the !sset


48/183

mp!#rment of !n #nd#v#du!l !sset

d"scount r!te "s the r!te the comp!n$ would p!$ "n ! current m!r%et tr!ns!ct"on to borrow mone$ to bu$ th!t spec"f"c !sset

ortfol"o&

m!r%et-determ"ned !sset-spec"f"c r!te "s not !v!"l!ble, ! surro#!te must be used th!t reflects the t"me v!lue of mone$ over

!sset’s l"fe !s well !s countr$ r"s%, currenc$ r"s%, pr"ce r"s%, !nd c!sh flow r"s%&

eversl of Imprments

se !re !llow!ble up to the deprec"!ted h"stor"c cost

wever, IAS 36 requ"res !n !ssessment !t e!ch b!l!nce sheet d!te whether there "s !n "nd"c!t"on th!t !n "mp!"rment loss m!$

e decre!sed& Th"s does not !ppl$ to #oodw"ll or to the unw"nd"n# of the d"scount&

GU !s the sm#llest !dent!f!#ble "roup of #ssets th#t "ener#tes c#sh

flows

the ex!mple of ! rest!ur!nt, the !ssets on the"r own do not #ener!te c!sh, but !ll to#ether the$ do& We c!ll the rest!ur!nt

whole ! CGU

h Gener!t#n% Un#ts


49/183

re !n !sset forms p!rt of ! CGU, !n$ "mp!"rment rev"ew must be m!de on the GROUP of !ssets !s ! whole

w should th"s "mp!"rment loss be !lloc!ted( Th"s w"ll be descr"bed "n the follow"n# sect"on&& so be p!t"ent $ou

w should n mprment loss be llocted

"mp!"rment loss "s !lloc!ted to reduce the c!rr$"n# !mount of the !ssets of the un"t "n the follow"n# order)

Reduce the c!rr$"n# !mount of #oodw"ll (!lloc!ted to the CGU)

Reduce the c!rr$"n# !mounts of the other !ssets of the un"t pro r!t!

tr!t#on

follow"n# c!rr$"n# !mounts were recorded "n the boo%s of ! rest!ur!nt "mmed"!tel$ pr"or to the "mp!"rment) -

oodw"ll 100

opert$, pl!nt !nd equ"pment 100

urn"ture !nd f"xtures 100

f!"r v!lue less costs to sell of these !ssets "s $260m where!s the v!lue "n use "s $270m

u"red)- Show the "mp!ct of the "mp!"rment

ut#on

over!ble !mount "s 270 - so the CV of the CGU needs to be reduced from 300 to 270 = 30


50/183


51/183

(The "nt!n#"ble doesn’t h!ve to be sep!r!ble AND !r"se from ! le#!l r"#ht, *ust one or the other "s enou#h)

ell !t's the old rel!#bl% me#sur#ble #nd prob#ble #"#!n*

posher terms

When !t !s prob#ble th#t future econom!c benef!ts #ttr!but#ble to the #sset w!ll flow to the ent!t%

The cost of the #sset c#n be me#sured rel!#bl%

thwh"le po"nt"n# out here th!t the prob!b"l"t$ cr"ter"! ment"oned !bove "s ALWAYS s!t"sf"ed for ! sep!r!tel$ !cqu"red

n#"ble, bec!use the cost w"ll reflect th!t prob!b"l"t$ the more prob!ble the benef"ts, the h"#her the cost

t how much should we show the sset t ntll

th"c% p!nts - "t’s obv"ousl$ brou#ht "n !t cost'' A!!rh but wh!t "s cost I he!r $ou wh"sper "n m$ b"# flopp$ cow-l"%e e!rs&&

"t’s

Purchse prce plus drectl ttrbutble costs

en c!n $ou reco%n#se !n IA !nd for how much&


52/183

,

excluded

If the ntnble cme wth subsdr we bouht

Well th"s t"me, the "nt!n#"ble !sset (other th!n #oodw"ll ) should "n"t"!ll$ be reco#n"sed !t "ts f!"r v!lue

If the FV c!nnot be !scert!"ned then "t "s not rel"!bl$ me!sur!ble !nd so c!nnot be shown "n the !ccounts&

In th"s c!se b$ not show"n# "t, th"s me!ns th!t #oodw"ll becomes h"#her

se#rch !s expensed, Development !s often #n #sset

serch

!rch "s "nvest"#!t"on to #et new %nowled#e !nd underst!nd"n#

All #oes to I/S

velopment

er IAS 38, !n "nt!n#"ble !sset must demonstr!te !ll of the follow"n# cr"ter"!)

p"r!te !s ! memor$ *o##er)

Prob#ble future econom!c benef!ts

ntent!on to complete #nd use or sell the #sset

Resources (techn!c#l, f!n#nc!#l #nd other resources) #re #dequ#te #nd #v#!l#ble

o complete #nd use the #sset

e!rch !nd development


53/183


54/183

Techn"c!l expert"se

Possess"on of f!vour!ble contr!cts

Good m!n!#ement !nd st!ff

e"#t!ve "oodw!ll

e d"fference !bove "s ne#!t"ve, the result"n# #!"n "s reco#n"sed !s ! b!r#!"n purch!se "n the st!tement of prof"t or loss

oodw!ll v Other !nt#n"!bles

n dfferences

It c!nnot be v!lued on "ts own

Goodw"ll c!nnot be d"sposed of !s ! sep!r!te !sset

The f!ctors contr"but"n# to the v!lue of #oodw"ll c!nnot be v!lued

The v!lue of #oodw"ll "s vol!t"le

p!#rment of Goodw#ll


55/183

oodw!ll !s rev!ewed for !mp#!rment not #mort!sed

mp!"rment occurs when the subs recover!ble !mount "s less th!n the subs c!rr$"n# v!lue + #oodw"ll

w th"s wor%s "n pr!ct"ce depends on how NCI "s me!sured&& Proport"on!te or F!"r V!lue method

oportonte NCI

e, NCI onl$ rece"ves % of S's net !ssets

DOES NOT h!ve !n$ sh!re of the #oodw"ll

Comp#re the recover#ble #mount of S (100%) to$$

NET ASSETS of S (100%) +

Goodw!ll (100%)

The problem !s th#t "oodw!ll on the SFP !s for the p#rent onl% - so th!s needs "ross!n" up f!rst

Then f!nd the d!fference - th!s !s the !mp#!rment - but onl% show the p#rent % of the !mp#!rment

mple

wns 80% of S& Proport"on!te NCI

dw"ll "s 80 !nd NA !re 200

over!ble !mount "s 240

w much "s the "mp!"rment(

ut#on

240

= 200 + G/W (80 x 100/80) = 100 = 300


56/183

!"rment "s therefore 60

"mp!"rment shown "n the !ccounts thou#h "s 80% x 60 = 48&

"s bec!use the #oodw"ll "n the proport"on!te method "s p!rent #oodw"ll onl$& Therefore onl$ p!rent "mp!"rment "s shown

r Vlue NCI

e, NCI rece"ves % of S's net !ssets AND #oodw"ll

DOES now own some #oodw"ll

Comp#re the recover#ble #mount of S (100%) to$$

NET ASSETS of S (100%) +

Goodw!ll (100%)

As, here, "oodw!ll on the SFP !s 100% (p#rent & NCI) - so NO "ross!n" up needed

Then f!nd the d!fference - th!s !s the !mp#!rment - th!s !s spl!t between the p#rent #nd NCI sh#re

mple

wns 80% of S& F!"r V!lue NCI

dw"ll "s 80 !nd NA !re 200

over!ble !mount "s 240

w much "s the "mp!"rment(

ut#on

240

= 200 + G/W 80 = 280

!"rment "s therefore 40

"mp!"rment shown "n P's RE !s 80% x 40 = 32

"mp!"rment shown "n NCI "s 20% x 40 = 8


57/183

prment d ustment on the Income Sttement

Proport#on!te NCI

Add !t to P's expenses

F!#r V!lue NCI

Add !t to S's expenses

Th!s reduces S's PAT so reduces NCI when !t t#&es !ts sh#re of S's PAT)

ventor!es should be me#sured #t the lower of cost #nd net re#l!s#ble

lue

ht oes nto 'cost'

Purch#se pr!ce

Convers!on costs

Costs to br!n" !nto current loc#t!on & cond!t!on

ht does NOT o nto 'cost'

Abnorm!l !mounts

Stor!#e costs

Adm"n"str!t"on overhe!ds

nventor%

#c Inventor$


58/183


59/183

net re!l"s!ble v!lue of !n "tem "s essent"!ll$ "ts net sell"n# proceeds !fter !ll costs h!ve been deducted

c!lcul!ted !s follows&&

t"m!ted sell"n# pr"ce X

ss) est"m!ted costs of complet"on (X)

ss) est"m!ted sell"n# !nd d"str"but"on costs (X)

X

S 11 def!nes # construct!on contr#ct #s)

ntr!ct spec"f"c!ll$ ne#ot"!ted for the construct"on of !n !sset or ! comb"n!t"on of !ssets th!t !re closel$ "nterrel!ted or

rdependent "n terms of the"r des"#n, technolo#$, !nd funct"on for the"r ult"m!te purpose or use

ountn tretment

c!ll$ uses the !ccru!ls concept

S!les - % complete

Costs - % complete

nstruct#on Contr!cts - % complete


60/183

w do ou clculte % complete

e !re 2 w!$s - !nd $ou w"ll be told wh"ch to use ))

A%reed v!lue of wor" method

Wor% done so f!r / Contr!ct pr"ce tot!l

Cost Method

Costs to d!te / Tot!l costs

tr!t#on of % complete

ontr!ct Pr"ce 1,000

t"m!ted tot!l costs 800

osts to d!te 600

#reed v!lue of wor% done 700

o#ress b"ll"n#s "nvo"ced 600

ul!te the st!#e of complet"on us"n#)- !& the !#reed v!lue of wor% method b& the cost method

ut#on - !%reed v!lue of wor" done

/ 1,000 = 70%

!les would be 700

s would be (70% x 800) = 560


61/183

ut#on - Costs method

/ 800 = 75%

!les would be (75% x 1000) = 750

s would be 600

member the I/S shows the wor& done not the #mounts !nvo!ced

s loo" !t th!t ex!mple !%!#n

ontr!ct Pr"ce 1,000

t"m!ted tot!l costs 800

osts to d!te 600


o#ress b"ll"n#s "nvo"ced & rece"ved 600

Income st!tement pro form! for ! prof#t m!"#n% contr!ct

!les on I/S % Complete

OS on I/S % Complete

nstruct#on contr!cts - !ccount#n%


62/183

s"n# !#reed v!lue of wor% done method the Income st!tement would l"%e th"s&&

!les 700

OS (70% x 800) 560

form! for SFP

!les on I/S - Amounts "nvo"ced If + #oes to rece"v!bles+ "f - #oes to p!$!bles

OS on I/S - Costs to d!te "f + #oes to p!$!bles+ "f - #oes to rece"v!bles

mounts "nvo"ced - Amounts rece"ved #oes to tr!de rece"v!bles

00-600 = 100 Show "n Rece"v!bles

60 - 600 = 40 Show "n Rece"v!bles

rudent #nd show the whole loss !mmed!#tel

nstruct#on contr!cts - Loss m!"#n%


63/183

proform! for ! loss-m!"#n% contr!ct

!les % Complete

OS B!l!nc"n# f"#ure

oss Tot!l Loss

tr!t#on

ontr!ct Pr"ce 1,000

t"m!ted tot!l costs !t the st!rt 800

osts to d!te 600


o#ress b"ll"n#s "nvo"ced & rece"ved 600

t"m!ted tot!l costs now 1,100

!#reed v!lue of wor% done method to c!lcul!te percent!#e complete

u"red)- C!lcul!te the effect of the !bove contr!ct on the f"n!nc"!l st!tements


64/183

s"n# !#reed v!lue of wor% done method the Income st!tement would l"%e th"s&&

!les 700

OS (B!l!nc"n# f"#ure) 800

oss 100

form! for SFP

!les on I/S - Amounts "nvo"ced If + #oes to rece"v!bles+ "f - #oes to p!$!bles

OS on I/S - Costs to d!te "f + #oes to p!$!bles+ "f - #oes to rece"v!bles

mounts "nvo"ced - Amounts rece"ved #oes to tr!de rece"v!bles

00-600 = 100 Show "n Rece"v!bles

00 - 600 = 200 Show "n P!$!bles

ro prof!t !s shown here

nstruct#on Contr!cts - Unrel#!ble outcome


65/183

enue m!de to equ!l the recover!ble contr!ct costs

tr!t#on

v"l le!ther m!%"n# comp!n$ ne#ot"!ted ! two-$e!r pro *ect th!t commenced "n the l!tter h!lf of the $e!r

pro *ect m!n!#er (dev"l) h!s been rev"ew"n# the contr!ct !nd, !t the $e!r end, "s unsure whether the contr!ct w"ll m!%e !

"t or ! loss !s there !re uncert!"nt"es surround"n# the pro *ect’s complet"on (Good')

pro *ect m!n!#er’s records show th!t costs dur"n# the $e!r !mount to $700,000 !nd no c!sh h!d $et been rece"ved

t should the !ccount"n# entr"es be re#!rd"n# the contr!ct !t the $e!r end(

ut#on

!les 700

OS 700

h#t costs #re !n contr#ct costs'

lude tems such s

An$ d"rectl$ !ttr"but!ble costs "n"t"!ll$

An$ costs wh"ch c!n be spec"f"c!ll$ ch!r#ed to the customer under the terms of the contr!ct

t#f#c!t#on costs


66/183

"f"c!t"on costs must be ch!r#ed to the per"od "n wh"ch the$ were "ncurred, !nd not spre!d over the rem!"nder of the contr!ct

efore, such costs should not be !dded "n when c!lcul!t"n# the prof"t or loss to be shown on ! contr!ct

!s #ffects the I/S not SFP wor&!n"s

re ! contr!ct "s !lre!d$ p!rt w!$ throu#h, "&e& "n "ts second $e!r, some revenue !nd costs h!ve prev"ousl$ been reco#n"sed

efore, "t "s "mport!nt to t!%e th"s "nto !ccount "n the c!lcul!t"ons to m!%e sure the$ show the current $e!r revenue !nd costs

proch to te

Do contr#ct for %e#r 2 #s norm#l

T#&e #w#% Ye#r 1's S#les #nd COS f!"ures (#nd then %ou're left w!th %e#r 2 - perfect*

&, o&, rel#x #t the b#c& - th!s !s not #s b#d #s !t seems+ trust me

n#t#on

nstruct#on Contr!cts - !lre!d$ be%un((

n!nc#!l Assets !nd L#!b#l#t#es

!nc#!l Instruments - Introduct#on


67/183

&

mples

, tr!de rece"v!bles, "nvestments, tr!de p!$!bles !nd lo!ns-&

the tr#c"#er stuff*((

so !ppl"es to der"v!t"ves f"n!nc"!l such !s c!ll !nd put opt"ons, forw!rds, futures, !nd sw!ps

the 'ust pl!#n we#rd*(

so !ppl"es to some contr!cts th!t do not meet the def"n"t"on of ! f"n!nc"!l "nstrument, but h!ve ch!r!cter"st"cs s"m"l!r to

v!t"ve f"n!nc"!l "nstruments, such !s prec"ous met!ls !t ! future d!te when the follow"n# !ppl"es)contr!ct "s sub *ect to poss"ble settlement "n c!sh r!ther th!n b$ del"ver"n# the prec"ous met!l

purch!se of the prec"ous met!l w!s not norm!l for the ent"t$

follow#n% !re NOT f#n!nc#!l #nstruments)

th"n# w"thout ! contr!ct

Prep!$ments

th"n# not "nvolv"n# the tr!nsfer of ! f"n!nc"!l !sset

Deferred "ncome !nd W!rr!nt"es

conton

"mport!nt th"n# to underst!nd here "s th!t $ou br"n# ! FI "nto the !ccounts when $ou enter "nto the contr!ct NOT when the

r!ct "s settled& Therefore der"v!t"ves !re reco#n"sed "n"t"!ll$ even "f noth"n# "s p!"d for "t "n"t"!ll$

Subst!nce over form

Form (le#!ll$) me!ns ! preference sh!re "s ! sh!re !nd so p!rt of equ"t$& HOWEVER, ! subst!nce over form model "s !ppl"ed

to debt/equ"t$ cl!ss"f"c!t"on& An$ "tem w"th !n obl"#!t"on, such !s redeem!ble preference sh!res, w"ll be shown !s l"!b"l"t"es

reconton

b!s"c!ll$ me!ns when to #et r"d of "t / t!%e "t out of the !ccounts


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The contr!ctu!l r"#hts $ou used to h!ve h!ve exp"red/#one

For Ex!mple

You sell !n !sset !nd "ts benef"ts now #o to someone else (no cond"t"ons !tt!ched)

You DONT dereconse when

You sell !n !sset but !#ree to bu$ "t b!c% l!ter (th"s me!ns $ou st"ll h!ve !n "nterest "n the r"s% !nd rew!rds l!ter)

ere #re 3 c#te"or!es to remember

!te%or$ In#t#!l Me!surement Ye!r-end Me!surement D#fference %oes where&

VTPL FV FV Prof"t !nd Loss

VTOCI FV FV OCI

mort"sed Cost FV Amort"sed Cost -

IFRS 9 b!s"c!ll$ s!$s th!t "t must be ! rece"v!ble lo!n "n the norm!l sense of the term th!t #oes "nto !mort"sed cost&

So, ! norm!l rece"v!ble lo!n h!s ONLY c!p"t!l !nd "nterest to be rece"ved, !nd we don’t norm!ll$ sell "t before the lo!n

ht sort of thns o nto the mortsed cost cteor

!nc#!l Assets - In#t#!l Me!surement


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&

So there !re !ctu!ll$ 2 tests to help us dec"de "f !n "tem should #o to !mort"sed cost)

The 2 Tests !re

1& Bus"ness model test - do we norm!ll$ %eep our rece"v!ble lo!ns unt"l the end r!ther th!n sell them on(

2& C!shflows test - !re the ONLY c!shflows com"n# "n c!p"t!l !nd "nterest(

wht sort of thns o nto the FVTPL cteor

If one of the tests !bove !re not p!ssed then the$ !re deemed to f!ll "nto the FVTPL c!te#or$

Th"s w"ll "nclude !n$th"n# held for tr!d"n# !nd der"v!t"ves

TIAL mesurement

Good news' In"t"!ll$ both !re me!sured !t FV&

E!s$ pe!s$ to remember

The FV "s c!lcul!ted, !s usu!l, !s !ll c!sh "nflows d"scounted down !t the m!r%et r!te

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!te%or$ In#t#!l Me!surement Ye!r-end Me!surement D#fference %oes where&

VTPL FV FV Prof"t !nd Loss

VTOCI FV FV OCI

mort"sed Cost FV Amort"sed Cost -

!ll$ both !re me!sured !t FV

w let's loo% !t wh!t h!ppens !t the $e!r-end&&

TPL ccountn tretment

Rev#lue to FV

D!fference to I/S

TOCI ccountn tretment

Rev#lue to FV

D!fference to OCI

ortsed cost ccountn tretment

Re-c#lcul#te us!n" the #mort!sed cost t#ble

see below)


72/183

ort#sed Cost T!ble

00 rece"v!ble lo!n (effect"ve r!te 10% due to ! prem"um on redempt"on)

pen#n% B!l!nce Interest (effect#ve r!te) (C!shRece#ved) Clos#n% b!l!nce

0 10 (8) 102

ere's onl% 2 c#te"or!es, FVTPL #nd Amort!sed cost$$ Y#%*

t-$-o, we’ve loo%ed !t reco#n"s"n# (br"n# "nto the !ccounts for those of $ou who !re ! s!ndw"ch short of ! p"cn"c*) - now we

t to loo% !t HOW MUCH to br"n# the l"!b"l"t"es "n !t&

!lre!d$ de!lt w"th th"s on ! tr"c%$ convert"ble lo!n&

t me th"s sect"on "s much e!s"er& B!s"c!ll$ there !re 2 c!te#or"es of F"n!nc"!l L"!b"l"t$&&&

teores

F!#r V!lue Throu%h Prof#t !nd Loss

Th!s !ncludes f!n#nc!#l l!#b!l!t!es !ncurred for tr#d!n" purposes #nd #lso der!v#t!ves

Amort#sed Cost

f f!n#nc!#l l!#b!l!t!es #re not me#sured #t FVTPL (see below), the% #re me#sured #t #mort!sed cost

!nc#!l l#!b#l#t#es - C!te%or#es


73/183

#ood news "s th!t wh!tever the c!te#or$ the f"n!nc"!l l"!b"l"t$ f!lls "nto - we !lw!$s reco#n"se "t !t F!"r V!lue INITIALLY&

how we tre!t them !fterw!rds where the c!te#or$ m!tters (!nd remember here we !re *ust de!l"n# w"th the "n"t"!l

surement)

ccount#n$ Tre!tment of F#n!nc#!l L#!b#l#t#esOverv#ew)

In#t#!ll$ At Ye!r-End An$ %!#n/loss

VTPL F!"r V!lue F!"r V!lue Income St!tement

mort#sed Cost F!"r V!lue Amort"sed Cost

o - the quest#on #s - how do %ou me!sure the FVf ! lo!n&&

!#!"n the !nswer "s s"mple - !nd $ou’ve done "t !lre!d$ w"th compound "nstruments& All $ou do "s those 2 steps)

TEP 1) T!%e !ll $our !ctu!l future c!sh p!$ments

TEP 2) DIscount them down !t the m!r%et r!te

e m!r%et r!te "s the s!me !s the r!te $ou !ctu!ll$ p!$ then th"s "s no problem !nd $ou don’t re!ll$ h!ve to follow those 2

s !s $ou w"ll *ust come b!c% to the c!p"t!l !mount-let me expl!"n


74/183

1,000 P!$!ble Lo!n 3 $e!rs

t!l 1,000 x 0&751 751

rest 100 x 2&486 249

l 1,000

he conclus"on "s - WHERE THE EFFECTIVE RATE YOU PAY IS THE SAME AS THE MAR/ET RATE THEN THE FV IS THE PRINCIPAL -

o need to do the 2 steps&

!$s presume the m!r%et r!te "s the s!me !s the effect"ve r!te $ou’re p!$"n# unless told otherw"se b$ El Ex!m"nero&

oss#ble N!u$ht% B#ts

rem#um on redempt#on

"s *ust !nother w!$ of p!$"n# "nterest& Except $ou p!$ "t !t the end (on redempt"on)

% 1,000 p!$!ble lo!n - w"th ! 10% prem"um on redempt"on&

me!ns th!t the EFFECTIVE "nterest r!te "s more th!n 4% - bec!use we h!ven’t $et t!%en "nto !ccount the extr! 100 (10% x

0) p!$!ble !t the end& So the ex!m"ner w"ll tell $ou wh!t the effect"ve r!te !ctu!ll$ "s - let’s s!$ 8% (not enou#h "nfo "n the

st"on to c!lcul!te th"s)

cruc"!l po"nt here "s th!t $ou presume the effect"ve r!te "s the s!me !s the m!r%et r!te so the "n"t"!l FV "s st"ll 1,000

#scount on Issue

tl$ the s!me !s !bove - "t "s *ust !nother w!$ of p!$"n# "nterest - except th"s t"me $ou p!$ "t !t the st!rt

% 1,000 p!$!ble lo!n w"th ! 5% d"scount on "ssue

#!"n the "nterest r!te "s not 4%, bec!use "t "#nores the extr! "nterest $ou p!$ !t the be#"nn"n# of 50 (5% x 1,000)& So the

ct"ve r!te "s let’s s!$ 7% (!#!"n we c!nnot c!lcul!te th"s !nd w"ll *ust be #"ven "n the ex!m)

cruc"!l po"nt here "s th!t the d"scount "s p!"d "mmed"!tel$& So, !lthou#h $ou presume th!t the effect"ve r!te "s the s!me !s

m!r%et r!te (7% s!$), the INITIAL FV of the lo!n w!s 1,000 but "s "mmed"!tel$ reduced b$ the 50 d"scount - so "s !ctu!ll$ 950

You st"ll p!$ "nterest of 4% x 1,000 not 4% x 950

u!"nt old En#l"sh s!$"n# - me!n"n# $ou’re !n "d"ot )p


75/183

, we’ve (ust loo&ed #t !n!t!#l me#surement (#t FV) Now let’s loo& #t

w we me#sure !t from then onw#rds+$

"s where the c!te#or"es of f"n!nc"!l l"!b"l"t"es !re "mport!nt - so let’s rem"nd ourselves wh!t the$ !re)

In#t#!ll$ At Ye!r-End An$ %!#n/loss

VTPL F!"r V!lue F!"r V!lue Income St!tement

mort#sed Cost F!"r V!lue Amort"sed Cost -

ou onl$ h!ve 2 rules to remember - cool-

PL - s"mple *ust %eep the "tem !t "ts FV (remember th"s "s those 2 steps) !nd put the d"fference to the "ncome st!tementort#sed Cost - Amort"sed Cost "s the me!surement once the "n"t"!l me!surement !t FV "s done

mort#sed Cost

"s s"mpl$ spre!d"n# ALL "nterest over the len#th of the lo!n b$ ch!r#"n# the effect#ve "nterest r!te to the "ncome st!tement

$e!r&

ere’s noth"n# str!n#e (prem"ums etc) then th"s "s s"mple& For ex!mple

1,000 P!$!ble Lo!n

pen"n# Interest to I/S Interest !ctu!ll$ P!"d Clos"n# Lo!n on SFP

000 100 (100) 1,000

w let’s m!"e #t tr#c"#er

!nc#!l L#!bl#t#es - Amort#sed Cost


76/183

1,000 Lo!n w"th ! 10% prem"um on redempt"on & Effect"ve r!te "s 12%


000 120 (100) 1,020

n $e!r 1 the "ncome st!tement would show !n "nterest ch!r#e of 120 !nd the lo!n would be under l"!b"l"t"es on the SFP !t

0& Th"s SFP f"#ure w"ll %eep on "ncre!s"n# unt"l the end of the lo!n where "t w"ll equ!l the Lo!n + prem"um on redempt"on

tr#c"#er st#ll*

1,000 lo!n w"th ! 10% d"scount on "ssue& Effect"ve r!te "s 12%


00 108 (100) 908

r FVTPL - these "o to the !ncome st#tement

!nc#!l Instruments - Tr!ns!ct#ons costs


77/183

"t "s !n !sset - "t w"ll "ncre!se the open"n# b!l!nce

"s ! l"!b"l"t$ - "t w"ll decre!se the open"n# b!l!nce

strton Trnscton costs

nt"t$ !cqu"res ! f"n!nc"!l !sset for "ts offer pr"ce of £100 (b"d pr"ce £98)

9 tre!ts the b"d-offer spre!d !s ! tr!ns!ct"on cost)

f the #sset !s FVTPL

The tr#ns#ct!on cost of £2 !s reco"n!sed #s #n expense !n prof!t or loss #nd the f!n#nc!#l #sset !n!t!#ll% reco"n!sed #t the b!d pr!ce of

£98$

f the #sset !s cl#ss!f!ed #s !mort#sed cost

The tr#ns#ct!on cost should be #dded to the f#!r v#lue #nd the f!n#nc!#l #sset !n!t!#ll% reco"n!sed #t the offer pr!ce (the pr!ce

#ctu#ll% p#!d) of £100$

hen we reco"n!se # f!n#nc!#l !nstruments we loo& #t subst#nce r#ther

#n form

th"n# w"th !n obl"#!t"on "s ! l"!b"l"t$ (debt)&

wever we now h!ve ! problem when we cons"der convert"ble p!$!ble lo!ns& The ‘convert"ble’ b"t me!ns th!t the comp!n$

not h!ve to p!$ the b!n% b!c% w"th c!sh, but perh!ps sh!res&

th"s !n obl"#!t"on to p!$ c!sh (debt) or !n equ"t$ "nstrument(

ct "t "s both' It "s therefore c!lled ! Compound Instrument

!nc#!l L#!b#l#t#es - convert#ble lo!ns


78/183

These cont!"n both ! l"!b"l"t$ !nd !n equ"t$ component so e!ch h!s to be shown sep!r!tel$& Th"s "s best shown b$ ex!mple)

2% Convert"ble P!$!ble Lo!n 01,000

Th"s b!s"c!ll$ me!ns the comp!n$ h!s offered the b!n% the opt"on to convert the lo!n !t the end "nto sh!res "nste!d of

s"mpl$ t!%"n# 01,000

The "mport!nt th"n# to not"ce "s th!t th!t the b!n% h!s the opt"on to do th"s&

Should the sh!re pr"ce not prove f!vour!ble then "t w"ll s"mpl$ t!%e the 01,000 !s norm!l&

nvertble Pble Lons

Fe!tures of ! convert#ble p!%!ble lo!n

Better Interest r!te

The b!n% l"%es to h!ve the opt"on& Therefore, "n return, "t w"ll offer the comp!n$ ! f!vour!ble "nterest r!te comp!red

to norm!l lo!ns

H#%her F!#r V!lue of lo!n

Th"s lower "nterest r!te h!s effect"vel$ "ncre!sed the f!"r v!lue of the lo!n to the comp!n$ (we !ll l"%e to p!$ less

"nterest +-))

We need to show !ll p!$!ble lo!ns !t the"r f!"r v!lue !t the be#"nn"n#&

Lower lo!n f#%ure #n SFP

Import!nt) If the f!"r v!lue of ! l"!b"l"t$ h!s "ncre!sed the !mount p!$!ble (l"!b"l"t$) shown "n the !ccounts w"ll be

lower&

After !ll, f!"r v!lue "ncre!ses !re #ood news !nd we !ll prefer lower l"!b"l"t"es'

w to Clculte the Fr Vlue of Lon

ow "s th"s new f!"r v!lue, th!t we need !t the st!rt of the lo!n, c!lcul!ted(

"t "s b!s"c!ll$ the present v!lue of "ts future c!shflows-


79/183

C!p"t!l 01,000

Interest (2%) 020 p!&

Now let’s suppose th"s "s ! 4 $e!r lo!n !nd th!t norm!l (non-convert"ble) lo!ns c!rr$ !n "nterest r!te of 5%&

Step 2) D#scount the p!$ments #n step 1 !t the m!r"et r!te for norm!l lo!ns (Get the c!shflows PV)

T!%e wh!t the comp!n$ p!$s !nd d"scount them us"n# the f"#ures !bove !s follows)

C!p"t!l 01,000 d"scounted @ 5% (4 $e!rs SINGLE d"scount f"#ure) = 1,000 x 0&823 = 823

Interest 020 d"scounted @ 5% (4 $e!rs CUMULATIVE)= 20 x 3&465 = 69

Tot!l = 892

Th"s 0892 represents the f!"r v!lue of the lo!n !nd th"s "s the f"#ure we use "n the b!l!nce sheet "n"t"!ll$&

The rem!"n"n# 0108 (1,000-892) #oes to equ"t$&

clus#on

n $ou see ! convert"ble lo!n !ll $ou need to do "s t!%e the c!p"t!l !nd "nterest PAYABLE&

n d"scount these f"#ures down !t the r!te used for other non convert"ble lo!ns&

result"n# f"#ure "s the f!"r v!lue of the convert"ble lo!n !nd the rem!"nder s"ts "n equ"t$&

do th"s !t the START of e!ch lo!n - th!t’s !ll&

t h!ppens !fter the st!rt we w"ll see l!ter-

vert#ble P!$!ble Lo!n w#th tr!ns!ct#on costs - ee"+

well remember our 2 step process for de!l"n# w"th ! norm!l convert"ble lo!n( No(( Well $ou’re !n "d"ot& However, luc%"l$ for

I’m not so I w"ll rem"nd $ou )p

p 1) Wr"te down the c!p"t!l !nd "nterest to be PAID


80/183

-

n the tot!l w"ll be the FV of the lo!n !nd the rem!"nder *ust #oes to equ"t$& Remember we do th"s !t the st!rt of the lo!n

Y&

t then let’s now de!l w"th tr!ns!ct"on or "ssue costs& These !re p!"d !t the st!rt&

m!ll$ $ou s"mpl$ *ust reduce the Lo!n !mount w"th the full tr!ns!ct"on costs& However, here we w"ll h!ve ! lo!n !nd equ"t$ -

we spl"t the tr!ns!ct"on costs pro-r!t!

ow, I %now - $ou w!nt !n ex!mple-& bo$, $ou’re slow - luc%$ $ou’re #or#eous

% 1,000 3 $r Convert#ble Lo!n( Tr!ns!ct#on costs of £100 !lso to be p!#d( Non convert#ble lo!n r!te 10%

p 1 !nd 2

t!l 1,000 x 0&751 = 751

rest 40 x 2&486 = 99 ("sh)

l = 850

V of lo!n = 850, Equ"t$ = 150 (1,000-850)

w the tr!ns!ct"on costs (100) need to be deducted from these !mounts pro-r!t!

o!n = (850-85) = 765

t$ (150-15) = 135

rel!x-&

#ns "o to debt (l!#b!l!t!es), ord!n#r% sh#res "o to equ!t%$ Wh%'

b!c% to the conceptu!l fr!mewor% !#!"n !nd !lso to the "mport!nt concept of subst!nce over form

bt !nd Equ#t$


81/183

def"n"t"on of l"!b"l"t$ "ncludes the need for ! present obl#%!t#on&

nterest MUST be p!"d but d"v"dends m!$ not, onl$ lo!ns h!ve th"s obl"#!t"on !nd so #o to l"!b"l"t"es&

rml Pble lons

se h!ve !n obl"#!t"on to p!$ "nterest !nd c!p"t!l

Debt

deemble Preference shres

se h!ve !n obl"#!t"on to p!$ d"v"dends !nd c!p"t!l

Debt

edeemble Preference shres

e do NOT h!ve !n obl"#!t"on to p!$ d"v"dends !nd c!p"t!l

Equ"t$

r own shres

e do NOT h!ve !n obl"#!t"on to p!$ d"v"dends or c!p"t!l

Equ"t$

nvertble lons


82/183

se do h!ve !n obl"#!t"on but !re !lso potent"!l sh!res

Debt !nd Equ"t$

ere #re 2 t%pes of le#se - #n Oper#t!n" #nd # F!n#nce le#se

mple terms, ! f"n!nce le!se "s where the LESSEE t!%es the m!*or"t$ of the r"s%s !nd rew!rds of the underl$"n# !sset

efore w"th ! f"n!nce le!se the lessee would show the !sset on the"r SFP (!nd the rel!ted f"n!nce le!se l"!b"l"t$)

n cl!ss"f$"n# loo% for subst!nce r!ther th!n the form

nce Lese Indctors

The lessee #ets ownersh"p of the !sset !t the end of the le!se term

The lessee c!n bu$ the !sset !t such ! low pr"ce th!t "t "s re!son!bl$ cert!"n th!t the opt"on w"ll be exerc"sed+

The le!se term "s for the m!*or p!rt of the econom"c l"fe

The PV of the le!se p!$ments "s subst!nt"!ll$ the f!"r v!lue of the le!sed !sset+ !nd

Onl$ the lessee c!n use the !sset !s "t "s so spec"!l"sed

e!s#n$

ses - Introduct#on


83/183

her possble fnnce lese ndctors

If the lessee c!ncels the le!se, he h!s to p!$ the lessor’s losses

The lessee #ets !n$ res"du!l v!lue #!"ns/losses !nd

The lessee c!n le!se for ! second!r$ per"od !t ! che!p rent

nd & Bu!ld!n"s

rmll seprtel clssfed

m"n"mum le!se p!$ments !re !lloc!ted between the l!nd !nd bu"ld"n#s elements "n proport"on to the"r rel!t"ve f!"r v!lues&

L!nd = Oper!t"n# le!se (unless t"tle p!sses to the lessee !t the end of the le!se term)

Bu"ld"n#s = Oper!t"n# or f"n!nce le!se (b$ !ppl$"n# the cl!ss"f"c!t"on cr"ter"! "n IAS 17)

cl!ss"f"c!t"on of le!ses "s ! %e$ "ssue "n corpor!te report"n#& From ! lessees po"nt of v"ew, cl!ss"f$"n# !s ! f"n!nce le!se w"ll

e!se #e!r"n# !nd decre!se ROCE (!s there’s more c!p"t!l emplo$ed due to the f"n!nce le!se l"!b"l"t$)& Interest cover w"ll !lso

e!se

he SFP shows more l"!b"l"t$, future borrow"n# w"ll be h!rder to come b$ !nd current lo!n coven!nts m!$ be bre!ched& The

of perce"ved r"s% m!$ "ncre!se, lo!n coven!nts m!$ be comprom"sed !nd !n ent"t$’s future borrow"n# c!p!c"t$ m!$ be

"cted&

stud#es h!ve reve!led th!t !ver!%e oper!t#n% le!se comm#tments !re over ten t#mes th!t of reported f#n!nce le!se

%!t#ons(


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!s "!ves #n #sset on the SFP (#nd # rel#ted l!#b!l!t%)

efore we !lso need to show the rel!ted deprec"!t"on !nd "nterest on the I/S

ncome st!tement SFP

eprec"!t"on (10) Asset 100

terest (8) L"!b"l"t$ 100

ountn steps

Enter the Asset !nd L#!b#l#t$

At the F#!r v#lue of the #sset)

C!lcul!te deprec#!t#on

Th!s w!ll depend on whether the #sset "oes b#c& to the lessor #t the %e#r end or not

C!lcul!te #nterest !nd F#n!nce Le!se l#!b#l#t$ !t Y/E

Th!s !s done b% the #mort!sed cost t#ble (below)

ort#sed cost t!ble for ! F#n!nce le!se w#th p!$ments #n !rre!rs

pen"n# FL l"!b"l"t$ Interest to I/S Le!se rent!l P!"d Clos"n# L"!b"l"t$ on SFP

!nce Le!se !ccount#n%


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000 120 (100) 1,020

ort#sed cost t!ble for ! F#n!nce le!se w#th p!$ments #n !dv!nce

pen"n# FL l"!b"l"t$ Le!se rent!l p!"d B!l!nce Interest to I/S Clos"n# L"!b"l"t$ on SFP

000 (100) 900 90 990

t of le!se term

sset

n!nce Le!se l"!b"l"t$

wer of FV of the !sset !nd Present v!lue of the m"n"mum le!se p!$ments

n$ d"rect costs !dded to cost of !sset)

!$ments !re m!de

nce le!se p!$ments should be !pport"oned between the f"n!nce ch!r#e !nd p!$"n# off the l"!b"l"t$

nterest

n!nce Le!se l"!b"l"t$

!sh

"nterest "s !pport"oned us"n# the effect"ve r!te #"ven "n the quest"on

tr!t#on – F#n!nce Le!se) P!$ment #n Arre!rs

t Cost $10,000

e) 5 $e!rs x $3,000 p&!& "n !rre!rs

ct"ve/"mpl"c"t "nterest r!te "s 8%


86/183

pen"n# FL l"!b"l"t$ Interest to I/S Le!se rent!l P!"d Clos"n# L"!b"l"t$ on SFP

,000 800 (3,000) 7,800

!ble w#th#n one $e!r !nd !fter more th!n one $e!r

f"n!nce le!se l"!b"l"t$ must be spl"t between the !mount th!t "s to be p!"d w"th"n ! $e!r !nd the rem!"nder wh"ch "s p!$!ble

ore th!n one $e!r

pen#n% FL l#!b#l#t$ Interest to I/S Le!se rent!l P!#d Clos#n% L#!b#l#t$ on SFP

& 1 10,000 800 (3,000) 7,800

& 2 7,800 624 (3,000) 5,424

efore, the !mount p!$!ble "n less th!n ! $e!r ($e!r 2) "s (7,800 – 5,424) = $2,376 The rem!"n"n# $5,424 "s p!$!ble "n more th!n

$e!r

tr!t#on – F#n!nce Le!se) P!$ment #n Adv!nce

onl$ d"fference "s how the t!ble loo%s !nd the spl"t between p!$!ble w"th"n 1$r !nd !fter more th!n 1$r&

s"der the prev"ous ex!mple !#!"n& Th"s t"me the p!$ment comes before the "nterest !s "t "s p!"d "n !dv!nce)

pen#n% FL l#!b#l#t$ Le!se rent!l p!#d B!l!nce Interest to I/S Clos#n% L#!b#l#t$ on SFP

1 10,000 (3,000) 7,000 560 7,560

2 7,560 (3,000) 4,560

!mount p!$!ble < 1$r "s (7,560 – 4,560) = 3,000

$3,000 should "de!ll$ be further spl"t down between)

rest $560

t!l $2,440


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here the lessee does not t#&e the r!s&s #nd rew#rds of the #sset, so no

set !s shown on the SFP

h!t h!ppens "s the le!se p!$ments !re reco#n"sed !s !n expense "n the "ncome st!tement over the le!se term on ! str!"#ht-

b!s"s

per!t"n# le!se s"mpl$ shows the rent!l p!$ments "n the Income st!tement& Remember to do th"s on !n !ccru!ls b!s"s !nd not

$ment b!s"s

ustrton

mp!n$ p!$s !n "n"t"!l prem"um of 1,000 + 4 qu!rterl$ "nst!lments of 1,500& The le!se w!s !cqu"red h!lf w!$ throu#h the $e!r&

!t #s the #ncome st!tement ch!r%e #n the per#od&

wer) 1,000 + (4x1,500) = 7,000 "n tot!l for the $e!r

$ h!lf ! $e!r to be ch!r#ed re#!rdless of p!$ments - so 7,000 / 2 = 3,500

pertn Lese Incentves

lessee norm!ll$ reco#n"ses the tot!l "ncent"ves !s ! reduct"on of rent!l expense over the le!se term, on ! str!"#ht-l"ne b!s"s

er!t#n% Le!se !ccount#n%


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n#nce Le#ses #re # "ood ex#mple of subst#nce over form

bstnce over Form

p!n"es do not l"%e to h!ve m!n$ l"!b"l"t"es on the"r SFP

therefore "n the"r "nterests to record ! le!se !s !n oper!t"n# le!se "nste!d of ! f"n!nce le!se

wever&&

The subst#nce of the le#se must be followed not the le"#l form

Therefore !f !ts # f!n#nce le#se - #n #sset should be recorded even thou"h not le"#ll% owned

set Defnton

ost f"n!nce le!ses, the !sset "tself "s never owned b$ the comp!n$

Conceptu#l fr#mewor& def!nes #n #sset b% "control" not ownersh!p

Show!n" the #sset !s #n ex#mple of subst#nce over form

f blnce sheet fnncn

"s tre!t"n# ! f"n!nce le!se !s !n oper!t"n# le!se

ember w"th ! f"n!nce le!se $ou show the !sset AND the l"!b"l"t$

ses - Subst!nce over form


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l l l

But th!s !s not the true p!cture

W!ll d!stort r#t!os such #s ROCE

"n the st!tement of prof"t or loss, the oper!t"n# le!se would show *ust the le!se p!$ments, where!s the f"n!nce le!se would

w "nterest (from the l"!b"l"t$) !nd deprec"!t"on (from the !sset)

ss these two !re c!lcul!ted on ! str!"#ht l"ne b!s"s, "t would prob!bl$ be the c!se th!t "nterest + deprec"!t"on would be

er th!n le!se p!$ments "n the e!rl$ $e!rs !nd lower !s t"me moves on

prov!s!on !s # l!#b!l!t% of uncert#!n t!m!n" or #mount

h"s me!ns "s th!t "t "s not ! cred"tor, !s $ou %now ex!ctl$ how much th!t "s !nd when "t "s to be p!"d

wever "t "s st"ll ! potent"!l l"!b"l"t$

re!te ! prov"s"on thou#h

xpense

rov#s#on

potent"!l l"!b"l"t$ must be prob!bl "

fct 3 tests need to be pssed

s there # present obl#%!t#on (le"#l or construct!ve) #s # result of # p#st event

s !t prob!ble th#t #n outflow of resources embod%!n" econom!c benef!ts w!ll be requ!red to settle the obl!"#t!on

C#n # rel#!ble est#m!te c#n be m#de of the #mount of the obl! #t!on

rov#s#ons !nd Cont#n$enc#es

v#s#ons

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