Week 7
Income is increases in economic benefits during the accounting period in the form of inflows
or enhancements of assets or decreases of liabilities that result in increases in equity, other
than those relating to contributions from equity participants.
Income  A decrease in equity other than those relating to contributions from equity
participants.
Revenue and gains
1. Income encompasses both revenue and gains.
2. Revenue arises in the course of the ordinary activities of an entity. (refers to sales of.
G&S to customers)
3. Gains are other items that meet the definition of income and may, or may not, arise
in the course of the ordinary activities of an entity. (foreign exchange gains)
Gains may or may not arise in the course of the ordinary activities of an entity
The importance of revenue
1. Revenue is the top line of the statement of profit or loss. An important figure
stakeholders use to measure performance and make comparison across businesses.
2. Revenue affects profits and loss reported.
3. Revenue affects management compensation, tax liability and insurance coverage.
Revenue sale of goods
a. The entity has transferred to the buyer the significant risks and rewards of
ownership of the goods;
b. the entity retains neither continuing managerial involvement to the degree usually
associated with ownership nor effective control over the goods sold;
c. the amount of revenue can be measured reliably;
d. it is probable that the economic benefits associated with the transaction will flow to
the entity;
e. the costs incurred or to be incurred in respect of the transaction can be measured
reliably. (ensure matching principle is complied with)
Revenue rendering of service
a. the amount of revenue can be measured reliably;
b. it is probable that the economic benefits associated with the transaction will flow to
the entity;
c. the stage of completion of the transaction at the balance sheet date can be
measured reliably; and
d. the costs incurred for the transaction and the costs to complete the transaction can
be measured reliably.
Revenue from contracts with customers (SFRS(I) 15)
a. Both IASB and FASB issued a converged standard on revenue in May 2014.
b. IFRS 15 – Revenue from Contracts with Customers.
c. ASC issued SFRS(I) 15 in November 2014.
d. Effective for financial periods beginning on or after 1 January 2017. Earlier
application is permitted.
e. In Nov 2015, ASC extended the effective date to 1 January 2018.
SFRS (I) 15 Supersedes
a. FRS 11 – Construction Contracts
b. FRS 18 – Revenue
c. INT FRS 113 – Customer Loyalty Programmes
d. INT SFRS(I) 15 – Agreements for the Construction of Real Estate
e. INT FRS 118 - Transfer of Assets from Customers
f. INT FRS 31 – Revenue – Barter Transactions Involving Advertising Services
Objective of SFRS(I) 115
To establish the principles that an entity shall apply to report useful information to
users of financial statements about:
 nature
 amount
 timing
 uncertainty of
revenue and cash flows arising from a contract with a customer.
Core principle of FRS 115
- An entity shall recognise revenue to depict the transfer of promised goods or
services to customers in an amount that reflects the consideration to which the
entity expects to be entitled in exchange for those goods or services.
Scope of FRS 115
- An entity shall apply FRS 115 to all contracts with customers, except for:
o Lease contracts – FRS 17 – Leases
o Insurance contracts – FRS 104 - Insurance Contracts
o Financial instruments – FRS 39 (FRS 109)
o Other contractual rights and obligations under FRS 110, 111, 27 and 28
(group of companies, subsidiaries, joint ventures and associates)
o Non-monetary exchanges between entities in same line of business
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An entity shall apply this standard to a contract only if:
o The counterparty to the contract is a customer;
o A customer has contracted with an entity to obtain goods and services that
are an output of the entity’s ordinary activities in exchange for consideration.
(Usually cash consideration)
FRS 115 does not apply to non-monetary exchanges between entities in same line of
business.
Five steps to recognise revenue from contracts with customers
- Step 1: Identify the contract(s) with a customer
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Step 2: Identify the performance obligations in the contract
Step 3: Determine the transaction price
Step 4: Allocate the transaction price to the performance obligations in the contract
Step 5: Recognise revenue when (or as) the entity satisfies a performance obligation
Under FRS 115
STEP 1
- Definition of a contract:
o A contract is an agreement between two or more parties that creates
enforceable rights and obligations. (SFRS(I) 15: IN7a)
o A contract includes promises to transfer goods or services to a customer.
(SFRS(I) 15: IN7b)
- Definition of a customer:
o A customer is a party that has contracted with an entity to obtain goods and
services that are an output of the entity’s ordinary activities in exchange for
consideration. (SFRS(I) 15: 6)
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An entity shall account for a contract with a customer that is within the scope of this
Standard only when all the following criteria are met:
1. Contract is approved (written, verbal or in other customary business
practices).
2. Each party’s rights to the goods and services to be transferred can be
identified.
3. Payment terms can be identified.
4. Has commercial substance. (Means that the entity has a future cash inflow or
is making a profit from this transaction)
5. Probable to collect from customer (customer’s ability and intention to pay).
(ability and intention to pay are different)
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SFRS(I) 15: 13If SFRS(I) 15:9 fulfilled, no need to reassess.
SFRS(I) 15: 14 and 115: 15If SFRS(I) 15:9 not fulfilled, continue to assess. (if they
are met at the point of contract inception but subsequently the customer become
incapable of paying due to subsequent changes in his financial situation account for
it under impairment loss on AR, subsequent change in financial situation will not
render contract invalid)
STEP 2
- At contract inception, an entity shall identify the performance obligation each
promise to transfer to the customer either:
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a. a good or service (or a bundle of goods or services) that is distinct; or
b. a series of distinct goods or services that are substantially the same and that
have the same pattern of transfer to the customers.
A good or service that is promised to a customer is distinct if both of the following
criteria are met:
a. the customer can benefit from the good or service either on its own or
together with other resources that are readily available to the customer
(i.e. the good or service is capable of being distinct); and
For some goods and services, a customer may be able to benefit from a good or
service on its own.
For other goods and services, a customer may be able to benefit from the good or
service only in conjunction with other readily available resources.
For example, the fact that the entity regularly sells a good or service separately
would indicate that a customer can benefit from the good or service on its own or
with other readily available resources.
A readily available resource refers to a good or service that is sold separately by the
entity or others or a resource that a customer has already obtained from the entity
A good or service that is promised to a customer is distinct if both of the following
criteria are met:
b. the entity’s promise to transfer the good or service to the customer is
separately identifiable from other promises in the contract (i.e. the
promise to transfer the good or service is distinct within the context of
the contract).
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Factors that indicate that two or more promises to transfer goods or services to a
customer are not separately identifiable include, but are not limited to, the
following:
a. the entity provides a significant service of integrating the goods or
services with other goods or services....
b. one or more of the goods or services significantly modifies or customises,
or are significantly modified or customised by, one or more of the other
goods or services promised in the contract.
c. the goods or services are highly interdependent , or highly interrelated.
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If a promised good or service is not distinct, an entity shall combine that good or
service with other promised goods or services until it identifies a bundle of goods or
service that is distinct.
In some cases, that would result in the entity accounting for all the goods or services
promised in a contract as a single performance obligation.
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SFRS(I) 15: 6 – goods and services that are an output of the entity’s ordinary
activities
SFRS(I) 15: 25 – admin tasks to set up contracts and setup activities are not a
performance obligations.
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when a customer contracts with an entity for a bundle of goods or services, it can be
difficult and subjective for the entity to identify the main goods or services for which
the customer has contracted. In addition, the outcome of that assessment could vary
significantly depending on whether the entity performs the assessment from the
perspective of its business model or from the perspective of the customer.
Consequently, the boards decided that all goods or services promised to a customer
as a result of a contract give rise to performance obligations (even when if it
something given for free) because those promises were made as part of the
negotiated exchange between the entity and its customer
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Criterion 1: capable of being Distinct
 A. Customer can
Material right: option for additional goods or services
- Para 40: If in a contract an entity grants a customer the option to acquire
STEP 3 (relating to measurement issue)
- An entity shall consider the terms of the contract and its customary business
practices to determine the transaction price.
- The transaction price is the amount of consideration to which an entity expects to be
entitled in exchange for transferring promised goods or services to a customer,
excluding amounts collected on behalf of third parties (e.g. GST).
STEP 4
- The objective when allocating the transaction price is for an entity to allocate the
transaction price to each performance obligation (or distinct good or service) in an
amount that depicts the amount of consideration to which the entity expects to be
entitled in exchange for transferring the promised goods or services to the customer.
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To allocate the transaction price to each performance obligation on a relative standalone selling price basis. (SFRS(I) 15: 76)
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The stand-alone selling price is the price at which an entity would sell a promised
good or service separately to a customer. (SFRS(I) 15: 77)
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If a stand-alone selling price is not directly observable, an entity shall estimate the
stand-alone selling price... (SFRS(I) 15: 78)
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Methods to estimate stand-alone selling price (SFRS(I) 15: 79-80) – for reading only.
STEP 5 (recognition issue)
- An entity shall recognise revenue when (or as) the entity satisfies a performance
obligation by transferring a promised good or service (i.e. an asset) to a customer. An
asset is transferred when (or as) the customer obtains control of that asset.
- Satisfies the performance obligation over time or at a point in time.
Control of asset
- Control of an asset refers to the ability to direct the use of, and obtain substantially
all of the remaining benefits from, the asset. Control includes the ability to prevent
other entities from directing the use of, and obtaining the benefits from, an asset.
The benefits of an asset are the potential cash flows (inflows or savings in outflows)
that can be obtained directly or indirectly
Performance obligations satisfied over time (usually for sale of service)
- When one of the following criteria is met:
1. The customer simultaneously receives and consumes the benefits provided
by the entity’s performance as the entity performs (e.g. cleaning services).
2. The entity’s performance creates or enhances an asset that the customer
controls as the asset is created or enhanced (e.g. renovation and repairs and
maintenance services).
3. The entity’s performance does not create an asset with an alternative use to
the entity and the entity has an enforceable right for payment for
performance completed to date. (e.g. contractual restriction, substantial
modifications).
Performance obligations satisfied at a point in time
- If a performance obligation is not satisfied over time... an entity satisfies the
performance obligation at a point in time.
- An entity satisfies a performance obligation when the customer obtains control of a
promised asset.
Indicators of transfer of control
a. The entity has a present right to payment for the asset.
b. The customer has legal title to the asset.
c. The entity has transferred physical possession of the asset.
d. The customer has the significant risks and rewards of ownership of the asset.
e. The customer has accepted the asset.
Customer acceptance clauses
- Customer acceptance clauses allow a customer to cancel a contract or require an
entity to take remedial action if a good or service does not meet agreed-upon
specifications.
Principal vs agent considerations
- An entity is a principal if it controls the specified good or service before that good or
service is transferred to a customer.
- An entity that is a principal may satisfy its performance obligation to provide the
specified good or service itself or it may engage another party (e.g. a subcontractor)
to satisfy some or all of the performance obligation on its behalf.
- An entity is an agent if the entity’s performance obligation is to arrange for the
provision of the specified good or service by another party.
- Indicators that an entity controls the specified good or service before it is transferred
to the customer and is therefore a principal include, but are not limited to:
a. the entity is primarily responsible for fulfilling the promise to provide the
specified good or service
b. the entity has inventory risk
c. the entity has discretion in establishing the price for the specified good or
service
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When (or as) an entity that is a principal satisfies a performance obligation, the
entity recognises revenue in the gross amount of consideration to which it expects to
be entitled in exchange for the specified goods or service transferred. (SFRS(I)
15:B35B)
When (or as) an entity that is an agent satisfies a performance obligation, the entity
recognises revenue in the amount of any fee or commission to which it expects to be
entitled in exchange for arranging for the specified goods or services to be provided
by the other party. (SFRS(I) 15:B36)
Presentation
- When either party to a contract has performed, an entity shall present the contract
in the statement of financial position as a contract asset or contract liability,
depending on the relationship between the entity’s performance and the customer’s
payment.
- An entity shall present any unconditional rights to consideration as a receivable.
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If a customer pays consideration, or an entity has a right to an amount of
consideration that is unconditional (i.e. a receivable), before the entity transfers a
good or service to the customer, the entity shall present the contract as a contract
liability.
Dr Cash Cr Unearned Revenue (Contract liability)
Dr Accounts Receivable Cr Unearned Revenue (Contract liability)
If an entity performs by transferring goods or services to a customer before the
customer pays consideration or before payment is due, the entity shall present the
contract as a contract asset.
A contract asset is an entity’s right to consideration in exchange for goods or services
that the entity has transferred to a customer.
Dr Accounts Receivable (Contract asset) Cr Revenue
Dr Accounts Receivable (Not a contract asset) Cr Unearned Revenue (Contract
liability)
Contract assets as the entity’s rights to consideration in exchange for goods or services that
the entity has transferred to a customer
Consideration received from customers
- An entity shall recognise the consideration received from a customer as a liability
until
1. the entity has no remaining obligations; or
2. the contract has been terminated and the consideration received from the
customer is non-refundable.
- The liability recognised represents the entity’s obligation to either transfer goods or
services in the future or refund the consideration received.
Disclosure
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To disclose sufficient information to enable users of financial statements to
understand the nature, amount, timing and uncertainty of revenue and cash flows
arising from contracts with customers.
Disclose qualitative and quantitative information about:
Contracts with Customers
1. Separate revenue recognised from contracts with customers from other
revenue sources.
2. Any impairment losses recognised on receivables.
Disaggregation of revenue
3. Disaggregate revenue recognised into categories that depict how the nature,
amount, timing and uncertainty of revenue and cash flows are affected by
economic factors
Contract balances
4. Opening and closing balances of receivables, contract assets and contract
liabilities.
5. Revenue recognised in the reporting period from opening contract liabilities
and from performance obligations satisfied or partially satisfied in the
previous period.
6. Explain how the timing of satisfaction of its performance obligation relates to
timing of payment.
7. Explain significant changes in the contract asset and the contract liability.
Performance obligations
8. When the entity typically satisfies its performance obligations.
9. Its significant payment terms.
10. Nature of goods and services that the entity promised to transfer.
11. Obligations for returns, refunds, and other similar obligations.
12. Types of warranties and related obligations.
Transaction price allocated to remaining performance obligations
13. Aggregated amount of transaction price allocation to unsatisfied
performance obligations.
14. Explanation when the entity expects to recognise revenue of the unsatisfied
performance obligations.
Disclosure principle: Entities should report enough information for users of financial
statements to make decisions about the entities.
Week 8
The need for estimating sales returns
- Most companies do not have material sales returns, thus it is alright to record sales
returns as and when it occurs.
- However, some retailers with returns policy may have material sales returns.
- Sales can be reported in one period while sales returns may occur in the following
period, thus resulting in an overstatement of sales in the period of sales but
understatement of sales in the period of sales return.
- Thus, there is a need to estimate and record the sales returns and refund liability
during the period of sales.
Refund liability
- It is a liability account
- It is a refund to be made to the customers for the expected sales returns
Week 9
Income statement (statement of profit or loss and other comprehensive income)
- Classification of expense
o By Nature of expense
 An entity aggregates expenses within profit or loss according to their
nature, and does not reallocate them among functions within the
entity
 Depreciation
 Purchases of materials
 Transport costs
 Employee benefits
 Advertising costs etc
o By function of expense
 Classifies expenses according to their function as part of cost of sales,
or costs of distribution or administrative activities
 At a minimum an entity discloses its cost of sales under this method
separately from other expenses
 Can provide more relevant info to users as compared to nature
method
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Allocating costs to functions may require arbitrary allocations and
involve considerable judgment
Need to disclose additional info on the nature of expenses, including
depreciation and amortisation expense an employee benefits expense
because info on the nature of expenses is useful in predicting future
cash flows
The choice between the function or nature method depends on historical and industry
factors and the nature of the entity. Both methods provide an indication of those costs that
might vary directly or indirectly with the level of sales
Choose a method that is reliable and more relevant
Statement of changes in equity
Total comprehensive income for the year showing separately total amounts attributable to
owners of parent , non-controlling interests
Notes to the financial statements
Order of presentation:
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General information:
o Place of domicile
o Registered office
o Principal activities
Summary of significant accounting policies applied:
o Measurement basis used
 Fair value model
 Cost model
 FIFO basis
o Sources of estimation uncertainty
Explanatory notes and supporting info for items presented in the financial
statements:
o Movement of number of shares
o Movement or breakdown of:
 Provisions
 Trade receivables
 PPE
 Investment property
o Other disclosures
 Contingent liabilities and contractual commitments
o Non-financial disclosures
 Risk management policies
Concept of capital and capital maintenance
- Concept of capital
o Under financial concept of capital such as invested money or invested
purchasing power, capital is synonymous with the net assets or equity of the
entity (adopted by most)
 Capital = net assets/ equity of entity
o Under a physical concept of capital such as operating capability, capital is
regarded as the productive capacity of the entity based on e.g. unit of output
per day
- Concept of capital maintenance
o Financial capital maintenance
 Profit is earned only if the financial amt of the bet assets at the end of
the period exceeds the beginning of the period
 Exclude any distributions to and contributions from the
owners during the period
 Measured in either nominal monetary units/units of constant
purchasing power
o Physical capital maintenance
 Profit is earned only if the operating capability of the entity at the end
of the period exceeds that at the beginning of the period
 Exclude any distributions to and contributions from owners
during that period
Week 10
Firms engage in three main types of investing activities
- Invest in PPE
- Invest in tangible assets
- Invest in other companies
Investing activities potentially create value for the company. A firm had to consider risks and
returns before deciding to invest
Property plant and equipment (PPE) (how does the entity use that asset)
- They are tangible items that are held for use in the production or supply of goods or
services, for rental to others or for administrative purposes and are expected to be
used during more than one period
- Long-term
o Non-current or long lived
o to be used during more than one period
- Used in the business
- Land/building held to rental or for capital appreciation  investment property
- Non-property PPE (machines) are classified as PPE when held for rental
- Recognise PPE as an asset if and only if it is probable that future economic benefits
associated with the item will flow to the entity and the cost of the item can be
measured reliably
Examples of PPE:
- Land
- Land improvements
- Motor vehicles
- Buildings
- Machinery
- Factory
Freehold land is not depreciable as its useful life is infinite
Leasehold land is depreciable because it has a finite lease term
Land improvements are separately recorded from land because it is not part of land. These
are depreciable because they have finite useful life
Concept of capitalisation
- Which is the process of identifying an expenditure as an asset
- Need to distinguish the expenditures that produce future benefits (assets) from
those that produce benefits only in the current period (expenses)
An item of PPE that qualifies for recognition as an asset shall be initially measured at its cost
at acquisition
The modes of acquisition are:
- Purchase
- Self-constructed assets
- Exchange
The measurement issues to consider when purchasing an asset are:
- It's purchase price including import duties non-refundable purchase taxes and
foreign exchange gains or losses after deducting trade discounts and rebates.
Refundable taxes should not be included in the cost of PPE
- Directly attributable cost: any cost directly attributable to bringing the asset to the
location and condition necessary for it to be capable of operating in the manner
intended by management. These include delivery, assembling as well as testing
costs.
- Estimate of dismantling of removal costs and restoration costs.
o Example of dismantling course all costs of preparing the land to build the
warehouse such as cost of clearing grading and removal should be capitalized
as part of the cost of land
o The cost of restoration has to be estimated and capitalized upon acquisition
due to contract or agreement
- All initial expenditures that are necessary to bring the PP to its usable condition
should be capitalized
Self-constructed asset
- The cost of a self-constructed asset is determined using the same principles As for a
purchased asset.
- Cost includes identifiable materials labor and a portion of the companies
manufacturing overhead costs such as utility bills. They're not profit and cost of
abnormal amounts of wasted material, labor, other resources in court is not included
when arriving at the cost of a self-constructed asset.
- Some measurement issues related to self-constructed assets are:
o do we capitalize borrowing costs incurred?
o Do we recognize gains or losses if construction costs are lower or higher than
purchase prices?
- If construction cost is less than the purchase price of a similar asset no gain is
recognized. If construction cost is more than the purchase price, a loss is recognized.
Exchange
- One or more items of PPE may be acquired in exchange for a non-monetary asset or
assets or a combination of monetary and non-monetary assets
- To determine the cost of the acquired asset:
o SFRS(I) provides that an item of PPE acquired in exchange for a non-monetary
asset should be measured at fair value, unless the exchange lacks commercial
substance or the fair value of neither the asset received nor the asset given
up is really measurable. The standard further provides that the fair value of
the asset given up should be used unless the fair value of the asset received is
more clearly evident.
o A transaction is deemed to have commercial substance if the company
expects a change in future cash flows as a result of the exchange and this
expected change is significant relative to the fair value of the assets
exchange. The greater the fair value of the exchange asset, the greater the
future cash inflows.
o Gain or loss in disposal of the old asset: 2 scenarios
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1. Assume that the fair value of the new asset can be reliably
measured and is more clearly evident than the fair value of the old
asset
2. Assume that the fair value of the new asset cannot be reliably
measured
If neither the fair value of the new asset nor the fair value of the old
asset can be measured reliably we use the book value of the old asset
to calculate the initial cost of the new asset. In this Case No gain or
loss will be recognized for the exchange
Initial measurement issues
Lump sum acquisition
- In some cases multiple PPE are acquired at the same time. We should capitalize the
expenses according to the intended use of each expenditure.
What do we do with subsequent expenditure?
- Expenditure that simply maintain a given level of benefit, such as day-to-day
maintenance are expensed as profit/loss. In order to be capitalized as an asset
expenditures have to create future economic benefits.
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These benefits include an extension in the assets estimate the useful life, increasing
capacity, substantial improvement in the quality of output and substantial
reductions in previously assessed operating costs.
The outcome of the statement of profit or loss and statement of financial position
are dependent on classification of expenditures.
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If subsequent costs are expensed off and included as profit/ loss, the statement of
profit or loss will reflect higher expense and lower net income in the future in the
current period while the statement of financial position will reflect lower asset
values in the current maybe. In this scenario subsequent depreciation expense will
be lower. If subsequent costs are capitalized and recognized in the carrying amount
of an item of the statement of profit or loss will reflect lower expense and higher net
income in the current period while the statement of financial position will reflect
higher asset values in the current period. Subsequent depreciation expense will be
higher.
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During the whole life of the asset, the total expense will be the same no matter
whether subsequent expenditures are expensed off or capitalized.
Whether the subsequent course are expensed or capitalized also depends on
management activities. An entity aiming for IPO in the current period will look to
increase their asset values through capitalization.
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Measurement models for PPE (can use to account for the subsequent measurement of PPE)
- Accounting treatments for initial acquisition and subsequent costs incurred are the
same for both the cost model and the revaluation model
o Cost Model
 PPE carried that cost is valued at (initial cost at acquisition +
subsequent costs incurred) - accumulated depreciation - subsequent
impairment
 Firms are encouraged to disclose fair value of PPE in notes if it is
materially different from the carrying amount
o Revaluation model
 PPE carried at a revalued amount is the fair value at their valuation subsequent accumulated depreciation - subsequent impairment
Cost model Depreciation
- Depreciation is a systematic cost allocation process will be part of the acquisition
cost of a PPE will be expensed in each accounting over its useful life.
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Assets by definition are expected future economic benefits and the initial
recognition of an item of, PPE requires that it is probable that the future economic
benefits will flow to the entity. On acquiring these benefits, and entity will have
expectations as to the period over which these benefits are to be received or
consumed, and the pattern of these benefits. The economic benefits could be
received or consumed evenly over the useful life of the asset.
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The purpose of determining the depreciation charge for the period is to measure the
consumption of benefits allocable to the current period ensuring that over the useful
life of the asset each. Will be allocated its fair share of the cost of the asset acquired.
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Useful life is the period over which an asset is expected to be available for use by an
entity or the number of production or similar units expected to be obtained from the
asset by an entity.
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Residual value is the estimated amount of an asset that an entity will currently
obtain from the disposal of the asset after deducting the estimated cost of disposal if
the asset was already of the age and in the condition expected at the end of its
useful life
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The depreciation should begin when the asset is available for use. Accumulated
depreciation is the cumulative amount of depreciation charged since initial
recognition and measurement of an asset.
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This is a Contra asset: a Contra asset is always paired with an asset and reduces the
assets balance. the Contra asset account has a credit balance. a Contra asset is
reported in the statement of financial position.
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When we record the depreciation of a specific period, we would debit the
depreciation which is the profit or loss account and credit accumulated this
depreciation to record the increase in accumulated depreciation which will decrease
the asset value on the statement of financial position
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The depreciation method used shall reflect the pattern in which the asset's future
economic benefits are expected to be consumed by the entity. Different
depreciation methods will have different effects on the financial statements but the
total depreciation if expands over the whole useful life of our PPE will be the same
no matter what matter is used
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Straight-line depreciation method
o Assign an equal amount of depreciation to each year of the asset service life.
o Depreciation expense equals to acquisition cost minus residual value divided
by the estimated useful life in years of the asset. This method is generally
applied to assets that are expected to provide a level amount of economic
benefits throughout its useful life.
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The declining-balance method
o Is an accelerated depreciation method that writes off a larger amount of the
assets cost near the start of its useful life.
o The depreciation expanse equals to the beginning book value multiplied by
an acceleration factor divided by the useful life in years. The beginning book
value is equal to the acquisition cost minus the beginning accumulated
depreciation. Deceleration factor should be greater than one.
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Sum of the years digits is another accelerated depreciation method
o The depreciation expense equals to acquisition cost minus residual value
multiplied by the remaining years of useful life divided by the sum of the
years digits
o The sum of tthe year some of the digits can be calculated based on the
formula n *( n + 1) / 2 by n stands for the useful life in years
o the sum of the years digits and declining balance above accelerated
depreciation methods generally applied to assets that provide greater
economic benefits at a more rapid rate at the start of the useful life.
o Accelerated methods result in more depreciation in the early years and less
depreciation in the later years of an asset useful life. In the early years the
statement of financial position will reflect lower asset values and the
statement of profit or loss will reflect lower net income due to higher
expenses therefore if we compare the accelerated method to the straight line
method we will get lower asset values and lower net income in the early
years under the accelerated method.
o
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Units-of-production depreciation method
o Assigns a fixed amount of depreciation to each unit of output or service
produced by the asset
o The depreciation per unit equals to acquisition cost – residual value, divided
by useful life in units of production. Depreciation expense is then derived by
taking the depreciation per unit multiply by the number of units produced by
for a given time period
o Usually applied to asset which provide economic benefits that vary in direct
proportion to the amount of asset usage
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Changes in depreciation estimates
o If there is a change in the estimated useful life or the residual value, these
changes will be accounted for prospectively; The book value less any residual
value at the date of change is depreciated over the remaining useful life and
a disclosure note should describe the nature and the effects of the change.
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Impairment
o Impairment tests
 SFSR(I) requires entities to conduct impairment tests for its assets to
see if it has incurred any impairment losses. The purpose of the
impairment test is to ensure that assets are not carried at amounts
that exceed their recoverable amounts or more simply that assets are
not overstated
 Not necessary at the end of each reporting period to test each asset in
order to determine if it is impaired. The only assets that need to be
tested at the end of the reporting period are those where there is any
indication that an asset may be impaired
 To see if asset is impaired: entity need to consider both external and
internal sources of information:
 Physical damage to an asset
 Significant decline in the market value of an asset
 Lower-than-expected economic performance of a segment
 Significant changes in the technological, economic or legal
environment
 Significant increase in the interest rates used in discounting
asset’s value in use
o Cost-model impairment
 An asset is impaired when carrying amount exceeds recoverable
amount
 Impairment loss = Carrying amount – recoverable amount


When an assets carrying amount exceeds its recoverable amount and
impairment loss of carrying amount minus recoverable amount
should be recognized and expensed as profit or loss.


The cumulative amount of impairment loss is known as accumulated
impairment loss. This is also a Contra asset.
When we record the impairment of a specific period debit the
impairment which is the profit or loss account and credit accumulated
impairment to record the increase in accumulated impairment which
would decrease the asset value on the statement of financial position.
Recoverable amount

Carrying amount

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Effect of impairment on subsequent depreciation
o New carrying amount = cost- accumulated impairment -accumulated
depreciation
o Subsequent depreciation will be based on the new carrying amount as shown
in the formula.
o
o
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Disposal of PPE under the cost model
o When PPE is disposed under the cost model, the entity needs to:
o Remove all records related to PPE, including cost, which is the gross amount
of PPE accumulated depreciation, accumulated impairment
o Record the net proceeds from the disposal derived from sale price minus cost
paid for disposal
o Account for gain or loss which is the difference between net proceeds and
carrying amount of PPE. There is a disposal gain if net proceeds is more than
carrying amount, and the disposal loss if net proceeds is less than carrying
amount.
o
Revaluation model
- Use it only if fair value of the PPE item can be measured reliably. If an entity has
chosen the revaluation model for subsequent measurement of the PPE, an item of
PPE shall be carried at a revalued amount, being its fair value at the date of
revaluation less any subsequent accumulated depreciation and subsequent
impairment losses
- Measurement issues:
o PPE should be valued with sufficient regularity so that the carrying amount
does not differ significantly from its fair value
- Reevaluation for PPE can either increase or decrease the carrying amount of PPE
- The transaction used to determine the fair value measurement should be the one
where market participants are able to use the asset to generate economic benefits in
its highest and best use or to sell the asset to another market participant who use
the asset in its highest and best use.
- The highest and best use of a non-financial asset takes into account the use of the
asset that is physically possible, legally permissible, and financially feasible.
- Physically possible: physical characteristics of the acid such as size and location will
be taken into consideration when the asset is price
- Legally possible: legal restrictions on the use of the assets such as zoning regulations
will be taken into consideration when the asset is priced
- Financially feasible: the extent to which the use of an asset can produce future
economic benefits will also be taken into consideration when the asset is priced
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Initial revaluation
o Upon initial revaluation the assets carrying amount can increase or decrease
o If an asset carrying amount is increased as a result of reevaluation the
increase shall be recognized in other comprehensive income and
accumulated in equity under the heading of revaluation surplus
o As this is an upward revaluation we debit the PE to record the increased
amount of the asset and credit the revaluation reserve to record the increase
in equity
o If an asset carrying amount is decreased as a result of revaluation the
decrease shall be recognized in profit or loss
o As this is a downward revaluation we credit the PPE to record the decreased
amount of the asset and debit a profit or loss account which is the loss on
reevaluation to record the increase in expense
o
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Subsequent revaluation
o When current revaluation increases carrying amount of PPE and the previous
revaluation had increased carrying amount it would recognize the current
increase in other comprehensive income or if the previous revaluation had
the decreased carrying amount we need to reverse this previous loss by
recognizing an increase in the profit or loss to the same extent. When
previous losses are fully reversed, the remaining increase in carrying amount
if any will be recognized in other comprehensive income under revaluation
reserve
o When current revaluation decreases carrying amount of PPE and the previous
revaluation had decreased carrying amount we will recognize the current
decrease in profit or loss or if the previous revaluation had increased carrying
amount we need to consume the revaluation reserve in other comprehensive
income. When valuation reserve is fully consumed the remaining decrease in
carrying amount if any will be recognized in profit or loss
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After revaluation
o The benchmark for revaluation is the carrying amount because we compare
the revalue amount with the carrying amount determined the revaluation
effect. After the revaluation, the carrying amount is equal to the revalued
amount.
o For non-depreciable PPE we don't need to determine the new cost and the
new accumulated depreciation after the revaluation because accumulated
depreciation is not considered for non-depreciable PPE. the asset is carried at
revalued amount after revaluation with no accumulated depreciation.
o For depreciable PE the assets are carried at cost minus accumulated
depreciation. Therefore, after the revaluation, we need to determine the
new cost and the new accumulated depreciation for the carrying amount of
the PPE. this new cost minus the new accumulated depreciation should be
equal to the revalued amount.
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Revaluation for depreciable assets
o Method 1: is to restate the new cost and accumulated depreciation
proportionately according to old values by multiplying the old cost and old
accumulated depreciation respectively by the revalued amount divided by
the old carrying amount
o Method 2: it's to treat their asset and revaluation as a new asset and assume
zero accumulated depreciation. Therefore the new cost is equal to the
revalued amount.
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Disposal
o The entity needs to:
 Remove all records related to PPE including cost ,which is the gross
amount of PPE, accumulated depreciation
 Record the net proceeds from the disposal, derived from sales price
minus cost paid for disposal
 Account for gain or loss which is the difference between net proceeds
and carrying amount of PPE
 Eliminate revaluation reserve associated with the disposed PPE by
transferring the amount directly to retained earnings when the asset
is derecognized.
 Debit revaluation reserve to remove the revaluation reserve
associated with the disposed PPE and credit retained earnings to
reflect the transfer

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When there is a gain on revaluation, this will be recognized in the statement of profit
or loss and other comprehensive income under the section on other comprehensive
income. The same amount will be reflected in the statement of changes in equity
under the heading of revaluation surplus, total comprehensive income for the year.
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On disposal the revaluation surplus from the PPE is transferred to retained earnings
in statement of changes in equity. The transfer leads to an increase in retained
earnings by 40 million and a decrease in the revaluation surplus due to the removal
of the revaluation reserve associated with the PPE