APC311 INTERNATIONAL FINANCIAL REPORTING
Lecture 5
Accounting for Fixed Tangible Assets
Learning Outcomes
To distinguish and describe key definitions of fixed tangible assets (FTA)
To describe IAS requirements of FTA on:
Recognition & derecognition
Measurement
Presentation
Disclosure
Disposal
Impairment
Introduction
An important element in the balance sheet: fixed tangible assets
Management vs. the fixed tangible assets: creative accounting (self-learning)
Relevant regulations
IAS 16 Property, Plant and Equipment (PPE)
IAS 23 Borrowing Cost
IAS 36 Impairment of Assets
IAS 20 Government grants (self-learning)
IAS 40 Investment Properties (self-learning)
Definitions
What is an asset?
IAS (Framework para. 49a): a resource controlled by an entity as a result of past events and from which economic benefits are expected to flow
What is a fixed asset
An asset that the firm intends to use within the business, over an extended period, in order to assist its daily operating activities.
What is a fixed tangible asset?
An asset that has physical substance and the firm....
A fixed intangible asset:
Invisible
E.g.: computer software, copyrights, brands, long term investment, etc.
Recognition
When is a tangible fixed asset recognized in the balance sheet?
There is sufficient evidence that the change in assets or liabilities has occurred
Including, where appropriate, evidence that a future inflow or outflow of benefit will occur; and
It can be measured at a monetary amount with sufficient reliability
IAS 16 PPE - Measurement
Measurement of initial expenditure
Initially valued in the balance sheet
IAS 16: an asset should initially be measured at its cost – purchase price and any directly attributable costs of bringing the asset to working condition for its intended use.
Purchase price includes:
Cost of purchase
Import duties
Non-refundable purchase taxes
Measurement of initial expenditure
Directly attributable: could be avoided if the expenditure on the qualifying asset had not been made
Directly attributable costs include:
Cost of site preparation
Initial delivery and handling costs
Installation costs
Professional fees: architects and engineers
The provisions of dismantling and removing the asset and restoring the site
Subsequent measurement
Historical cost accounting is rejected by IAS
IAS 16: two alternative approaches:
Cost model: the recognised initial cost less any accumulated depreciation and any accumulated impairment losses
The revaluation model: the fair value at the date of revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses
Subsequent measurement
Fair value
An asset can be exchanged between a knowledgeable, willing buyer and a knowledgeable, willing seller in an arm’s length transaction
Land and building: the market value determined by professional qualified valuers, or the value which is available on the open market
Plant and equipment: if market value is not available due to their specialised nature, the asset should be valued at their depreciated replacement cost by using appropriate specific price indices
Revaluation
When an item of PPE is revalued, the entire class of PPE should be revalued
The carrying values of assets will be changed: gearing ratios
Potentially and eventually, retained earnings
Accounting for revaluations
Revaluation surplus: directly credit the increase
Expense: recognise the decrease
Retained earnings: transfer from revaluation surplus for disposals
The depreciable amount is allocated on a systematic basis over its useful life
The depreciation method is selected based on the expected pattern of its economic benefits
Straight line, reducing balance, and the units of production (usage) method
Consistency is required once the method has been chosen
Definition: interest and other costs are incurred by an entity in connection with the borrowing of funds
Benchmark treatment: borrowing costs should all be recognised as an expense of the period in which there are incurred
Alternative treatment: to be capitalised if they are directly attributable to the acquisition, construction, or production of a qualifying asset – part of the cost of the asset
A qualifying asset: an asset necessary takes a substantial period of time to get ready for its intended use or sale
Directly attributable: could be avoided if the expenditure on the qualifying asset had not been made
Objective: the assets are carried at no more than their recoverable amount
The following assets are excluded:
Inventories (IAS 2)
Deferred tax assets (IAS 12)
Assets arising from employee benefits (IAS 19)
Investment property measured at fair value (IAS 40)
Non-current assets classified as held for sale (IFRS 5)
Recoverable amount: the higher of its net selling price and its value in use
Net selling price (or fair value less costs to sell)
A binding sale agreement
The current market price less costs of disposal
Available and reliable information in pricing the assets
Value in use
Cash inflows and outflows are derived from the use of the asset and its ultimate disposal, with a suitable discount rate to these cash flows
Identification of an impaired asset
IAS 36: assessment of impairment should be conducted at each balance sheet date
Indications of impairment
External information
The asset’s market value has declined more than expected
An adverse effect from changes of business environment
The carrying amount is more than the market capitalisation
Indications of impairment
Internal information
Evidence of obsolescence or damage of the asset
Changes in the way the asset is used have occurred or are imminent
Evidence of the economic performance of the asset is, or will be, worse than expected
Recognition and measurement
An impairment loss: the recoverable amount is less than the carrying value
The asset must be written down to its recoverable amount
IAS 36 Impairment of AssetsRecognition and measurement
An impairment loss: recognised immediately as an expense in the income statement
If the asset has any revaluation surplus, the impairment loss can be offset against the surplus
Depreciation: adjusted for future periods to reflect the reduced carrying amount
Goodwill impairment: next lecture
Relevant accounting standards in your own country
What are major requirements?
What are major differences?
What are major impact of the differences on financial statements if IASs adopted?
How to eliminate the impact?
How managers manipulate the financial statements by using tangible assets?