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1. Employee Benefits: IAS 19

2. Lease Contracts: IFRS 16

3. Provisions, Contingent Liabilities and Contingent Assets – IAS 37

4. Government Grants – IAS 20

5. Events after reporting period – IAS 10


IAS 19 Employee Benefits


Objective of IAS 19


SHORT TERM BENEFITS

1. Salaries

2. Allowances

3. Other benefits receivable within 12 months

4. COMPENSATED ABSENCES

ETC


Accounting for Leave Pay Provisions

Dr Short-term employee benefits (p/L)

Cr Leave Provisions (SoFP)

Formula for amount of leave pay provision:

Amount = expected # of days leave to be taken/paid out X salary per day


Attempt

Question 20.2 page 19

1. Which short term employee benefits can you identify????

2. How should the leave days be accounted for???


Profit-sharing and Bonus Payments

• The entity should recognise the expected cost of profit-sharing and bonus payments when, and only when,

– it has a legal or constructive obligation to make such payments as a result of past events and

–a reliable estimate of the expected cost can be made. [IAS 19.17]

• IAS 37 – provisions (Provision for bonus)


Attempt

Question 20.2 page 19 – Account for the Bonus

Provision for bonus payment 2012 2011

One Month’s salary 210,000 200,00


Deferred Tax Implications

B/S Method

CA TB TD DT

Bonus prov XXX 0 XXX 28% X


Post-employment Benefit Plans

• Defined contribution plan,

• Defined benefit plan


Defined Contribution Diagram


CAA Ltd - Employer NASSA/Insurer

Employee/Retiree

$ Contributions paid

Pension paid

Employer defines/guarantees the employee contribution only

Defined Contribution Plans

• For defined contribution plans, the cost to be recognised in the period is the contribution payable in exchange for service rendered by employees during the period.

Dr Defined Contribution expense (6% of Gross salary)

Cr Bank (contribution)/Contribution payable



Example• All the employees of Toi-Toi Ltd belong to the XYZ provident fund (a

defined contribution plan). During the year current contributions amounting to $210 000 were paid over to the fund. Apart from that, the company also decided to pay over additional contributions of $500 000 during the current year, in order to improve the future benefits of current and retired employees. Forty percent of this additional contribution relates to retired employees. The remaining average working life of the current employees is ten years. What will the defined contribution plan expense for the year amount to?



Example

• $710 000, According to IAS 19.44, the total contribution payable to a defined contribution plan in exchange for services, should be recognised as an expense. No distinction is made between current and additional contributions, or between current and retired employees.

Dr Employee benefits 710k

Cr Bank/Provident fund contribution payable 710k



Defined Benefit Plan Diagram

CAA Ltd – Employer

Obligation on guaranteed benefits

IAS 19

Pension Fund/InsurerIAS 26

Plan Asset:-cash

-money market-shares investments

property

Employee/Retiree

$ Contributions paid

$ Benefits paid

Employer defines/guarantees the employee benefit ($2000) after retirement and is obliged to provide this. Employer is liable for any short-falls

Be

nefits

defin

ed

Defined Benefit Obligation

Reconciliation of mvt in the defined benefit obligation:

Opening Balance –PV XXXX

+Past service cost (if any)- (P/L) XX

+Finance cost (Op Bal x Discount rate) (P/L) X

+Current Service Cost (P/L) XX

- Benefits paid (XX)

-/+ re-measurement gains/losses (OCI) X

Closing Balance – PV (given by actuary) (SFP) XXXX


Interest Cost

• Measurement:

– Opening PV of defined benefit obligation + past service cost determined at the BEGINNING of the year) X % discount rate

• NB**-: use this formula if the benefits paid are paid at the end of the year and not during the year at specific dates.


Plan Assets- Funded

Reconciliation of mvt in the defined benefit obligation:

Opening Balance –FV XXXX

+Interest Income(Op Bal x disc rate)-(P/L) X

+Contribution paid XX

- Benefits paid (XX)

+/- re-measurement gains/losses (b/f) (OCI) X

Closing Balance – FV (given by actuary) (SFP) XXXX


Plan Assets

Interest income:

• Measurement:

– Opening FV of plan assets + contributions made at the BEGINNING of the year) X yield rate (or discount rate)

• NB**-: use this formula if the contributions are paid at the BEGGINNING of the year and not during the year at specific dates.


SOFP Presentation


SOFP Disclosure – Nature of the benefit par 139


SOFP Disclosure – Recon of Plan Obligation


SOFP Disclosure – Recon of Plan Assets


SOFP Disclosure – infor in the F/S


P/L Disclosure – profit b4 tax note


Disclosure Asset Ceiling Recon


Attempt

Question 20.2 page 19


Curtailment

• Plan curtailments or settlements: Gains or losses resulting from curtailments or settlements of a plan are recognised when the curtailment or settlement occurs.

• Curtailments are:

– reductions in scope of employees covered or

– in benefits.


Curtailment/Settlement

• Closure Ltd decides to close down a plant on 31 December 20.1 and that each employee will receive a lump-sum payment of R25,000, as a final settlement of all obligations to the employees. Using the current actuarial assumptions immediately before the settlement, the following was established:– Present value of the obligation immediately:

• Before closure of the plant 920,000• After closure of the plant 828,000

– Fair value of plan assets immediately before closure was 800,000 and decrease in assets due to settlement is 50,000

Q- What is the gain/loss on settlement?


Curtailment JE

Change in obligation (920000-828000) 92000Change in plan assets (800000-750000) (50000)Gain on net decrease in net liability 42000

Dr Defined benefit obligation (F/P) 92000Cr Plan assets (F/P) 50000Cr Gain on curtailment (staff costs) (P/L) 42000


Asset Ceiling (IAS 19.64):

If the calculation of the balance sheet amount as set out above results in an asset, the amount recognised should be limited to lower of :

– the surplus in the defined benefit plan, and

– the asset ceiling determined using the discount rate specified in paragraph 83


Deferred Tax Implications

• Sec 11(1) of the RSA Income tax Act allows the employer to deduct his contribution when it is actually paid to the fund.

• For a defined benefit plan the employee benefits expense is an accounting expense.

• Deferred tax arise as there is always a difference between the contribution and the employee benefit expense.


Other Long-term Benefits

Recognition and measurement in the SoFP:• The amount recognised as a liability for other long-term employee

benefits is thus the net total of the following amounts:• The PV of the defined benefit obligation at the reporting date,• minus the FV at the reporting date of plan assets (if any) out of

which the obligations are to be settled directly.

PV of Defined Obligation XXXXXLess FV of Plan Asset (XXXX)Other Long-term benefit liability XX


Other Long-term Benefits


Termination Benefits par 166 - 167

For termination benefits, IAS 19 specifies that amounts payable should be recognised when, and only when, the entity is demonstrably committed to either: – terminate the employment of an employee or group of employees before the normal retirement date;

or – provide termination benefits as a result of an offer made in order to encourage voluntary redundancy.

Recognise termination benefits when an entity can demonstrate commitment to a termination, e.g. :entity has a detailed formal plan for the termination;

– the location, function, and approximate number of employees who will be compensated for terminating their services;

– the termination benefits for each job classification or function;– when the plan will be implemented; and

• is without realistic possibility of withdrawal.• Where termination benefits fall due after more than 12 months after the balance sheet date,

they should be discounted. [IAS 19.139 & IAS 37.72- Restructuring Provision]


Termination Benefits


Any questions?.

.


IFRS 16 – LEASES


Lecture ObjectiveThe following key concepts are fundamental to this study unit:

1. Identify a lease arrangement

2. The classification of lease arrangements.

3. Separating Lease Components

4. Determine a Lease term

5. Lease recognition and measurement (Lessee and Lessor)

6. Lease Modifications

7. Instalment sale agreements

8. Manufacturer Dealer Leases

9. Sale Lease back agreements

10. Tax implications

11. Presentation and Disclosure


Intention

Leases transfer the right of use of an asset

• Legally - has Ownership transferred

• Substance – has Control transferred.

IFRS prescribes “substance over form” principle


Objective of IFRS 16

IFRS 16 establishes principles for the:

i. recognition,

ii. measurement,

iii. presentation and

iv. disclosure

of leases. [IFRS 16:1]


What changed

IAS 17

❖Finance Lease – Capitalised

❖Operating Lease – Expensed

IFRS 16 - effective date is 1 January 2019.

❖Lessee – Operating & Finance Lease – Capitalised

❖Lessor – No change from IAS 17


IAS 17


What is changing?

• IFRS 16 supersedes:

– IAS 17 Leases;

– IFRIC 4 Determining whether an Arrangement contains a Lease;

– SIC-15 Operating Leases—Incentives; and

– SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease.


So WHY IFRS 16 ?

To eliminate off-balance sheet financing• Under IAS 17, lessees needed to classify the lease as either finance

or operating.• If the lease was classified as operating, then the lessees did not

show neither asset nor liability in their balance sheets – just the lease payments as an expense in profit or loss.

• But, some operating leases were non-cancellable, and therefore, they represented a liability (and an asset) for the lessees.

• This liability was hidden from the readers of the financial statements, as it was not presented anywhere.


What changes in the Lessee’s SFP?


IFRS 16


Scope

IFRS 16 does not apply to [IFRS 16:3]

➢leases to explore for or use minerals, oil, natural gas and similar non-regenerative resources;

➢leases of biological assets held by a lessee (see IAS 41 Agriculture);

➢service concession arrangements (see IFRIC 12 Service Concession Arrangements);

➢licences of intellectual property granted by a lessor (see IFRS 15 Revenue from Contracts with Customers); and

➢rights held by a lessee under licensing agreements for items such as films, videos, plays, manuscripts, patents and copyrights within the scope of IAS 38 Intangible Assets


Identifying a Lease Contract

Previously – IFRIC 4

Now – IFRS 16

Considerations from IFRS 16

1. right to control use

2. Identifiable asset

3. for a period of time in exchange for consideration. [IFRS 16:9]


Identifiable Asset


Control

Control is conveyed where the customer has both the right to:

i. direct the identified asset’s use and,

ii. obtain substantially all of the economic benefits[IFRS 16:B9]


Substantive Rights to substitution

Where a supplier has a substantive right of substitution throughout the period of use,a customer does not have a right to use an identified asset. [IFRS 16:B13-14]

A supplier’s right of substitution is only considered substantive if the supplier has boththe practical ability to substitute alternative assets throughout the period of use and

they would economically benefit from substitution.

NB**- Substitution of assets by the lease during time of maintenance or breakdowns

does not prevent a lessee from controlling right of use of asset. (par B30)


In the exam apply B31 to prove a lease contract


Attempt Question 21.2 page 37


Types of Contracts to expect

1. None lease contracts

2. Lease Contract

3. Service Contract

4. Combined Contracts


Combined Contracts

A contract may combine more than one obligation to the lessee. These may be a combination of lease and none lease components. In such a case, each separate component must be identified and accounted for separately either as a lease or non-lease contract.

A lessee may elect not to separate non-lease components from lease components and instead account for all components as a lease. [IFRS 16:13-15]


Separating components of a Lease Contract (par 12)

A component is classified as a lease component if it satisfy the following:

i. The lessee can benefit from use of the underlying asset either on its own or together with other resources that are readily available for the lessee.

ii. The underlying asset is neither highly dependent on, nor highly interrelated with underlying assets in the contract.


Separating components of a Lease Contract (par 13-14)

• Separate the components using their stand alone prices.

• A stand alone price is that price that the supplier would charge another client if they were to offer the component separately.


How about services cost in a lease contract

Maintenance,

Security,

Cleaning, etc.


Lease Term

The lease period is:

i. the non-cancellable period of the lease plus

ii. period covered by an option to extend or an option to terminate if the lessee is reasonably certain to exercise the extension option or not exercise the termination option.


Lessee Accounting


Recognition

Initial recognition: Upon lease commencement a lessee recognises a right-of-use asset and a lease liability. [IFRS 16:22]

Dr Right-of-use asset (SFP)

Cr Lease liability (SFP)


IFRS 16 - Exceptions

• Lease of assets for less than 12 months (short-term leases), and

• Lease of assets of a low value (such as computers, furniture etc.).

NB**- Operating lease accounting is applied to these.


Initial measurement: Right of use Asset

The right-of-use asset is initially measured at the amount of the lease liability plus any initial direct costs incurred by the lessee.Adjustments may also be required for lease incentives, payments at or prior to commencement and restoration obligations or similar. [IFRS 16:24]


Initial measurement: Lease Liability

Measured at the present value of the lease payments payable over the lease term, discounted at the rate implicit in the lease if that can be readily determined.

If that rate cannot be readily determined, the lessee shall use their incremental borrowing rate. [IFRS 16:26]

Variable lease payments are included in the initial measurement of the lease liability using the index or rate as at the commencement date. Amounts expected to be payable by the lessee under residual value guarantees are also included. [IFRS 16:27(b),(c)] Apply IE 14


Implicit Interest Rate


Attempt Question 21.3 page 41


Subsequent measurement: Right of use Asset

A lessee shall measure the right-of-use asset using a cost model, Revaluation model or FV (where its an IP) [IFRS 16:29-32, 34, 35]

Dr amortisation expense (P/L)

Cr Accumulated amortisation (SFP)


Subsequent measurement: Lease Liability

The lease liability is subsequently remeasured to reflect changes in: [IFRS 16:36]

• the lease term (using a revised discount rate);

• the assessment of a purchase option (using a revised discount rate);

• the amounts expected to be payable under residual value guarantees (using an unchanged discount rate); or

• future lease payments resulting from a change in an index or a rate used to determine those payments (using an unchanged discount rate).


Lessor


Classification

Lessors shall classify each lease as an operating lease or a finance lease


Finance Lease

A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership of an underlying asset.

Otherwise a lease is classified as an operating lease.


Indicators of a Finance Lease [IFRS 16:63]• the lease transfers ownership of the asset to the lessee by the end of the

lease term;• the lessee has the option to purchase the asset at a price which is expected to

be sufficiently lower than fair value at the date the option becomesexercisable that, at the inception of the lease, it is reasonably certain that theoption will be exercised;• the lease term is for the major part of the economic life of the asset, even if

title is not transferred at the inception of the lease’• the present value of the minimum lease payments amounts to at least

substantially all of the fair value of the leased asset; and• the leased assets are of a specialised nature such that only the lessee can use

them without major modifications being made.


Initial Recognition and Measurement

Dr Gross lease debtor (SFP) (all pmts + GRV + URV)

Cr Unearned Finance income (SFP)

Cr Asset Leased-Cost (Plant, vehicle, e.tc) (SFP)

Dr Asset Leased- Accumulated Depreciation (SFP)

Cr/(Dr) Gain/(loss) on disposal (P/L)


net investment in the lease

Subsequent measurement

Dr Bank

Cr Gross investment in lease

Receipt of lease income

Dr Unearned Finance Income

Cr Finance income

Amortisation of finance income on net investment


Manufacturer or Dealer Lessors

At the commencement date, a manufacturer or dealer lessor recognises selling profit or loss in accordance with its policy for outright sales to which IFRS 15 applies. [IFRS 16:71c)]


Dr Gross lease debtor (all pmts + GRV + URV)Cr Unearned Finance incomeCr Vat OutputCr Sales (lower of the FV and PV of MLP)

Initial recognition of lease debtor and related sale

Dr Cost of salesCr Inventories

Derecognition of inventory and recognition of cost of sales


Dr Revenue

Cr Cost of sales- PV of URV

Adjusting the revenue and cost of sales with the impact of unguaranteed residual value

Dr Selling expenses

Cr Bank

Recognition of selling costs incurred by the lessor


Subsequently

Dr Bank

Cr Gross investment in lease

Receipt of lease income

Dr Unearned Finance Income

Cr Finance income

Amortisation of finance income on net investment


Attempt Qtn 21.5 pg 47


Sale and Leaseback Transactions (par 99)

An entity shall apply the requirements for determining when a performance obligation is satisfied in IFRS 15 [Refer: IFRS 15 paragraphs 31–34, 38 and B64–B76] to determine whether the transfer of an asset is accounted for as a sale of that asset.


If transfer satisfies the requirements of IFRS 15

(a) the seller-lessee shall measure the right-of-use asset arising from the leaseback at the proportion of the previous carrying amount of the asset that relates to the right of use retained by the seller-lessee. Accordingly, the seller-lessee shall recognise only the amount of any gain or loss that relates to the rights transferred to the buyer-lessor.

(b) the buyer-lessor shall account for the purchase of the asset applying applicable Standards, and for the lease applying the lessor accounting requirements in IFRS 16.


Example IE 24


Any questions?.

.


Provisions, Contingent Liabilities and Assets: IAS 37


Attempt Qtn – 23.1 page 61


Provision

• What is a Provision?

A provision is a:

liability of

Uncertain:

timing or

amount.


Payment date not definite

A provision has to meet the definition of a liability first

Amount may be estimated

Recognition

Incorporation or recording of the monetary effects of a business transaction into books of account or financial statements.

Dr

Cr


Provisions

• When is a provision recognized?

IAS37.14: A provision shall be recognised when:

(a) an entity has a present obligation (legal or constructive) as a result of a past event;

(b) it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and

(c) (c) a reliable estimate can be made of the amount of the obligation.

NB: If these conditions are not met, no provision shall be recognised.


Definitions

• A legal obligation is an obligation that derives from: (a) a contract (through its explicit or implicit terms); (e.g. warranty cost

or breach of contract costs)(b) legislation; or (e.g. environmental law requirements)(c) other operation of law. (court or arbitration ruling)A constructive obligation is an obligation that derives from an entity’s actions

where: (a) by an established pattern of past practice, published policies or a sufficiently

specific current statement, the entity has indicated to other parties that it will accept certain responsibilities; and (13th cheque or bonus payment)

(b) as a result, the entity has created a valid expectation on the part of those other parties that it will discharge those responsibilities.



Present obligation as a result of an obligating event

Reliable Estimate

Probable outflow Remote

Possible Obligation

Recognise a provision

Disclose Contingent

LiabilityDo nothing

Start

Yes

Yes

Yes

No

No

No

Yes

No

No

Yes

Provisions: Measurement

a reliable estimate can be made of the amount of the obligation

Use the Best Estimate to measure the provision

In the extremely rare case where no reliable estimate can be made, a liability exists that cannot be recognised. That liability is disclosed as a contingent liability


Measurement

• Best estimate-

– The amount recognised as a provision shall be the best estimate of the expenditure required to settle the present obligation at the end of the reporting period.

• Best estimate is:

– Based on management’s judgement

– Supported by experience of similar transactions

– Take time value of money into account

– Takes uncertainty & expected value:

• for large population – weighted probability of all possible outcomes (see next slide)

• Single item- recognise in full


Measurement

Example: (refer to the TV Sales & Home example)

The company’s past experience and future expectations indicate the following pattern of likely repairs:

What is the value of the warranty provision at year end?


Goods sold Defects Expected cost of repairs

75% None Nil

20% Minor $1 million

5% Major $4 million

Provisions

Answer:

Best estimate is equal to expected value

(75% x $nil) + (20% x 1 million) + (5% x 4 million)

$ 400,000


Provisions

• Present Value:– Where time value of money is material, use present value at the best estimate.

– The discount rate (or rates) shall be a pre-tax rate (or rates) that reflect(s) current market assessments of the time value of money and the risks specific to the liability.

– The discount rate(s) shall not reflect risks for which future cash flow estimates have been adjusted.

• Future events

• 48 Future events that may affect the amount required to settle an obligation shall be reflected in the amount of a provision where there is sufficient objective evidence that they will occur.


Reimbursements (IAS 37.53-58)

• Where some or all of the expenditure required to settle a provision is expected to be reimbursed by another party, the reimbursement shall be recognised when,

– and only when, it is virtually certain that reimbursement will be received if the entity settles the obligation.

• Recognition- treat as a separate asset.

• Measurement- reimbursement shall not exceed the amount of the provision.

• In the P/L, the expense relating to a provision may be presented net of the amount recognised for a reimbursement. (set-off reimbursement against the expense of the provision and show only net amount) – para 54


Use of provisions (IAS 37.61-62)

• A provision should be used only for the purpose for which it was originally raised and any unused amount is therefore reversed to profit or loss. Settling expenditures against a provision that was originally raised for another purpose would conceal the impact of two different events.

• E.G. A provision raised for a court case at reporting date shall be reversed to P/L if the court case do not result in any obligation:

Dr Provision for court case (SoFP)Cr Reversal of provision of court case (P/L)

NB: This be regarded as a change in accounting estimate, hence, reverse to current year profits even if the provision was raised in prior period.


Application of the recognition & measurement rules:

1. Future operating losses (IAS 37.63-65)

2. Onerous Contracts (IAS 37.66-69)

3. Restructuring (IAS 37.70-83)


Future operating losses

• 63 Provisions shall NOT be recognised for future operating losses.

– Does NOT meet definition of a provision

– Rather indicate impairment of assets – test for impairment under IAS 36.


Onerous contracts

• Definition: An onerous contract is a contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it.

• 66 If an entity has a contract that is onerous, the present obligation under the contract shall be recognised and measured as a provision.

• Measurement- at the least net cost of exiting from the contract, which is the lower of:– the cost of fulfilling it and

– any compensation or penalties arising from failure to fulfil it


Restructurings

• Examples of events that may fall under the definition of restructuring:

• (a) sale or termination of a line of business;

• (b) the closure of business locations in a country or region or the relocation of business activities from one country or region to another;

• (c) changes in management structure, for example, eliminating a layer of management; and

• (d) fundamental reorganisations that have a material effect on the nature and focus of the entity’s operations.


Restructurings

Recognition Criteria for Restructuring provision

• Recognise a provision from a constructive obligation to restructure which arises only when an entity:

(a) has a detailed formal plan for the restructuring identifying at least:

(i) the business or part of a business concerned;

(ii) the principal locations affected;

(iii) the location, function, and approximate number of employees who will be compensated for terminating their services;

(iv) the expenditures that will be undertaken; and

(v) when the plan will be implemented; and

• has raised a valid expectation in those affected that it will carry out the restructuring by starting to implement that plan or announcing its main features to those affected by it.


Restructurings

Measurement of a Restructurings Provision:

• Measurement- Cost to be included:

• A restructuring provision shall include only the direct expenditures arising from the restructuring, which are those that are both:

(a) necessarily entailed by the restructuring; and

(b) not associated with the ongoing activities of the entity.

• A restructuring provision does not include such costs as:

(a) retraining or relocating continuing staff;

(b) marketing; or

(c) investment in new systems and distribution networks.


EX 1- Restructurings

No implementation before reporting date

• On 15 December 2011 the board of PARS Ltd decided to close down its restaurant division. Before reporting date (31 December 2011), the decision was not communicated to any of those affected and no other steps were taken to implement the decision.

Answer• Conclusion

• There has been no obligating event, no obligation has arisen and accordingly no provision is recognised. If the plan is implemented after year-end and is regarded as material, it should be disclosed as a non-adjusting event after the reporting period.


Ex 2- Restructurings

Communication or implementation before reporting date

• On 15 December 2011 the board of Yada Ltd decided to close down its bakery division. On 22 December 2011 a detailed plan for closing down the division was agreed upon by the board; letters were sent to customers warning them to seek an alternative source of supply, and redundancy notices were sent to the staff of the division.

Answer• Conclusion

• The obligating event is the communication of the decision to the customers and employees, which gives rise to a constructive obligation that the division will be closed. An outflow of resources embodying economic benefits in settlement is probable. Aprovision is recognised at 31 December 2011 for the best estimate of the costs of closing the division.


Provision for Dismantling costs

According to IAS16.16(c), the estimated cost (PV of future dismantling cost) of dismantling and removing the asset and restoring the site should be added to the cost of the asset at initial recognition (see IAS 37, Provisions, Contingent Liabilities and Contingent Assets).

However, the entity must have a present legal obligation or constructive obligation to dismantle and remove the item in order to include such costs in the cost of PPE.

Apply the recognition creteria of a provision in IAS 37 – at initial recognition of dismantling costs on PPE.


http://www.iasplus.com/standard/ias37.htm

Contingent liabilities

An entity shall not recognise a contingent liability.


Definitions

• A contingent liability is: (a) a possible obligation that arises from past events and whose

existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity; or

(b) a present obligation that arises from past events but is not recognised because: (i) it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation; or(ii) the amount of the obligation cannot be measured with sufficient reliability.


Disclosure – Contingent Liability

• Unless the possibility of any outflow in settlement is remote, an entity shall disclose for each class of contingent liability at the end of the reporting period a brief description of the nature of the contingent liability and, where practicable:

(a) an estimate of its financial effect, measured under paragraphs 36–52;

(b) an indication of the uncertainties relating to the amount or timing of any outflow; and

(c) the possibility of any reimbursement.


Contingent Assets

A contingent asset is a possible asset that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity.

31 An entity shall not recognise a contingent asset.


Tax Implications

• Three possible alternatives exist regarding the tax deductibility of expenses resulting from provisions:

– The expense may be deductible for tax purposes when the provision is raised.

– The expense may be deductible for tax purposes when the amount is settled in future.

– The expense may not be deductible for tax purposes at any stage.


Tax Implications

• This gives rise to the following three different scenarios when dealing with deferred tax:– If the expense is deductible for tax purposes when the provision is raised, then the tax base of

the provision will be the same as its carrying amount (tax base = carrying amount less zero, as zero will be deductible for tax purposes in the future), with the result that there is no temporary difference and also no deferred tax consequences. CA= TB

– If the expense is deductible for tax purposes in the future when the amount is settled, then the tax base of the provision will be zero (tax base = carrying amount less amount equal to carrying amount that will be deductible in future), with the result that a deductible temporary difference arises in respect of which a deferred tax asset is raised. CA=X TB=0

– If the expense is not deductible for tax purposes at any stage, then the tax base of the provision will be the same as its carrying amount (tax base = carrying amount less zero, as zero will be deductible for tax purposes in the future), with the result that there is no temporary difference and also no deferred tax consequences. CA= TB


Government Grants: IAS 20


IAS 20

• Accounting for Government Grants and Disclosure of Government Assistance



Accounting for Get Grant

Asset grant

Monetary

Offset agnst cost of asset

Deferred Income (when asset not

yet bought)

Non-monetary

At fair value At nominal value

Income grant

Separate credit in P/L

Offset angst expense

Types Of Get Grants

• Grants related to assets are government grants:

– whose primary condition is that an entity qualifying for them:

• should purchase, construct or

• otherwise acquire long-term assets.

– Subsidiary conditions may also be attached restricting the type or location of the assets or the periods during which they are to be acquired or held.


Types Of Get Grants

• Grants related to income are government grants other than those related to assets.


Types Of Get Grants

• Forgivable loans are loans which the lender undertakes to waive repayment of under certain prescribed conditions


Non-monetary grants

• Non-monetary grants, such as free land or other freeresources, etc. provided by the government, are usually accounted for at fair value, although recording both the asset and the grant at a nominal amount is also permitted. [IAS 20.23]


Types Of Get Grants

Below market rate loans

• The benefit of a government loan at a below-market rate of interest is treated as a government grant. [IAS 20.10A]

•


Categories of Grants

• Conditional Grants

• Unconditional grants


Conditional Grant

• Shall be recognised when the conditions are met or are expected to be met.


Unconditional grant

• A grant receivable as compensation for costs already incurred or for immediate financial support, with no future related costs, should be recognised as income in the period in which it is receivable. [IAS 20.20]


Subsequent measurement

• The grant is recognised as income over the period necessary to match them with the related costs, for which they are intended to compensate, on a systematic basis. [IAS 20.12]


Accounting for Grants

• A government grant is recognised only when there is reasonable assurance that:

• (a) the entity will comply with any conditions attached to the grant, and

• (b) the grant will be received. [IAS 20.7]


Accounting for Grant Related to Asset

The grant should be recognised as follows: Deduction from cost of the asset, or Deferred IncomeNB: Always follow the accounting policy of the entity with regards to the

manner of recognition (since the entity has a choice)Deduction from cost of the assetDr Bank

Cr PPE - cost (asset acquired using the grant)Reduction of the cost of the asset with amount received on the grant.NB: Depreciation should be charged on the reduced cost- reduced

depreciation.


Accounting for Grant Related to Asset

Deferred Income

Dr Bank

Cr Deferred Income

Recognition of the grant as a income received in advance

After every year of meeting the set grant conditions, the following should be recognised over the useful life of the asset.

Dr Deferred Income

Cr Grant Income (other income)


Accounting for Grant Related to Income

• The grant should be recognised as follows:

– Separate income item (other income), or

– Deducted from related expenses


Repayment of government grants (IAS 20.32-33)

• Recognition: account for as a change in accounting estimate

Income Based grant:

a) apply first against any unamortised deferred credit recognised in respect of the grant.

b) recognised immediately in profit or loss to the extent that the repayment exceeds any such deferred credit, or when no deferred credit exists.

Journalise as follows:

Dr Deferred Income (a)

Dr repayment of gvt grant loss (p/L) (excess)(b)

Cr Gvt grant repayable


Repayment of government grants (IAS 20.32-33)

Recognition: account for as a change in accounting estimate

Asset Based grant are accounted either as:

Deduction from cost of the asset, or

Deferred IncomeNB: the accounting policy determines the accounts affected on repayment of the grant. (See next slide)

• Repayment of an asset related grant- is an indicator of impairment, hence, test for impairment after increasing the cost of the asset.


Repayment of government grants (IAS 20.32-33)-Asset Based grant:Deduction from cost of the asset

• increase the CA of the asset.

• Immediately recognise the cumulative additional depreciation that would have been recognised in profit or loss to date in the absence of the grant.

NB: Repayment of an asset related grant- is an indicator of impairment,

Deferred Income

• reducing the deferred income balance by the amount repayable


Repayment of government grants (IAS 20.32-33)-Asset Based grant:Deduction from cost of the asset

Dr Asset

Cr Gvt gran repayable

Amount repayable

Dr Depreciation (p/l)

Accumulated Depreciation

Cumulative difference of depr after repayment and b4 repayment till beginning of yr of repayment

Dr Depreciation (p/l)

Cr Accumulated Depreciation

New depreciation after repayment,

Deferred Income

Dr Deferred Income

Cr Gvt grant repayable


Events After the Reporting Period: IAS 10


Agenda

DefinitionsDate of authorisation for issueRecognition and measurement:Adjusting events after the reporting periodNon-adjusting events after the reporting periodDividendsGoing concern

DisclosureUpdating disclosure about conditions at the end of the reporting

period


What is an event after reporting period?

Definition of Events after reporting date: [IAS10.3]

Events after the reporting period are those events, favourable and unfavourable, that occur between the end of the reporting period and the date when the financial statements are authorised for issue. Two types of events can be identified:

(a) those that provide evidence of conditions that existed at the end of the reporting period (adjusting events after the reporting period); and

(b) those that are indicative of conditions that arose after the reporting period (non-adjusting events after the reporting period).



What is an event after reporting period?

Reporting date AFS Authorisation Date

Events after the reporting period

What is the AFS Authorisation Date?

• The date of authorisation the financial statements for issue will vary depending:

– upon the management structure,

– statutory requirements and procedures followed in preparing and finalising the financial statements.


Recognition & Measurement

• Adjusting events

• Non-adjusting events


Adjusting events after the reporting period

Adjusting events:

• Those events that provide evidence of conditions that existed at the end of the reporting period.

Accounting Treatment:

• adjust the amounts recognised in its financial statements to reflect adjusting events after the reporting period.


Non-Adjusting events after the reporting period

Non-Adjusting events:• Events that are indicative of conditions that arose after the reporting period.

Accounting Treatment:• those that are indicative of conditions that arose after the reporting period.

Disclosure:• Material events: • Disclose each material category of non-adjusting event after the reporting period:

(a) the nature of the event; and(b) an estimate of its financial effect, or a statement that such an estimate cannot be

made.


Adjusting and Non-adjusting Event

Events after Reporting Date

Adjusting Events:

Event confirms circumstances existing at

reporting date

Examples-IAS10.9:

- court case settlement

-bankruptcy of a customer

-stock sold below cost

Discovery of fraud or error

-going concern issues

Non-adjusting Events:

New events NOT confirming circumstances at reporting date

Examples -IAS10.22:

-major buzz combination

Plan to discontinue a line of operations

Change in current tax rate


Dividends

12 If dividend declared after the reporting period:

– the entity shall NOT recognise those dividends as a liability at the end of the reporting period.

13 If dividends are declared after the reporting period but before the financial statements are authorised for issue:

– the dividends are NOT recognised as a liability at the end of the reporting period because no obligation exists at that time.

– Such dividends are disclosed in the notes in accordance with IAS 1 Presentation of Financial Statements.


Going concern

14 An entity shall not prepare its financial statements on a going concern basis if management determines after the reporting period either that it intends to liquidate the entity or to cease trading, or that it has no realistic alternative but to do so.

15 Deterioration in operating results and financial position after the reporting period may indicate a need to consider whether the going concern assumption is still appropriate. If the going concern assumption is no longer appropriate, the effect is so pervasive that this Standard requires a fundamental change in the basis of accounting, rather than an adjustment to the amounts recognised within the original basis of accounting.

16 IAS 1 specifies required disclosures if: (a) the financial statements are not prepared on a going concern basis; or(b) management is aware of material uncertainties related to events or conditions that may cast significant doubt upon the entity’s ability to continue as a going concern. The events or conditions requiring disclosure may arise after the reporting period.


Disclosure (IAS10.17-22)

• General disclosures:

– The date when the financial statements were authorised for issue;

– who gave that authorisation; and

– that the entity's owners or others have the power to amend the financial statements after they have been issued, should this be the case.



• Adjusting events (information received after the reporting period about conditions existing at the reporting date)

– Update the relevant amounts and other disclosures to reflect the new information.



• Non-adjusting events (conditions that arose after the reporting date)

– If Non-adjusting Event is Material:

– Disclose each material category of non-adjusting event after the reporting period:

(a) the nature of the event; and

(b) an estimate of its financial effect, or a statement that such an estimate cannot be made.


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