4. B) Assets: Intangible, Leases and Inventories Flashcards
IFRS 16 Leases
Sets out the principles for the recognition, measurement and presentation of leases in the accounts.
2 parties of the leasing contract
- Lessor: often a finance company.
- Lessee: entity that obtains the right to use an asset for a period of time in exchange for consideration.
Commencement of lease entries
- 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.
Interest rate implicit in the lease
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.
After the commencement date, measurement
- Cost model: cost less any accumulated depreciation, and any accumulated impairment losses
or - Revaluation model
Depreciation period of the leased asset
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.
Lease liability changes
- Increases as interest is added:
(Dr Finance cost / Cr Lease Liab) - Reduces as payments made:
(Dr Lease Liab / Cr Bank)
6 Accounts involved
- 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)
Determine the Lease liability at the end of each year (payment arrears)
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.
Determine the Lease liability at the end of each year (payment in advance)
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.
Short-term/low value leases
- 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.
IAS38 Intangible Assets
Sets out the accounting treatment of expenditure on acquiring, developing, maintaining or enhancing intangible assets.
Intangible asset
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)
3 key elements of intangible asset
- Identifiability: is capable of being separated or divided from the entity, or arises from contractual or other legal rights
- Controllable
- Expected future economic benefits
Conditions of recognition of intangible asset
- 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.
Research and development
- 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.
To capitalise development costs, the entity can demonstrate:
- 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
Useful life of intangible assets
- 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.
IAS 2 Inventories
- Inventories shall be measured at the lower of cost or net realisable value.
Inventories definititon
Current assets held for sale in the ordinary course of business.
Cost of inventories includes
- All costs of purchase
- Costs of conversion
- Other costs incurred in bringing the inventories to their present location and condition.
Net realisable value
The estimated selling price less the estimated costs necessary to make the sale.
Inventory valuation methods (for cost)
- 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.
