Reporting of assets and liabilities

Question 1

IAS 36 Impairment of Assets 1.1 Definitions

Answer 1

An asset is impaired if the ‘carrying amount exceeds its recoverable
amount.’ (IAS 36, para 8)
‘The recoverable amount of an asset or a cash-generating unit is the higher of
 its fair value less costs of disposal and
 its value in use.’
‘Value in use is the present value of the future cash flows expected to be
derived from an asset or cash-generating unit.’ (IAS 36, para 6)
 The discount rate should reflect the risks specific to the asset.
 Estimates of future cash flows should reflect the current condition of the asset.
 Usually it is only possible to reliably forecast cash flows for a maximum of
five years.
 After five years, projected cash flows are extrapolated using an appropriate
growth/decline rate.

Question 2

IAS 36 Impairment of Assets 1.2 Frequency of impairment reviews

Answer 2

 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.

Question 3

IAS 36 Impairment of Assets 1.3 Recognition of impairment losses

Answer 3

 Impairment losses are taken to profit or loss, 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.

Question 4

IAS 36 Impairment of Assets 1.4 Cash-generating units

Answer 4

Sometimes, it can be difficult to determine the value-in-use of a specific asset.
In these circumstances we must consider groups of assets called cashgenerating units (CGUs).
‘A cash-generating unit is the smallest identifiable group of
assets that generates cash inflows that are largely
independent of the cash inflows from other assets or groups
of assets.’

Question 5

IAS 36 Impairment of Assets 1.5 Allocating central assets to CGUs

Answer 5

Some assets within a business do not generate cash flows. These include
corporate assets (such as a head office building used by several CGUs), and
goodwill.
 These assets should be allocated to CGUs on a reasonable, consistent basis,
such as their respective carrying amounts

Question 6

IAS 36 Impairment of Assets 1.6 Impairment review of a CGU

Answer 6

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:
Carrying amount of CGU > Recoverable amount of CGU
= sum of the carrying
amounts of the individual
assets of the CGU
= Higher of value-in-use and
fair value less costs to sell
This is the same as when recognising an impairment of an individual asset.
According to IAS 36 Impairment of Assets, the carrying amount of a
cash-generating unit ‘does not include the carrying amount of any
recognised liability, unless the recoverable amount of the cashgenerating unit cannot be determined without consideration of this
liability.’ (IAS 36, para 76(b))
An example of when a liability may need to be included would be if the recoverable
amount reflected an offer for the entire CGU, including its liabilities.

Question 7

IAS 36 Impairment of Assets 1.7 Allocation of impairment to CGU assets

Answer 7

1. Goodwill (allocated)
2. Pro rata (CA)

Don’t go under recov! If not; zero

‘The impairment loss shall be allocated to reduce the carrying
amount of the assets of the unit (group of units) in the following
order:
(a) first, reduce the carrying amount of any goodwill allocated to
the cash-generating unit (group of units), and
(b) then to the other assets of the unit (group of units) pro-rata
on the basis of the carrying amount of each asset in the unit
(group of units).’ (IAS 36, para 104)
Note: No individual asset should be written down below its own
recoverable amount (if determinable) or zero.

Question 8

IAS 36 Impairment of Assets 1.8 Reversal of impairment losses

Answer 8

Impairment losses can be reversed if the recoverable amount increases after an
impairment has been performed.
 Assess whether a reversal has occurred at each year-end.
 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
occured.
 Any excess between the cap and the recoverable amount,
– under the cost model, is not recognised
– under the revaluation model, is treated as a revaluation in
accordance with IAS 16 Property, Plant and Equipment.
 Impairment losses against goodwill can never be reversed.
Therefore, the reversal should be allocated to assets (other than goodwill) on a prorata basis according to their carrying amount.

Question 9

IAS 2 Inventories

Answer 9

Inventory should be valued on a line-by-line basis ‘at the lower of cost
and net realisable value (selling price) .’ (IAS 2, para 9)
The costs include:
 Costs of the purchase, plus
 Any incidental costs ‘incurred in bringing the inventories to their present
location and condition.’ (IAS 2, para 10)
The cost should be calculated using FIFO or AVCO.
The net realisable value is the selling price, less any costs to complete and selling

Question 10

IAS 16 Property, Plant and
Equipment 3.1 Measurement

Answer 10

The cost of an item of property, plant and equipment comprises:
(a) ‘its purchase price, including import duties and
non‑refundable purchase taxes, after deducting trade
discounts and rebates.
(b) 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.
(c) the initial estimate of the costs of dismantling and removing
the item and restoring the site on which it is located’ (IAS 16,
para 16)

Question 11

IAS 16 Property, Plant and
Equipment 3.2 Revaluation model

Answer 11

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 the SPL.
 Revaluation losses are taken to SPL unless reverses gains previously
recognised in revaluation surplus/OCI.

Question 12

IAS 16 Property, Plant and
Equipment 3.3 Depreciation

Answer 12

Commences when asset available for use.

 Changes to depreciation method, UL, or RV should be recognised
prospectively.

 An entity may choose to make a reserve transfer annually
between revaluation surplus and retained earnings, for any extra
depreciation resulting from a revaluation.

Question 13

IAS 16 Property, Plant and
Equipment 3.4 Derecognition

Answer 13

Remove from 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 to be sold, classify it as held for sale (see Chapter 17 Reporting
financial performance).

Question 14

IAS 23 Borrowing Costs

Answer 14

According to IAS 23 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.

Question 15

IAS 38 Intangible Assets 5.1 Definition

Answer 15

An intangible asset:
 Has no physical substance.
 It is identifiable – meaning it is either separable or arises from a
contractual or legal right.
 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.

Question 16

IAS 38 Intangible Assets 5.2 Types of intangibles

Answer 16

1. Acquired separately – recognise at cost.
2. Acquired with a business combination – if it can be identified separately and
   recognised at fair value, otherwise include it in goodwill.
3. Internally generated – recognise at directly attributable cost if it meets the
   criteria of IAS 38.

Question 17

IAS 38 Intangible Assets 5.3 Recognition and measurement

Answer 17

 Initial recognition is at cost.
 Amortisation should be applied if there is a useful life.
 Impairment reviews should be performed annually if a useful life cannot be
identified.
 If the intangible is being amortised then impairment reviews should only be
performed if there is some indication of impairment.
 Intangibles can be revalued if there is an active market.

Question 18

IAS 38 Intangible Assets 5.4 Research and development (internally generated intangibles)

Answer 18

 Research – write off as an expense immediately

 Development – must capitalise if meet certain criteria (PIRATE)
1 Profit made on the project
2 Intention to use/sell product
3 Resources available to complete the project
4 Ability to use/sell the product
5 Technically feasible
6 Expenditure is identifiable

Question 19

IAS 38 Intangible Assets 5.5 Other internally generated intangibles

Answer 19

Internally generated brands, mastheads, publishing titles,
customer lists and items similar in substance shall not be
recognised as intangible assets. (IAS 38, para 63)

Question 20

Intangible assets – website costs

Answer 20

This is a specific application of the rules on intangible assets used in website
development for which there is guidance in the SIC® Interpretations: SIC-32.
Nb. SIC stands for Standards Interpretations Committee.
The guidance states:

 In determining directly attributable costs to capitalise, the rules in IAS 38 should
be followed.
 Activities involved in planning a website are similar to the research phase in
IAS 38 and as such should not be capitalised.
 Application and infrastructure development, graphical design and content
development (other than for advertising) are similar to the development stage of
IAS 38 and should be capitalised.
 Expenditure which contributes to advertising and promotion should be
expensed. e.g. expenditure on digital photography of products sold via the site.
 The useful life of a website is likely to be short.

Question 21

IAS 20 Accounting for Government
Grants and Disclosure of Government
Assistance

Answer 21

‘Government assistance is action by the government designed to
provide an economic benefit specific to an entity or range of
entities qualifying under certain criteria.’ (IAS 20, para 3)
Government assistance should be disclosed in the accounts.
Government grants are assistance in the form of a transfer of resources that can be
quantified in return for past or future compliance with certain conditions.

Question 22

IAS 20 Accounting for Government
Grants and Disclosure of Government
Assistance 7.1 Initial recognition

Answer 22

Recognise government grants at fair value when there is reasonable assurance that:
 The entity will comply with any conditions and
 The grant will actually be received.

Question 23

IAS 20 Accounting for Government
Grants and Disclosure of Government
Assistance 7.2 Measurement

Answer 23

Match the grant income to the related expenditure. This will either be capital
expenditure or revenue expenditure.

Capital expenditure:
If the grant relates to a *depreciating asset *
Recognise the grant over the same period as depreciation.
If the grant relates to a non-depreciating asset
Recognise the grant over the period when the costs of meeting the obligation
are incurred.
The grant can be shown as deferred income OR netted off
against the carrying amount of the asset.

Revenue expenditure e.g. grant to encourage job creation in areas of high
unemployment
The grant is taken to profit or loss to match the expense. It
can be shown separately or netted off.
If the expenditure has already been incurred – recognise the
grant immediately upon receipt.
 Non-monetary government grants (e.g. assets instead of cash) – recognise at
the fair value.

Question 24

IAS 20 Accounting for Government
Grants and Disclosure of Government
Assistance 7.3 Repayment of grant

Answer 24

Derecognise (P&L)

 If the grant relates to assets, increase the carrying amount of the asset as if the
grant had never been received, or reduce any deferred income (excess of the
repayment over the remaining deferred income is recognised as an expense).
 If it relates to income, reduce any deferred income. If the repayment exceeds
the carrying amount of the deferred income the excess is treated as an
expense

Question 25

IAS 10 Events after the Reporting
Period

Answer 25

IAS 10 Events after the Reporting Period covers events between the end of the
reporting period and the date the accounts are authorised for issue.
The events are split into two types:

 Adjusting events – which provide ‘evidence of conditions that existed at the
end of the reporting period’ (IAS 10, para 3(a)). The financial statements
should be adjusted to reflect adjusting events.

 Non-adjusting events – are ‘indicative of conditions that arose after the
reporting period’ (IAS 10, para 3(b)). Disclosure should be made in the
financial statements where the event is material.
Going concern basis

 Financial statements are prepared on a going concern basis. When an entity
goes into liquidation after the reporting date, it is no longer considered to be a
going concern and the financial statements should, therefore, be prepared on a
break-up basis.

Question 26

IAS 37 Provisions, Contingent
Liabilities and Contingent Assets 9.1 Provisions

Answer 26

‘A provision is a liability of uncertain timing or amount.’ (IAS 37,
para 10)
‘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) a reliable estimate can be made of the amount of the
obligation. ‘(IAS 37, para 14)
The measurement of a provision should consider:
 The best estimate of the amount needed to settle the liability
 Discounting to present value when the time value of money is material
 Reviewing and revising at each year end, to ensure the best estimate.

IAS 37 Provisions, Contingent Liabilities and Contingent Assets considers the
following specific issues:
 Onerous contracts – where the unavoidable cost of fulfilling the contract
outweighs the benefit that will be received. The excess unavoidable costs
should be provided for.
 Future operating losses – there is no obligation to make losses in the future and
therefore, they should not be provided for.
 Restructuring costs – should only be provided when there is a constructive
obligation. This would arise from:
– a detailed formal plan that includes an estimate of the costs and the
timescale, and
– an announcement to those affected by the restructuring.

Question 27

IAS 37 Provisions, Contingent
Liabilities and Contingent Assets 9.2 Contingent liabilities

Answer 27

A contingent liability is a possible obligation or a present obligation
that is not recognised (because it is not probable or cannot be
measured reliably).
 It should be disclosed in the financial statements unless the
outflow of economic benefits is deemed remote.

Question 28

IAS 37 Provisions, Contingent
Liabilities and Contingent Assets 9.3 Contingent assets and reimbursement

Answer 28

‘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.’ (IAS 37, para 10)
 It should be disclosed in the financial statements only when the expected inflow
of economic benefit is probable, and recognised as an asset if virtually certain.
 An entity may be entitled to reimbursement for all or part of the expenditure
required to settle a provision e.g. from an insurance company.
 A provision and reimbursement are recognised separately. A reimbursement is
only recognised when it is virtually certain the amount will be received. The
reimbursement recognised cannot exceed the amount of the provision.

Question 29

IAS 37 Provisions, Contingent
Liabilities and Contingent Assets 9.4 Sustainability

Answer 29

As companies act to address climate change, provisions may need to be recognised
and contingent liabilities disclosed.IAS 37 Provisions, Contingent Liabilities and Contingent Assets contains several
relevant examples in its implementation guidance:

 Contaminated land – legislation to clean up virtually certain to be enacted:
The obligating event is the contamination of land.
 Contaminated land – constructive obligation:
If there is no environmental legislation, but the company has a published
environmental policy which it has previously honoured, the contamination of the
land will represent a constructive obligation.

 Offshore oilfield:
If there is a licensing agreement to restore the seabed, then this represents a
legal obligation. On construction of an oil platform/rig, a provision must be
recognised for the restoration costs resulting from its building.
This provision represents a direct cost of the asset and must be capitalised as
part of the asset and subsequently depreciated.

 Legal requirement to fit smoke filters:
If an entity is required under law to fit smoke filters to a factory, no provision
should be recognised as there is no obligation independent of the entity’s future
actions. For example, the entity could choose to cease operating the factory.
However, an obligation may exist to pay fines for which a provision should be
recognised.

Question 30

Audit and assurance implications of
impairments: Tests/procedures

Risks

Impaired assets might not be identified
as such.

Answer 30

 On inspection of assets, identify
any that appear damaged or not in
use
 Review management produced
variance analysis for operations
with adverse variances
 Review minutes of management
and board meetings for discussion
of underperforming operations
and/or plans to change strategy
 Obtain management’s impairment
review.

Question 31

Audit and assurance implications of
impairments: Tests/procedures

Risks

FV less costs of disposal could be hard
to determine

Answer 31

Obtain management’s estimate of
fair value and ensure that FV is
supported by evidence such as
traded market price or other
reliable data
 Review costs of disposal for
completeness and agree any
estimates to supporting evidence
e.g. quotes from selling agents etc

Question 32

Audit and assurance implications of
impairments: Tests/procedures

Risks

Value in use involves significant
judgement:
 estimating future cash flows
 identifying an appropriate riskadjusted discount rate.

Answer 32

Obtain management’s calculation
of value in use and:
– reperform calculations
– compare cash flows to
forecasts assessing the
reasonableness of the
assumptions in the forecast
– agree discount rate used to
rates of return available on
similar assets/operations
– assess the reliability of
estimates by reviewing
previous estimates made
– ensure that estimates reflect
existing condition of asset.

Question 33

Audit and assurance implications of
impairments: Tests/procedures

Risks

Cash generating units may be
misidentified

Answer 33

Review CGUs to ensure their cash
flows are largely independent of
other groups of assets
 For any CGUs identified, assess
whether there are any smaller
groups of assets with
independently identifiable cash
flows

Question 34

Audit and assurance implications of
impairments: Tests/procedures

Risks

Impairments may not be allocated
correctly to the assets within a CGU

Answer 34

Obtain workings and review to
ensure that:
– any goodwill is written down
first
– other assets are written down
pro-rata based on the
carrying amount
– no asset is written down
below zero or its own
recoverable amount.