FinAcc 278 Notes - 1st semester
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Financial
Accounting
278
by: Alexandra Shtein
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Table of Contents
PERVASIVE STANDARDS ..................................................................................................................................................... 2
CONCEPTUAL FRAMEWORK ............................................................................................................................................... 2
IAS 1- PRESENTATION OF FINANCIAL STATEMENTS .................................................................................................. 5
IAS 7 - STATEMENT OF CASH FLOWS.............................................................................................................................. 14
IAS 10 - EVENTS AFTER THE REPORTING DATE ......................................................................................................... 17
IAS 12 - INCOME TAXES ..................................................................................................................................................... 19
IAS 8 & IAS 37 - CHANGE IN ESTIMATES W.R.T PROVISIONS .................................................................................... 23
IFRS 15 - REVENUE FROM CONTRACTS WITH CUSTOMERS ....................................................................................... 0
IAS 16 - PROPERTY, PLANT & EQUIPMENT................................................................................................................... 19
IAS 36 - IMPAIRMENT OF ASSETS ................................................................................................................................... 24
IAS 38 - INTANGIBLE ASSETS .......................................................................................................................................... 35
IAS 2- INVENTORIES ........................................................................................................................................................... 54
IAS 8- CORRECTION OF PRIOR PERIOD ERRORS ......................................................................................................... 95
GROUP STATEMENTS ....................................................................................................................................................... 101
1
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PERVASIVE STANDARDS
CONCEPTUAL FRAMEWORK
•
Objective of general-purpose financial statements
to provide financial information about the entity to primary users (existing / potential investors/ creditors/
lenders) to make decisions (regarding equity, loans / voting rights) about the company
•
General Purpose Financial Reports
provide information about the financial position:
1) economic resources (assets) & claims (liabilities against the reporting entity
2) effects of transactions & events that change reporting entity’s economic resources and claims
(PROFIT & LOSS)
•
ACCRUAL ACCOUNTING
- depicts the effects of transactions, other events & circumstances on economic resources and claims
in the periods in which those effects occur, even if the resulting cash receipts / payments occur in a
different period
•
Elements of financial statements
ASSET
LIABILITY
EQUITY
INCOME
EXPENSES
•
- a present economic resource controlled by the entity as a result of past events. An economic
resource is a right that has the potential to produce economic benefits
- a present obligation of the entity to transfer an economic resource as a result of past events
- the residual interest in the assets of the entity after deducting all of its liabilities
- increases in assets or decreases in liabilities that results in increases in equity, other than those
relating to contributions from holders of equity claims
- decreases in assets or increases in liabilities that results in decreases in equity, other than those
relating to contributions from holders of equity claims
RECOGNITION & DERECOGNITION
-
asset / liability is only recognised if the recognition of that asset or liability and resulting income,
expenses or changes in equity provides users with information that is USEFUL
relevant & faithful representation
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•
QUALITATIVE CHARACTERISTICS OF USEFUL FINANCIAL INFORMATION
fundamental
relevance
predictive value
confirming value
enhancing
faithful representation
comparability
timeliness verifiability understandability
completeness
neutrality
free from material error
example:
Examples from the note prepared by the financial manager: FAITHFUL REPRESENTATION
Complete depiction:
Neutrality:
Free from error:
Comparability:
Verifiability:
Timeliness:
-
The note is not complete and is missing the South African income tax rate on
companies of 28%. This is a requirement in terms of IAS 12 par (c)(i).[OR The
currency is not disclosed].
-
The note is not neutral because the directors wish to accentuate the note and
manipulate users of financial information.
-
The note is not free from error and shows the income tax expense through
other comprehensive income instead of through profit and loss. [OR the note
is free from error as it is mathematically accurate].
-
Even though the information might be comparable with other entities, it is
not comparable with a prior period because no comparative information is
disclosed.
-
The under provision will be directly verifiable with SARS. Different
knowledgeable and independent observers would reach consensus eg. The
auditors would get to the same conclusion as the manager.
3
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-
•
Information must be available to decision-makers in time to be capable of
influencing their decisions. If the financial statements are completed by
middle September, this will provide useful financial information for decisionmaking since financials will be available within 3 months after year-end.
MEASUREMENT
1. HISTORICAL COST
provides information about A/L/I/E using information derived from the price of the transaction / any
other event that gave rise to them
- no changes in values (other than A/L impairment)
2. CURRENT VALUE
provides monetary information about A/L/I/E using information updated to reflect conditions at the
measurement date
- reflects changes since previous measurement date
- Fair value / Value in Use / Current value
•
DISCOUNTING
applies i.r.t IFRS 15:
-
-
•
only discount if the transaction has a significant financing element
indicators:
difference between cash and deferred price
credit terms exceed the norm
no other business reasons for extended payment
less than 12 months – only discount if told that there is a significant financing
component
CONCEPTS OF CAPITAL & CAPITAL MAINTENANCE
-
-
financial concept of capital (most entities use)
capital = net assets / equity
profit is only earned if net assets @ end of period exceed net assets @ beginning
physical concept of capital
capital = production capacity / operation caoability
profit is only earned if physical productive capacity @ end of period exceeds physical productive capacity @
beginning
4
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IAS 1- Presentation of Financial Statements
•
•
•
•
•
•
FUNDAMENTAL ASSUMPTION OF FINANCIAL STATEMENTS:
- going concern: no intention to seize operation in the foreseeable future / liquidate
•
COMPLETE SET OF FINANCIAL STATEMENTS (IAS1) -components:
- Statement of Financial Position
- Statement of Comprehensive Income
- Statement of Changes in Equity
- Statement of Cash Flows
- Notes
•
SHOWN CLEARLY ON EACH COMPONENT OF FINANCIAL STATEMENTS (IAS1 Presentation):
- Name of the entity
- Name of component
- Individual entity or group
- Reporting date / period
- Currency
- Degree of rounding
•
ELEMENTS OF FINANCIAL STATEMENTS:
- Assets
- Liabilities
- Equity
- Income
- Expenses
STATEMENT OF FINANCIAL POSITION
STATEMENT OF COMPREHENSIVE INCOME
STATEMENT OF CHANGES IN EQUITY
STATEMENT OF CASH FLOWS (IAS 7)
NOTES TO THE FINANCIAL STATEMENTS (including significant accounting polices)
5
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IAS 7 - Statement of Cash Flows
income + increase in debtors
cash expenses + change in working capital
cash expenses:
actual monetary amount
received
Income
Profit before Tax
adjusted for:
DR
CR
xxx
xxx
Interest expense
Dividend Income
Cash expenses (bal)
xxx
xxx
X
change in working
capital:
(increase in inventory)
(decrease in creditors)
Non-cash flow items:
-
depreciation
(ab) normal losses
FV adjustment
NRV
Donations
Bad debts
Amortisation
P/L on asset sale
cash paid to suppliers / employees
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INCOME
Profit before tax
adjusted for:
interest expense
dividend income
cash expenses (= balancing)
400 000
51 400
+
4000
BALANCING
348 100
430 500
TAKE ACROSS
CASH EXPENSES
CHANGES IN WORKING CAPITAL
increase in inventory
decrease in creditors
3500
=
430 500
(348 100)
(800)
(600)
(349 500)
+
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED...
1. Cash & Cash equivalents
cash & cash equivalents conbsist of cash on hand and balances @ banks
2. Non cash transactions
during the year the land was bought at a cost price of RXXX by issuing XXX ordinary shares at RX each & XXX
preference shares at RX each
15
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example:
DEF Ltd.
Statement of cash flows for the year ended 30 September 2018
Cash outflow from investing activities:
Acquisition of plant and equipment:
Replacement of plant and equipment (maintain)
Expansion of plant and equipment (expand)
Proceeds on the sale of plant and equipment (140 000 + 4 000)
16
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IAS 10 - Events after the reporting date
Events after the reporting period are those events, favourable and unfavourable, that occur between the end
of the reporting period and the date when the financial statements are authorised for issue IAS 10.3, par3
Two types of events can be identified:
a) those that provide evidence of conditions that existed at the end of the reporting period (adjusting
events after the reporting period)
&
b) those that are indicative of conditions that rose after the reporting period (non-adjusting events)
before FS authorised
for issue?
YES
EVENT
AFTER THE
REPORTING
DATE
NO
not in IAS 10
NO
YES
no adjustment
refer to a
circumstance
that existed on
the reporting
date?
YES
NO
ADJUSTING event = adjust
NON-ADJUSTING event = disclose
year end
events after the
reporting date
FS authorised for
issue
The event X did / did not occur on XXX after the year end XXX but before the authorisation of the financial
statements
Adjusting: Event X provides evidence of [circumstance] that existed at reporting date’s YE
Non-adjusting: Event X only occurred after YE & does not provide additional evidence of circumstances
IAS 10, par10: An entity shall not adjust the amounts recognised in its financial statements to reflect non-adjusting events
after the reporting period.
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example:
IAS 10.3, par 3: Events after the reporting period are those events, favourable and unfavourable, that occur
between the end of the reporting period and the date when the financial statements are authorised for issue
Two types of events can be identified:
a) those that provide evidence of conditions that existed at the end of the reporting period (adjusting events
after the reporting period), and
b) those that are indicative of conditions that rose after the reporting period (non-adjusting events)
The decrease in the fair value of the investment is an event after reporting date since it happened on 10
October 2018, which is between the year-end (30 September 2018) and the approval date (31 October
2018).
It is however a non-adjustment event after reporting date, since it is an indication of circumstances which
arose after the reporting period.
IAS 10, par10: An entity shall not adjust the amounts recognised in its financial statements to reflect nonadjusting events after the reporting period.
The decrease in the fair value normally does not have relation to the condition of the investment at the end
of the reporting period, but reflects circumstances which arose afterwards. An entity will not adjust the
amounts that were recognised in the financial statements to show the non-adjustment event after the
reporting date.
The decrease in the fair value is not material and need not be disclosed in the notes to the financial
statements for the year ended 30 September 2018.
18
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IAS 12 - Income Taxes
TAX STEPS:
① Pay provisional income tax
6 months & end of year
② Tax estimate
DR – Tax expense (P/L)
CR – Tax payable (SFP)
③ Return
under/overprovision
④ Pay / receive outstanding amount
underprovision:
overprovision:
DR – Tax payable (SFP)
CR – Bank (SFP)
31 Dec ‘11
Eg:
DR – Bank (SFP)
CR – Tax payable (SFP)
30 Jun ‘12
31 Dec ‘12
after audit
any time
1st provisional
payment
2nd provisional
payment
tax estimate
receive tax
assessment
R140 000
R150 000
R50 000
R70 000
TAX EXPENSE (P/L)
TAX PAYABLE (SFP)
Tax expense 140 000
Bank 50 000
Bank 70 000
Bal c/d 30 000
Tax payable 140 000
Profit & Loss 140 000
Tax expense 10 000
Tax payable 10 000
underprovision
Journals:
19
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•
Pay provisional tax:
DR – Tax payable (SFP)
CR – Bank (SFP)
•
Tax estimate:
DR – Tax expense (P/L)
CR – Tax payable (SFP)
•
Account for differences:
DR – Tax payable (SFP)
CR – Tax expense
(P/L)
•
Pay/ Receive differences:
underprovision:
overprovision:
•
Interest / Penalties:
DR – Tax payable (SFP)
CR – Bank (SFP)
DR – Bank (SFP)
CR – Tax payable (SFP)
DR – Interest expense / penalties (P/L)
CR – Tax payable (SFP)
example:
20
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General Ledger of Advice Ltd. for the year ending 30 June 2016
TAX EXPENSE (P/L)
1/04/16
30/6/16
Tax payable (’15) 3000
27/08/15
Tax payable (’16) 84 000
30/6/16
Tax payable (’14) 5000
Profit / Loss 82 000
TAX PAYABLE (SFP)
Tax expense (’14) 5000
27/08/15
31/12/15
Bank (’16) 40 000
1/07/15
Balance 51 000
1/04/16
Tax expense (’15) 3000
Fine (’15) 2000
Interest (’15) 2692
31/05/16
Bank (’15) 83 692
31/06/16
Bank (’16) 45 000
1/07/16
173 692
Balance b/d 1 000
30/6/16
Tax expense (’16) 84 000
Balance c/d 1 000
173 692
workings:
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IAS 8 & IAS 37 - Change in Estimates w.r.t provisions
Contingent liability
Possible obligation, arising from past events, with its existence confirmed by occurrence or non-occurrence of
uncertain future events (not wholly in entity’s control) OR
Present obligation, arising from past events & not recognised because: outflow of economic benefits not
probable, or amount cannot be measured reliably
Contingent asset
Possible asset, arising from past events events(not wholly within control of entity) & existence confirmed by
occurrence or non-occurrence of uncertain future events (not wholly within control of entity)
RECOGNITION
Provisions
Recognise only when:
a) Entity has present obligation (legal or constructive), as result of past event (par.15-22),
b) Probable that an outflow of economic benefits will be required to settle obligation (par.23-24), and
c) A reliable estimate of amount of obligation can be made (par.25- 26)
Contingent liability
Will not be recognised (par.27-30)
Contingent asset
Will not be recognised (par.31-35)
FORWARD / CATCH UP METHOD:
23
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-
adjustment of CA of asset/ liability or amount of asset’s periodic consumables results from assessment of present status
/ expected future obligations / benefits
uncertainties: lead to estimates (useful lives / dep. method / warranty obligations / allowance for CL)
FORWARD METHOD:
→ use now estimate going forward (for current / future years)
CATCH-UP METHOD:
→ adjust current year’s depreciation so that CA @ end of current year = CA had the new estimate always been applicable
examples:
On 31 Dec
2017
1/1/2015
3
2
1
31/12/2015
31/12/2016
4
31/12/2018
31/12/2017
300 000
a) further (forward) method
5 years changes to 4 years
1 Jan 17:
CA 2016
(depreciation)
CA 2017
(future depreciation)
CA future
i)
original: 300 000 = 100 000
3
original
300 000
(100 000)
200 000
(200 000)
0
new: 300 000 = 150 000
2
(now only 2 years left)
revised
300 000
(150 000)
150 000
(150 000)
0
difference
DR – Depreciation (P/L) 150 000
CR – Accumulated depreciation (SFP) 150 000
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50 000
50 000
(50 000)
0
24
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if dep already posted, journals look like:
DR – Depreciation (P/L) 100 000
CR – Accumulated depreciation (SFP) 100 000
iii)
VALENTINO LIMITED
Notes to the financial statements for the year ended 31 December 2017
Change in accounting estimate:
The estimates economic useful life of machinery changed from 5 years to 4 years as it is a better indication of the
economic benefits which flow to the entity with the use of machinery. This resulted in an increase in depreciation
in the current year of R50 000 & a cumulative decrease in future periods of R50 000.
b) catch-up method
calculations:
-
new estimate opening CA:
1/12/2016: 500 000 – (500 000 x 2) = 250 000
4
-
current opening CA: (old)
31/12/2016: 500 000 – (500 000 x 2) = 300 000
5
-
catch-up depreciation:
decrease by R50 000
-
dep for current year: (new)
250 000 = 125 000
2
-
CA @ end of year:
300 000 – 50 000 – 125 000 = 125 000
i)
ii)
iii)
DR – Depreciation (P/L) 175 000
CR – Accumulated depreciation (SFP) 175 000
(300 000-125000)
DR – Depreciation (P/L) 75 000
CR – Accumulated depreciation (SFP) 75 000
VALENTINO LIMITED
Notes to the financial statements for the year ended 31 December 2017
Change in accounting estimate:
The estimates economic useful life of machinery changed from 5 years to 4 years as it is a better indication of the
economic benefits which flow to the entity with the use of machinery. This resulted in an increase in depreciation
in the current year of R75000 & a cumulative decrease in future periods of R575000.
25
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On 31 Dec
2017
2
1
1/1/2015
31/12/2015
3
4
31/12/2016
31/12/2017
5
31/12/2018
a) further (forward) method
residual value changes from R0 to R90 000
1 Jan 17:
CA 2016
(depreciation)
CA 2017
(future depreciation)
CA future
original: 500 000 = 100 000
5
original
300 000
(100 000)
200 000
(200 000)
0
i)
DR – Depreciation (P/L) 70 000
CR – Accumulated depreciation (SFP) 70 000
ii)
DR – Accumulated depreciation (SFP) 30 000
CR – Depreciation (P/L) 30 000
iii)
new: 300 000-90 000 = 70 000
3
revised
300 000
(70 000)
230 000
(140 000)
90 000
difference
30 000
30 000
(60 000)
90 000
AFRICA LIMITED
Notes to the financial statements for the year ended 31 December 2017
Change in accounting estimate:
The estimated residual value of machinery changed from nil to R90 000 as it is a better indication of the economic
benefits which flow to the entity with the use of machinery. This resulted in an increase in depreciation in the
current year of R30 000 & a cumulative decrease in future periods of R60 000.
26
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b) catch-up method
calculations:
-
new estimate opening CA:
31/12/2016: 500 000 - (500 000- 90 000) x2 ) = 336 000
5
-
current opening CA: (old)
31/12/2016: 500 000 – (500 000 x 2) = 300 000
5
-
catch-up depreciation for 2017:
-
dep for current year: (new)
(336 000 – 90 000) = 82 000
3
-
total dep for 2017:
82 000 – 36 000 = 46 000
CA 2016
(depreciation)
CA 2017
(future depreciation)
CA future
decrease by R36 000
original
300 000
(100 000)
200 000
(200 000)
0
i)
DR – Depreciation (P/L) 46 000
CR – Accumulated depreciation (SFP) 46 000
ii)
DR – Accumulated depreciation (SFP) 54 000
CR – Depreciation (P/L) 54 000
iii)
(DR depreciation)
revised
336 000
(82 000)
254 000
(164 000)
90 000
difference
36 000
18 000
54 000
(36 000)
90 000
(100 000-46 000)
AFRICA LIMITED
Notes to the financial statements for the year ended 31 December 2017
Change in accounting estimate:
The estimated residual value of machinery changed from nil to R90 000 as it is a better indication of the economic
benefits which flow to the entity with the use of machinery. This resulted in an increase in depreciation in the
current year of R54 000 & a cumulative decrease in future periods of R36 000.
27
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EXAMPLE:
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EXAMPLE: PRESENT VALUE OF PROVISIONS AND RELATED JOURNAL ENTRIES
BLUE LTD.
GENERAL JOURNAL FOR THE YEAR ENDED 28 FEBRUARY 2018
1/03: DR – Rehabilitation Costs (P/L) 600 000
CR – Provision for rehabilitation costs (SFP) 600 000
Provision for present value of
rehabilitation costs
28/02: DR – Finance Costs (P/L) 60 000
CR – Provision for rehabilitation costs (SFP) 60 000
Increase in provision for rehabilitation
costs due to unwinding of discount
present value:
FV = R798 600; i = 10%; n = 3; p/yr = 1; PV = R600 000
28/02: DR – Finance Costs (P/L) 66 000
CR – Provision for rehabilitation costs (SFP) 66 000
(660 000 + 66 000) x 10%
Increase in provision for rehabilitation
costs due to unwinding of discount
DR – Finance Costs (P/L) 72 600
CR – Provision for rehabilitation costs (SFP) 72 600
Increase in provision for rehabilitation
costs due to unwinding of discount
28/02: DR – Provision for rehabilitation costs (SFP) 798 600
CR – Bank (SFP) 798 600
payment of rehabilitation costs
29
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Remember: any of the estimates can
change (n or i or FV). The principle
remains the same.
EXAMPLE 2: CHANGE IN ESTIMATE
BLUE LTD.
GENERAL JOURNAL FOR THE YEAR ENDED 28 FEBRUARY 2018
1/03: DR – Rehabilitation Costs (P/L) 600 000
CR – Provision for rehabilitation costs (SFP) 600 000
Provision for present value of
rehabilitation costs
28/02: DR – Finance Costs (P/L) 60 000
CR – Provision for rehabilitation costs (SFP) 60 000
600 000 x 10%
Increase in provision for rehabilitation
costs due to unwinding of discount
present value:
FV = R798 600; i = 10%; n = 3; p/yr = 1; PV = R600 000
28/02: DR – Provision for rehabilitation costs (SFP) 23 361
CR – Rehabilitation costs (P/L) 23 361
(660 000 – 636 639)
28/02: DR – Finance Costs (P/L) 76 397
CR – Provision for rehabilitation costs (SFP) 76 397
(660 000 + 66 000) x 10%
Increase in provision for rehabilitation
costs due to unwinding of discount
Present value – 10%:
= R600 000 + R60 000 OR FV = R798 600; i = 10%; n = 2; p/yr = 1; PV = R660 000
Present value – 12%:
FV = R798 600; i = 12%; n = 2; p/yr = 1; PV = R636 639
28/02: DR – Finance Costs (P/L) 85 564
CR – Provision for rehabilitation costs (SFP) 85 564
(636 639 + 76 397) x12%
Increase in provision for rehabilitation
costs due to unwinding of discount
28/02: DR – Provision for rehabilitation costs (SFP) 798 600
CR – Bank (SFP) 798 600
payment of rehabilitation costs
30
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IFRS 15 - Revenue from Contracts with customers
SCOPE:
to fall within the scope of IFRS 15, the counterparty to a contract must be a customer. A customer is a party who
contracted with the entity to obtain goods / services that are an output of the entity’s ordinary activities in
exchange for consideration
IFRS 15 STEPS:
① identify contract
② identify performance obligations
③ determine transaction price
④ allocate transaction price to performance obligations
⑤ satisfaction of performance obligations
STEP ①
IDENTIFY CONTRACT
Must meet all the criteria:
1.
2.
3.
4.
5.
parties to the contract must approve the contract and be committed to perform their obligations
entity can identify each party’s rights regarding the goods / services to be transferred
entity can identify payment terms for goods / services to be transferred
contract has commercial substance
probable that the entity will collect consideration that it is entitled to in exchange for goods / services
collected by the customers
* consider customer’s ability & intention to pay amount when due
nb: contract will NOT exist when each party can terminate wholly unperformed contract (entity has not received and is
not entitled to consideration)
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STEP ②
IDENTIFY PERFORMANCE OBLIGATIONS
performance obligation:
→ to transfer to a customer either:
a) a distinct good / service / bundle of goods and services
b) a series of distinct goods / services substantially the same / with the same transfer pattern to
the customer
* never includes an entity’s activities to fulfil a contract unless it is to transfer goods / services to a customer
a performance obligation is:
1) capable of being distinct
2) distinct in the context of
the contract
DISTINCT goods / services
2 criteria:
1) customer can benefit from the goods / services on their own / with other resources readily available to
the customer
2) entity’s promise to transfer a good / service to a customer is separately identifiable from other
promises in the contract
1) customer can benefit:
goods / services can be consumed / used / sold at an amount > scrap value or held in a way that generates economic
benefits
readily available resource: goods / services sold separately / resource customer obtained from other transactions
2) not separately identifiable:
(can be more than 1)
- entity provides significant service to integrate g/s with with other g/s integrated in the contract
- g/s significantly modify / customise another g/s promised in the contract
- g/s service highly dependent / interrelated to other g/s services promised in the contract
examples of DISTINCT g/s:
sale of goods produced by entity, resale of goods purchased by the entity, resale of rights to g/s purchased by the entity, performing
contractually agreed upon tasks for customer, granting licences / rights to g/s to be provided in the future...
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STEP ③
DETERMINE TRANSACTION PRICE
transaction price:
→ amount of consideration entity expects to be entitled to in exchange for transferring a promised good /
service to a customer excluding amounts collected on behalf of 3rd parties
consider:
a) variable consideration
b) constraining estimates
c) significant financing components
d) non-cash consideration
e) consideration payable to a customer
SIGNIFICANT FINANCING COMPONENTS:
SECOND YEAR*
* only for a period greater than 1 year
(when the transaction and payment dates differ)
objective: to recognise revenue @ amount the customer would’ve paid if paid on the date the goods and services
were transferred to the customer
-
NOT a significant financing component:
customer paid for all g/s services in advance & timing is at customer’s direction
substantial amount of consideration = variable
consideration ≠ cash selling price, but difference is not due to provision of finance
payment date
transaction date
payment date
transaction date
customer provides
finance
= interest expense
entity provides
finance
= interest income
contract asset = conditional right
contract liability = unconditional right
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ENTITY PROVIDES FINANCE
CUSTOMER PROVIDES FINANCE
TD before PD = entity provides finance
PD before TD = customer provides finance
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STEP ④
ALLOCATE TRANSACTION PRICE
stand-alone selling price:
→ price at which an entity would sell a promised good/ service separately to a customer
determine price @ contract inception
determine:
- market assessment approach
- expected cost & margin approach
- residual approach
ALLOCATION OF DISCOUNT:
sum of stand-alone selling prices > promised consideration
allocate proportionally to performance obligations
CRITERIA FOR: “one or more but not all”
discount can only be allocated to one specific performance obligation / to the bundle if:
-
entity regularly sells each distinct good/service on a stand-alone basis and @discount
entity regularly sells a bundle of some of those distinct goods/services @discount to their stand-alone selling
prices
discount attributable to each bundle of goods & services = substantially the same as the discount in the
contract
* allocate BEFORE using residual approach
formula to calculate discount:
$%&'() &* +,-*&-%$(., &/012$)1&(
3'% &* +,-*&-%$(., &/012$)1&(3 413.&'() 13 $++01,4 )&
× 𝑑𝑖𝑠𝑐𝑜𝑢𝑛𝑡
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use table for allocation:
performance
obligation
stand-alone
selling price
discount
contract price
significant
financing
component
transaction price
if allocating: allocate to the individual PO’s in a distinct bundle of goods and services if all criteria is met for “one or
more but not all”
changes in the transaction price:
-
resolution of uncertain events
changes in circumstances
* stand-alone selling price NEVER changes
example:
Contract price = R155 000
Contract discount = R15 000 allocated to A&B
R10 000 residual value
POs:
A = R100 000
B = R50 000
C=?
1) first allocate discount
A: 100 000 x 15 000 = R10 000
150 000
= 100 000 – 10 000 = R90 000
B: 50 000 x 15 000 = R5 000
150 000
= 50 000 – 5000 = R45 000
2) residual approach
155 000 – (90 000 + 45 000) = C
∴C = R20 000
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STEP ⑤
SATISFACTION OF PERFORMANCE OBLIGATIONS
recognise revenue → when the entity satisfies a performance obligation over time / at a point in time
performance obligations are satisfied when control is transferred to the client
control of asset:
- ability to direct use of asset
- ability to obtain all of remaining benefits of asset / ability to prevent others from this
potential cash flows obtained:
- use asset to produce goods / services / enhance value of others
- sell / exchange / hold asset
Satisfied OVER time:
if one of the following criteria are met:
- customer simultaneously receives & consumes benefits
- entity controls and creates assets
- entity’s performance does not create asset with alternative use & entity has right to payment to date
Satisfied AT A POINT IN time:
-
requirements for control
indicator of transfer of control: present right to payment for asset, customer has legal title of asset, entity
transferred physical possession of asset, customer accepted asset
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Financial Statements for IFRS 15:
Extract from the statement of financial position on XXX
ASSETS
Current assets
Trade and other debtors
LIABILITIES
Current liabilities
Trade and other creditors
Extract from the statement of comprehensive income for the year ended XXX
Revenue
Other income
Finance Income
Notes to the financial statements for the year ended XXX
5. Trade and other receivables
Contract Assets
Receivables
6. Trade and other creditors
Contract Liability
11. Revenue from contracts with customers - disaggregation
Revenue from contracts with customers is disaggregated based on the type of product sold and the services
rendered as this is how the company evaluates the performance of its segments.
Type of product sold / services rendered: XXX
- Watches
- Maintenance services
apportionment:
Revenue from contracts with customers are apportioned based on the type of product sold and the services
rendered as this is how the performance of the segments are evaluated
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HOW PROFIT EARNED FROM SALE IS TREATED IN IFRS 15:
-
A transaction will only fall within the scope of IFRS 15 if the counterparty to the contract is a
customer.
-
A customer is a party that contracted with the entity to acquire goods / services and these goods /
services are the output of the entity’s normal activities in exchange for compensation.
-
As the sale of the delivery vehicle does not fall within the scope of the entity’s normal activities, the
transaction will not fall within the scope of IFRS 15
-
therefore any profit earned from the sale shall be recognised as other income in the statement of
comprehensive income of Lexi Limited for the year ended XXX
o journal entry, conclude contract and perform on the same day:
Contract = R1800, PO 1 = 1260, PO2 = R540
Performed Po1 & will perform PO2 at a later day
DR – Bank (SFP) 1800
CR – Revenue (P/L) 1260
CR – Contract Liability (SFP) 540
o transaction price = cash consideration on transaction date:
total contract = R87 000
deposit = R8700
YE = 31 Oct 2017
Lexi will provide 10 smoothies on 1 June 2017 to Adam.
Adam paid the deposit on 1 June 2017.
Adam must pay the balance on 31 May 2019
FV = R78 300
(87 000 – 8700)
found PV on calc:
FV = 78 300
I/YR = 9%
P/YR = 1
N= 2
∴ PV = R65 904
TRANSACTION PRICE =
INTEREST =
65 904 + 8700
PV
+
DEPOSIT
= R 74 604
65 904 x 9% x 5/12 = R2471
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IFRS 15 examples:
1) Criteria not met at inception
contract on 5 November: quantity is unknown ∴ rights & obligations cannot be accounted for / identified – not all 5 criteria
met ∴ not a contract in terms of IFRS 15
- all receipts must be recognised as a liability
- recognised as revenue as contract terminated & deposit = non-refundable
2)
12 Nov:
28 Nov:
DR – Bank (SFP) 5000
CR – Refund liability (SFP) 5000
DR – Refund liability (SFP) 5000
CR – Revenue (P/L) 5000
Criteria met at inception & subsequently not met
criteria met ∴ recognise revenue
but when disputed → cannot receive revenue anymore (criteria no longer met) ∴ recognise as a liability
2 Jan:
5 May:
DR – Receivable (SFP) 4000
CR – Revenue (P/L) 4000
DR – Receivable (SFP) 1000
CR – Refund liability (SFP) 1000
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3) Distinct goods and services
a) each individual good is capable of being distinct as the customer will be able to benefit from each separately
(all goods sold on a separate basis & customer could generate economic benefits by using / selling them)
b) the goods and services are not distinct as the promises are not separately identifiable: the contract promises to
combine goods into a BATHROOM
c)
one performance obligation (to construct the bathroom)
d) construction & repair = highly independent ∴ 2 separate performance obligations
4) Significant financing component: arrears vs advance
A)
DR – Debtors (SFP) 90 000
CR – Revenue (SFP) 90 000
transaction date
then at the payment date recognise the R10 000
B)
entity provides finance
= interest income
payment date
DR – Bank (SFP) 100 000
CR – Contract liability (SFP) 100 000
DR – Interest expense (SFP) 10 000
CR – Contract liability (SFP) 10 000
payment date
transaction date
customer provides finance
= interest expense
1/1/2020: (transaction date)
DR – Contract liability (SFP) 110 000
CR – Revenue (SFP) 110 000
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* collectability does not affect the transaction price nor revenue
5) Transaction price and collectability
still a contract in terms of IFRS 15
A) revenue measured @ full transaction price = amount expected to be entitled to
receivable → show corresponding credit loss expense
↳ = R85 000 (gross carrying amount – allowance)
(100 000 – 15 000) @ 31 December
20 June:
DR – Receivable (SFP) 100 000
CR – Revenue (P/L) 100 000
DR – Movement in allowance for credit losses (P/L) 10 000
CR – Allowance for credit losses (SFP) 10 000
31 December:
DR – Movement in allowance for credit losses (P/L) 5 000
CR – Allowance for credit losses (SFP) 5 000
B)
customer pays – no effect on transaction price or revenue
15 Jan:
DR – Bank (SFP) 85 000
DR – Allowance for credit losses (SFP) 15 000
CR – Receivable (SFP) 100 000
C) 15 Jan:
DR – Allowance for credit losses (SFP) 15 000
CR – Movement in allowance for credit losses (P/L) 15 000
DR – Bank (SFP) 100 000
CR – Receivable (SFP) 100 000
reverse allowance for credit losses
no effect on transaction price / revenue
D) only receive R80 000 ∴ recognise a further loss of R50 00
15 Jan:
no effect on transaction price / revenue
DR – Bank (SFP) 80 000
DR – Allowance for credit losses (SFP) 20 000
CR – Receivable (SFP) 100 000
receipt
DR – Movement in allowance for credit losses (P/L) 5 000
CR – Allowance for credit losses (SFP) 5 000
raise a credit loss of R5000
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6) Significant financing component: arrears journals
31 Dec ‘19
1 Jan ‘18
entity provides finance
= interest income
transaction date
payment date
R121 000
transaction price = cash sales price on transaction date (must find the PV)
CALCULATOR:
FV = -121 000 n=2 I/YR = 10%
∴ PV = R100 000
P/YR = 1
1 INPUT 1 AMORT = interest = R10 000
1 Jan ‘18:
DR – Accounts receivable (SFP) 100 000
CR – Revenue (P/L) 100 000
31 Dec ‘18:
DR – Accounts receivable (SFP) 10 000
CR – Interest income (P/L) 10 000
31 Dec ‘19:
DR – Accounts receivable (SFP) 11 000
CR – Interest income (P/L) 11 000
2 INPUT 2 AMORT = interest = R11 000
DR – Bank (SFP) 121 000
CR – Accounts receivable (SFP) 121 000
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7) Significant financing component: advance journals
1 Jan ‘18
payment date
31 Dec ‘19
transaction date
1 Jan ‘18:
DR – Bank (SFP) 100 000
CR – Contract liability (SFP) 100 000
31 Dec ‘18:
DR – Interest expense (P/L) 10 000
CR – Contract liability (SFP) 10 000
31 Dec ‘19:
DR – Interest expense (P/L) 11 000
CR – Contract liability (SFP) 11 000
DR – Contract liability (SFP) 121 000
CR – Revenue (P/L) 121 000
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8) Allocating a transaction price based on stand-alone selling prices
contract price & stand-alone selling prices differ = discount
use TABLE
performance
obligation
stand-alone
selling price
discount
contract price
transaction
price
163 636
significant
financing
component
-
PLANT
180 000
(16 364)
MAINTENANCE
40 000
(3636)
36 364
-
36 364
220 000
(20 000)
200 000
163 636
200 000
calcs:
(180 000 + 40 000) – 200 000 = 20 000
180 000 x 20 000 = 16 364
220 000
40 000 x 20 000 = 3636
220 000
9) Allocating a discount to only one / some performance obligations
criteria 1 met
stand-alone SPs
250 000
330 000
criteria 2 met
discount = R30 000
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performance
obligation
stand-alone
selling price
discount
contract price
transaction
price
176 000
significant
financing
component
-
PLANT
200 000
(24 000)
INSTALLATION
50 000
(6 000)
44 000
-
44 000
MAINTENANCE
80 000
-
80 000
-
80 000
330 000
(30 000)
300 000
176 000
300 000
* allocate the discount to the plant & installation
(entity regularly sells the plant together with the installation services) BUNDLE
200 000 x 30 000 = 24 000
250 000
50 000 x 30 000 = 6000
250 000
10) Allocating a discount when regular discount ≠ contract discount
always allocate
the contract
discount
discount = R30 000, but A+B’s discount = R20 000
performance
obligation
stand-alone
selling price
discount
contract price
transaction
price
176 000
significant
financing
component
-
A
200 000
(24 000)
B
50 000
(6 000)
44 000
-
44 000
C
60 000
-
60 000
-
60 000
D
20 000
-
20 000
-
20 000
330 000
(30 000)
300 000
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300 000
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11) Does customer receive & consume benefits at the same time the entity performs its obligations
routine tasks – no
reperformance necessary
half way – new lawyer will have
to review all the previous work
the old lawyer did
ASK: is reperformance of the work (substantially) necessary?
YES: did not receive & consume simultaneously
NO: did receive & consume simultaneously
a) The nature of the receptionist’s tasks is routine, which typically suggests that ‘substantial reperformance’ of these
tasks is unnecessary or even impossible. does receive & consume simultaneously = satisfied OVER time
b) The nature of the legal advice and representation is not routine, which typically suggests that ‘substantial reperformance’ of these tasks would be necessary. does not receive & consume simultaneously = not satisfied OVER time
12) Entity’s performance enhances an asset
satisfied OVER time
satisfied AT a point in time
a) developed onsite & live = physical possession of asset (can direct the use & obtain substantially all the benefits) ∴
satisfied over time
b) only obtain benefits + direct widget use after 3 months control = after, not during creation ∴ 2nd criteria not met
∴ not satisfied over time = satisfied at a point in time
Satisifed OVER time:
1) simultaneously receive + consume benefits
2) creates + controls assets
3) no substantial reperformance needed + alternative use for asset created
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13) Entity’s performance doesn’t create an asset with alternative use
CRITERIA 1:
This legal advice + representation is not routine
if there was an early termination, another entity would have to reperform a substantial amount of the work
Therefore, the customer does not receive the asset & consume its benefits simultaneously as it performs obligations
CRITERIA 3:
No alternative use for the asset (customer specific)
contract entitles entity to expect payment for work completed to date entitlement stipulated in contract & nothing to
negate it , right to performance = enforceable
Criteria 3 met ∴ satisfied over time
14) Outcome not reasonably measured
DR – Bank (SFP) 40 000
DR – Receivable (SFP) 10 000
CR – Revenue (P/L) 20 000
CR – Contract liability (SFP) 30 000
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15) Contract asset vs a receivable
but less than 12 months = no
significant component
difference in dates
20 000
at a point in time
1 Apr ‘18:
Conditional right
DR – Contract asset (SFP) 15 000
CR – Revenue (P/L) 15 000
= only payable after fireplace +
door provided
customer gets control recognise contract asset, but will only
receive money on 25 July
5 May ‘18:
1
DR – Accounts receivable (SFP) 5 000
CR – Revenue (P/L) 5 000
2
transfer
(not unconditional)
Unconditional right
= satisfied both performance
obligations
DR – Accounts receivable (SFP) 15 000
CR – Contract asset (SFP) 15 000
25 July ‘18:
DR – Bank (SFP) 20 000
CR – Accounts receivable (SFP) 20 000
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IAS 16 - Property, Plant & Equipment
PPE:
→ tangible items held for use in the production / supply of goods and services; rental to others or admin
purposes & expected to be in use for more than 1 period
asset definition not separately defined in IAS 16, therefore use the Conceptual Framework definition
COST OF PPE:
PPE cost includes: initial costs incurred to acquire / construct an item of PPE & subsequent cost to add to /
replace an item / service an item of PPE
significant components: depreciated separately / have different useful life to the rest of the asset
derecognition: if cost was recognised as part of cost price initially (to replace part)
ESTIMATE* - use new cost as what it would have been initially (not adjusted)
RECOGNITION:
cost is recognised as an asset (PPE) if:
1) probable that future economic benefits will flow to the entity
2) cost can be measured reliably
initial costs:
PPE for safety / environmental reasons
(eg: air filters not directly involved in manufacturing process but essential for the production process)
cost elements:
registered vendor = invoice price excluding VAT
-
non-registered vendor = invoice price including VAT
purchase price
import duties
VAT
discount / rebate
directly attributable costs
costs incurred to bring an asset to working location & in
working condition
salaries & wages, initial transport costs. lawyer fees,
handling fees, site preparation costs
FOB (Free On Board):
* see when to start capitalising
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- ceases when
eg: FOB Cape Town – start capitalising once it reaches Cape Town
excluded costs:
-
marketing
advertising, admin ...
day-to-day servicing
profit / loss
* capitalisation ceases when good is in location / condition necessary for its intended use
SUBSEQUENT COSTS:
replacing of parts:
capitalise cost of replacement if meet the recognition criteria
derecognise carrying amount
example:
Replacement of component
ASSET = R20 million
significant component = R5 million
USEFUL LIFE:
rest = R15 million
5 years
20 years
replace component after 5 years for R5 million
cost @ beg. year
acc dep year 1-4
opening CA
(Depreciation)
Derecognise CA
recognise new
closing CA
Significant component
5 000 000
(400 000)
1 000 000
(1 000 000)
0
5 000 000
5 000 000
Rest
15 000 000
(3 000 000)
12 000 000
(750 000)
11 250 000
Total
20 000 000
(7 000 000)
13 000 000
(1 750 000)
16 250 000
calculations:
at end of year 4:
5 000 000 x 4 = 4 000 000
5
at end of year 5:
acc dep = 100 000
15 000 000 x 5 = 3 750 000
20
example:
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MAJOR INSPECTIONS
Lucie Ltd acquired a machine on 2 January 2011 that needs a major inspection every 2 years. The cost price of the
machine is R2 000 000 and is estimated that the cost of the major inspection will be R200 000. The useful life of the
machine is estimated to be 8 years and the company has a 31 December year end. If the inspection is done after 18
months instead of 2 years and actual cost of inspection = R300 000
Inspection
100 000
(50 000)
50 000
(50 000)
0
300 000
(75 000)
CA: 31/12/2011
(depreciation)
CA
derecognise
CA
recognise
(dep – 6mnths)
Rest
1 575 000
(1 125 000)
1 462 500
(125 000)
Total
1 675 000
(1 625 000)
1 512 500
(50 000)
1 462 500
300 000
(300 000)
1 575 000
DISCOUNT?
deferred payment terms transaction:
if has significant financing component – assume exists if payment > 12 months
if less than 12 month: only discount if states
deferred payment:
cost = cash price equivalent
ASSET EXCHANGE
ASSET 1
derecognise CA (cost – acc dep)
ASSET 2
COST PRICE OF ASSET?
3 options:
1) Fair value of asset given up
2) Fair value of asset received
* use if more evident
3) CA of asset given up
(lacks commercial substance) –
commercial substance = future cash flows
change
DEPRECIATION:
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① fixed instalment
② diminishing balance
③ production units
depreciable amount x units produced
total estimated units to be produced
starts: from day asset is available for use & in location / condition intended for use
ends: derecognised / held for sale
Land & Buildings:
LAND: unlimited useful life ∴ don’t depreciate (until honours) *except for a quarry / mine
BUILDINGS: limited useful life ∴ depreciate
Land – revaluation model:
eg: if CA of land increases from R50 000 to R75 000
DR – Land (SFP) 25 000
CR – Gain with revaluation of land (OCI) 25 000
DR – Gain with revaluation of land (OCI) 25 000
CR – Revaluation surplus (SFP) 25 000
revaluation surplus:
Opening balance
0
Other comprehensive income 25 000
Closing balance
25 000
derecognise CA:
disposal of asset:
DISCLOSURE:
asset disposed / no future economic benefits expected
determine sale date
for each class of PPE
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accounting policy:
-
measurement basis to determine gross CA (cost model / revaluation model)
depreciation method, useful life / depreciation rate
SFP notes:
3. Property, Plant & Equipment:
LAND
BUILDINGS
VEHICLES
TOTAL
Carrying amount at 1 January 2017
Gross Carrying amount
Accumulated depreciation
Additions
Disposal
Depreciation
Revaluation
Impairment loss
Carrying amount at 1 January 2017
Gross Carrying amount
Accumulated depreciation
19. Profit before tax
Profit before tax is shown after the following has been taken into account:
Income
Profit on sale of property, plant and equipment
Profit on sale of investments
Net fair value adjustments (net gain) on financial assets at fair value through profit or loss
Reversal of impairment losses
Dividend income
– from subsidiaries
– from financial assets at fair value through profit or loss
Expenses
Depreciation (included in other expenses)
Loss on sale of property, plant and equipment
Impairment loss - machinery
Loss on sale of investments
Net fair value adjustments (net loss) on financial assets at fair value through profit or loss
Amortisation (included in other expenses)
Write-down of inventory to net realisable value
Abnormal loss on inventory due to fire
Employee benefits expense (excluding directors’ remuneration) Research and development costs expensed
Director’s remuneration:
Mr Adams - fees for services as director - for other services
Mrs Block - compensation for loss of office
The impairment loss (included in the line item ‘other expenses’ on the statement of comprehensive income) [1⁄2] is in connection
with machinery and is due to a new competitor that has entered the market . The machine is used in weaving carpets. The
recoverable amount is R2 442 640 on 30 April 2019 and is based on the value in use of the asset. The discount rate used for the
current estimate is 14%
disclose: contractual commitments, compensation etc, how depreciation is treated (as expense / cost of other assets)
- if PPE is revalued, disclose: date of revaluation, if independent valuer involved
- for every revalued class: CA & revaluation surplus
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Information to be presented in the Statement of Comprehensive Income / notes:
(IAS 1 par 98)
278: will stipulate if material
circumstances that would give rise to separate disclosures of items of incomes / expenses
- write down to NRV, disposals, reversals of provisions, litigation settlements, discontinued operations, costs of
restructuring activities
IAS 16 & IAS 8:
- residual value & useful life must be reviewed at least @ end of the year
- significant change = use IAS 8
IAS 36 - Impairment of assets
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IDENTIFYING AN ASSET THAT MAY BE IMPAIRED:
SCENARIO 1:
always test for impairment
Goodwill
Intangible assets:
indefinite useful life
not yet available for use
SCENARIO 2:
only test if there is an indication of impairment
All other assets
sources of indication:
paragraph 12
internal – eg: physical damage / obsolete
external – eg: change in interest rate / new competitor
* consider:
MATERIALITY
if did an impairment test last year and found not to be impaired (recoverable amount > carrying amount),
then it is not necessary to recalculate the recoverable amount if no events occurred that would eliminate
the difference
indication of impairment = review IAS 8 (residual value may not be the same anymore)
PERFORM THE IMPAIRMENT TEST:
- discount rate = pre-tax rate
- can only adjust 1: discount or cash flow
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vs
FAIR VALUE
market based
VALUE IN
USE
specific to entity
① calculate the RECOVERABLE AMOUNT:
= higher of Future value – Costs of disposal or Value In Use
Costs of Disposal:
- only include incremental costs (costs incurred due to sale of asset)
- exclude: finance costs / income tax expense / salaries
- if raise a liability – cannot deduct from FV
Value In Use:
*measure asset in current condition
- cash outflows = expenditure necessary to use asset (eg: maintenance)
- management budgets = max 5 years budgeted data
eg: machine has a 7 year useful life (no residual value)
Lt industry growth rate = 1%
source
budget
extrapolated
using industry
growth rate
year
1
2
3
4
5
6
7
amount
10 000
10 500
13 000
11 200
12 000
12 120
12241
= 12 000 x 1,01
= 12 120 x 1,01
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VALUE IN USE:
ALWAYS USE NET INFLOWS!
example:
answer:
31 000
37 000
22 000
49 470
inflow before lease
(2000)
(2000)
(2000)
-
LEASE (CASH)
29 000
35 000
20 000
47 470
NET INFLOW
add these together (2015 @ start)
= 67 470
PV = 96 045 (VIU)
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SEE IF THERE IS AN IMPAIRMENT LOSS:
②IMPAIRMENT LOSS:
= carrying amount > recoverable amount
eg:
Carrying value
Fair value
Cost of disposal
Fair value less cost of
disposal
Value in Use
Recoverable amount
New carrying amount
R
10 000
11 000
2 500
?
8 000
?
?
A) FV less cost of disposal
B) Value in use
= 11 000 – 2500 = 8500
= 8000
recoverable amount
impairment loss
new carrying amount
= 8500
= 10 000 - 8500 = 1500
= 8500
(* highest of A or B)
(CA-RA)
JOURNAL:
DR – Impairment loss (P/L) 1500
CR – Accumulated impairment loss (SFP) 1500
eg:
Cost of asset
Recoverable amount
Carrying amount
Impairment loss
impairment loss
new carrying amount
adjusted depreciation
R
10 000
3500
5000
?
= 5000 - 3500 = 1500
= 3500
= 3500 = 700
2
(CA-RA)
JOURNAL:
DR – Impairment loss (P/L) 1500
CR – Accumulated impairment loss (SFP) 1500
Exceptions when determining RA:
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* unless there is an exception – must calculate both Fv-CoD & VIU to determine CA
❶ Fv-CoD or VIU is higher than the carrying amount → no impairment loss
❷ FV cannot be reliably measured (IFRS 13) ∴ use VIU
❸ no reason to believe VIU is significantly higher than Fv-CoD
(typically when asset is about to be sold)
VIU
VIU
even if:
CA
CA = only recoverable when considering only Fv-CoD
Fv-CoD
1) Fv-CoD higher than CA
2) NOT vice versa
VIU
3) VIU not expected to be significantly higher than Fv-CoD
VIU
Company year end = 31/12/2018. The FV-CoD of an asset = R1million (FV= price received to sell an asset)
if the asset is to be sold on 1/1/2019, then the value in use calc might look like:
Net inflow from use
Net inflow from sale
Total net inflows on 1/1/2019
Present value on 31/12/2018 (ONE DAY BACK)
Assume discount rate of 10%, but effect of time
value of money insignificant
Cashflows
R1 mill
R1 mill
R1 mill
use the fair value less cost of disposal as the recoverable amount
There is no reason to believe that the value in use is significantly higher than the fair value less cost of disposal = use Fv-Cod
if there is reason then use VIU
The fair value cannot be determined reliably, in which case the value in use will be accepted as the recoverable amount.
if VIU cannot be determine & Fv-Cod cannot be used = CGU
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Reversal of Impairment Loss:
assessment every year-end:
indication impairment loss in prior periods decreased / no longer exists eg: increase in asset’s value
ONLY reverse:
change in estimates used to determine recoverable amount
- change in basis for RA
- change in amount / timing of estimated future CFs or discount rate
- change in estimates of components of Fv-CoD
Change in estimate of RA:
increase CA to RA → limited to what CA would have been if no impairment loss previously recognised
example:
limited to what CA
would have been is no
impairment loss
previously recognised
10 000 – 5000 = R5000
4000 – (4000) = 3333
6
new CA – “new CA”
remaining useful life
COST PRICE
end Y4
Carrying amount
Recoverable amount
Impairment loss
end Y5
Recoverable amount
Carrying amount
Reversal
Carrying amount
Depreciation Y6
useful life = 10 years
R
10 000
10 000 - 4000
6000
4000
(2000)
limited to 5000
6000
3333
1667
5000
1000
(5000-3333)
end Y4 - JOURNAL:
DR – Impairment loss (P/L) 2000
CR – Accumulated impairment loss (SFP) 2000
end Y5 - JOURNAL:
DR– Accumulated impairment loss (SFP) 1667
CR– Impairment loss (P/L) 1667
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CASH GENERATING UNITS:
nb: we test individual assets
determine RA: determine both Fv-CoD and VIU
what if an asset does not generate cash flows on its own?:
HOW TO DETERMINE RA
-
CGU vs individual asset:
identify GROUP of asset it belongs to that generate cash sales so that VIU can be calculated
impairment test for GROUP indicates that the GROUP had an impairment loss
test asset (IAS 36)
identify impairment
measure RA
Fv-CoD
VIU
future cash flow
discount rate
recognise & measure
impairment loss
individual asset
recognise loss
reversal
CGU
disclose
- identify
- measure CA & RA
goodwill
corp. assets
- recognise loss
- reversal
Identify the CGU asset belongs to:
① ESTIMATE recoverable amount of individual asset
cannot be determined if:
- VIU cannot be estimated close to Fv-CoD
- asset does not generate cash flow independently
② Determine VIU & Fv-CoD for CGU
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Cash Generating Unit:
-
recoverable amount = highest of VIU or Fv-CoD
CA = generate future cash flows
* impairment loss: CA > RA
pro-rata to other assets of CGU: based on CA of each asset
- amount of impairment loss normally allocated to asset should be allocated to other assets of CGU
- CA of asset not decreased below the highest of: Fv-CoD & VIU
* if RA of individual asset cannot be determined – not a loss for the asset if the CGU is not impaired
example:
impairment loss of CGU
CA:
3000+2000+6000+4000
RA:
Impairment loss
15 000
10 000
5000
impairment loss allocated to individual assets
CA before impairment
Equipment
3000
allocated impairment
loss
(1000)
Vehicles
2000
(1667)
1333
Plant
6000
(2000)
4000
Building
4000
(13333)
2667
15 000
(5000)
10 000
3000
15 000
x 5000
CA after
impairment
2000
JOURNAL:
DR – Impairment loss (P/L) 5000
CR – Equipment: Accumulated impairment loss (SFP) 1000
CR – Vehicles : Accumulated impairment loss (SFP) 667
CR – Plant: Accumulated impairment loss (SFP) 2000
CR – Building: Accumulated impairment loss (SFP) 1333
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matter 2
matter 1
1. was an indication of an impairment loss for the cutting machine
on 30 June 2019 and therefore the accountant was correct to
1. On 30 June 2019 there was an indication that the
test for a possible impairment loss.
circumstances no longer exist which gave rise to the
2. When a test for an impairment loss is performed, the
impairment loss of the washing machine on 30 June
recoverable amount of the cutting machine should be
2018. It was therefore correct to test for an
determined.
impairment loss or a possible reversal of a previously
3. The recoverable amount of an asset is the higher of the fair
recognised impairment loss.
value less cost of disposal and the value in use.
2. When the calculation for the reversal loss of the
4. Both the fair value less cost of disposal and the value in use of an
impairment loss was performed, the accountant
asset should be determined, unless:
should have ensured that the carrying amount of
5. Any of the fair value less cost of disposal or the value in use of
washing machine after the reversal was performed,
the asset is higher than the carrying amount of the asset. This is
should not exceed the carrying amount it would have
not the case as the fair value less cost of disposal is less than the
been had the washing machine never been impaired.
carrying amount of the asset and the value in use cannot be
3. The accountant did not take the limit into account
determined.
when he/she performed the calculation as the
6. The fair value cannot be determined reliably, in which case the
reversal is more than the original impairment loss.
value in use will be accepted as the recoverable amount. This is
4. therefore do not agree with the calculations of the
not applicable to the scenario as the fair value can be
accountant.
determined reliably.
5. The accountant should limit the reversal of the
7. There is no reason to believe that the value in use is significantly
previously recognised impairment loss to ensure that
higher than the fair value less cost of disposal. This is not the
case as HSH expects to use the asset for the next five years.
the limit (the carrying amount it would have been had
8. Since none of the exceptions are applicable, which would make
the asset never been impaired) is not exceeded.
it acceptable to use the fair value less cost of disposal as the
recoverable amount, it is incorrect to use the fair value less cost
of disposal when the value in use cannot be determined.
9. Instead, the cutting machine’s recoverable amount should have
been determined as part of a cash generating unit (CGU)
10. Since the weaving machine are used with the cutting machine to
generate future economic cash flows, the two assets should be
considered as a CGU and should the fair value less cost of
disposal and the value in used of the CGU be determined.
11. And should be allocated pro-rata to each of the assets according
to the carrying amount of each asset.
12. If the CGU’s recoverable amount is less than the carrying
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IAS 38 - Intangible Assets
•
DEFINITION:
intangible asset = an identifiable non-monetary asset without physical substance
§
identifiable – if it is either:
1) separable (capable of being separated from the entity & sold / transferred / licensed / rented)
2) arises from contractual or other legal rights (regardless of whether those rights are transferable /
separable from the entity)
§
non-monetary:
monetary – money held (eg: bank / cash) and assets to be received in fixed / determinable amount of money
(debtors/ investors)
§
without physical substance – not tangible
§
asset – resource controlled by an entity as a result of past events and from which future economic benefits are
expected to flow to the entity
§
control – an entity controls an asset if the entity has the power to obtain future economic benefits flowing from
the underlying resource AND has the power to restrict the access of others to those benefits
(control normally stems from a legal right – but not a necessary condition)
§
future economic benefits – revenue from sale, cost savings
i.e the use of intellectual property in a production process may reduce future costs rather than increase future revenues
NOT recognised: it cannot be distinguished from the cost of developing the business as a whole
IAS 16 or IAS 38? → use judgement to determine which part is more significant
If intangible element is integral (asset cannot function without it) to the part of the related hardware
→ treat the whole asset under IAS 16 PPE
examples of intangible resources:
computer software, patents, copyrights, films, customer lists,
import quotas, fishing licenses, customer loyalty etc
NB: not all meet the definition of an intangible asset
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•
RECOGNITION:
RECOGNISE as an intangible asset if the item meets:
a) the definition of an intangible asset and
b) recognition criteria
- probable that expected future economic benefits attributable to the asset will flow to the entity
- cost can be measured reliably
due to the nature of intangible assets, subsequent expenditure will rarely meet the definition of an intangible asset
•
MEASUREMENT = R-VALUE
INITIAL AT ACQUISITION
SUBSEQUENT AFTER ACQUISITION
COST PRICE
AMORTISE
Year end
(carrying value)
carrying value of intangible asset:
COST PRICE
minus: accumulated amortisation
minus: accumulated impairment losses
TEST FOR
IMPAIRMENT
(IAS 36)
method of acquisition:
1) Separate Acquisition
2) Exchange of assets
3) Internally generated
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① SEPARATE ACQUISITION
separate acquisition = the asset is bought
-
Price an entity pays will reflect expectations about the probability that expected future economic benefits
embodied in asset will flow to entity
(entity expects there to be an inflow of economic benefits –
even if there is uncertainty about the timing or the amount of the inflow)
Therefore, probability criteria (probable that expected future economic benefits attributable to the asset will flow to the entity)
= always satisfied for separately acquired intangible assets
Cost of separately acquired intangible asset can usually be measured reliably.
Particularly when the purchase consideration is in cash or other monetary assets
COST
= Purchase price + import duties + non-refundable taxes - trade discounts
+
- rebates
Any directly attributable cost to get assets ready for intended use
(Eg cost of employee benefits; professional fees; cost of testing whether asset is working properly)
NOT included in cost:
a) costs of introducing new product or service, including advertising and promotion
b) cost of conducting business in new location / with new class of customer; and
c) admin and other general overhead costs
-
Recognition of costs ceases:
when asset is in condition necessary to be capable of operating in the manner intended by management.
Not included:
costs incurred while asset capable of operating as intended, but not yet brought into use initial operating losses
-
Income and related expenses of incidental operations are recognised in profit and loss (see IAS 16 – same
principal)
-
Payment deferred beyond normal credit terms:
Cost price = cash price equivalent (difference between this and total payments is interest expense recognised over
credit term
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② EXCHANGE OF ASSETS
(same as IAS 16)
ASSET EXCHANGE
ASSET 1
derecognise CA (cost – acc dep)
ASSET 2
COST PRICE OF ASSET?
3
options:
1) Fair value of asset given up
2) Fair value of asset received
* use if more evident
3) CA of asset given up
(lacks commercial substance) –
commercial substance = future cash flows
change
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③ INTERNALLY GENERATED
1) Internally generated goodwill:
-
NOT recognised as an asset:
not identifiable (not separable nor does it arise from contractual or other legal rights)
cost cannot be measured reliably
2) Internally generated asset:
Problems with recognition:
• Identifying whether and when there is an identifiable asset that will generate expected future economic
benefits
• Determining the costs of the asset reliably
Thus, in addition to general recognition requirements:
apply requirements and guidelines in par. 52-67
à 6 additional requirements (Development Phase)
a) Classify the generation of an internally generated intangible asset into:
1) Research phase
2) Development phase
* If these 2 phases are not distinguishable, then classify all expenditure as if it were incurred in the research phase only:
DR – Research expense (P/L)
1) RESEARCH PHASE
research – the original and planned investigation undertaken with the prospect of gaining new scientific /
technical knowledge and understanding
-
the expenditures incurred in research phase = recognised as expenses (through P/L) when incurred
in the research phase: the entity cannot demonstrate that an intangible asset exists that will generate probable
future economic benefits
examples: activities aimed at obtaining new knowledge, search for alternatives for materials etc
eg: it is a search for different alternatives: the entity did not decide on the chosen alternative
DR – Research expense (P/L)
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2) DEVELOPMENT PHASE
development - Application of research findings / other knowledge to a plan / design for the production of
new or substantially improved materials, devices, products, processes, systems or services before start of
commercial production or use
-
recognise the intangible asset ONLY if all the criteria is met:
Par. 52-67
a) Technical feasibility of completing the asset so that it will be available for use or sale
b) Its intention to complete the asset and use or sell it
c) Ability to use or sell the asset
d) How the asset will generate probable future economic benefits (eg. demonstrate an external market exists for
the output of the intangible asset or the asset itself, or its usefulness internally)
e) Availability of adequate technical, financial resources to complete the development and to use or sell it
f) Ability to measure reliably the expenditure attributed to the asset during the development phase
-
in the development phase: the entity can sometimes identify an asset & demonstrate that it will generate
probable future economic benefits (more advanced that the research phase)
has chosen an alternative & developed it further
examples: prototypes, design, construction etc
COST PRICE:
Cost = total expenditure since general and additional recognition criteria were met
a) the definition of an intangible asset and
b) recognition criteria
- probable that expected future economic benefits
attributable to the asset will flow to the entity
- cost can be measured reliably
development phase
a) Technical feasibility of completing the asset so that it will be available for use
or sale
b) Its intention to complete the asset and use or sell it
c) Ability to use or sell the asset
d) How the asset will generate probable future economic benefits (eg.
demonstrate an external market exists for the output of the intangible asset or
the asset itself, or its usefulness internally)
e) Availability of adequate technical, financial resources to complete the
development and to use or sell it
f) Ability to measure reliably the expenditure attributed to the asset during the
development phase
+ all directly attributable costs necessary to create, produce & prepare asset to be capable of operating
as intended by management
* note: costs previously recorded as expenses cannot now be capitalised
ONLY the costs in the development phase AND from the date it complies with the 6
requirements, will it be recognised as an INTANGIBLE ASSET
DR – Intangible Asset (SFP)
Prior to the date of complying with the requirements of paragraph 57 = recognised as an
expense
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•
COST PRICE:
examples:
a) materials & services used
b) cost of employee benefits
c) fees for registering a legal right
d) amortisation of patents and license used to produce the asset
excluded from cost:
a) selling, admin, general overheads (unless directly attributable)
b) identified inefficiencies and initial operating losses
c) expenditure on training staff to operate the asset
-
Expenditure on intangible items shall be recognised as an expense when it is incurred, unless: meets the
recognition criteria in par. 18-67
-
Examples of items recognised as expenses:
§
§
-
•
Research costs, start-up costs, training, advertising and promotional,
relocating and reorganising part of entity
Past expenses NOT to be recognised as an asset at a later date
recognise as an expense: all research costs & development costs prior to complying with paragraph 57
SUBSEQUENT MEASUREMENT
Entity can choose between:
Cost model
Cost less accumulated amortisation and accumulated impairment losses
Revaluation model
Carried at revalued amount (revalue to fair value with reference to active market) less subsequent
accumulated amortisation and subsequent accumulated impairment losses
(Uncommon for an active market to exist for intangibles)
COST MODEL
Cost less accumulated amortisation and accumulated impairment losses
amortisation – systematic allocation of the depreciable amount of an intangible asset over its useful life
depreciable amount – cost of asset less residual value
residual value of intangible asset – estimated amount that an entity would currently obtain from disposal of the
asset, after deducting the costs of disposal if the asset were already of the age / in the condition expected at the end of
its useful life
useful life – period over which an asset is expected to be available for use by an entity or number of production or
similar units expected to be obtained from the asset by an entity
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INITIAL & SUBSEQUENT MEASUREMENT:
IAS 38:24
•
An intangible asset is initially measured at cost price
•
To determine the cost price of an internally generated intangible asset, one must distinguish between the
research phase and development phase
•
All costs incurred during the research phase are recognised as an expense in the period in
which it occurred
•
All costs incurred during the development phase, from the date that the entity meets the recognition criteria is
capitalised as part of the cost price of the asset IAS 38:57
•
If one cannot distinguish between the research and development phase, all costs incurred are treated as if it were
incurred in the research phase (i.e as an expense) IAS 38:53
•
The cost price of an internally generate asset comprises all directly attributable costs necessary to create, produce
and prepare the asset to be capable of operating in the manner intended by management IAS 38:66
•
Marketing costs that are not directly attributable to the development of the intangible asset, is not part of the
cost price of the intangible asset IAS 38:67(a)
•
Subsequent measurement according to the cost price model states that the intangible asset shall be carried at its
cost price less any accumulated amortisation less any accumulated impairment losses IAS 38:74
IAS 38:54
IAS 36: IMPAIRMENT
•
At the end of each reporting period an entity shall assess whether there is any indication that an asset may be
impaired. If any such indication exists, the entity shall estimate the recoverable amount of the asset
IAS 36:9
•
If the recoverable amount of the asset is less than its carrying amount, the carrying amount of the asset shall be
reduced to its recoverable amount with the difference being accounted for as an impairment loss IAS 36:59
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USEFUL LIFE
•
Entity shall assess whether the useful life of an intangible asset is finite or indefinite
FINITE useful life = amortised
INDEFINITE useful life = not amortised
- Regarded as indefinite if, based on relevant factors, there is no foreseeable limit to the period over which the asset is expected to
generate net cash inflows
•
CONTRACTUAL / LEGAL RIGHTS:
-
the useful life of an intangible asset that arises from contractual / legal rights shall not exceed the period of the
period of the contractual / legal rights (but may be shorter)
Factors influencing the useful life of an intangible asset:
1) economic factors – determine the period over which the future economic benefits will be received by
the entity
2) legal factors – restrict the period over which the entity controls access to these benefits
USEFUL LIFE = shorter of the periods determined by these 2 factors
entity can renew the contractual / legal rights without cost if:
a) evidence that the contractual / legal rights will be renewed (if based on a third party – evidence that they will give
consent is required)
b) evidence that conditions to obtain renewal will be satisfied
c) cost of renewal is not significant when compared to future economic benefits expected to flow to the entity from
renewal
if the cost of renewal is significant (when compared to future economic benefits expected to flow to the entity from
renewal) the renewal cost represents the cost to acquire a new intangible asset at the renewal date
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•
FINITE USEFUL LIFE → AMORTISATION
amortisation – systematic allocation of the depreciable amount of an intangible asset over its useful life
start: asset is available for use (in the location / condition ready for use & intended by management)
cease: earliest of when classified as held for sale (IFRS 5) or derecognised
-
Method – to reflect the pattern in which future economic benefits of asset are expected to be consumed by
entity
Recognise amortisation expense in profit & loss, or as part of carrying amount of another asset (if so
permitted by another IFRS)
Residual value – assumed to be zero, unless there is as commitment by 3rd party to purchase, or active
market; review end of each year
Amortisation period and –method at least reviewed on every financial year end.
If differs from previous period it must be adjusted in terms of IAS 8
PAR 100(A):
Residual value of an intangible asset with a finite useful life = assumed to be 0 unless:
a) there is a commitment by a third party to purchase the asset at the end of its useful life
b) there is an active market for the asset and
i)
residual value can be determined
ii)
probable such a market will exist @ end of asset’s useful life
•
INDEFINITE USEFUL LIFE → NO AMORTISATION
-
•
If there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows, the
useful life is regarded as indefinite
Test for impairment annually / whenever there is an indication of impairment (IAS 36)
RETIREMENTS & DISPOSALS
-
derecognise: on disposal / when no future economic benefits are expected from the use or disposal
profit or loss (difference between proceeds & carrying amount) from derecognition
not classified as revenue
determine disposal date in terms of IFRS 15
amortisation does not cease when asset is no longer used (unless is fully depreciated or held for sale – IFRS 5)
at year-end
Carrying amount:
Amount at which an asset is recognised in the SFP after deducting
any accumulated amortisation / accumulated impairment losses
* test for impairment
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•
DISCLOSURE
Disclose for each CLASS
- A class is a grouping of assets of similar nature / use, eg: Computer software / Copyrights
distinguishing between internally generated and other intangible assets:
a) Whether useful lives are finite / indefinite and, if finite, useful lives / amortisation rates used;
b) amortisation methods;
c) Gross carrying amount and accumulated amortisation together with accumulated impairment losses at the beginning
and end of period;
d) Line item in SCI in which any amortisation is included;
e) A reconciliation of the carrying amount at the beginning and end of the period showing:
i) Additions, indicating SEPARATELY those obtained from internal development, those acquired separately, or through
business combinations
ii) Assets classified as held for sale (IFRS 5)
iii) Increases / decreases in revaluations or impairment losses recognised or reversed in OCI
iv) Impairment losses recognised through P/L
v) Impairment losses reversed through P/L
vi) amortisation
vii) Net exchange differences
viii) Other changes in the carrying amount
Also disclose:
a) For intangible asset assessed as having indefinite useful life:
- the carrying amount
- reasons supporting assessment
b) For individual intangible assets that are material
- the carrying amount
- description
- remaining amortisation periods
c)
For intangible assets acquired through government grants and initially recognised at fair value:
- Amount of contractual commitments for the acquisition of intangible assets
- Existence and carrying amounts of assets whose title is restricted and those pledged as security
Research and development expenses
• Disclose aggregate amount of research and development expenditure recognised as expenses in period
• Other information encouraged, but not required
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SUMMARY IAS 38
INTERNALLY GENERATED INTANGIBLE ASSETS
research (expense) vs development (capitalise once par. 57 is met)
intangible asset with finite useful life = test for impairment when indication of impairment exists
intangible asset with indefinite useful life = test for impairment annually
An intangible asset is initially measured at cost price
To determine the cost price, one must distinguish between the research and development phases:
All costs incurred during the research phase are recognised as an expense
All costs incurred during the development phase are capitalised as part of the cost price of the asset
if one cannot distinguish between the phases, all costs incurred are treated as occurring in the research phase (i.e expense)
The cost price of an internally generated asset = all directly attributable costs needed to create the asset
Subsequent measurement:
COST PRICE MODEL:
the intangible asset is carried at:
cost price – accumulated amortisation – accumulated impairment losses
REVALUATION MODEL:
the intangible asset is carried at:
revalued amount - accumulated amortisation - accumulated impairment losses
(revalued to fair value with reference to active market)
-
expenditure initially recognised as an expense shall not be recognised as part of the cost of an intangible asset at a
later date
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NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED XXX
1. Accounting policy:
The financial statements are prepared in accordance with the Companies Act of South Africa and the International
Financial Reporting Standards. The financial statements are prepared on the historical cost basis & the accounting
policy is in accordance with that of the previous year.
Intangible assets
Separately acquired / exchanged / Internally generated intangible assets have a finite / indefinite useful life
and are shown at cost price / fair value less accumulated amortisation less accumulated impairment loss.
These assets are written off on a XXX basis over XXX years and have a XXX residual value
3. Intangible assets:
Separately acquired
Patent
Carrying amount 1 May 2013
Gross carrying amount
Accumulated amortisation
Additions
Disposals
Amortisation
Carrying amount 30 April 2013
Gross carrying amount
Accumulated amortisation
Internally generated
patent
Licences
(
)
(
(
)
)
(
)
Individually material intangible assets:
Internally generated patent for eg: sensors with a carrying amount of XXX on XXX. Was not yet taken into use on XXX
10. Profit before tax:
Profit before tax is shown after the following:
INCOME
Profit on sale of separately acquired plant
EXPENSES
Amortisation
Research and development cost
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example:
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Classification
Definition of intangible asset
It must be an asset, which is a resource under control of DesignIt Limited, as a result of a past event; and from which
future economic benefits are expected to flow to the entity.
The asset must be without physical substance;
non-monetary in nature;
and identifiable.
Control exists if the entity has the right to future economic benefits and can limit the access of others to the benefits.
An asset is identifiable if it can be separated from the entity by sale or transfer to another party; or if it arises from a
contractual or other legal right.
Recognition of an intangible asset:
Both intangible assets must comply to the recognition criteria before it can be recognised, namely: it must be probable
that economic benefits will flow in;
the cost must be measured reliably.
Internally generated assets are only recognised if all the following requirements are also met:
a) Technical feasibility of completing the asset so that it will be available for use or sale
b) Its intention to complete the asset and use or sell it
c) Ability to use or sell the asset
d) How the asset will generate probable future economic benefits (eg demonstrate an external
market exists for the output of the intangible asset or the asset itself, or its usefulness
internally)
e) Availability of adequate technical, financial resources to complete the development and to use
or sell it
f) Ability to measure reliably the expenditure attributed to the asset during the development
phase
o
Application on license purchased
Classification
- The price paid by the entity for the separately acquired asset reflects the expectation of future economic benefits.
- The benefits of the license are limited to DesignIt Limited, because they are the owners of the license and therefore have
control.
- The right of use which arises from the license is not tangible and therefore without physical substance.
- The license is not money held and is thus non-monetary.
- The license is identifiable, because it can be separated from the entity and sold to another party / arises from a purchase
agreement.
- The license meets the requirements and is therefore an intangible asset.
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Recognition and initial measurement
- The license was obtained by separate acquisition and therefore the price paid, R7 400, is a reliable measurement of
the cost.
- The price paid by the entity for the separately acquired asset reflects the expectation of future economic benefits.
- Recognition date is therefore 30 November 2017 and the initial measurement of the cost price is R7400.
o
Application on ‘MedBuild’
Classification
- The company acquires economic benefits from the use of “MedBuild”, which completes the design of medical facilities
quickly and effectively, and the benefits of “MedBuild” are limited to DesignIt Limited because they manufactured and owns
the model and therefore has control.
- The model is not tangible and therefore without physical substance.
- The model is not money held and is thus non-monetary.
- The model is identifiable, because it can be separated from the entity and sold to another party. The model meets the
requirements and is therefore an intangible asset.
Recognition
- On 28 September 2017 the executive manager approved option A for development, which confirms the intention to
complete the asset for use or sale.
- On 11 November 2017 the viability is confirmed by the assistant, thus it will generate future economic benefits.
- On 30 November 2017 the executive manager confirms the technical feasibility of the development.
- On 30 November 2017 the executive manager confirmed the economic viability and the inflow of economic benefits
and thus, the ability to complete the asset for use or sale.
- On 30 November 2017 the completion was authorised, which confirmed the availability of resources.
The costs incurred were given and can be determined reliably.
On 30 November 2017 all six requirements were met and the costs could be recognised as an intangible asset.
Costs incurred during the research phase are recognised as research expenses since there is not yet certainty regarding
the probability of the inflow of economic benefits at the time.
The following costs will therefore be recognised as expenses:
R5 000 - attending course, R2 100 - presentation of alternatives, R180 000 - salaries (1 August 2017 to 30 November
2017 - 540 000 x 4/12)
The cost of R3 500 on 11 November 2017, regarding the investigation of viability, is classified as a development
expense, since all the recognition criteria have not yet been met.
Initial measurement
The costs capitalised since the date of recognition are:
R180 000 - Salaries (1 December 2017 to 31 March 2018- 540 000 x 4/12) R1 096 - Amortisation of license (7 400 x 4/27
months)
Capitalisation ends on 1 April 2018, when “MedBuild” is ready for use.
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IAS 2- Inventories
inventory = assets held for sale in the ordinary course of business, in the process of production for such sale or
in the form of materials / supplies to be consumed in the production process / the rendering of services
Example ABC Limited produces bottle wine:
Raw material = grapes
Work-in-progress = process of converting grapes, for example the pressing of grapes, into wine
Finished products = completed bottle of wine ready to be sold to customers
o
Measurement of inventory:
* Inventory shall be carried at lowest of cost price and net realisable value
COST PRICE:
IAS 2 par 10
The cost of inventories shall comprise all costs of purchase, costs of conversion and other costs incurred in
bringing the inventories to their present location and condition
NRV
Net realisable value (NRV) (entity specific): estimated selling price in ordinary course of business less
estimated cost to complete, less estimated cost to sell
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o
first year revision:
•
PROFIT MARGINS
1) Gross Profit as % of cost price
∴ cost price = 100%
2) Gross Profit as % of sales price
∴ sales price = 100%
eg: 20% GP on cost price:
SP = 120
CP = (100)
GP = 20
eg: 20% GP on sales price:
SP = 100
CP = (80)
GP = 20
3) Discounts
eg: GP is 30% on sales price and there is a 5% discount:
normally
SP = 100
CP = (70)
GP = 30
•
sale- discount
x0.95 SP = 95
CP = (70)
GP = 25
Normal losses
= normal part of the production process eg: paint spillage
- included in the cost of inventory expense (DR- Cost of Sales)
DR – Cost of Sales (P/L)
CR – Inventory (SFP)
•
Abnormal losses
= not a normal part of the production process eg: fire
- separate expense
DR – Abnormal Loss (P/L)
CR – Inventory (SFP)
•
Insurance
DR – Insurance Debtor (SFP)
CR – VAT Control (SFP)
CR – Insurance Income (P/L)
•
FOB (Free On Board):
* see when to start capitalising
eg: FOB Cape Town – start capitalising once it reaches Cape Town
excluded costs:
-
marketing
advertising, admin ...
day-to-day servicing
profit / loss
* capitalisation ceases when good is in location / condition necessary for its intended use
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o INVENTORY SYSTEMS:
Perpetual v Periodic
PERPETUAL:
- accounts kept up to date continuously
- cost price calculated after each sales transaction
PURCHASES RETURNS:
PURCHASE INVENTORY:
DR – Inventory (SFP)
CR – Bank / Creditors (SFP)
SELL INVENTORY:
DR – Creditors (SFP)
CR – Inventory (SFP)
SALES RETURNS:
DR – Bank (SFP)
DR – Cost of Sales (P/L)
CR – Sales (P/L)
CR – Inventory (SFP)
DR – Sales (P/L)
DR – Inventory (SFP)
CR – Bank (SFP)
CR – Cost of Sales (P/L)
NORMAL SHORTAGE:
ABNORMAL SHORTAGE:
DR – Abnormal Losses (P/L)
CR – Inventory (SFP)
DR – Cost of Sales (P/L)
CR – Inventory (SFP)
PERIODIC:
- physical inventory counts done periodically
PURCHASES RETURNS:
PURCHASE INVENTORY:
DR – Purchases (P/L)
CR – Bank / Creditors (SFP)
SELL INVENTORY:
DR – Bank (SFP)
CR – Sales (P/L)
NORMAL SHORTAGE:
no entry
(included in closing stock)
DR – Creditors (SFP)
CR – Purchases (P/L)
SALES RETURNS:
DR – Sales (P/L)
CR – Bank (SFP)
ABNORMAL SHORTAGE:
DR – Abnormal Losses (P/L)
CR – Cost of Sales (P/L)
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DIFFERENCE BETWEEN FIRST YEAR AND SECOND YEAR:
In FinAcc 178:
inventory bought were ready to be sold to customers without a production process involve.
Finished goods/products were bought and re-sold to customers.
In FinAcc 278:
raw materials will be bought and the converted into finish goods, through a production process, and then it will be ready to sell
to customers. (Raw material – production process – finished products)
Finished goods
• Purchases
• Sales (Perpetual / Periodic)
• @ YE (lowest CP & NRV)
• Normal & abnormal shortages
Raw material
Conversion
- Cost price
- Normal & Abnormal inventory losses
- Account for @ YE
- Cost price
- Normal & Abnormal inventory losses
- Account for @ YE
Production process
Finished goods
• from conversion
• Sales (Perpetual / Periodic)
• Account for @ YE (lowest CP & NRV)
• Normal & Abnormal inventory shortages
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EXAMPLE:
For now, know this: ‘shortages’ refer to
missing finished goods. We use the word
‘losses’ when we refer to missing goods in
the production process. We still distinguish
between normal vs abnormal shortages.
An important take-away
from this easy example is the
fact that the answer is
exactly the same – does not
matter whether you use the
perpetual or periodic
system! The transactions
lead to a gross profit of 20.
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USE THROUGHOUT IAS 2:
EXAMPLE:
ABC Limited is a wine producing company with 31 December year end.
ABC Limited buys grapes from local grape farms in Stellenbosch and transports it to its wineries in Stellenbosch.
During the producing of the wine, a pressing machine is used to press the grapes. Depreciation on the pressing
machine is write off according to the straight-line method over a useful life of five years with no residual value.
The machine is control by the factory foreman, who is paid R80 per hour. The pressing machine uses electricity to
operate. ABC Limited rents the premises of the winery at a cost of R100 000 per month
o COST PRICE OF INVENTORY:
Purchases
purchase costs
+
WIP
+
Costs of conversion:
Fixed production
overheads
Variable production
overheads
Finished Products
- Cost per unit
= x units on hand on
Y/E = cost price of
inventory
The costs of inventory include:
1. The purchase price of raw material
2. The cost to converted raw material into finished products, and
3. The cost price of completed products.
•
RAW MATERIALS
Purchase costs
• Purchase price
• Import duties and other taxes (non-recoverable)
• initial transport / handling costs
• All other costs directly attributable to the acquisition of inventory
• Trade discounts, rebates and other similar items are deducted in determining costs of purchase
Excludes: Abnormal losses, advertising / marketing, storage costs, VAT (if a registered vendor)
ABC Limited:
In our example the cost price of the grapes will be the raw material used in our manufacturing process.
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•
TRADE DISCOUNT
eg: A Ltd. receives 5% discount when purchasing 10 or more items from a supplier. Cost price per item is R100.
eg:
The entity buys inventory from a supplier. Ignore VAT. The details are as follows:
R
Purchase price
Trade discount
10 000
10%
Situation A:
The entity pays cash and receives a cash discount of R500.
Situation B:
The supplier offers a settlement discount of R400 if paid within 20 days. The
expectation is that the entity will pay within 20 days. The entity eventually pays their
debt within 20 days and receive R400 settlement discount.
Situation C:
The supplier offers a settlement discount of R400 if paid within 20 days. The
expectation is that the entity will pay within 20 days. The entity pays their debt after
20 days and therefore does not receive the settlement discount.
Solution A – receive trade discount and cash discount
Bank
Inventory
8 500
Bank
Inventory
8 500
Notice that with a cash discount we immediately pay the
amount after the discount have been taken into account.
(In IAS 2 par 11 there is extra guidance in the ‘block’ below the
paragraph. The ‘block’ is called E3).
E3 specifically says that ‘cash discounts received should be
deducted from the cost of the goods purchased’.
There is NO DISCOUNT ALLOWED account!! And most
importantly, inventory is recorded at the amount excluding
the discount.
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Solution B – receive trade discount and settlement discount
Inventory
Creditors
8 600
Bank
Bank
Creditors
Creditor
8 600 Inventory
8 600
8 600
With situation B we take into account the
expectation or normal business activities of the
entity. If we normally pay within 20 days, then
the expectation is that we will do that again and
therefore inventory is recorded after the
settlement discount is taken into consideration,
i.e. at R9 000 – 400 = R8 600.
Solution C – receive trade discount but not settlement discount
Creditors
Creditors
Inventory
8 600
400
Bank
Creditor
9 000 Inventory
Inventory
8 600
400
Bank
Creditors
9 000
With situation C we see that the expectation or
normal business operation is to pay within 20
days. So we record inventory by taking business
practice into consideration, i.e. at R9 000 – R400
= R8 600.
On the date that we do NOT meet the
expectation any more, therefore on the day that
we’ve exceeded the 20 days, we do not qualify
for the settlement discount any more and have
to increase the value of our inventory
immediately to reflect the full amount due.
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•
Work in Progress
Costs of conversion:
1) direct
2) indirect costs
* rent for manufacturing, wages etc considered to be a cost of conversion of inventory (to get inventory in its state for
use) , all costs of conversion: included in CP of inventory
1) DIRECT COSTS:
-
costs that directly relate to the units of production, such as direct labour (IAS 2 p12)
ABC Limited:
if it takes 10 hours to produce 1 bottle of wine & the factory foreman is paid R80 per hour, the direct
labour costs for 15 bottles = R12 000 (10 hours x 15 units x R80 p/h)
Journal entries:
1) If the wages does not form part of the cost of conversion (i.e. not capitalised against inventory):
DR Wages (P/L)
12 000
CR Bank (SFP)
12 000
2) If the wages are direct costs which is capitalised (added to) the cost of conversion (i.e. inventory
DR Wages (P/L)
CR Bank (SFP)
12 000
12 000
DR Inventory WIP (SFP) 12 000
CR Wages (P/L)
12 000
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2) INDIRECT COSTS:
-
Indirect costs are costs are which does not directly link to the production process.
Indirect costs are further split between:
a) fixed production overheads
b) variable production overheads.
a) Fixed production overheads:
-
Indirect costs are costs which stays the same regardless of whether an entity produced any finished goods.
eg : Monthly rent, depreciation, etc.
* Very important with depreciation, it can only be a fixed production overhead costs if the entity uses the straight-line
method and never the units of production method. Why do you think this is the case?
-
Allocate based on normal capacity:
§ Production expected on average under normal circumstances
§ Taking into account loss of capacity resulting from planned maintenance
§ Actual level of production may be used if it approximates normal capacity
ABC Limited:
The rent of R100 000 per month and the depreciation on the pressing machine will be constant regardless of
the number of bottles of wine produced.
These costs are examples of fixed production overheads.
Journal entries:
Normally we would have done the following for rent expense and depreciation:
DR Rent expense (P/L)
CR Bank (SFP)
DR Depreciation (P/L)
CR Accumulated depreciation (SFP)
However if we now capitalise all as fixed production overhead costs the journal would be as follows:
DR Rent expense (P/L)
CR Bank (SFP)
DR Depreciation (P/L)
CR Accumulated depreciation (SFP)
DR Inventory (SFP)
CR Rent expense (P/L)
DR Inventory (SFP)
CR Depreciation (P/L)
- Fixed production overheads are allocated to the cost of conversion based on normal capacity.
Normal capacity will be provided in questions but look out for financial year version production year.
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•
The allocation of fixed production overheads based on normal capacity can lead to over or under recovery of
production overheads.
In order to determine whether there is an over or under recovery, normal capacity is compared to actual capacity.
Over-recovery
(Actual units produced is more than normal capacity)
- Limit allocation to actual fixed costs
- Thus, allocate based on actual units
Under-recovery
(Actual units produced is less than normal capacity)
DR Cost of sales (P/L)
CR Bank (SFP)
Over-recovery:
Normal capacity = 10 000 units (ABC Limited bottles of wine)
Actual capacity = 12 000 units (ABC Limited bottles of wine)
If this happens actual capacity is limited to normal capacity and thus 10 000 units are used to allocate fixed
production overheads.
Under-recovery:
Normal capacity = 12 000 units (ABC Limited bottles of wine)
Actual capacity = 10 000 units (ABC Limited bottles of wine)
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example:
UNDER-RECOVERY
Normal capacity
Fixed production overheads
Production (actual)
Allocated to cost of inventory (asset):
(50c x 8 000) OR (8 000/10 000 x 5 000)
Allocated to cost of sales (expense):
Under-recovery of 2 000 units =
10 000 units
R 5 000 (= 50 c/u)
8 000 units
R 4 000
R 1 000
(or R5 000 – R4 000)
Allocating fixed production overheads:
•
Normal capacity > Actual capacity
therefore normal capacity is to determine the absorption rate.
R5 000/ 10 000 units
= R0.50 per unit
•
Allocated fixed production overhead to cost of inventory
= rate per unit multiply by the actual units (actual capacity)
= 0.5 x 8 000
= R4 000
•
Journal entry:
DR Inventory (SFP)
CR Bank (SFP)
4 000
4 000
The allocated costs of R4 000 forms part of the cost of conversion (i.e. part of cost of inventory)
The R1 000 will form part of cost of sales.
•
Journal entry:
DR Cost of sales (P/L) 1 000
CR Bank (SFP)
1 000
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example:
OVER-RECOVERY
Normal capacity
Fixed production overheads
Production (actual)
Fixed production overheads per unit
(R5 000 / 12 000 units)
10 000 units
R 5 000 (= 50c/u)
12 000 units
Allocated to cost of inventory (asset):
(41.67c x 12 000)
Allocated to cost of sales (expense):
R5 000
= 41.67 c/u
Rnil
Allocating fixed production overheads:
•
•
Normal capacity < Actual capacity
therefore limit actual capacity to normal capacity
ABSORPTION RATE
R5 000/ 12 000 units
= R0.4167 per unit
•
Allocated fixed production overhead to cost of inventory
= rate per unit multiply by the actual units (actual capacity)
= 0.4167 x 12 000
= R5 000
•
Journal entry:
DR Inventory (SFP)
CR Bank (SFP)
5 000
5 000
& NO allocation to cost of sales
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OVERVIEW
ALLOCATION OF FIXED PRODUCTION OVERHEADS
•
Over-recovery:
Normal capacity < Actual capacity
- therefore limit actual capacity to normal capacity
•
Under-recovery:
Normal capacity > Actual capacity
- therefore normal capacity is to determine the absorption rate.
ALLOCATING
1) Under-recovery: N>A, use normal
2) Over-recovery: N<A, limit actual to normal
1. Calculate the Absorption rate
absorption rate = Fixed Production overhead
Normal Capacity
= rate p.u
2. Allocate fixed production overhead to cost of inventory
= rate per unit x the actual units (actual capacity)
3. Journalise:
DR Inventory (SFP)
CR Bank (SFP)
4. UNDER-RECOVERY/ OVER-RECOVERY
UNDER-RECOVERY:
- The allocated costs forms part of the cost of conversion (i.e. part of cost of inventory)
- The difference (ACTUAL – NORMAL) will form part of cost of sales.
Journal entry:
DR Cost of sales (P/L)
CR Bank (SFP)
OVER-RECOVERY:
NO allocation to cost of sales
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b) Variable production overheads:
-
indirect costs varies according to units of production
eg: electricity / depreciation
-
Allocate based on actual units produced
ABC Limited:
If depreciation method was according to the units of production method, depreciation would be a variable
production overhead.
The electricity costs will be an example of variable production overhead. The more bottles of wine are produced,
the more electricity the pressing machine will use.
Variable production overheads are allocated to the cost of conversion (i.e. the cost of inventory) based on actual
production (IAS 2 p13).
EXAMPLE:
Variable production overheads
Production
Allocated to inventory
R 40 per unit
1 000 units
R 40 000
Journal entry:
DR Inventory (SFP)
CR Variable production overheads (P/L)
40 000
40 000
Variable production overheads:
Variable production overhead cost per unit X actual production
= 40 X 1 000 units
= R40 000
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By-products
-
During production process two products can be simultaneously produced:
1) Main Product:
This is the intended product which the entity wants to produce, i.e. inventory of entity.
2) By-Product:
This product is produced while entity is producing its main product. Its normally not the intended
product which entity wants to produce.
ABC Limited:
The bottle wine will be the main product.
During the production process, and while pressing the grapes, the grapes stalks which is used as a compost.
This grape stalks is thus a by-product in the product process of the wine.
IAS 2p14:
- If the cost of conversion of the main product and by-product can not be separate, for example, its not
possible to determine what is the costs of removing the grape stalks from the grapes, IAS 2 p14 states: costs
must be allocated on a rational and consistent basis.
- The allocation can be on relative sales value of the main product and by-product, or if the by-products re
immaterial it can be measured at it NRV.
eg: All apple cores and pips are discarded prior to juicing and sold to a local farmer for a small fee. In the 2019
financial year this amounted to R10 000.
Calculate the total cost of production and minus the cost of the by-product:
Costs incurred in WIP for the 2019 year
Opening balance
Raw materials brought into production
Electricity
Wages
Fixed manufacturing overheads allocation
Less: Costs received from by-product
Total costs for production
R
XX
XX
XX
XX
XX
-10,000
XX
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DETERMINING THE COST PRICE OF INVENTORY:
NB: Whenever you do a IAS 2 question, you ALWAYS have to test for NRV!!
•
Other costs: Any costs incurred in bringing inventories to their present location and condition
•
Excluded Costs:
•
•
•
•
•
Storage costs unless?
Administrative overheads
Selling costs
Abnormal amounts of wasted material etc.
Inventory purchased on deferred settlement terms
eg: transaction w financing element
•
•
Recognise at PRESENT VALUE
Interest recognised as EXPENSE over period of financing
Deferred payments:
- The cost of inventory is recognised at the present value of future payments.
- If the difference between payment date and performance date (g/s delivered) is more than 12 months, you can
accept that the transaction contains a significant financing component (The question does not have to tell you)
-
However, when you see an interest rate in the question, that is already a clue so make sure to look out for a
significant financing transaction. If difference between payment date and performance date is exactly 12 months,
we will tell you if the transaction contains a significant financing component.
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If the difference between payment date and performance date
(g/s delivered) is more than 12 months, you can accept that the
transaction contains a significant financing component. The
question does not have to tell you! An interest rate in the question
= a clue for a significant financing transaction!
Deferred payment:
ABC Limited purchase inventory on 1 January 2015.
Per the agreement with the supplier,
ABC Limited will pay the full purchase price of R20 000
only on 31 December 2016.
A market related interest rate is 10% per year compounded annually.
Required:
Journalise the transaction above in the general journal of ABC Limited.
Transaction
date
1/1/2015
Pay R20 000
31/12/2015
31/12/2016
Purchase
CP = ?
FV = 20 000
I/YR = 10
P/YR = 1
N=2
PV = 16 529
Interest at 10% per annum is
already added to the R20 000,
calculate the PV
General journal of ABC Limited for the year ending 31 December 2015
1/1/2015: Purchase of inventory:
DR Inventory (P/L)
16 529
CR
Creditors (SFP)
16 529
31/12/2015: Interest accrued:
DR Interest expense (P/L)
1 653
CR Creditors (SFP)
On the transaction date: recognise inventory
at the present value and a corresponding
creditor for the amount owed
(16 529 x 10%)
1 653
Interest is capitalised to the creditor, i.e. we
owe more due to interest.
General journal of ABC Limited for the year ending 31 December 2016
31/12/2016: Interest accrued:
DR Interest expense (P/L)
1 818
CR Creditors (SFP)
[(16 529 + 1 653) X10%]
Very NB! Notice that the interest
for 2015 (R1 653) is added to the
principal sum before interest is
calculated for 2016.
1 818
31/12/2016: Pay creditor:
DR Creditors (P/L)
20 000
CR Bank (SFP)
20 000
After interest for both years
have been capitalised, the
total value on your creditor
is: R16 529 + 1 653 + 1 818 =
20 000 which is exactly the
amount that needs to be
settled.
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NORMAL LOSSES v ABNORMAL LOSSES
In FA 178: Only focused on finished goods therefore it was normal and abnormal shortages (Not losses)
FA 278: Raw material or work-in-progress = normal and abnormal losses
shortage = finished goods lost
loss = raw-material / WIP lost
•
NORMAL INVENTORY LOSSES
Part of conversion costs to produce inventory
INCLUDED in cost of inventory
•
ABNORMAL INVENTORY LOSSES
NOT part of process in bringing inventory to their present condition and location
EXPENSED (cost of sales)
NORMAL
SHORTAGE(178)
ABNORMAL
COS
LOSS(278)
Separate expense
(Part of CP of Inventory)
COS
example:
We’re an entity that manufactures dresses.
1) When we cut the fabric, some fabric is lost and won’t be used.
Normal Loss
= part of CP of inventory
2) A burglar breaks into the shop one evening and steals half of our dresses
Abnormal shortage
= separate P/L account
3) One of the dresses’ hems are skew (i.e. defective dress) and we throw it away
Normal shortage
= part of cost of sales
4) The truck delivering our fabric gets in an accident and raw material is damaged.
With regards to normal
losses:
If we use 1 meter of fabric
for a t-shirt at R200 per
meter and have 2cm worth
of cut-off fabric. We are not
going to adjust the R200
with 2% (i.e. with R4). We
are going to use the full
R200 in the CP of the t-shirt,
NOT R196. The 2cm is a
normal loss incurred to
make the t-shirt. That is
why we say a normal loss is
‘included in the CP of
inventory’.
Abnormal Loss
= part of cost of sales
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FA 178:
Normal & abnormal inventory losses, but a better description would actually be:
normal & abnormal “INVENTORY SHORTAGES”.
Reason: FA178 only discusses finished products and not WIP.
Example: Normal inventory shortage:
Normal that wine cellar loses a number of bottles of wine.
NB: Wine = FINISHED GOODS
Dr Cost of sales (P/L)
Cr Inventory (SFP)
1 000
1 000
Same entries as FA178 BUT
Different name (i.e.
shortage)
Example: Abnormal inventory shortage:
Dr Abnormal shortage (P/L)
Cr Inventory (SFP)
FA 178 = “normal
loss”
1 000
1 000
FA 278:
Normal inventory loss: No journal entry required
Losses = production process
part of CP if inventory
Abnormal inventory loss:
Dr Cost of sales (P/L)
Cr Labour cost (P/L)
500
500
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o
COST MEASUREMENT TECHNIQUES:
The cost measurement techniques refer is used to calculate the cost of inventory. In FA 278 = use actual costs.
* the same cost formula is used for all inventories having similar nature and use to entity
•
COST PRICE TECHNIQUES*
1) FIFO
• Assumes item purchased / produced first = sold first
Eg:
buy 10 units @ R10
buy 10 units @ R15
balance
sell 12 units
R100
R150
R250
(R100)
COST OF SALES
(R30)
R120 work backwards
10 of R10
2 of R15
balance 8 units @ R15
2) WEIGHTED AVERAGE
•
•
•
Weighted average of cost of similar items @ beginning of period +
Cost of similar items purchased / produced during period
Calculate periodically OR @ each new purchase
buy 10 units @ R10
buy 10 units @ R15
R100
R150
weighted average cost: 250 = R12,50
20
sell 12 units of R12,50 (R150)
balance 8 units @ R12,50
R100
3) SPECIFIC IDENTIFICATION
•
•
•
•
Inventories not ordinarily interchangeable
Goods / services produced and segregated for specific projects
each item has its own selling price
STANDARD METHOD v RETAIL METHOD:
RETAIL METHOD – items @ stock count = recorded at selling price
STANDARD METHOD - if goods are purchased at a price higher than standard cost = ADJUST:
DR – Purchases (P/L)
@standard price
DR – Variance account (P/L)
CR – Bank (SFP)
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o
COST PRICE v NRV:
NB: Whenever you do a IAS 2 question, you ALWAYS have to test for NRV!!
If you determine that NRV < CP for raw material, but that the finished product does NOT have a writedown, you HAVE TO STATE THIS IN YOUR ANSWER! There will be a mark awarded for considering NRV
and concluding that there is no write-down in Raw Material because of par 32.
-
At the end of the year, inventory on the SFP must be carried at the lower of cost price and net realisable
value.
Net realisable value (NRV) (entity specific):
estimated selling price in ordinary course of business less estimated cost to complete, less estimated cost to sell)
* NRV is an entity specific value!
i.e. if you have two entities producing the same product and selling to the same customers. The NRV of these
two entities will be different as each company can negotiate their own estimate future selling price which
may/may not impact the estimate cost to complete.
NRV < Cost price:
DR Cost of sales (P/L)
CR Inventory (SFP)
Net realisable value is entity specific while fair value is a market value, which is applicable to every entity.
Eg:
•
•
A Ltd. and B Ltd. manufacture identical cell phones for X Ltd.
Cell phones are 95% completed for both.
Selling price to X Ltd.
A Ltd.
R100
B Ltd.
R110
less: cost to complete
(R5)
(R10)
NRV
R95
R100
NRV write down:
At year end date:
Cost price (current carrying amount)
Net realisable value
(NRV)
80
60
Show inventory at NRV
Write down against cost of inventory
60
20
Journal entry
DR Cost of sales (P/L)
CR Inventory (SFP)
20
20
The NRV write down will be against inventory and cost of sales.
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(even though NRV write-down is treated differently between perpetual and periodic, remember that CoS will still have the same answer)
Important to remember: If the NRV of inventory exceeds the cost price of
inventory there is no NRV write down.
Inventory is carried at the lower of NRV and cost price.
EXAMPLE:
01/01
xx
xx
Balance
Bank
Bank
31/12
Balance b/d
Inventory (SFP)
100 xx
20
30 31/12
150
80
Cost of sales
70
Balance c/f
80
150
Estimated SP – cost to complete – cost to sell
CALCULATE NRV
60
WRITE-DOWN =
20
NRV: Periodic v Perpetual
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o NRV Write-BACK
NRV change?
• Circumstances that previously caused inventory to be written down, no longer exist
• Amount of write-down = written back to lower of cost and new NRV
-
The reversal of the write down to NRV is limited to the original NRV write-down (i.e. the reversal of NRV
cannot exceed the original write-down which mean the value of inventory cannot go above the cost price).
-
Take note the inventory must still be on hand. You cannot reverse the NRV write down if inventory was sold
already.
31/12/15
100
80
Cost price (SFP)
Net realisable value
Adjustment 2015:
DR CoS (P/L)
CR Inventory (SFP)
(20)
(20)
Adjustment 2016:
DR Inventory (SFP)
CR CoS (P/L)
20
20
Inventory as at 31 Dec (SFP)
o
31/12/16
100
120
80
100
NRV EXCEPTIONS:
NRV < Cost price:
- NOT written down below cost if finished products (in which raw materials and packing material are used) expected
to be sold > cost
RAW MATERIALS:
- Measure of NRV: Replacement cost
NRV exception – IAS 2 p32
• According to the above paragraph raw material and other supplies which will be used in the production of
finished goods must not be written off to NRV, if there is no indication that the finished goods will be sold at
cost or above the cost price.
• If however the NRV of the raw material and other supplies are below cost and the finished goods’ (for which
raw material will be used to produce) NRV is also below cost, then raw material and other supplies must be
written of to replacement cost.
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Inventory @ lower of CP & NRV
Watch out for IAS 2 p32
example:
CP
Writedown
NRV
-
Grapes (Raw material)
1 000
800
Wine in tank (WIP)
3 000
2 500
-
500
450
-
80
100
-
Boxes (Packaging material)
Bottled wine (Finished product)
or:
CP
Writedown
NRV
Grapes (Raw material)
1 000
1 200
-
Wine in tank (WIP)
3 000
2 500
(500)
Boxes (Packaging material)
Bottled wine (Finished product)
You’ll see here that the NRV of grapes
and wine in the tank and boxes are all
less than CP.
want to have a write-down to NRV for
these inventory classes.
BUT, IAS 2 par 32 specifically states that,
‘materials and other supplies held for
use in the production of inventories are
NOT written down below cost if the
finished products in which they will be
incorporated
(i.e. the bottled wine) are expected to be
sold at or above cost’. So, because we do
not have a NRV write-down for bottled
wine (NRV 100 is higher than cost 80) we
don’t have a write down in the other
inventory categories.
IAS 2 p 32
Finished good:
CP < NRV
500
450
(50)
80
60
(20)
Allowed because
finished goods also
have a NRV writedown
NB: Whenever you do a IAS 2
question, you ALWAYS have to
test for NRV!!
If you determine that NRV < CP
for raw material, but that the
finished product does NOT have
a write-down, you HAVE TO
STATE THIS IN YOUR ANSWER!
There will be a mark awarded
for considering NRV and
concluding that there is no
write-down in Raw Material
because of par 32.
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Cost of sales (expense)
•
•
•
•
•
•
Cost of inventory sold during the year
Write-down to NRV
Normal inventory shortage
Reversal of write-down to NRV
Abnormal inventory losses
Under-recovery of fixed production overheads
Carrying amount of inventory can also be allocated to the cost price of other assets
•
•
Occur if inventory is used as component of self-constructed PPE
Cost of inventory will be written off over useful life of other asset by way of depreciation
In this example, the entity produces bricks as its inventory.
During the year the entity used some of the bricks (inventory) to build its own building (PPE).
The bricks would thus form part of the cost of PPE and would the building is ready for use, it will be depreciated
according to the entity’s depreciation policy.
Bank
Inventory (Bricks) (SFP)
500 000 Building 100 000
Balance
Balance
500 000
400 000
400 000
500 000
Building (SFP)
Inventory 100 000
Bank
xxx
Bank
xxx
CP
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ADDITIONAL NOTES:
If the net realizable value of finished goods exceeds the cost price one:
Do not have to write-down raw material value even if the cost price of RM exceeds the NRV
STEPS:
1. Find RAW MATERIAL allocated to WIP (items manufactured)
2. Find WIP allocated to FG (completed items)
3. Find FIXED PRODUCTION OVERHEADS
& cost per unit
4. Find VARIABLE PRODUCTION OVERHEADS
& cost per unit
5. ADD these costs per unit to get TOTAL COST PER COMPLETED UNIT
COST OF INVENTORY
= closing balance x p p/unit
of RM + PM + WIP + FG
COST OF SALES:
Abnormal loss
Under-recovery: fixed OH
Cost of units sold
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QUESTION:
Mini Moo Limited manufactures flavoured yogurt which is distributed in the Western Cape. The company’s operating
activities commenced on 1 January 2011 and the financial year-end is 31 July 2011.
The information below was obtained for the period 1 January 2011 to 31 July 2011.
1. One litre raw material is used for the manufacturing of 4 small containers of yogurt (250ml). During the period
45 000 litres raw material were purchased at R270 000. At 31 July 2011, 3 500 litres raw materials were still on
hand.
2. The normal manufacturing capacity for Mini Moo Limited is 300 000 small containers of yogurt (250ml) per
annum.
3. Raw materials can be purchased in the market at R5.50 per litre on 31 July 2011.
4. During the period, 22 000 productive labour hours were spent on the manufacturing process.
5. Mini Moo Limited recorded 4 500 idle labour hours, of which 240 labour hours can be attributed to strikes. The
strikes are not regarded as normal to the production process, while the other idle labour hours are deemed part
of the normal production process.
6. The wage schedule of Mini Moo Limited shows a total labour cost of R275 000, evenly incurred for the period.
Mini Moo Limited was obligated to compensate the labourers during the strike.
7. Variable production overheads, excluding labour costs, amount to R225 000 for the relevant period.
8. Fixed overheads for the period amounts to R460 000. It comprises of production overheads, insurance of the
administrative buildings at a cost of R3 000 per month, as well as salaries to the value of R390 000, of which 25%
is attributable to the marketing personnel and 75% to the production personnel.
9. The weighted average cost formula is used to calculate the cost per container of yogurt.
10. The material, in which the yogurt is packaged, amounts to R2 per container of yogurt. This material includes the
container, lid and label. There is no packaging material on hand at 31 July 2011.
11. 2 400 completed containers of yogurt are still on hand at 31 July 2011, while 1 200 containers must still be sealed.
The completion and sealing involves adding the lid and label at a cost of R1.00 per container. No further fixed
overheads must be allocated to the unfinished containers.
12. You confirmed that the net realisable value of the completed containers in closing inventory exceed its cost of
manufacturing.
13. You can ignore any tax implications.
a) Calculate the total inventory value as included in the statement of financial position of Mini Moo Limited, as at 31
July 2011, in accordance with the provisions of IAS 2 Inventories.
b) Calculate the total cost of sales for the period ended 31 July 2011, as it would appear in the statement of
comprehensive income of Mini Moo Limited, in accordance with the provisions of IAS 2 Inventories. The statement
of comprehensive income is compiled according to function. If your calculation of cost of sales includes items,
which in accordance with the provisions of IAS 2 Inventories, are not part of the cost of sales, it will be marked
negatively.
c) Explain to the financial manager of Mini Moo Limited what the impact would be on the total inventory value in the
statement of financial position as at 31 July 2011, if the cost price of the completed containers of yogurt exceeded
the net realisable value thereof on 31 July 2011. Assume that all the given information would otherwise remain the
same and that a container of yogurt is sold at R7.00 each.
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QUESTION (ILP):
Woody Limited manufactures two products, namely wooden chairs and wooden tables.
The following information is available with regards to the year ended 30 June 2007:
Raw materials
Opening balance
Purchases
Closing balance
Units
16 000
1 000 000
20 000
R
32 000
2 000 000
??
Wooden chairs
Finished goods
Units
R
1 500
645 000
5 000
??
Wooden tables
Finished goods
Units
R
5 000
2 400 000
5 500
??
The normal production capacity for wooden chairs and wooden tables are 17 000 and 10 000 units respectively. 13 000
chairs were sold during the year ended 30 June 2007, whilst 11 000 tables were manufactured. The production level of
tables is seen as abnormally high.
Production cost was made up as follows:
Direct raw materials and labour (Variable overheads)
Fixed overheads
•
•
•
•
•
Wooden chairs
R
4 800 000
2 900 000
7 700 000
Wooden tables
R
4 700 000
800 000
5 500 000
During the year there was a once-off abnormal loss of raw materials when a store burned down. The stock loss
amounts to R50 000. This loss is included with the R4 800 000 direct raw materials and labour cost of wooden chairs
as stipulated above.
The cost of inventory is calculated on the first-in-first-out basis
The sales price of the products amount to R500 per chair and R650 per table. It has however been decided that the
chairs will be sold at R420 per chair in the future.
The replacement cost for raw materials were R60 000 on 30 June 2007.
There were no opening or closing balance in work-in-progress for the 2007 year.
(Tip: Accept that it is not necessary to know how much raw material is used in the production of chairs and tables respectively. The question
contains enough information to be able to complete the required.)
a) Calculate the total value of cost of inventory as it would be disclosed in the statement of financial position of Woody
Limited as at 30 June 2007. All calculations should be clearly and separately shown with regards to every type of
inventory item.
b) Calculate the total value of cost of sales as it would be disclosed in the statement of comprehensive income of Woody
Limited for the year ending 30 June 2007. All calculations must be shown clearly and the different components of the
expense must be shown separately. The statement of comprehensive income is compiled according to function.
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EXAMPLE:
Kalahari Ltd manufactures camping tents for the 4x4 industry. The following information relates to January 2008 being the
company’s first month of production. The financial year end is 31 January 2008:
Information for the month ended 31 January 2008:
Raw materials purchased
Salaries and wages
Transport of raw materials and workers to the production plant
Transport of finished goods to customers
Variable production overhead costs
Factory rent and insurance
Fixed production overhead costs
Packing materials purchased
R
1 500 300
644 500
25 460 * costs included or excluded in cost
21 400 price of inventory??
35 750 *Is the cost variable or fixed??
40 600
25 250
34 500
Additional information
All amounts exclude VAT, except for those specifically mentioned. Kalahari Ltd is a registered VAT vendor.
Kalahari Ltd measures inventories at the lower of cost of net realisable value. Kalahari Ltd uses the FIFO cost formula.
•
Salaries and wages can be allocated to departments as follows:
Percentage
Department
Cost nature
50%
Manufacturing
Variable
30%
Sales
Fixed
20%
Administration
Variable
•
Rent of the factory is paid at the end of each month in arrears. Total rent paid in arrears on 31st of January 2008 was
R15 500.
•
Equal insurance premiums are paid two months in advance at the beginning of every two-month cycle. The first
payment of the financial year was on 1st of January 2008.
•
Included in the raw material purchased, are amounts of R10 000 and R15 500. The expenditure of R15 500 was
incurred when a Kalahari Ltd transport vehicle overturned on the N1 and the raw materials were damaged beyond use
•
The R10 000 was a result of one of the production machines not functioning effectively. The suppliers of the machine
indicated that this waste is normal to the functioning of the machine.
•
Variable production overhead costs consist of indirect labour and indirect raw material costs. 45% of the variable
production overhead costs were not incurred to bring the inventories to their present location and condition.
•
Total fixed production overhead costs are attributable to the production process and to bring the inventories to their
present location and condition.
•
On the 1st of January 2008 Kalahari Ltd estimated that normal production capacity levels should be 2000 units per
month for 2008. The actual number of units produced and completed in January 2008 totaled 2 200. 1750 complete
tents were sold during January 2008.
•
Packing material is used for the packaging of finished products. The closing balance on the packing materials account
was R12 540 on 31 January 2008. The net realisable value of the packing material was R13 000 on 31 January 2008.
Work-in-progress on 31 January 2008 was R45 600. This represented 100 incomplete tents on 31 January 2008. The
total cost of completing these tents will be R25 500. (There was no raw material on hand on 31 January 2008
•
•
•
On 31 January 2008 the estimated selling price of a completed tent was R765. Selling costs is R85 per tent.
R10 000 of the value of the finished products has been pledged as a security at National Bank.
a) Prepare the notes relating to inventories to the financial statements of Kalahari Ltd for the financial year ended 31
January 2008 in accordance with IAS 2 Inventories.
b) Calculate the cost of sales in the statement of comprehensive income for the financial year ended 31 January 2008.
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CALCULATIONS:
raw materials purchased:
Dr Materials (SFP); Cr Bank (SFP)
Rent & insurance:
fixed cost
R40 600: R15 500 (Rent)
R25 100 (Insurance) [balancing]
12550 JAN 12550 FEB = 25 100
Abnormal loss:
vehicle overturned = R15 500
Variable overheads attributable to the cost:
[ 55% incl x 35 750 = 19 663 ]
RECOVERY:
actual units manufactured and completed is already > normal capacity, thus OVER RECOVERY
fixed overheads ÷ actual units
Complete the tents:
R25 500 ÷ 100 = R255 p.unit
Estimated SP = NRV
NRV = R765
CLOSING BALANCE:
Opening balance
nil units
Manufactured and completed
2 200 units
Sales
(1 750) units
Closing balance
450 units
1. WORK IN PROGRESS
Cost price = R45 600 (given)
NRV = SP R765 (per tent)
less cost to complete (R 255)
less cost to sell (R85)
= R425 per tent
Incomplete units on hand at year-end = 100 tents
Thus, NRV = R425 x 100 = R42 500
Thus CA = NRV = R42 500
CANNOT show the value of calculation in the final answer
can only show WIP at NRV should Finished Goods also be shown at NRV!
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2. FINISHED GOODS
a) each unit of Finished Product contains the following costs:
- Raw materials
- Salaries and Wages
- Transport of raw materials and workers to the production plant
- Variable production overhead costs
- Factory rent and insurance
- Packing materials
b) decide how much of each cost should be included in cost price.
Variable cost
Raw material:
Opening balance
Purchases (given)
Abnormal loss (given)
Closing balance (given)
Used in production
R
nil
1 500 300
(15 500)
nil
1 484 800
R/unit
÷ Actual units manufactured that already received raw material
c) Actual units manufactured is unknown and must be calculated:
Actual units = Actual units manufactured and completed during January 2008 (given) = 2 200
+ 100 incomplete tents on 31 January 2008 (given)
= 2 300 units
The problem = no idea what the stage of completion is for the incomplete units at year-end.
do not know which of the production costs were already incurred with regards to the 100 units, or which production
costs still need to be incurred
= impossible to work with unit prices, since we do not know if all 2 300 units have received for example all of the raw
materials or if just 2200 of the units have received raw materials.
canNOT do calculations based on price per unit and we are forced to use total cost.
Raw materials used in production =
1 484 800
Salaries and Wages (644 500 x 50%)
322 250
Transport cost
Variable production overhead
(35 750 x 55%)
25 460
19 663
Packing material
Opening balance
Purchased (given)
Closing balance (given)
Used in production
nil
34 500
12 540
21 960
Fixed cost
Factory rent
15 500
Actual units manufactured is more than normal capacity.
= over recovery of fixed overheads - cannot use normal capacity to calculate R/unit.
cannot use actual units manufactured, since we do not know the stage of complete of the WIP (some may need
fixed costs in order to be complete).
Thus, we HAVE to work with total cost at this stage.
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Insurance
Fixed production overheads
TOTAL COST
12 550
25 250
1 927 433
This total cost is the total cost incurred to complete 2 200 units AND to start the 100 units and complete them
to their current stage of completion (which is unknown).
We know the 100 incomplete units have a closing balance of R45 600 (WIP balance 31 January 2008). Even
though we do not know which costs were already incurred with regards to the 100 units, we know that R45
600 of the total cost of R1 927 433 was incurred with regards to the incomplete units at year-end.
Thus we can calculate the total cost incurred to complete the 2 200 units:
Cost of finished goods
Total cost
Less cost of incomplete units
Cost of finished goods
1 927 433
(45 600)
1 881 833
÷ 2 200
R818/unit
The CP p/u of finished good manufactured = R818.
compared with the NRV per unit finished good.
NRV finished good:
Sales price
Cost to sell
R765
(R85)
R680 /unit
Thus Finished good must be shown at a unit price of R680
Packing material and WIP may be written down to NRV (if necessary).
d) PACKING MATERIAL
(lowest of R12 540 and R13 000)
NOTE: can immediately write down the answer for packing materials, since cost price is the lowest. If NRV was lowest,
you would only show it at NRV if Finished Goods are also shown at NRV.
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a) NOTES TO THE FINANCIAL STATEMENTS OF KALAHARI LIMITED FOR THE MONTH ENDING 31 JANUARY 2008
1. Accounting policy
The financial statements are prepared using the historical cost convention and all accounting policies are consistent with
those applied in previous years. The financial statements are prepared in compliance with International Financial Reporting
Standards
Inventories
Inventories are valued at the lower of cost price and net realisable value. Cost of manufactured goods comprises direct
materials, direct labour and an appropriate proportion of variable and fixed overhead expenditure. Fixed overheads are
allocated on the basis of normal operating capacity. The cost price is calculated according to the first-in-first-out cost
formula. Any write-down to net realisable value is recognised in profit or loss.
2. Inventories
Finished products
680 x closing units 450
Work-in-progress
306 000
42 500
Raw materials
Packing materials
lower of 12 540 or 13 000
R12 540
R10 000 of the product was given as security on the loan.
3. Profit before tax
The following was taken into account in the profit before tax
Expenses
Write-down to net realisable value (45 600 – 42 500) +(855-680) x closing units 450
81 850
b) COST OF SALES
Cost of sales:
Cost of goods sold (1 750 units (given) x R855p/unit (calculated)
Abnormal loss (given)
Under recovery of fixed overheads (NONE - there was an over recovery)
Write-down to net realisable value (calculated)
R1 496 250
R 15 500
RR81 850
R1 593 600
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o DISCLOSURE
Disclose the following in the financial statements:
a) The accounting policies adopted in measuring inventories, including the cost formula used
b) The total carrying amount of inventories and the carrying amount in classifications appropriate to the entity
- common classifications: merchandise, production supplies, materials, work in progress and finished goods
- inventories of a service provider may be classified as work in progress
c) The carrying amount of inventories carried at fair value less cost to sell
d) The amount of inventories recognised as an expense during the period
e) The amount of any write-down of inventories recognised as an expense in the period in accordance with par 34
f) The amount of any reversal of any write down that is recognised as a reduction in the amount of inventories
recognised as an expense in the period in accordance with par 34.
g) The circumstance or events that led to the reversal of a write-down of inventories in accordance with par 34
h) The carrying amount of inventories pledged as security for liabilities
IAS 1 PAR.99
• An entity must present an analysis of expenses recognised in profit and loss using a classification based on either
their NATURE or FUNCTION within the entity
• Use classification that is more relevant and provides reliable information
IAS 8: ACCOUNTING POLICY
What do we do when we have to / we want to CHANGE our policy
Inventory = grey area for IAS 8. BACC = Change in Acc policy. Practice = either Acc policy / Change in estimate
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• Accounting policies:
•
Are the specific principles, bases, conventions, rules and practices applied by an entity in
preparing and presenting financial statements
• Change only if:
•
•
Required by IFRS or interpretation or
Results in reliable and more relevant presentation fin statements (voluntary) (e.g. CP to FV/reval
model)
• Normal method of change in acc policy: Retrospective correction – adjust opening
balance of each item in equity for earliest period and comparative figures as if the
new policy always applied
• UNLESS impracticable to apply retrospectively or cumulatively: then retrospective
as far as practicable
• CP to Reval-model: change in acc policy, but treated ito IAS16 PPE and IAS38
Intangible assets (do treatment prospectively)
• Examples:
•
•
Inv property: CP to Fair value model
Inventory: FIFO to weigthed average (and vica versa)
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IAS 2 – INVENTORIES
PRESENTATION AND DISCLOSURE EXAMPLE TEMPLATE
IAS 1, Par 40A
ABC Limited
Statement of financial position on 31 December 2018
Assets
Current assets
Inventories
IAS 2, Par 36(b)
Note
2018
R
2017
R
01/01/2017
R
6
45 000
xxx
xxx
ABC Limited
Statement of comprehensive income for the year ended 31 December 2018
Note
Revenue
Cost of sales
Gross profit
Profit before tax
Income tax expense
Profit for the year
IAS 2, Par 36(d) & Par 38
16
2018
R
240 000
(50 000)
190 000
2017
R
XXX
(XXX)
XXX
50 000
(13 300)
36 700
XXX
(XXX)
XXX
Statement of changes in equity of ABC Limited for the year ended 31 December 2018
Retained
Earnings
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
Balance on 31 December 2016
Change in accounting policy
IAS 1, Par 106(b)
Restated opening balance
Total comprehensive income for the period
Balance on 31 December 2017
As previously stated
Change in accounting policy
Total comprehensive income for the period
Balance on 31 December 2018
ABC Limited
Notes to the financial statements for the year ended 31 December 2018
1. Accounting policy
The financial statements are prepared in accordance with the Companies Act of South Africa and International
Financial Reporting Standards (“IFRS”). The financial statements are prepared on the historical cost basis and the
accounting policy is in accordance with that of the previous year.
Inventories
Inventories are valued at the lower of cost price and net realisable value. Cost of manufactured goods comprises
direct materials, direct labour and an appropriate proportion of variable and fixed overhead expenditure. Fixed
overheads are allocated on the basis of normal operating capacity. The cost price is calculated according to the
first-in-first-out or weighted average cost formula. Any write-down to net realisable value is recognised in profit
or loss.
IAS 2, Par 36(a)
6. Inventories
2018
2017
Raw materials
10 000
XXX
Work in progress
5 000
XXX
Finished goods
30
000
XXX
IAS 2, Par 37
Merchandise
XXX
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Consumables
45 000
XXX
XXX
Inventory with a carrying amount of R10 000 is pledged as security for creditors.
16. Profit before tax
Profit before tax is shown after the following has been taken into account:
Income
Reversal of write-down to net realisable value
Expenses
Write-down to net realisable value
IAS 2, Par 36(f)
IAS 2, Par 36(e)
IAS 2, Par 36(h)
2018
2017
17 000
XXX
300
XXX
The reversal of the write-down to net realisable value occurred as a result of an increase in the selling price of the
finished goods.
IAS 2, Par 36(g)
The write down to net realisable value occurred as a result of new competitors that are also selling product X.
Expected selling prices decreased as a result of the new competition.
IAS 1, Par 97 (if material)
23. Change in accounting policy
IAS 8, Par 29(a)(b)
The company changed their accounting policy with regard to inventory during the year. The cost price of inventory is
now calculated in terms of the XXX cost method, while it was previously determined on the XXX basis. The new method
reflects a more accurate value of the inventory. The comparative amounts were restated to reflect the change in
accounting policy. The effect of the change is as follows:
IAS 8, Par 29(d)
IAS 8, Par 29(c)(i)
2018
XXX
XXX
XXX
2017
XXX
XXX
XXX
Increase/(Decrease) in retained earnings – beginning of the period
Increase/(Decrease) in retained earnings – end of the period
XXX
XXX
XXX
XXX
(Decrease)/Increase in closing inventory
Decrease/ (Increase) in tax payable
(Decrease)/increase in deferred tax asset
(Decrease)/increase in retained earnings
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
Decrease/(Increase) in cost of sales
Decrease/(Increase) in taxation expense
(Decrease)/Increase in profit for the period
1/1/2017
XXX
XXX
XXX
XXX
IAS 10, Par 21
24. Events after the reporting period
There was a gas explosion at one of the branches during March 2019. Inventories amounting to R10 000 were
destroyed. Damage to buildings amounting to R25 000 was suffered.
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Assume that the following are the details for the calculation of the profit before tax of
a manufacturing entity for the year ended 31 December 20.14:
R
Revenue
7 500 000
Cost of finished goods sold
3 995 100
Direct materials used
910 100
Labour
1 200
000
Variable production overhead costs allocated
800 000
Fixed production overhead costs allocated
845 000
Packing material
310 000
Cost of finished goods manufactured
4 065 100
Opening inventory finished goods
70 000
Closing inventory finished goods
(140
000)
Selling and administrative expenses
1 735 000
Write-down of cost of materials to net realisable value
25 000
Under recovery of fixed production overhead costs
41 000
Abnormal spillage of materials
15 000
This will be disclosed as follows in the first part of the statement of comprehensive
income:
Statement of comprehensive income for the year ended 31 December 20.14
Function
Revenue
Cost of sales
(3 995 100
+ 25 000
+ 41 000
+ 15 000)
7 500 000
(4 076 100)
(OS + purchases - CS)
(write offs)
(under recovery)
(abnormal loss)
Gross profit
This example illustrates the
difference when the SCI is
presented according to
function vs nature. The
important ‘take home’
from this is that the profit
before tax answer is exactly
the same, irrespective of
how it is PRESENTED on the
financial statements.
Our questions use the
SCI per function.
3 423 900
Other expenses
(1 735 000)
Profit before tax
1 688 900
OR
Nature
Revenue
7 500 000
Changes in inventories (140 000 – 70 000) (OS – CS)
70 000
Material used (910 100 + 310 000 + 15 000 + 25 000)
(1 260
100)
(1 200
000)
Labour costs
Other expenses
Production overhead costs:
Variable
(800 000)
Fixed (845 000 + 41 000)
(886 000)
Selling and administrative expenses
1 735 000
Profit before tax
1 688 900
This material has been copied under license and is not for resale.
Source: Descriptive Accounting 20th edition. Koppeschaar et al. LexisNexis.
[revised in terms of under recovery]
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IAS 8- Correction of prior period errors
o
Prior period errors
(IAS 8.41 – 49)
Omissions or misstatements in fin statements for one or more prior periods arising from a failure to use or misuse
of reliable information that:
• Was available when financial statements for those periods were authorised for issue or
• Could reasonably expected to have been obtained and taken into account in the presentation of
those fin statements.
Includes mathematical mistakes, mistakes in applying accounting policies, oversights or misinterpretations of facts/ fraud.
•
WHY are they prior period errors?
§
§
§
§
The financial statements are signed off and we can not make any adjustment to the financial statements to correct
the error.
Any expense or income in the statement of comprehensive income is already closed off to profit or loss and
included in retained earnings.
Assets and liabilities is also already closed off and all prior period figures show in the opening balance of the assets
and liabilities of the current year
Take note: prior period include all previous financial years
Example: Closing journals of expenses and income
The company incurred a salary expense for the financial year of R500 000:
DR Salary expense (P/L)
CR Bank (SFP)
500 000
DR Profit or loss (P/L)
CR Salary expense (P/L)
500 000
DR Retained earnings (SFP)
CR Profit or loss (P/L)
500 000
500 000
500 000
500 000
Assume: In year 1 the company incorrectly recorded salaries at R500 000 and not at R580 000.
In year 2 the accountant realized that an error was made in year, but the account is already
closed off and the financial statements are signed. How do we correct the error??
o
o
o
o
•
All expenses and income through profit or loss is closed off to retained earnings
Therefore the error cannot be corrected in the individual account.
Cannot go back to correct the salary account! The salary account is already
closed off to retained earnings for that financial year so cannot go back to correct it
= need to correct RETAINED EARNINGS!
If the error takes place in the current financial year:
The account is not closed off – therefore, correct the salaries in the current year
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o
Prior period errors
(IAS 8.41 – 49)
Material prior period errors must be corrected retrospectively in the first set of financial statements
after discovery:
•
•
o
Restate the comparative amounts for the prior period in which the error occurred
OR
If the error occurred before the earliest prior period presented, restate the opening
balances of assets, liabilities and equity for the earliest prior period presented
DISCLOSURE:
Disclosure note
• Nature of the prior period error
• For each prior period, amount of the correction:
• For each affected financial statement line item
• Amount of the correction at the beginning of the earliest prior period presented (also read IAS 1 par
40A)
• If retrospective restatement is impracticable for a particular prior period, the circumstances that led to
the existence of that condition and a description of how and from when the error has been corrected
Statement of financial position
• The effect on the SFP by showing a 3rd set of SFP
Statement of changes in equity
• Indicate the effect of the error on the retained earnings opening balances and the effect on the profit
for the year.
Use of increase/decrease …
• Important to indicate whether there will be an increase or decrease in the line item.
• It is further important to correctly use a bracket/no bracket with the increase or decrease.
• These brackets are used from the viewpoint on the effect of the movement in retained earnings.
•
•
An increase in expenses and liabilities results in a decrease in retained earnings, therefore it is shown as:
(Increase)
A decrease in income and assets results in a decrease in retained earnings and is therefore shown as: (Decrease)
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DISCLOSURE TEMPLATES
Effect of the error on the
opening balance for the
previous financial year.
This is the old profit ± the
correction of the error for
that financial year
effect of the error on the
opening balance
effect of the error on the current year is INCLUDED if
it affects P/L.
= The old profit ± the correction of the error
= the old profit
Effect of the error on the
opening balance for the
previous financial year.
NAME of disclosure
what happened?
indicated the financial
year the error took place
what is currently wrong?
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previous financial year
This is the first day of the
previous financial year
(earliest period)
indicate increase / decrease in the account
greyed out line items can
be omitted for 278
effect on
retained
earnings
indicate correct line item affected on FS
these figures
should correspond
(end of period)
these figures should
correspond (beginning of
period)
previous financial year
greyed out line items can
be omitted for 278
+
effect on
profit
indicate correct line item affected on FS
& effect
TEST:
Profit for the year + retained earnings @
beginning of year = retained earnings @ end
of year
+
=
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example:
i)
ABC Limited has a 31 March year-end. During the finalization of the 31 March 2020 trial balance, the
accountant discovered an outstanding repairs and maintenance invoice which was incorrectly recorded on 10
April 2019 as follow:
Dr Repairs and maintenance (P/L)
Cr Bank (SFP)
ii)
With further investigation the accountant confirmed that repairs and maintenance relates to normal repairs
to the vehicles for an amount of R80 000. The invoice is dated 15 March 2019.
i)
ii)
should not have been recorded in the 2020 financial year
should record the repairs & maintenance in the 2019 financial year
should have recorded in 2019:
DR Repairs and maintenance (P/L) 80 000
CR Creditors (SFP)
80 000
BUT: Trial balance is already closed off – therefore no adjustment to repairs and maintenance (P/L)
THEREFORE:
DR Retained earnings (SFP) 80 000
CR Creditors (SFP)
80 000
(only P/L are closed off to retained earnings)
CORRECT THE CURRENT FINANCIAL YEAR:
Trial balance for the current year is not yet closed off, we can therefore correct the error in the individual
accounts
It is incorrectly included in the 2020 financial year as follow:
Dr Repairs and maintenance (P/L)
Cr Bank (SFP)
(we subsequently created a creditor to correct the journal in 2019 as in previous slide)
CORRECT in the 2020 financial year:
Dr Creditor (SFP)
Cr Repairs and maintenance (P/L)
General journal of ABC Limited for the year ending 31 March 2020
01/04/2019
DR Retained earnings (SFP)
80 000
CR Creditors (SFP)
80 000
31/03/2020
DR Creditors (SFP)
80 000
CR Repairs and maintenance (P/L)
80 000
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repairs & maintenance expense was
reversed – therefore increases profit
for the year
indicate financial year
correction of error decreases retained
earnings of the prior financial year
describe what happened
amounts agree w closing
balance of previous year
ACCURACY TEST:
80 000 + 0 = 80 000
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GROUP STATEMENTS
CHAPTER 1
o First year revision
Consolidated financial statements
= FS of a group in which the assets, liabilities, expenses and incomes and cash flow of the parent and its
subsidiaries are presented as those of a single economic entity
Separate financial statements
= statements presented by the parent where the investor is accounted for at cost price
—
—
—
—
Group = A parent and all its subsidiaries.
IFRS 10 Appendix A
Parent = An entity that controls one or more entities.
Subsidiary = An entity that is controlled by another entity.
Non-controlling interest = Equity in subsidiary not directly or indirectly attributable to the parent.
o CONTROL
when the parent company is exposed / has rights to variable returns from its involvement with the subsidiary &
has the ability to affect those returns through its power over the investee
parent controls subsidiary if all elements are met:
- power over the investee
- exposure to rights / variable returns
- ability to use power to affect variable returns
ELEMENTS OF CONTROL:
o
POWER: existing rights give parent company the current ability to direct the relevant activities
*arises:
1) 50% of voting rights
2) less than 50% of voting rights and a contractual agreement
•
•
Relevant activities = activities of the investee that significantly affect the investee’s returns
Size of voting rights are influenced by size and dispersion of holding and cooperation of other investors.
PARENT HAS DIRECT CONTROL
PARENT HAS INDIRECT CONTROL
PARENT
51%
Subsidiary 1
55%
Subsidiary 2
60%
Subsidiary 4
80%
20%
Subsidiary 3
40%
P only has 20% of S5 but
controls S3 which has 40%
therefore has 60% control
over S5
Subsidiary 5
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o
RIGHTS:
- voting right from shares
- right to appoint / remove members on the board of directors right to appoint / remove other entity that
directs relevant activities
- right to direct investee to enter into transactions or veto, to the benefit of the investor
1 issued ORDINARY share = 1 voting right
except to extent provided otherwise by memorandum of incorporation or Companies act
-
o
-
Take into account circumstances in which voting rights are exercisable.
Voting right held as nominee, are deemed to be that of other person
Voting right held in fiduciary capacity, treated as held by beneficiary
-
Memorandum of Incorporation can specifically exclude preference
shareholders, except if:
•
Dividends in arrears
•
Their rights are affected by any proposals
EXPOSURE TO / RIGHT TO VARIABLE RETURNS:
-
Exposed to / have rights to returns, if returns vary as result of investee’s performance.
One investor control, but more than one can share in returns
Returns = dividends / interest / remuneration for services / fees and exposure to loss / savings through
combination of operations / access to proprietary knowledge. (complete list GS 1.6)
-
EG: P owns 80% shares in S
therefore, controls 100% of S but other 20% shareholders get dividends
CONTROL IS EITHER 0% OR 100%
PARENT
eg: Mr A owns 35%
Mr B owns 25%
together, they can vote against P as P does not have control
40%
S
o
ABILITY TO AFFECT RETURNS:
-
Must have ability to use power to affect its returns
Principal‘s decision making authority will influence return;
but agent acts to the benefit of another, and does not control
investee.
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o Consolidated Financial Statements
PARENT
100%
PARTIALLY-OWNED SUBSIDIARY
non-controlling interest 20%
WHOLLY-OWNED SUBSIDIARY
80%
*parent must present consolidate financial statements unless all requirements are met:
1) parent = wholly-owned subsidiary & other shareholders informed / do not object
2) debt + equity instruments are not listed
3) parent is not in the process to be listed
CONSOLIDATION PROCEDURE:
1) elimination of common items
2) consolidation of remaining items
•
consolidation @ initial acquisition:
- eliminate common items (investment by oarent / equity of subsidiary)
- recognise new items (non-controlling interest, goodwill / gain from bargain purchase)
•
consolidation since acquisition:
- combine assets & liabilities
- recognise:
Non-controlling interest in equity
Goodwill in net assets
Gain on bargain purchase as part of retained earnings
•
eliminate intergroup loans at year end
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EXAMPLES:
① WHOLLY-OWNED & PRICE PAID = FV OF NET ASSETS
Tree Ltd. buys all issued ordinary shares of Apple limited on 31 December 2011 for R25 000
Apple ltd = wholly-owned subsidiary of Tree Ltd.
analysis of equity:
equity of
subsidiary
parent
@acquisition
Ordinary share capital
Retained earnings
TOTAL
Parent company = 100%
@acquisition
since acquisition
20 000
5 000
20 000
5 000
= 25 000
25 000
Investment
0 for 178
non-controlling
interest
0
0
Consolidation journal entry:
DR – Ordinary Share Capital – Apple Ltd. (SFP)
DR – Retained Earnings – Apple Ltd. (SFP)
CR – Investment in Apple Ltd. (SFP)
20 000
5000
25 00
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Consolidated financial statements:
Fixed Assets
Investment in Apple Ltd.
TOTAL
equity & liabilities
ordinary share capital
retained earnings
owner’s equity
loan
TOTAL
Tree Ltd.
40 000
25 000
65 000
Apple Ltd.
35 000
Journal DR
Journal CR
(25 000)
(25 000)
35 000
50 000
20 000
5 000
25 000
10 000
35 000
50 000
15 000
65 000
(20 000)
(5 000)
(25 000)
Consolidated SFP
75 000
0
75 000
MUST BE 0!
50 000
0
50 000
25 000
75 000
25 000
② WHOLLY-OWNED & PRICE PAID > FV OF NET ASSETS
Tree Ltd. buys all issued ordinary shares of Apple limited on 31 December 2011 for R28 000
Apple ltd = wholly-owned subsidiary of Tree Ltd. Fixed assets of Tree Ltd. = R37 000
investment > NAV
Consolidation journal entry:
DR – Ordinary Share Capital – Apple Ltd. (SFP)
DR – Retained Earnings – Apple Ltd. (SFP)
DR – Goodwill (SFP)
CR – Investment in Apple Ltd. (SFP)
20 000
5000
3000
28 000
balancing
parent company paid more than the fair value of the net assets of the subsidiary
∴ difference = GOODWILL
③ WHOLLY-OWNED & PRICE PAID < FV OF NET ASSETS
Tree Ltd. buys all issued ordinary shares of Apple limited on 31 December 2011 for R24 000
Apple ltd = wholly-owned subsidiary of Tree Ltd. Fixed assets of Tree Ltd. = R41 000
Consolidation journal entry:
DR – Ordinary Share Capital – Apple Ltd. (SFP)
DR – Retained Earnings – Apple Ltd. (SFP)
CR – Investment in Apple Ltd. (SFP)
CR – Gain from bargain purchase (P/L)
20 000
5000
24 000
1 000
close off
DR – Gain from bargain purchase (P/L)
CR – Retained earnings (SFP)
1 000
1 000
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Pay MORE than FV of net assets of subsidiary: DR – Goodwill
Pay LESS than FV of net assets of subsidiary: CR – Gain from bargain purchase
④ PARTIALLY -OWNED & PRICE PAID = FV OF NET ASSETS
Tree Ltd. buys all issued ordinary shares of Apple limited on 31 December 2011 for R17 500
Apple ltd = wholly-owned subsidiary of Tree Ltd. Fixed assets of Tree Ltd. = R47 500
Parent only owns 70% of ordinary share capital
analysis of equity:
TOTAL
equity of
subsidiary
parent
@acquisition
Ordinary share capital
Retained earnings
Parent company = 70%
@acquisition
x0,7
20 000
5 000
25 000
0 for 178
14 000
3 500
= 17 500
17 500
Investment
since acquisition
non-controlling
interest (30%)
6 000
1 500
7500
20 000 x 30%
5000 x 30%
Consolidation journal entry:
DR – Ordinary Share Capital – Apple Ltd. (SFP)
DR – Retained Earnings – Apple Ltd. (SFP)
CR – Investment in Apple Ltd. (SFP)
CR – Non-Controlling interest (SFP)
20 000
5000
17 500
7 500
⑤ PARTIALLY -OWNED & PRICE PAID > FV OF NET ASSETS
Tree Ltd. buys all issued ordinary shares of Apple limited on 31 December 2011 for R23 000
Apple ltd = wholly-owned subsidiary of Tree Ltd. Fixed assets of Tree Ltd. = R42 000
Parent only owns 70% of ordinary share capital
Consolidation journal entry:
DR – Ordinary Share Capital – Apple Ltd. (SFP)
DR – Retained Earnings – Apple Ltd. (SFP)
DR – Goodwill (SFP)
CR – Investment in Apple Ltd. (SFP)
CR – Non-Controlling interest (SFP)
20 000
5000
5500
23 000
7 500
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⑥ PARTIALLY -OWNED & PRICE PAID < FV OF NET ASSETS
Tree Ltd. buys all issued ordinary shares of Apple limited on 31 December 2011 for R17 000
Apple ltd = wholly-owned subsidiary of Tree Ltd. Fixed assets of Tree Ltd. = R48 000
Parent only owns 70% of ordinary share capital
Consolidation journal entry:
DR – Ordinary Share Capital – Apple Ltd. (SFP)
DR – Retained Earnings – Apple Ltd. (SFP)
CR – Investment in Apple Ltd. (SFP)
CR – Non-Controlling interest (SFP)
CR – Gain from bargain purchase (P/L)
20 000
5000
17 000
7 500
500
close off
DR – Gain from bargain purchase (P/L)
CR – Retained earnings (SFP)
500
500
—
IAS 27.01
Prescribed accounting and disclosure requirements for investments in subsidiaries / joint ventures / and associates
when separate statements are prepared.
—
IFRS 10.01
Principles for presentation and preparation of consolidated financial statements
—
IFRS 12.01
Disclosure of information that enable users of FS to evaluate
(a) nature of, and risks associated with interest in other entities;
(b) effects of those interests on SFP, SCI and cash flows.
Tree Limited buys 50 000 shares in Apple Limited (therefore 100% of the issued shares) and gains CONTROL. In Tree
Limited’s separate FS they account for the investment in subsidiary in terms of IAS 27. When CFS are prepared we
use IFRS 10 for the presentation and preparation of the statements. IFRS 12 helps us with disclosure requirements
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o PREPARATION OF SEPARATE FINANCIAL STATEMENTS
(IAS 27 PAR 9 – 10)
(.10): When parent prepares separate financial statements:
account for investments in subsidiaries / joint ventures and associates at:
• Cost or
• according to IFRS 9 or
• using equity method (ito IAS 28)
(.12) Dividends received:
• Recognised in separate financial statements when entity’s right to receive the dividend is established
• Recognised in profit or loss
• unless entity use equity method (IAS28) (FA379)
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o PREPARATION OF CONSOLIDATE GROUP FINANCIAL STATEMENTS
IFRS 10 par. 19-20
•
Parent must prepare CFS according to IFRS 10
•
Accounting policies
§ Uniform accounting policies must be used for similar transactions
§ If not, adjustments must be made to ensure conformity in the group
•
Different reporting dates
§ Subsidiary compiles statements for consolidation purposes on reporting date of parent, unless unpractical, OR
§ Most recent statements with adjustments for significant transactions or occurrences
§ Difference in reporting dates < 3 months
§ Start consolidating from date that investor obtains control.
§ Consolidating cease when investor loses control.
-
Parent shall present CFS unless it meets ALL these requirements (IFRS 10.04):
§ parent is itself a wholly-owned sub or other shareholders have been informed and does not object to it
§ debt or equity instruments are not traded
§ parent is not in the process of listing; and
§ Ultimate parent of the parent produces CFS according to IFRS
example:
P
100%
S
80%
T
- S which is parent company, is wholly owned subsidiary itself and therefore does not
need to prepare consolidated financial statements
P
80%
S
80%
T
S which is parent company, is not wholly owned subsidiary itself but the other 20% shareholders
have been informed and did not object.
Therefore S does not need to prepare consolidated financial statements
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o
DISCLOSURE SEPARATE FINANCIAL STATEMENTS
(IAS 27 PAR 16)
-
o
The fact that it is separate financial statements and reason for not preparing CFS (slide 24) (Incl. name and
principal place of business of entity who compiled CFS and address where CFS are obtainable)
— A list of significant investments in subsidiaries, associates, JV’s (incl. name, country, % ownership and % voting
power if different)
— Description of method used in accounting for investments
— Par 17: A parent chooses to prepare separate FS
DISCLOSURE GROUP FINANCIAL STATEMENTS
(IAS 1)
•
•
•
•
o
Par 54(q) SFP: Separate line item for non-controlling interest, presented within equity
Par 81B(a) SCI: profit or loss attributable to NCI
Par 81B(b) SCI: Comprehensive income attributable to NCI
Par 106(a) SCE: Total comprehensive income, showing separately amounts attributable to owners of the
parent and to NCI
DISCLOSURE GROUP FINANCIAL STATEMENTS
(IFRS 12)
—
—
—
—
par 10 (a)(i) Information to understand composition of group
par 10 (a)(ii) The interest of non-controlling interest in group’s activities and cash flows.
par 10(b)(i) Nature and extent of significant restrictions on use of assets and settle of liabilities. (also refer to
par 13)
par 11(a) en (b) Fact that reporting date of subsidiary differs + date of subsidiary’s year-end + reason for use
of other period.
Par 12:
For subsidiary with non-controlling interest (NCI):
• (a) Name of subsidiary
• (b) Principal place of business
• (c & d) % interest held by NCI (ownership and voting rights if different)
• (e) Profit / loss allocated to NCI for reporting period
• (f) Accumulated NCI in subsidiary at end of reporting period
• (g) Summarised financial information about assets, liabilities, profit/loss and cash flow of subsidiary to
understand nature of NCI (refer B10(b) & B11 in standard. Also take into account B5 & B6).
• B10(a) Dividend paid to NCI
Above ONLY applicable if NCI is material
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o
CONSOLIDATION PROCEDURES
1. Elimination of common items:
•
•
•
•
Group must reflect as single entity.
Investment in SFP of P = Part of equity in SFP of S
Mirror images of same item must be eliminated.
Use pro-forma journals for elimination
- part of working papers
- these journals are only for consolidation purposes, not recognised in individual records
2. Consolidation of remaining items :
• Consolidation = combining of similar items.
• Group must reflect single entity.
• Remaining assets, liabilities, equity, income and expenses of P & S must be added together.
• Done on a line-by-line basis
• = Consolidated financial statements
Consolidation WITH initial acquisition:
— Eliminate common items:
— Eliminate the investment in the records of parent
— Eliminate equity of subsidiary
— Recognise new items as result of consolidation process
Non-controlling interest
AND
Goodwill / gain from bargain purchase
Consolidation SINCE initial acquisition:
SFP:
• Combine 100% of P and S’ Assets and Liabilities
• Elimination of intergroup balances
• Recognise NCI in net assets
SCI:
• Combine 100% of P and S’ Income and Expenses
• Elimination of intergroup transactions eg:
- unrealised profit / loss
- dividends
- income and expenses
- taxation
• Recognise NCI in profit/loss
— NON-CONTROLLING INTEREST
SFP & SCE
Presented as part of equity, but separate from parent’s equity
SCI
— Profit/loss of group is shared between owners of parent and NCI.
— Total comprehensive income of group is shared between owners of parent and NCI.
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°
Consolidation at ACQUISITION DATE:
Wholly owned subsidiaries:
Basic consolidation techniques:
1.
•
•
•
Elimination of common items
Pro forma journals are prepared to account for the elimination of intragroup items
Pro forma journals prepared for consolidation purposes only – part of working papers
Not recognized in the individual records of either the parent or the subsidiary
2.
Consolidation of remaining non-common) items, line-by-line
Eliminate of common items:
- Investment in S (SFP of parent) vs equity of S (SFP of subsidiary)
SFP PARENT
SFP SUBSIDIARY
CONSOLIDATION JOURNAL
Non-current assets
Investment in sub
Equity
Share capital
Retained earnings
DR Share capital (SCE)
DR Ret earnings (SCE)
CR Investment in S (SFP)
Consolidation of remaining (non-common) items:
- Similar items added together
- Dissimilar items show separately
Parent
Subsidiary
Consolidation
PPE
PPE
PPE (P) + PPE (S)
Debtors
-
Debtors (P) + Rnil (S)
-
Creditors
Rnil (P) + Creditors (S)
°
Make use of the following when consolidating
•
•
•
•
Analysis of owners’ interests in subsidiary
§ Calculation to determine the NCI portion
§ Help to write consolidation journals
Pro forma consolidation journals
Calculation of goodwill / gain from bargain purchase
Worksheet (NOT FA278)
°
Components of consolidated financial statements.
Consolidated statement of financial position (SFP) - Chap 3
o Financial position of group on a specific date, but as if one company / economic unit
o Consolidation at date of acquisition (thus no accounting period for which statement of comprehensive income
(SCI) or statement of changes in equity (SCE) could be prepared)
Consolidated statement of comprehensive income – Chap 4
Consolidated statement of changes in equity – Chap 4
Consolidated cash flow statement (FA 379)
Notes (to the extent that information is available)
IFRS 3 establishes important principles at acquisition:
° Measurement of value of investment
° Measurement of non-controlling interest
° Measurement of goodwill or gain from bargain purchase
° Disclosure requirements
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°
Consolidation of SFP (wholly-owned subsidiary)
Separate SFP of parent:
Investment @ CP (FV at acquisition date) shown in records of P (parent)
• Acquisition date (date when control is obtained)
• Assume assets and liabilities are measured at fair value (FV) as required by IFRS 3
Acquisition price (CP) of interest in S
• Interest acquired @ NAV (net asset value)
• Interest acquired @ premium (> NAV)
• Interest acquired @ discount (< NAV)
Consolidated SFP:
• Investment in subsidiary is not shown
• Show only share capital of P
• Assets and Liabilities combined - (100% of P + 100% of S)
• Recognize goodwill / gain from bargain purchase
• Recognize non-controlling interest
Interest @ net asset value example 3.1 refer textbook p.91; interest @ premium example 3.2 p.97
°
Interest acquired at a premium:
Cost of interest > NAV of underlying assets of subsidiary
• Premium can be ascribed to entity as whole rather than specific assets
• Create an intangible asset (“goodwill”) that were not previously recorded in separate financial statements
°
Goodwill calculation and measurement:
Recognition and measurement of goodwill:
IFRS 3 Business Combinations
• Prohibit amortization of goodwill
• Goodwill is the payment for future economic benefits from assets that cannot be identified individually or recognized
separately
• Initial treatment of goodwill asset:
o @ cost price
• Subsequent measurement (IAS 38 Intangible assets):
o @ cost price – impairment losses (test annually in accordance with IAS 36 Impairment of Assets)
Calculation of goodwill or gain from bargaining purchase:
Consideratio
n
°
NCI
FV prev interest
(NOT FA278)
FV of A and L
of S (100%)
Interest acquired at a discount
Cost of interest < NAV of underlying assets
• Parent have to revise the measurement of the assets, liabilities and contingent liabilities of subsidiary
• Any surplus (profit) after revision should be recognised in profit/loss immediately (IFRS 3)
• Profit can be attributable to:
o Errors in fair value measurement of combination of assets, liabilities and contingent liabilities of S
• IFRS requires that net assets acquired @ other value as fair value should be treated as if acquired at fair value
• Described as gain from bargain purchase
(Assume in chap 3 - 4 the revision was done and the discount was due to shares acquired at a bargain)
Interest @ discount example 3.3 refer to textbook p.101
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o Consolidation at acquisition date ( partially owned subsidiary)
Non-controlling interest:
• NCI (definition): Equity in subsidiary, not directly or indirectly attributable to the parent.
• According to IFRS 3
§ NCI in principle, measured at fair value at the acquisition date. (FA379)
§ Also permits the measurement of NCI at proportionate share of the acquirees identifiable net assets.
(FA278)
• Entitles NCI to undivided interest in net assets
• E=A-L, equity thus allocated to non- controlling interest
• The NCI in the net assets consist of:
o The amount of the NCI share at date of acquisition of control by parent
o The NCI share in changes in equity since acquisition
• NCI shall be presented separately in consolidated SFP and SCI
o Analysis of owners’ equity:
Analyses equity of subsidiary at acquisition by making an allocation to:
• Portion of equity attributable to Parent (including goodwill or gain from bargain purchase)
• Portion of equity attributable to NCI (not directly or indirectly owned by Parent
In the consolidated SFP
• Disclose NCI separately (but as part of total equity)
o Acquisition of partial share in subsidiary:
In the examples that follow, the consolidation takes place at the acquisition date, therefore only the respective, SFP of the
parent and partially-owned subsidiary can be consolidated,
3 Situations
• Interest acquired @ NAV
• Interest acquired @ premium (> NAV)
• Interest acquired @ discount (< NAV)
Considera
tion
NCI
FV prev
interest (NOT
FA278)
FV of A
and L of S
(100%)
Assume:
• Cost price of investment = fair value of investment in records of P, and Fair value has not changed
Example 3.4 p.107 interest at net asset value; example 3.5 p.112 interest at premium; example 3.7 p.119 interest at discount
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o Consolidation after acquisition date
Basic procedures are the same:
1) Eliminate common items:
- Investment in S (P)
- Share capital (S)
- Retained earnings - at (S)
- Create goodwill and NCI
2) Eliminate intra-group items
3) Consolidate remaining items
- Assets and Liabilities (P)
- Assets and Liabilities (S)
•
After initial recognition, an investment in a subsidiary shall be carried either at its fair value or at its cost price in
the separate records of the parent (IFRS 9.5.4)
1) Cost method
– Measure initially at cost
– Adjust value only when
• Acquire extra interest (FA 379)
• Sell (FA 379)
• Material permanent impairment in value (FA 379)
2) Fair value method (FA 379)
– Change as above
– or when fair value changes (including increases)
3) Assumption (For FA 278)
– Cost price = fair value and that fair value remains unchanged
•
Distributable profits in hands of subsidiary
PURCHASED
– Reserves AT date of acquisition
• Part of equity
• Not earned by GROUP, but purchased
• Not distributable for P or GROUP
• Part of equity (common elements) eliminated at acquisition
EARNED
– Reserves SINCE acquisition
• Distributable for group
• NB until S distributes dividends to P, the profits are not available for distribution by P.
•
MOVEMENT IN RESERVES
•
•
Due to the creation of new reserves or movements in old reserves
Influences analysis in the following way:
(i) Additional line item AT - balance as AT acquisition
(ii) Additional line item SINCE to beginning of current year - increase since acquisition to beginning of current year
(iii) 2 additional line items in CURRENT YEAR - transfer to reserves
- increase in reserves
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•
DIVIDENDS OF THE SUBSIDIARY:
-
Dividends received from pre-acquisition reserves (FA 379)
-
Dividends received by parent from subsidiary’s post-acquisition reserves = distributable for group, but only a
movement between parent and subsidiary and has no effect on group statements
Intragroup transaction and must be eliminated
Pro-forma journal if SUBSIDIARY is a wholly owned subsidiary of PARENT:
Dr Dividends received (parent) (P/L)
Cr Dividends paid (subs) (SCE)
•
CONSOLIDATION AFTER ACQUISITION:
-
-
•
SFP, SCI, SCE
o Eliminate common items
§ Investment, equity
Create goodwill and NCI
o Eliminate inter-company items in order to account for group as one economic entity
§ Dividends received by P and paid by S
o Consolidate remaining items (line-by-line)
Show results of the parent combined with the results/reserves of subsidiary SINCE acquisition
COMPREHENSIVE APPROACH:
-
-
STEP 1: Analysis of owners’ equity & GW calculation
o At
o Since
§ Until beginning of current year
§ Current year
STEP 2: Pro-forma journals
(NB!! FA 278 omit worksheet– do shortened approach)
STEP 3: Prepare consolidated financial statements
GROUP STATEMENTS - DIVIDENDS
PRINCIPLES:
o Dividends are only showed as a liability in an entity’s accounting records if it was DECLARED before year end.
o If parent or subsidiary has not made any provisions for dividends declared, provision must first be made in their
individual records and then eliminated.
o Only div in consolidated SCE is that of Parent (plus portion of div paid by subsidiary to non-controlling
shareholders (NCI))
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HOW TO ACCOUNT FOR DIVIDENDS:
•
•
•
Scenario 1 – Subsidiary makes no provision and does not plan to (no dividend declared)
Scenario 2 – Subsidiary paid dividend
Scenario 3 – Dividend declared – both parent and
subsidiary makes provision
SCENARIO 1: NO DIVIDEND PAID OR PROVIDED
•
•
No journal required
NB – this is about dividends declared by subsidiary not Parent
SCENARIO 2: DIVIDEND HAS BEEN PAID
•
•
What are recorded in individual records?
Dividend of R3 000, Parent has 80% interest in Subsidiary
In PARENT
In SUBSIDIARY
PRO-FORMA
DR Bank (SFP)
CR Dividends received (P/L)
R2 400
DR Dividends paid (SCE)
CR Bank (NCI div) (SFP)
CR Bank (SFP) (P’s div)
R3 000
DR Dividend received (P/L)
DR Non-controlling interest (SFP)
CR Dividends paid (SCE)
R2 400
R 600
R2 400
R 600
R2 400
R3 000
SCENARIO 3: DIVIDEND DECLARED – BOTH HAVE PROVIDED
•
•
What are in the records of individual records?
Dividend of R3 000, P has 80% interest in S
In PARENT
DR Current Account S (SFP)
CR Dividends received (P/L)
R2 400
In SUBSIDIARY
DR Dividends paid (SCE)
CR Shareholders for dividends (SFP)
R3 000
PRO-FORMA
DR Dividend received (P/L)
DR Non-controlling interest (SFP)
R2 400
R 600
Additional:
DR Shareholders for div (SFP)
CR Current acc: P (SFP)
DR Current acc: P (SFP)
CR Current acc: S (SFP)
R2 400
R2 400
R2 400
R 600
R2 400
R2 400
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GROUP STATEMENTS - WHOLLY OWNED SUBSIDIARY
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GROUP STATEMENTS
PARTIALLY OWNED SUBSIDIARY
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JOURNALS:
INCREASE DEPRECIATION:
DR – Depreciation (P/L)
CR – Accumulated Depreciation (SFP)
INCREASE PROVISION FOR CREDIT LOSS:
DR – Movement in allowance for credit losses (P/L)
CR – Allowance for credit losses (SFP)
ASSET DISPOSAL:
DR – Accumulated Depreciation (SFP)
DR – Loss on disposal (P/L)
CR – Vehicle / Equipment (SFP)
CR – Profit on disposal (P/L)
IFRS 15:
we fulfilled before they paid
(transaction before pmt)
fulfilled PO:
interest:
paid:
DR – Debtors (SFP)
CR – Revenue (P/L)
DR – Debtors (SFP)
CR – Interest Income (P/L)
DR – Bank (SFP)
CR – Debtors (SFP)
they paid us before we fulfilled
(Pmt before transaction)
paid:
interest:
fulfilled PO:
DR – Bank (SFP)
CR – Contract Liability (SFP)
DR – Interest expense (P/L)
CR – Contract Liability (SFP)
DR – Contract Liability (SFP)
CR – Revenue (P/L)
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QUESTION EXAMPLES FOR A1S1:
IAS 16 / IAS 8
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IAS 36
IFRS 15
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IFRS 15
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IFRS 15
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IFRS 15
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IFRS 15
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This work has been completed in its entirety by:
Alexandra Shtein
disclaimer:
I do not take any credit for many of the examples as these were class examples
provided by the Univeristy and / or lecturers. However, the notes and extra
information is all mine
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