4. B) Assets: Intangible, Leases and Inventories

Question 1

IFRS 16 Leases

Answer 1

Sets out the principles for the recognition, measurement and presentation of leases in the accounts.

Question 2

2 parties of the leasing contract

Answer 2

1. Lessor: often a finance company.
2. Lessee: entity that obtains the right to use an asset for a period of time in exchange for consideration.

Question 3

Commencement of lease entries

Answer 3

• Debit right-of-use (ROU) asset
• Credit lease liability

Initial measurement of ROU asset is at cost: Initial measurement of lease liability + payments made - incentives received.

Initial measurement of Lease liability: present value of the lease payments to be paid over the lease term.

Question 4

Interest rate implicit in the lease

Answer 4

Interest rate will cause the lease payments, plus the residual value of the asset at the end of the lease term, to equal the fair value of the asset plus any direct costs.

Question 5

After the commencement date, measurement

Answer 5

• Cost model: cost less any accumulated depreciation, and any accumulated impairment losses
  or
• Revaluation model

Question 6

Depreciation period of the leased asset

Answer 6

The useful life of the asset if the lease transfers ownership of the asset at the end of the lease.
If not, the earlier of the asset’s useful life and the lease term.

Question 7

Lease liability changes

Answer 7

• Increases as interest is added:
  (Dr Finance cost / Cr Lease Liab)
• Reduces as payments made:
  (Dr Lease Liab / Cr Bank)

Question 8

6 Accounts involved

Answer 8

• PPE or ROU Asset (SFP)
• Accumulated depreciation (SFP)
• Depreciation charges (SPL)
• Lease liability (SFP)
  (split between current, and non-current)
• Finance cost (SPL)
• Bank (SFP)

Question 9

Determine the Lease liability at the end of each year (payment arrears)

Answer 9

Liability at the beginning
+ Interest cost
- Lease payment
= Liability at the end

Current liability = Next year’s payment - Next year’s interest
Non-current = Lease liability at the end of next year.

Question 10

Determine the Lease liability at the end of each year (payment in advance)

Answer 10

Liability at the beginning
- Lease payment
+ Interest cost
= Liability at the end

Current liability = Next year’s payment.
Non-current = Lease liability at the end of year - Next year’s payment.

Question 11

Short-term/low value leases

Answer 11

• Less than 12 months and with no option to buy at the end of the lease.
• Or low value, the valuation must be based on the value of the asset when it is new, and on an absolute basis.
• No need to recognise the asset, posted as an expense.

Question 12

IAS38 Intangible Assets

Answer 12

Sets out the accounting treatment of expenditure on acquiring, developing, maintaining or enhancing intangible assets.

Question 13

Intangible asset

Answer 13

An identifiable non-monetary asset without physical substance.
Asset is: “A resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.”
(Expected instead of potential)

Question 14

3 key elements of intangible asset

Answer 14

1. Identifiability: is capable of being separated or divided from the entity, or arises from contractual or other legal rights
2. Controllable
3. Expected future economic benefits

Question 15

Conditions of recognition of intangible asset

Answer 15

• It is probable that the expected future economic benefits that are attributable to the asset will flow to the entity.
• The cost of the asset can be measured reliably.

Question 16

Research and development

Answer 16

• Only costs from the development phase can be recognised.
• Expenditure on research shall be recognised as an expense.
• When the costs from research cannot be separated from development, these costs will not be recognised.
• Internally generated brands shall not be recognised.

Question 17

To capitalise development costs, the entity can demonstrate:

Answer 17

• The technical feasibility of completing the intangible asset.
• Its intention to complete the intangible asset
• Its ability to use or sell the intangible asset.
• How the asset will generate probable benefits.
• The availability of resources to complete the development.
• Its ability to measure reliably the expenditure

Question 18

Useful life of intangible assets

Answer 18

• Finite: limited useful life.
• Indefinite: no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the entity.
  An intangible asset with an indefinite useful life shall not be amortised but tested for impairment annually.

Question 19

IAS 2 Inventories

Answer 19

• Inventories shall be measured at the lower of cost or net realisable value.

Question 20

Inventories definititon

Answer 20

Current assets held for sale in the ordinary course of business.

Question 21

Cost of inventories includes

Answer 21

• All costs of purchase
• Costs of conversion
• Other costs incurred in bringing the inventories to their present location and condition.

Question 22

Net realisable value

Answer 22

The estimated selling price less the estimated costs necessary to make the sale.

Question 23

Inventory valuation methods (for cost)

Answer 23

• FIFO: first in first out
• AVCO: weighted average cost formula

The same valuation is to be used for all inventories having similar nature and use to the entity.