IAS 1R- Presentation of Financial Statements Introduction...

IAS 1R- Presentation of Financial Statements Introduction to IFRS / Ind AS

IAS 2 - Inventory

Application

IAS 2 applies to all inventories, except: Work in progress arising under construction contracts, including directly related service

contracts (see IAS 11 Construction Contracts); financial instruments (see IAS 32 Financial Instruments: Presentation and IAS 39 Financial

Instruments: Recognition and Measurement); and biological assets related to agricultural activity and agricultural produce at the point of harvest

(see IAS 41 Agriculture).

Inventory

The measurement of IAS 2 does not apply to the inventories of: Producers of agriculture, forest and mineral products (at NRV)

As the sale is assured under forward contract or government guarantee or active market, which leads to negligible risk

Commodity broker- traders (fair value less costs to sell) As the commodities are traded in the active market and are purchased with a view to resell in near future with an intention of profit on margins

Inventory comprises of assets (a) held for sale in the ordinary course of business;

(b) in the process of production for such sale; or

(c) in the form of materials or supplies to be consumed in the production process or in the rendering of services

Recognize when?

When entity has control over it

Expects to derive future benefits

Can measure cost reliably

Inventory

Case Study

Whether distribution cost incurred in the following situations are required to be included into the cost of inventory or charged to Income statement? 1.External distribution costs such as those relating to the transfer of goods from a sales depot to an external customer.

2.Costs incurred by the company in distributing goods from its factory to its sales depot.

Solution External distribution cost to be charged to Income Statement

Costs incurred in distributing goods from its factory to its sales depot will be included to the cost of inventory, as these are costs incurred in bringing the inventory to its present location.

Inventory

Function not volume is its characteristic nature (e.g. whether marketing, production or selling expense)

Borrowing costs to the extent of IAS 23 Borrowing Costs is allowed

Specific costs of designing for a particular client, etc should be included.

Other aspects of Costs of conversion

Inventory

Costs to be excluded from inventory and to be charged as expense

Abnormal amounts of wasted materials, labour or other production costs

Storage costs, unless necessary in a production process prior to further production stage

Administrative overheads (not used in bringing inventory to present condition)

Selling overheads

Inventory

Valuation

Initial recognition : at cost;

Subsequent valuation : at the lower of cost and

net realisable value (NRV)

NRV is the estimated selling price in the ordinary course of business, less the estimated costs of completion and estimated selling expenses.

Inventory

Accounting policies (including cost formula) Total carrying amount and classification (face of balance sheet)

Merchandise Production supplies Materials Work in progress Finished goods

Amount recognised as an expense during the period Amount of write down Any amount of reversal Circumstances of reversal or write down Carrying amount of pledged inventory as liability

Disclosure

Inventory

IAS 16 Property, plant and equipment

Ind AS 16 defines property, plant and equipment as: tangible items that:

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

are expected to be used during more than one period.

Property, Plant and Equipment

Scope of the standard This Standard should be applied in accounting for property, plant and equipment, except where another Ind AS requires or permits a different accounting treatment.

Scoped out Items

Biological Assets

Exploration and Evaluation assets

Mineral rights and Mineral reserves

Assets classified As held for Sale

Investment Properties Under Ind AS 40

Initial Measurement

Initial Measurement will be at Cost

Purchase price, including import duties and non-

refundable purchase taxes less any trade

discounts and rebates

Directly attributable costs of bringing the asset to the location

and condition necessary for it to be

capable of operating in the manner intended

by management

Initial estimate of the costs of

dismantling and removing the item and restoring the site on which it is

located.

+ +

Cost of Property, Plant and Equipment


Initial Measurement-Other Issues

Deferred payment

Exchanges of assets


Initial Measurement-Other Issues


Person A - Car X Person B - Car Y Book value 13000 Not required Fair value 13250 13100 Cash received 150

Value of car in books of A

Commercial substance Yes 13100 Cash received from Y 150

Car A/c Dr. 100 Cash A/c Dr. 150 Profit A/c Cr. 250

Commercial substance No 12850 Cash received from Y 150

New Car A/c Dr. 12850 Cash A/c Dr. 150 Old Car A/c Cr. 13000

Major Inspections and Overhauls

Replacement costs: To be capitalized in accordance with guidance under Significant Components.

Repairs and maintenance costs are also dealt with separately under the general recognition principle i.e. whether such costs meet the criteria for recognition of an asset.

When each major inspection is carried out, the cost is capitalized as a replacement if it meets the asset recognition criteria in the standard. Any remaining carrying amount relating to the previous inspection is derecognised.

Inspection costs

Replacement costs Major

Maintenance costs


Measurement Subsequent to Initial Recognition

Cost Model Cost less

Accumulated depreciation and

impairment

Cost Model

Revaluation Model Fair value less

subsequent accumulated

depreciation and impairment

Revaluation model


Revaluation Model A revaluation surplus is credited directly to other comprehensive income and

accumulated in equity under the heading of revaluation surplus unless it reverses a revaluation decrease on the same asset previously recognized as an expense, it should be credited to the profit and loss account. Ind AS 16 does not specify that where an asset has previously been revalued downwards and is subsequently revalued upwards, the credit to income should be reduced by depreciation that would have been charged had the asset not been revalued downwards in the past.

Revaluation surplus in equity be transferred directly to retained earnings when the surplus is realized either on account of derecognition or as and when the asset is used.

A revaluation decrease should be charged against any related revaluation surplus. Any balance will be recognized as an expense in the profit and loss account.

Entire class of assets to be revalued to

avoid cherry-picking


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Revaluation by Class of Assets

CASE STUDY :

Entity A is a large manufacturing group. It owns a considerable number of industrial buildings, such as factories and warehouses and office buildings in several capital cities. The industrial buildings are located in industrial zones, whereas the office buildings are in central business districts of the cities. Entity A's management want to apply the Ind AS 16 revaluation model to the subsequent measurement of the office buildings but continue to apply the historical cost model to the industrial buildings. Is this acceptable under Ind AS 16, 'Property, plant and equipment'?

Solution:

Entity A's management can apply the revaluation model to just the office buildings. The office buildings can be clearly distinguished from the industrial buildings in terms of their function, their nature and their general location. Ind AS 16 permits assets to be revalued on a class-by-class basis. The different characteristics of the buildings enable them to be classified as different PPE classes. The different measurement models can, therefore, be applied to these classes for subsequent measurement. All properties within the class of office buildings must, therefore, be carried at revalued amount. Separate disclosure of the two classes must be given.


Revaluation Model

Frequency

Valuations should remain up-to-date, as old valuations that do not reflect current values are meaningless.

Carrying amount should not differ materially from fair value at the balance sheet date.

Bases of Valuation

Fair Value

The amount for which an asset could be exchanged between knowledgeable, willing parties in an arms length transaction.

Depreciated Replacement Cost (DRC)

Used for specialised items of property, plant and equipment, where there is no means of ascertaining a market value for such assets.


Component Depreciation

Each part of an item of property, plant and equipment that has a cost that is significant when compared to the total cost of the item, should be depreciated separately.

Where one significant part has a useful life and a depreciation method that is the same as those of another part of that same item of property, plant and equipment, the two parts may be grouped together for depreciation purposes.

Where an entity identifies and depreciates a significant part or parts of an asset separately, it should also depreciate the rest of the asset separately which consists of parts that are not individually significant.


Air craft - Boeing 747

Cost 300 Crores

Useful life 20 years

Residual value 25 Crores

Depreciation method SLM

Depreciation per year 13.75 Crores

Air craft - Boeing 747 Components Engines Body Interiors Cost 300 Crores 100 Crores 100 Crores 100 Crores Useful life 25 years 10 Years 5 Years Residual value 25 Crores 15 Crores 10 Crores - Depreciation method SLM Depreciation per year 32.5 Crores 3.5 Crores 9 Crores 20 Crores


Asset Retirement Obligations

Initial Recognition Asset retirement costs are the estimated costs of dismantling and removing the asset and restoring the site on which it is located

Included in initial costs at present value

Decommissioning costs arising later in the asset's life should be capitalized to the extent that they relate to the asset's installation, construction or acquisition.

The unwinding of the discount is included within finance costs.

Provisions that arise during an asset's life as a result of damage incurred through the asset's use are production costs and should not be capitalized.

Changes in estimates of decommissioning obligations may arise due to changes in legislation, technology, timing of the decommissioning, management's assumptions etc.


Asset Retirement Obligations

Subsequent accounting (IFRIC 1) Changes in ARO should be added to, or deducted from, the cost of the related asset in

the current period, provided that the deduction must not give rise to a 'negative asset.

If the decrease in the liability exceeds the asset's carrying amount, the excess must be recognized immediately in profit or loss.

If the adjustment results in an addition to the cost of the asset, the entity must consider whether the new carrying amount is fully recoverable or not.

If there is an indication that the asset may not be fully recoverable the entity should carry out an impairment test and account for any loss in accordance with Ind AS 36.

Changes In Estimates

Useful life Residual value Method of depreciation

Should be reviewed at least at each year end

Accounted for prospectively as a change in accounting estimate

Estimate should be changed if

expectations differ from previous estimates

Reviews of residual value would take

account reasonably expected technological changes, price changes and inflation since the

last balance sheet date. If expectations differ

from previous estimates change the estimate

If there has been a significant change in

the expected pattern of consumption of the

asset's future economic benefits, the method should be changed to reflect the changed

pattern


Derecognition Of Property, Plant and Equipment

An item of property plant and equipment should be derecognized when:

It is disposed of, or;

No future economic benefits are expected from its use or disposal.

The profit or loss on derecognition (that is, on disposal or retirement from use) is the difference between the estimated net disposal proceeds and the carrying amount.


Disclosures


There are additional disclosures required for revaluation model

Disclosures

Measurement bases

Depreciation methods

Useful lives

Gross carrying amount

Cumulative Amount of

Provisions for Depreciation

Restrictions on assets pledged

Depreciation capitalized

Contractual Commitments

Disclosures


Sample disclosure to be presented for both the years

Freehold Land

Buildings and

leasehold land

Plant and Machinery

Furniture, fixtures

and fittings

Vehicles Total

At 1 January 2010 Cost or valuation Accumulated depreciation () () () () () () Net book amount Opening net book amount Additions Disposals (note X) () () () () () () Transfer to Investment property () () Assets held for sale () () () () () () Closing net book amount At 31 December 2010 Cost or valuation Accumulated depreciation () () () () () () Net book amount

Disclosures


Additional Notes:

1.Depreciation expense of Rs.__ has been charged in cost of goods sold, Rs.__ in selling and marketing costs and Rs.__ in administrative expenses.

2.The Group has capitalized Rs.__ during the period and capitalization rate used to determine the amount of borrowing costs eligible for capitalization is X%.

3.The Group leases XXXX and other related assets under finance lease agreements. At 31 December 2010 the net carrying amount of XXXX and other related assets was Rs.__. Lease rentals amounting to Rs.__ and Rs.__ relating to the XXXX and other related assets, respectively, are included in the income statement (note xx).

4. with a carrying amount of Rs.__ approx have been pledged to secure borrowings of the Group. The Group is not allowed to pledge these assets as security for other borrowings or to sell them to another entity.

Property, Plant and Equipment and related topics

Impact

A Significant areas Ind AS 101 - Deemed Fair Value, Event Driven Organisation Revaluation Model Fair Value at time of Business Combination Exchange of Assets B Differences in Indian Accounting Standards for earlier periods Asset Retirement Obligation Capitalisation of Borrowing Costs Indirect expenditure during trial run IFRIC - 4; Capital leasing arrangement within Service Contracts Capitalization of Exchange Fluctuation

Net Worth Profit & Loss Disclosures

Efforts

Property, Plant and Equipment and related topics

Impact

C Other matters resulting in differences in capitalization Assets Supplied on Deferred Credit Less than Rs.5000 assets D Year on Year Impact - Recomputed since capitalization date for each asset Component Approach for Capitalization of Fixed Assets Depreciation Rates (Useful Life) Residual Value - Revisited at each reporting date Residual Life - Revisited at each reporting date Recoup of Depreciation on Revalued Assets Profit or loss on Sale of Assets

Net Worth Profit & Loss Disclosures

Efforts

IAS 40 Investment property

Subsequent measurement

Investment property

1.Cost model

2.Fair value model

Disclosure

1.Disclosures

Thank You

Slide Number 1Slide Number 2Slide Number 3Slide Number 4Case StudyOther aspects of Costs of conversionCosts to be excluded from inventory and to be charged as expenseValuationSlide Number 9Slide Number 10Scope of the standardInitial MeasurementInitial Measurement-Other IssuesInitial Measurement-Other IssuesMajor Inspections and OverhaulsMeasurement Subsequent to Initial RecognitionRevaluation ModelRevaluation by Class of AssetsRevaluation ModelComponent DepreciationAsset Retirement ObligationsAsset Retirement ObligationsChanges In EstimatesDerecognition Of Property, Plant and EquipmentDisclosuresDisclosuresDisclosuresImpactImpactSlide Number 30Subsequent measurementSlide Number 32

IAS 1R- Presentation of Financial Statements Introduction...

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