C. REPORTING THE FINANCIAL PERFORMANCE OF A RANGE OF ENTITIES - NON-CURRENT ASSETS

Question 1

Property, plant and equipment (IAS 16)

Answer 1

are tangible assets with the following properties:
 Held by entity for use in the production or supply of goods or services, for rental to others, or for administrative purposes
 Expected to be used during more than one period.

Question 2

Recognition of PPE.

Answer 2

As with all the assets the recognition depends on two criteria:
 It is probable that future economic benefits associated with the item will flow to the entity
 The cost of the item can be measured reliably
These recognition criteria apply to subsequent expenditure as well as costs incurred initially.
Smaller items such as tools may be classified as consumables and expensed rather than capitalized (otherwise aggregate and capitalize as one). Large and complex assets should be broken down into composite parts and depreciated separately, if the parts have differing patterns of benefits and the cost of each is significant.

Question 3

Measurement at recognition PPE.

Answer 3

PPE should initially be measured at cost, which includes:
 Purchase price, less trade discount/rebate, including import duties and non-refundable purchase taxes (for example, non-refundable value added tax: however, purchase taxes are not included in cost if they are refundable to the entity).
 Directly attributable costs of bringing the asset to working condition for intended use: employee benefit costs, site preparation, initial delivery and handling costs, installation and assembly costs, professional fees, costs of testing, dismantling and site restoration costs.
 Finance costs: capitalized for qualifying assets

Question 4

Measurement after recognition PPE

Answer 4

After recognition, entities can chose between two models:
 Cost model. Carry asset at cost less depreciation and any accumulated impairment losses
 Revaluation model. Carry asset at revalued amount – fair value less subsequent accumulated depreciation and any accumulated impairment losses.

Question 5

Revaluations PPE.

Answer 5

If the revaluation model is applied:
 Revaluations must be carried out regularly, depending on volatility
 The asset should be revalued to fair value, using fair value hierarchy in IFRS 13
 If one asset is revalued, so must be the whole of the rest of the class of assets at the same time
 An increase in value is credited to other comprehensive income (and the revaluation surplus in equity)
 A decrease is an expense in profit and loss after cancelling a previous revaluation surplus

Question 6

Depreciation of PPE

Answer 6

An item of PPE should be depreciated:
 Depreciation is based on the carrying amount in the statement of financial position. It must be determined separately for each significant part of the item.
 Excess over historical cost depreciation can be transferred to realised earnings through reserves.
 The residual value and useful life of an asset, as well as the depreciation method, must be reviewed at least at each financial year end. Changes are treated as changes in accounting estimates and are accounted for prospectively as adjustments to future depreciation.
 Depreciation of the item does not cease when it becomes temporarily idle or is retires from active use and held for disposal, unless it is classified as held for sale.

Question 7

Derecognition of PPE

Answer 7

An item of PPE should be derecognized on disposal of the item or when no future economic benefits are expected from its use or disposal. Gains or losses are calculated by comparing net proceeds with the carrying amount of the assets and are recognized as income/expense in profit or loss. When revalued asset is disposed of, any revaluation surplus must be transferred directly to retained earnings (alternatively may be left in equity under revaluation surplus).

Question 8

Exchanges of items of PPE,

Answer 8

Exchanges of items of PPE, regardless of whether the assets are similar, are measured at fair value, unless the exchange transaction lacks commercial substance or the fair value of neither of the assets exchanged can be measured reliably. If the acquired item is not measured at fair value, its cost is measured at the carrying amount of the asset given up.

Question 9

Impairment of assets.

Answer 9

The entity should look for evidence of impairment at the end of each period and conduct an impairment review on any asset where there is evidence of impairment.

Question 10

External indicators of impairment:

Answer 10

External indicators of impairment:
 Observable indications that the asset’s value has declined during the period significantly more than expected due to the passage of time or normal use.
 Significant changes with an adverse effect on entity in the technological or market environment, or in the economic or legal environment.
 Increased market interest rates or other market rates of return affecting discount rates and thus reducing value in use.
 Carrying amount of net assets of the entity exceeds market capitalisation

Question 11

Internal indicators of impairment.

Answer 11

Internal indicators of impairment.
 Evidence of obsolescence or physical damage
 Significant changes with an adverse effect on the entity
o The assets become idle
o Plans to discontinue/restructure the operation to which asset belongs
o Plans to dispose of an asset before the previously expected date
o Reassessing an asset’s useful life as finite rather than indefinite
 Internal evidence available that asset performance will be worse than expected

Question 12

Annual impairment tests

Answer 12

Annual impairment tests, irrespective of whether there are indications of impairments, are required for:
 Intangible assets with an indefinite useful life/not yet available for use
 Goodwill acquired in a business combinations

Question 13

Recoverable amount.

Answer 13

Recoverable amount. Assets must be carried at no more than their recoverable amount. Recoverable amount is higher of
 Fair value less costs of disposal – the price that would be received to sell that asset in an orderly transaction between market participants at the measurement date, less the direct incremental costs attributable to the disposal of the asset.
 Value in use – measured as the present value of estimated future cash flows generated by the asset, including its estimated net disposal value at the end of its expected useful life.
 If the carrying amount of an asset is higher than its recoverable amount, the asset is impaired and should be written down to its recoverable amount. The difference between carrying amount of the impaired asset and its recoverable amount is known as an impairment loss.

Question 14

Cash flow projections for recoverable amounts

Answer 14

Cash flow projections are based on most recent management approved budgets/forecasts. They should cover a maximum period of five years. The cash flows should include:
 Projections of cash inflows from continuing use of the asset
 Projections of cash outflows necessarily incurred to generate the cash inflows from continuing use of the asset
 Net cash flows, if any, for the disposal of the asset at the end of its useful life
 Future overheads that can be directly attributed, or allocated on a reasonable and consistent basis
Do not include cash outflows relating to obligations already recognized as liabilities, flows from financing activities or income tax receipts and payments, effects of future restructuring the entity is not yet committed.

Question 15

Discount rate for recoverable amount.

Answer 15

It should be pre-tax rate that reflects current market assessment of the time value of money and the risks specific to the asset for which future cash flow estimates have not been adjusted.

Question 16

Cash generating units (CGU).

Answer 16

Where it is not possible to estimate the recoverable amount of an individual asset, the entity estimates the recoverable amount of the cash-generating unit to which it belongs. CGU is the smallest identifiable group of assets that generate cash inflows that are largely independent of the cash inflows from other assets or groups of assets.

Question 17

Goodwill recoverable amount

Answer 17

Goodwill does not generate independent cash flows and therefore its recoverable amount as an individual asset cannot be determined. It is therefore allocated to the CGU to which it belongs, and the CGU tested for impairment. Goodwill that cannot be allocated to a CGU on a non-arbitrary basis is allocated to the group of CGUs to which it relates.

Question 18

Corporate assets

Answer 18

Corporate assets are group or divisional assets such as a head office building or research centre. Corporate assets do not generate cash inflows independently from other assets; hence their carrying amount cannot be fully attributed to a CGU under review. Treatment is similar to that of goodwill. The CGU includes corporate assets (or a portion of them) that can be allocated to it on a ‘reasonable and consistent basis’. Where this is not possible, the assets are tested for impairment as part of the group of CGUs to which they can be allocated on a reasonable and consistent basis.

Question 19

Impairment losses.

Answer 19

Should be recognized immediately. The asset’s carrying amount should be reduced to its recoverable amount, and for:
 Assets carried at historical cost – the impairment loss is charged to profit and loss
 Revalued assets – the impairment loss should be treated under the appropriate rules of the applicable IFRS.

Question 20

Impairment losses with CGU.

Answer 20

The impairment loss is allocated in the following order:
 Goodwill allocated to CGU
 Other assets on a pro-rata basis based on carrying amount
The carrying amount of an asset cannot be reduced below the higher of its recoverable amount and zero. The amount of the impairment loss that would other wise have been allocated to the asset is allocated to the other assets on a pro-rata basis
Where not all assets or goodwill will have been allocated to an individual CGU then different levels of impairment tests are performed to ensure the unallocated assets are tested.
 Test of individual CGUs – test the individual CGUs (including allocated goodwill and any portion of the carrying amount of corporate assets that can be allocated on a reasonable and consistent basis).
 Test of group of CGUs that includes the CGU under review and to which the goodwill can be allocated/a portion of the carrying amount of corporate assets can be allocated on a reasonable and consistent basis.

Question 21

Impairment loss and non-controlling interest.

Answer 21

Where non-controlling interests are measured at the date of acquisition at the proportionate share of fair value of the acquiree’s identifiable assets acquired and liabilities assumed (ie not at fair value), part of calculation of recoverable amount of the CGU relates to unrecognized non-controlling share of the goodwill. For the purpose of calculating an impairment loss, the carrying amount of the CGU is therefore notionally adjusted to include the non-controlling interests in the goodwill by grossing it up. The resulting impairment loss calculated is only recognized to the extent of the parent’s share. This adjustment is not required where non-controlling interests are measured at fair value at acquisition.

Question 22

Reversal of past impairments

Answer 22

. A reversal for a CGU is allocated to the assets of the CGU, except for goodwill, pro rata with the carrying amounts of those assets. However, the carrying amount of an asset is not increased above the lower of:
 Its recoverable amount and
 Its depreciated carrying amount had no impairment loss originally been recognized.
Any amounts left unallocated are allocated to the other assets (except goodwill) pro rata. The reversal is recognized in profit and loss, except where reversing a loss recognized on assets carried at revalued amounts, which are treated in accordance with the applicable IFRS. Once recognized impairment losses on goodwill are not reversed.

Question 23

IFRS 5 Non-current assets held for sale and discontinued operations.

Answer 23

IFRS 5 applies to all of an entity’s recognized non-current assets and disposal groups with the following exceptions:

 Deferred tax assets
 Assets arising from employee benefits
 Financial assets within the scope of IFRS 9
 Investment properties accounted for under the fair value model
 Biological assets measured at fair value
 Contractual rights under insurance contracts

Question 24

Disposal group:

Answer 24

Disposal group: a group of assets to be disposed of, by sale or otherwise, together as a group in a single transaction, and liabilities directly associated with those assets that will be transferred in the transaction. The disposal group may be a group of CGUs, a single CGU, or a part of a CGU.

Question 25

Classification of assets held for sale.

Answer 25

Classification of assets held for sale. An entity shall classify a non-current asset (or disposal group) as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use. To be classified as ‘held for sale’, the following criteria must be met:
 The asset (or disposal group) must be available for immediate sale in its present condition, subject only to usual and customary sales terms; and
 The sale must be highly probable:
o Price at which the asset (or disposal group) is actively marketed for sale must be reasonable in relation to its current fair value;
o Unlikely that significant changes will be made to the plan or the plan withdrawn (indicated by actions required to complete the plan);
o Management (at the appropriate level) must be committed to a plan to sell;
o Active programme to locate a buyer and complete the plan must have been initiated
o Sale expected to qualify for recognition as a completed sale within one year from the date of classification as held for sale.

Question 26

Measurement of NC assets held for sale

Answer 26

 Step 1. Immediately before initial classification as held for sale, the asset (or disposal group) is measured in accordance with the applicable IFRS
 Step 2. On classification of the non-current asset (or disposal group) as held for sale, it is written down to fair value less costs to sell (if less than carrying amount). Any impairment loss arising under IFRS 5 is charged to profit or loss (and the credit allocated to assets of a disposal group using the IAS 36 rules, ie first to goodwill, then to other assets pro rata based on carrying amount).
 Step 3. Non-current assets/disposal groups classified as held for sale are not depreciated/amortized.
 Step 4. Any subsequent changes in fair value less costs to sell are recognized as a further impairment loss (or reversal of an impairment loss (however gains recognized cannot exceed cumulative impairment losses to date).
 Step 5. Presented:
o As single amounts (of assets and liabilities)
o On the face of the statement of financial position
o Separately from other assets and liabilities
o Normally as current assets and liabilities (not offset).

Question 27

Disclosure for NC assets held for sale

Answer 27

Disclosure. As well as separate presentation of non-current assets held for sale, and liabilities directly associated with assets held for sale in the statement of financial position, any cumulative income or expense recognized in other comprehensive income relating to a non-current asset held for sale is presented separately in the reserves section of the statement of financial position.
Notes to financial statements:
 A description of the non-current asset
 A description of the facts and circumstances of the sale, or leading to the expected disposal, and the expected manner and timing of disposal
 The gain or loss recognized on assets aas held for sale
 If applicable, the operating segment in which the non-current asset is presented

Question 28

Non-current assets to be abandoned.

Answer 28

Non-current assets (or disposal groups) to be abandoned are not classified as held for sale, since their carrying amount will be recovered principally through continuing use. This includes non-current assets (or disposal groups) that are to be used to the end of their economic life or closed rather than sold. However, if the disposal group meets the definition of a discontinued operation, it is presented as such at the date it ceases to be used.

Question 29

Investment property (IAS 40)

Answer 29

Investment property (IAS 40)- property (land or building, or part, or both) held (by the owner or by the lessee as a right-of-use asset) to earn rentals or for capital appreciation or both, rather than for:
 Use in the production or supply of goods or services or for administrative purposes; or
 Sale in the ordinary course of business
The following are not investment property:
 Property held for sale in the ordinary course of business or in the process of construction or development for such sale
 Owner-occupied property, as well as held for future use/development and subsequent use as owner-occupied property.
 Property leased to another entity under a finance lease.

Question 30

Investment property recognition

Answer 30

Recognition. Investment property is recognized when it is probable that future economic benefits will flow to the entity and the cost can be measured reliably.

Question 31

Measurement at recognition investment property

Answer 31

Measurement at recognition. Investment property should be measured initially at cost, including directly attributable expenditure and transaction costs.

Question 32

Measurement after recognition investment property

Answer 32

Measurement after recognition. After recognition, entities can choose between two models and it should be applied to all of its investment property:
 Fair value model – any change in fair value reported in profit and loss, not depreciated.
 Cost model – as cost model of IAS 16 – unless held for sale (IFRS 5) or leased (IFRS 16)

Question 33

Transfers to or from investment property.

Answer 33

Transfer should only be made when there is a change in use. A change in use occurs when the property meets or ceases to meet the definition of investment property and there is evidence of the change in use. In isolation, a change in management’s intentions for the use of a property does not provide evidence of a change in use.
 Transfer from investment property to owner-occupied or inventories
o Cost for subsequent accounting is fair value at the date of change in use.
o Apply IAS 16, IAS 2 or IFRS 16 as appropriate after date of change in use.
 Transfer from owner-occupied to investment property
o Apply IAS 16 or IFRS 16 (for property held by a lessee as right-of-use asset) up to date of change in use
o At date of change, property revalued to fair value
o At date of change, any difference between the carrying amount under IAS 16 or IFRS 16 and its fair value is treated as a revaluation under IAS 16.

Question 34

Disposals investment property

Answer 34

Disposals. Any gain or loss on disposal of investment property is the difference between the net disposal proceeds and the carrying amount of the asset. It should be recognized as income or expense in profit or loss.

Question 35

Intangible asset (IAS 38)

Answer 35

Intangible asset (IAS 38) – is an identifiable non-monetary asset without physical substance. The asset must be:
 Controlled by the entity as a result of events in the past; and
 Something from which the entity expects future economic benefits to flow
An asset is identifiable if it is separable or arises from contractual/legal rights.

Question 36

Recognition intangible assets

Answer 36

Recognition. As with all assets, recognition depends on two criteria:
 It is probable that future economic benefits that are attributable to the asset will flow to the entity
 The cost of the asset can be measured reliably

Question 37

Measurement at recognition intangible assets

Answer 37

Measurement at recognition depends on how the intangible asset was acquired or generated:
 Separate acquisition – cost, which is purchase price
 Acquired as part of a business combination – fair value as per IFRS 3 Business Combinations
 Internally generated goodwill – not recognised
 Internally generated intangible asset – recognized when ‘PIRATE’ criteria met
 Acquired by government grant - asset and grant at fair value, or nominal amount plus expenditure directly attributable to preparation for use.

Question 38

Internally generated intangible assets.

Answer 38

To assess whether an internally generated intangible asset meets the criteria for recognition, an entity classifies the generation of the asset into a research phase and a development phase. During research phase all expenditure is recognised as an expense. During the development phase, internally generated intangible asset that meet all of the following criteria must be capitalized:
 Probable future economic benefits
 Intention to complete and use/sell asset
 Resources adequate and available to complete and use/sell asset
 Ability to use/sell the asset
 Technical feasibility of completing asset for use/sale
 Expenditure can be measured reliably
Expenditure not meeting all six criteria is treated as an expense.

Question 39

The costs allocated to internally generated intangible asset

Answer 39

The costs allocated to internally generated intangible asset should be only costs that can be directly attributed or allocated on a reasonable and consistent basis to creating, producing or preparing the asset for its intended use. The cost of an internally generated intangible asset is the sum of the expenditure incurred from the date when the intangible asset first meets the recognition criteria.

Question 40

Expenditure on internally generated brands

Answer 40

Expenditure on internally generated brands, mastheads, publishing titles, customer lists and items similar in substance are not recognized as intangible asset. Similarly, start-up, training, advertising, promotional, relocation and reorganization costs are all recognized as expense.

Question 41

Measurement after recognition intangible assets

Answer 41

After recognition, entities can choose between two models:
 Cost model – carry asset at cost less accumulated amortisation and impairment losses
 Revaluation model – carry asset at revalued amount, fair value amount less subsequent accumulated amortisation and impairment losses.

Question 42

Amortisation intangible assets

Answer 42

Amortisation. An intangible asset with a finite useful life should be amortised over its expected useful life.
 The depreciable amount (cost/revalued amount-residual value) is allocated on a systematic basis over the useful life.
 The residual value is normally assumed to be zero.
 Amortization begins when the asset is available for use (ie when it is in the location and condition necessary for it to be capable of operating in the manner intended by management)
 The useful life and amortisation method must be reviewed at least at each financial year end and adjusted where necessary
An intangible asset with an indefinite useful should not be amortised. IAS 36 requires that such an asset is tested for impairment at least annually.

Question 43

Disclosure intangible assets

Answer 43

Disclosure. Disclosure requirements are extensive. They include a reconciliation of the carrying amount of intangible assets at the beginning and end of the reporting period, the amortization methods used for assets with finite useful life, the amount of research and development recognised as an expense and a description areas of judgement such as the reasons supporting the assessment of indefinite useful lives.

Question 44

Borrowing costs (IAS 23)

Answer 44

directly attributable to the acquisition, construction or production of a qualifying asset are capitalized as part of the cost of that asset. A qualifying asset is one that necessarily takes a substantial period of time to get ready for its intended use or sale.

Question 45

Borrowing costs eligible for capitalization:

Answer 45

 Funds borrowed specifically for a qualifying asset – capitalise actual borrowing costs incurred less investment income on temporary investment of the funds
 Funds borrowed generally – weighted average of borrowing costs outstanding during the period (excluding borrowings specifically for a qualifying asset) multiplied by expenditure on qualifying asset. The amount capitalised should not exceed total borrowing costs incurred in the period.

Question 46

Commencement and casement of capitalisation of borrowing costs

Answer 46

Commencement of capitalisation begins when:
 Expenditures for the asset are being incurred
 Borrowing costs are being incurred and
 Activities that are necessary to prepare the asset for its intended use or sale are in progress.
Capitalisation is suspended during extended periods when development is interrupted. Capitalisation ceases when substantially all the activities necessary to prepare the asset for its intended use or sale are complete.

Question 47

Disclosure borrowing costs

Answer 47

The financial statements disclose:
 The amount of borrowing costs capitalised during the period and
 The capitalisation rate used to determine the amount of borrowing costs eligible for capitalisation.

Question 48

Intangible assets -revaluation model

Answer 48

If the revaluation model is used:
 Fair value must be able to be measured reliably with reference to an active market.
 The entire class of intangible assets of that type must be revalued at the same time.
 If an intangible asset in a class of revalued intangible assets cannot be revalued because there is no active market for this asset, the asset should be carried at its cost less any accumulated amortisation and impairment losses
 Revaluations should be made with such regularity that the carrying amount does not differ from that which would be determined using fair value at the year end.
There will not usually be an active market in an intangible asset; therefore, revaluation model will usually not be available.