Chapter 7 Reporting of assets and liabilities Flashcards
1.1 IAS 36 Impairment of Assets
An asset is impaired if the carrying amount exceeds its recoverable amount. The recoverable amount of an asset is the higher of its FV less cost of disposal and its value in use (PV of future cash flows expected to be derived from an asset).
The discount rate should reflect the risks specific to the asset. Estimates of future cash flows should reflects the current condition of the asset. Usually it is only possible to reliably forecast cash flows for a max of 5 years. After 5 years, projected cash flows are extrapolated using an appropriate growth/decline rate.
1.2 Frequency of impairment reviews
Perform impairment reviews annually for purchased goodwill and intangibles that are not being amortised. Perform impairment reviews for any other assets only when there is some indication that impairment has occurred.
1.3 Recognition of impairment losses
Impairment losses are taken to P+L, unless the asset is held under the revaluation model, in which case losses are first set against any revaluation surplus for the asset and charged to OCI.
1.4 Cash-generating units
It can be difficult the determine the value-in-use of a specific asset. When this occurs, we must consider groups of assets called cash-generating units. This is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or group of assets.
1.5 Allocating central assets to CGUs
Some assets within a business do not generate cash flows. These include corporate assets and goodwill. These assets should be allocated to CGUs on a reasonable, consistent basis, such as their respective carrying amounts.
1.6 Impairment review of a CGU
A CGU to which goodwill has been allocated must be tested for impairment at least annually. An impairment loss should be recognised against a CGU when the carrying amount of CGU (sum of the carrying amounts of the individual assets of the CGU) is more than the recoverable amount (higher of value in use and FV less costs to sell).
IAS36 states the carrying amount of a CGU does not include the carrying amount of any recognised liability, unless the recoverable amount of the CGU cannot be determined without consideration of this liability.
1.7 Allocation of impairment to CGU assets
The impairment loss shall be allocated to reduce the carrying amount of assets of the unit in the following order:
- Reduce the carrying amount of any goodwill allocated to the CGU, and
- Then to the other assets of the unit, pro-rata on the basis of the carrying amount of each asset in the unit
1.8 Reversal of impairment losses
Impairment losses can be reversed if the recoverable amount increases after an impairment has been performed. Assess whether a reversal has occurred at each YE. The reversal of the impairment loss through the SPL is capped so that the new carrying amount is not more than the carrying amount if no impairment had occurred. Any excess between the cap and the recoverable amount under the cost model is not recognised and under the revaluation model is treated as a revaluation in accordance with IAS 16.
Impairment losses against goodwill can never be reversed. Therefore, the reversal should be allocated to assets (other than goodwill) on a pro-rata basis according to their carrying amount.
2.1 IAS 2 Inventories
Inventory should be valued at the lower of cost and net realisable value. The costs include costs of purchase, plus any incidental costs incurred in bringing the inventories to their net realisable value. The cost should be calculated using FIFO or AVCO. The net realisable value is the selling price less any costs to complete and selling costs.
3.1 IAS 16 Property, plant and equipment
The cost of an item of PPE comprises:
- Purchase price, including import duties and non-refundable purchase taxes
- Any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management
- The initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located
3.2 Revaluation model
Apply consistently to the class of PPE. Carry out revaluations regularly. Revaluation gains are taken to revaluation surplus/OCI unless reverses losses previously charged to SPL. Revaluation losses are taken to SPL unless reverses gains previously recognised in revaluation surplus/OCI.
3.3 Depreciation
Commences when asset available for use. Changes to depreciation method, useful life or residual value should be recognised prospectively. An entity may make a reserve transfer annually between revaluation surplus and retained earnings, for any extra depreciation resulting from a revaluation.
3.4 Derecognition
Remove the SFP when an asset is sold/abandoned/scrapped with the gain or loss recognised in the SPL. Revaluation surplus balance is transferred to retained earnings on disposal. If an asset is sold, classify it as held for sale.
4.1 IAS23 Borrowing costs
If a loan is taken out to finance a qualifying asset, the interest is capitalised when:
- Expenditure on the asset is being incurred
- Activities to get the asset ready are taking place
- Interest expense is being incurred
If a specific loan is taken to fund the asset, capitalise the interest suffered less any interest earned whilst the funds are on deposit. If the asset is funded from general borrowings, calculate the weighted average cost of debt and apply it to the expenditure on the asset. Cease capitalisation when the asset is ready for use. Suspend capitalisation for any periods when the asset is not being developed.
5.1 IAS 38 Intangible assets
An intangible asset has no physical substance, it is identifiable (either separable or arises from a contractual or legal right) and it should be recognised if there is a probable economic benefit flowing to the entity as a result of ownership and its cost can be measured reliably.