International Financial Reporting Standards
Classification of assets
Joint World Bank and IFRS Foundation ‘train
the trainers’ workshop hosted by the ECCB,
30 April to 4 May 2012
The views expressed in this presentation are those of the
presenter, not necessarily those of the IASB or IFRS Foundation.
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International Financial Reporting Standards
Concepts—
classification of asset
The views expressed in this presentation are those of the
presenter,
not necessarily those of the IASB or IFRS Foundation
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Classification concepts
3
• Objective of financial reporting
• Financial statements portray financial effects of
transactions and events by:
– grouping into broad classes (the elements, eg asset)
– sub-classify elements (eg assets sub-classified by their
nature or function in the business)
• IAS 1
– application of IFRSs with additional disclosures when
necessary results in a fair presentation (faithful
representation of transactions, events and conditions)
– don’t offset assets & liabilities or income & expenses
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Classification concepts—assets
and claims
4
• Information about the nature and amounts of a
reporting entity’s economic resources and
claims can help users to identify the reporting
entity’s financial strengths and weaknesses.
• That information can help users to:
– assess the reporting entity’s liquidity and
solvency
– its needs for additional financing and how
successful it is likely to be in obtaining that
financing.
(CF.OB13)
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Classification concepts—assets
5
• Different types of economic resources affect a user’s
assessment of the reporting entity's prospects for future
cash flows differently.
– Some future cash flows result directly from existing
economic resources (eg accounts receivable and
investment property).
– Other cash flows result from using several resources in
combination to produce and market goods or services to
customers (eg PPE and intangible assets). Although
those cash flows cannot be identified with individual
economic resources (or claims), users of financial
reports need to know the nature and amount of the
resources available for use in a reporting entity’s
operations. (CF.OB14)
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Concept—asset
An asset is defined as:
• a resource controlled by the entity
• as a result of a past event
• from which future economic benefits are
expected to flow to the entity.
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6
Asset recognition concepts
7
An asset is recognised when:
• it is probable that any future economic benefit
associated with the item will flow to the entity;
and
• the item has a cost or value that can be
measured with reliability.
For some items that satisfy the definition of an asset,
significant judgement is required to evaluate whether
such items satisfy the recognition criteria. Individual
IFRSs provide principles and application guidance.
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Unit of account
8
• The unit of account is the level at which an asset is
aggregated or disaggregated for recognition
purposes.
• Most IFRS do not prescribe the unit of account
therefore judgement is required in applying
recognition criteria to an entity’s specific
circumstances. For example:
– individually insignificant items, such as moulds, tools
and dies may be aggregated when applying the
recognition criteria in IAS 16.
– cows would usually be recognised individually whereas
bees would usually be recognised as a swarm when
applying IAS 41.
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
International Financial Reporting Standards
Classifying assets
The views expressed in this presentation are those of the
presenter,
not necessarily those of the IASB or IFRS Foundation
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Assets overview
10
Classification, recognition and
measurement
PP&E
Intangible
Inventory
Assets
Inv
Property
Financial
Etc
Defined
Benefit
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Deferred
Tax
Classification of assets
11
• Different assets exhibit different characteristics (nature)
and can be held for a variety of uses (use) in order to
generate future economic benefits
• Nature and use determine the classification of assets
• IFRSs defines a number of assets
• For some assets significant judgement is required to
determine their classification
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Asset type
ASSET TYPE
USE IN BUSINESS ?
12
FORM OF FUTURE
ECONOMIC BENEFITS
Inventory (IAS 2)
Sale or used in production of
items for sale or in services
Usually cash or other asset received in
exchange
PP&E (IAS 16)
Used in production or supply of
goods or services, rental or
administration (more than one
period)
Usually cash through sale of ‘final’
product or service
Intangibles (IAS 38)
Used in production or supply of
goods or services
Usually cash through sale of ‘final’
product or service
Investment property
IAS 40)
Earn rentals or capital
appreciation, or both
Usually cash inflows independent from
other assets
Financial assets
(IFRS 9)
To generate cash returns or as
a hedging instrument
Cash or other financial assets received
in exchange
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Definition of inventory (IAS 2)
13
Definition
• Inventories are assets:
• held for sale in the ordinary course of business;
• in the process of production for sale; or
• materials or supplies to be used in the production
for sale.
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Definition of property, plant and
equipment (IAS 16)
14
Definition
• Property, plant and equipment (PPE) are
tangible items that are
• held for use in the production or supply of
goods or services, for rental to others, or for
administration purposes; and
• are expected to be used during more than one
period.
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Definition of intangible assets
(IAS 38)
15
Intangible assets
• The use within the business of intangible assets
is similar to that of property, plant and
equipment.
• An intangible asset is an identifiable nonmonetary asset without physical substance.
Such an asset is identifiable when it is
separable, or when it arises from contractual or
other legal rights.
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Recognition of internally generated
intangible assets (IAS 38)
16
• It is sometimes difficult to assess whether an internally
generated intangible asset qualifies for recognition
because of problems in:
a.
b.
identifying whether and when there is an identifiable
asset that will generate expected future economic
benefits; and
determining the cost of the asset reliably. In some
cases, the cost of generating an intangible asset
internally cannot be distinguished from the cost of
maintaining or enhancing the entity's internally
generated goodwill or of running day-to-day
operations.
• Therefore, special requirements in addition to the
general requirements for recognition of an internally
generated intangible asset apply.
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Recognition of research costs
(IAS 38)
17
• Expenditure on particular internally generated
intangible assets must be recognised as an
expense when incurred (eg research
activities—the original and planned
investigation undertaken with the prospect of
gaining new scientific or technical knowledge
and understanding.
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Recognition of development cost
(IAS 38)
18
An intangible asset arising from the development phase of an internal
project must be recognised if, and only if, an entity can demonstrate
all of the following:
a. the technical feasibility of completing the intangible asset so that
it will be available for use or sale.
b. its intention to complete the intangible asset and use or sell it.
c. its ability to use or sell the intangible asset.
d. how the intangible asset will generate probable future economic
benefits. Among other things, the entity can demonstrate the
existence of a market for the output of the intangible asset or the
intangible asset itself or, if it is to be used internally, the
usefulness of the intangible asset.
e. the availability of adequate technical, financial and other
resources to complete the development and to use or sell the
intangible asset.
f. its ability to measure reliably the expenditure attributable to the
intangible asset during its development.
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Definition of investment property
(IAS 40)
19
Definition
• Investment property is land or a building
(including part of a building) or both, held to earn
rentals or for capital appreciation or both.
• It is neither owner-occupied (see IAS 16 Property,
Plant and Equipment) nor held for sale in the
ordinary course of business (see IAS 2
Inventories).
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Judgements and estimates (IAS 40)
• Sometimes it is difficult to identify investment
property. In such cases an entity develops
criteria so that it can exercise that judgement
consistently
• eg, owner of a hotel transfers some
responsibilities to third parties under a
management contract (PPE or investment
property?)
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20
Financial instruments (IFRS 9)
21
Introduction
• IFRS 9 prescribes the classification and
measurement of financial assets and completes
the first phase of the project to replace IAS 39
Financial Instruments: Recognition and
Measurement.
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Classification model: financial
assets (IFRS 9)
22
Business model test
Contractual cash
flow characteristics
Amortised cost
(one impairment
method)
FVO for
accounting
mismatch
(option)
Reclassification required when business model changes
All other
instruments:
• Equities
• Derivatives
• Some hybrid
contracts
•…
Fair Value
(No impairment)
2011
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Equities:
OCI presentation
available
(alternative)
Embedded derivatives (IFRS 9)
23
• A hybrid contract (a non-derivative host contract
with an embedded derivative) with a host that is
a financial asset is not separated.
• Such contracts are classified in accordance with
the classification criteria in their entirety.
• Other hybrid contracts (eg host contract is a
financial liability or a non-financial item) are
separated if particular conditions apply unless
the entity designates the entire contract as at
fair value through profit or loss.
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Judgements and estimates
(IFRS 9)
24
• Classification of financial assets into IFRS 9
categories drives the subsequent measurement
and requires careful consideration of all
available evidence.
• Classification is made primarily based on an
entity’s business model
• Embedded derivatives may reside in contracts
other than financial instruments (ie leases, sale
or purchase contracts). Judgement must be
applied to determine whether they are present
in contracts.
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Judgements and estimates
(IFRS 9) continued
25
• Determining whether the designation at initial
recognition at fair value through profit or loss is
appropriate.
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Non-current Assets Held for Sale
(IFRS 5)
26
• A non-current asset is classified as ‘held for sale’ if
its carrying amount will be recovered principally
through a sale transaction, rather than through
continuing use (paragraph 6).
• To be classified as a non-current asset held for
sale:
• The asset must be available for immediate sale in
its present condition (subject only to terms that are
usual and customary for sales of such assets).
• The sale must be highly probable (appropriate
management commitment, actively seeking a buyer,
reasonable price, 12 month limit).
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Introduction (IAS 41)
27
• IAS 41 specifies the accounting for:
• biological assets (living plant or animal) in
agricultural activity—whose biological
transformation (growth, degeneration,
production and procreation) and harvest is
managed by an entity for sale or for conversion
into agricultural produce or into additional
biological assets; and
• agricultural produce up to the point of harvest.
• It does not address the processing of agricultural
produce after harvest (eg processing grapes into
wine, or wool into yarn).
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Classification (IAS 41)
28
• Biological assets that are attached to land
(eg trees in a plantation forest) are classified
separately from the land
• the trees are biological assets in agricultural
activity (IAS 41)
• if owner-occupied, the land is property
accounted for in accordance with IAS 16
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IAS 41
Agriculture
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29
Judgements and estimates
(IAS 41)
• It can be difficult to determine whether
particular biological assets are engaged in
agricultural activity and therefore in the
scope of IAS 41—eg the animals of some
zoos.
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30
Assets—classification examples
31
•
Ex 1: A trades in property (ie it buys property
to sell it at a profit near-term)
•
Ex 2: B trades in transferable taxi licences
•
Ex 3: C produces wine from grapes harvested
from its vineyards in a 3-year production cycle
•
Ex 4: D holds lubricants that are consumed
by its machine in producing goods
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Assets—classification examples
continued
32
• Ex 5: E maintains its plant using:
– a bespoke long-life cleaning machine; &
– a set of low-value common tools acquired
from a local hardware store
• Ex 6: F operate a hotel from a building it owns
– it rents out hotel rooms for short-stays
– guest services included in the room rate =
breakfast and television
– services charged for separately = other
meals, room bar, gymnasium facilities &
guided tours
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Assets—classification examples
continued
33
•
Ex 7: G buys a building to earn rentals under
an operating lease from its subsidiary. The
sub sells its products from the building
•
Ex 8: H owns
– a herd of cattle—breeding stock of its
agricultural activities
– a tractor used to transport feed to the herd
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Assets—classification examples
continued
34
•
Ex 9: I owns digital films and audio recordings
which it licenses to its customers
•
Ex 10: In accounting for the acquisition of the
net assets and operations of a competitor J
recognised future economic benefits arising
from assets that are not individually identified
as an asset (goodwill)
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Examples of classification judgements
35
– when unclear what purpose of acquiring
property is (inventories, IP or PPE?)
– when property owner provide ancillary
services to the occupants of a property (IP or
PPE?)
– mixed use property (IP or PPE?)
– when is undue cost or effort necessary to
measure the fair value of an IP on an
ongoing basis (IP or PPE?)
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Questions or comments?
Expressions of individual
views by members of the
IASB and its staff are
encouraged. The views
expressed in this
presentation are those of the
presenter.
Official positions of the IASB
on accounting matters are
determined only after
extensive due process and
deliberation.
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36
37
The requirements are set out in International Financial
Reporting Standards (IFRSs), as issued by the IASB at
1 January 2012 with an effective date after 1 January
2012 but not the IFRSs they will replace.
The IFRS Foundation, the authors, the presenters and
the publishers do not accept responsibility for loss
caused to any person who acts or refrains from acting
in reliance on the material in this PowerPoint
presentation, whether such loss is caused by
negligence or otherwise.
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