2. Overview
SCOPE
DEFINITIONS
GOVERNMENT GRANTS
NON-MONETARY GOVERNMENT GRANTS
PRESENTATION OF GRANTS RELATED TO ASSETS
PRESENTATION OF GRANTS RELATED TO INCOME
REPAYMENT OF GOVERNMENT GRANTS
GOVERNMENT ASSISTANCE
DISCLOSURE
3. SCOPE
The Standard shall be applied in accounting
for, and in the disclosure of, government grants
and in the disclosure of other forms of
government assistance.
4. DEFINITIONS
Government:- refers to government, government agencies and
similar bodies whether local, national or international.
Government assistance:- is action by government designed
to provide an economic benefit to an entity.
Government grants :-are assistance by government in the
form of transfers of resources to an entity in return for past or
future compliance with certain conditions relating to the operating
activities of the entity.
5. continued
Grants related to assets are government grants whose
primary condition is that an entity qualifying for them should
purchase, construct Or otherwise acquire long-term assets.
Grants related to income are government grants other than
those related to assets.
Forgivable loans are loans which the lender undertakes to
waive repayment of under certain prescribed conditions.
6. GOVERNMENT GRANTS
Government grants, including non-monetary grants at
fair value, shall not be recognized until there is
reasonable assurance that:
(a) the entity will comply with the conditions
attaching to them; and
(b) the grants will be received.
7. continued
Government grants shall be recognized in profit or
loss on a systematic basis over the periods in which
the entity recognizes as expenses the related costs for
which the grants are intended to compensate.
Non-monetary government grants:- Recognized based
on fair value
8. continued
There are two broad approaches to the accounting for
government grants: the
• capital approach, under which a grant is recognized outside
profit or loss, and
• Income approach, under which a grant is recognized in profit
or loss over one or more periods.
9. Disclosure
• the accounting policy adopted for government grants, including the methods
of presentation adopted in the financial statements;
• the nature and extent of government grants recognized in the financial
statements and an indication of other forms of government assistance from
which the entity has directly benefited; and
• unfulfilled conditions and other contingencies attaching to government
assistance that has been recognized.
12. Overview
CORE PRINCIPLE
SCOPE
DEFINITIONS
RECOGNITION
BORROWING COSTS ELIGIBLE FOR CAPITALIZATION
COMMENCEMENT OF CAPITALIZATION
SUSPENSION OF CAPITALIZATION
CESSATION OF CAPITALIZATION
DISCLOSURE
QUESTIONS AND DISCUSSION
13. CORE PRINCIPLE
Borrowing costs that are directly attributable to
the acquisition, construction or production of a
qualifying asset form part of the cost of that
asset. Other borrowing costs are recognized as
an expense.
15. DEFINITIONS
Borrowing costs are:- interest and other costs that an
entity incurs in connection with the borrowing of funds.
A qualifying asset:- is an asset that necessarily takes a
substantial period of time to get ready for its intended
use or sale.
Definitions
16. continued
Examples of qualifying assets:-
(a) inventories
(b) manufacturing plants
(c) power generation facilities
(d) intangible assets
(e) investment properties (f) bearer plants.
Examples of not qualifying assets:-
(a) Financial assets
(b) inventories that are manufactured over a short period of time
Continued
17. RECOGNITION
An entity shall capitalize borrowing costs when it is probable
that they will result in future economic benefits to the entity and
the costs can be measured reliably.
An entity shall recognize other borrowing costs as an expense
in the period in which it incurs them.
18. continued
Borrowing costs eligible for capitalization
actual borrowing costs incurred on that
borrowing during the period less any investment
income on the temporary investment of those
borrowing.
19. continued
To the extent that an entity borrows funds
generally and uses them for the purpose of
obtaining a qualifying asset, the entity shall
determine the amount of borrowing costs
eligible for capitalization by applying a
capitalization rate
20. continued
The capitalization rate shall be the weighted average
of the borrowing costs that are outstanding during the
period, other than borrowings made specifically for the
purpose of obtaining a qualifying asset.
21. continued
• The amount of borrowing costs that an
entity capitalizes during a period shall not
exceed the amount of borrowing costs it
incurred during that period.
22. continued
Commencement of capitalization
The commencement date for capitalization Is the date when
the entity first meets all of The following conditions:
(a) it incurs expenditures for the asset;
(b) it incurs borrowing costs; and
(c) it undertakes activities that are necessary to prepare the
asset for its intended use or sale.
23. continued
Suspension of capitalization
An entity shall suspend capitalization of borrowing costs during
extended periods in which it suspends active development of a
qualifying asset.
24. continued
Cessation of capitalization
An entity shall cease capitalizing borrowing costs when substantially all the
activities necessary to prepare the qualifying asset for its Intended use or
sale are complete.
25. Disclosure
An entity shall disclose:
(a) the amount of borrowing costs capitalized during
the period; and
(b) the capitalization rate used to determine the amount
of borrowing costs eligible for capitalization.
28. Overview
OBJECTIVE
SCOPE
DEFINITIONS
Elaboration on the definitions
REPORTING FOREIGN CURRENCY TRANSACTIONS IN THE
FUNCTIONAL
CURRENCY
Initial recognition
Reporting at the ends of subsequent reporting periods
Recognition of exchange differences
Change in functional currency
USE OF A PRESENTATION CURRENCY OTHER THAN THE
FUNCTIONALCURRENCY
Translation to the presentation currency
DISCLOSURE
29. OBJECTIVE
to prescribe how to include foreign currency transactions and foreign
operations in the financial statements.
how to translate financial statements into a presentation currency.
to determine which exchange rate(s) to use and
how to report the effects of changes in exchange rates in the financial
statements.
30. SCOPE
For all IAS 21 issues and except for IFRS 9
Linked to IAS 12, IAS 29 , IFRS 3 & IFRS 10
31. DEFINITIONS
Closing rate :-is the spot exchange rate at the end of the
Reporting period.
Exchange difference :-is the difference resulting from translating
a given number of units of one currency into another currency at
different exchange rates.
32. continued
Exchange rate :-is the ratio of exchange for
two currencies.
Foreign currency :- is a currency other than
the functional currency of the entity.
33. continued
Foreign operation :-is an entity that is a subsidiary,
associate, joint arrangement or branch of a reporting
entity, the activities of which are based or conducted in
a country or currency other than those of the reporting
entity.
Functional currency :-is the currency of the primary
economic environment in which the entity operates.
34. continued
Presentation currency :-is the currency in which the
financial statements are presented.
Spot exchange rate :- is the exchange rate for
immediate delivery.
35. Elaboration on the definitions
Factors to be consider during determining Functional
Currency:-
(a) sales prices for goods and services are denominated and
settled
(b) The currency of competitive forces and regulations
(c) the currency that mainly influences labor, material and other
costs
36. continued
factors that provide evidence of an entity’s functional currency:
(a) the currency in which funds from financing activities (ie
issuing debt and equity instruments) are generated.
(b) currency in which receipts from operating activities are
usually retained.
37. continued
Note:-
When the above indicators are mixed and the functional
currency is not obvious, management uses its judgment to
determine the functional currency that most faithfully represents
the economic effects of the underlying transactions, events and
conditions
once determined, the functional currency is not changed unless
there is a change in those underlying transactions, events and
conditions.
38. REPORTING FOREIGN CURRENCY
TRANSACTIONS
IN THE FUNCTIONAL CURRENCY
Initial recognition
A foreign currency transaction shall be recorded, on
the functional currency, by applying to the foreign
currency amount the spot exchange rate between the
functional currency and the foreign currency at the
date of the transaction.
39. continued
Reporting at the ends of subsequent reporting periods
At the end of each reporting period:
(a) foreign currency monetary items shall be translated using the closing rate;
(b) non-monetary items that are measured in terms of historical cost in a foreign
currency shall be translated using the exchange rate at the date of the transaction; and
(c) non-monetary items that are measured at fair value in a foreign currency shall be
translated using the exchange rates at the date when the fair value was measured.
42. continued
Recognition of exchange differences
When a gain or loss on a non-monetary item is recognized in Other comprehensive
income, any exchange component of that gain or loss shall be recognized in other
comprehensive income.
conversely, when a gain or loss on a non-monetary item is recognized in profit or
loss, any exchange component of that gain or loss shall be recognized in profit or
loss.
Exchange differences arising on monetary Items shall be recognized in profit or loss.
Change in functional currency
The effect of a change in functional currency is accounted for prospectively
43. USE OF A PRESENTATION CURRENCY OTHER THAN
THE FUNCTIONALCURRENCY
Translation to the presentation currency
Procedures to translate functional currency to presentation currency in
(a) assets and liabilities for each statement of financial position presented (ie
including comparatives) shall be translated at the closing rate at the date of that
statement of financial position;
(b) income and expenses for each statement presenting P/L and other
comprehensive income (ie including comparatives) shall be translated at
exchange rates at the dates of the transactions; and
(c) all resulting exchange differences shall be recognized in other
comprehensive income.
44. DISCLOSURE
The following will be disclosed
(a) The functional currency
(b) amount of exchange differences recognized in p/L and OCI
(c) the reason for using a different presentation currency.
47. Overview
OBJECTIVE
SCOPE
DEFINITIONS
IDENTIFYING AN ASSET THAT MAY BE IMPAIRED
MEASURING RECOVERABLE AMOUNT
RECOGNISING AND MEASURING AN IMPAIRMENT LOSS
CASH-GENERATING UNITS AND GOODWILL
REVERSING AN IMPAIRMENT LOSS
DISCLOSURE
Questions and Discussion
48. OBJECTIVE
The objective of this Standard is to prescribe the
procedures that an entity applies to ensure that its
assets are carried at no more than their
recoverable amount
49. SCOPE
The standard shall be applied for all assets except IAS
20, IAS 12, IAS 19, IAS 40, IAS 41 IFRS 4, IFRS 5,
IFRS 9, IFRS 15
50. DEFINITIONS
Carrying amount:- is the amount at which an asset is recognized after
deducting any accumulated depreciation (amortization) and Accumulated
impairment losses thereon.
51. continued
A cash-generating unit:- is the smallest identifiable
group of assets That generates cash inflows that are
largely independent of the cash Inflows from other
assets or groups of assets
52. continued
Example
1. A mining entity owns a private railway to support its mining
activities. The private railway could be sold only for scrap
value and it does not generate cash inflows that are largely
independent of the cash inflows from the other assets of the
mine.
2. A bus company provides services under contract with a
municipality that requires minimum service on each of five
separate routes. Assets devoted to each route and the cash
flows from each route can be identified separately. One of the
routes operates at a significant loss.
53. continued
An impairment loss:- is the amount by which the carrying
amount of an asset or a cash-generating unit exceeds its
recoverable amount.
The recoverable amount of an asset or a cash-
generating unit:- is the higher of its fair value less costs of
disposal and its value in use.
54. IDENTIFYING AN ASSET THAT MAY BE
IMPAIRED
An entity shall assess at the end of each reporting period 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.
55. continued
o Irrespective of whether there is any indication of impairment, an entity shall
also test:
an intangible asset with an indefinite useful life & goodwill acquired in a
business combination
Note:- Impairment test should be made before the end of the period at the
same time on yearly basis
56. continued
Indications for Impairment:-
External sources of information:-
The decline in asset values
significant change in technological, market, economic
or legal environment in which the entity operates
the increase in market interest rate or market rate of
return on investment
57. continued
Internal sources of information:-
obsolescence or physical damage
decline in performance
significant plan change made by the management
decline in performance
59. RECOGNISING AND MEASURING AN IMPAIRMENT
LOSS
The value of the impairment loss is the difference between the
carrying amount and its recoverable amount
An impairment loss shall be recognized immediately in profit or
loss, unless the asset is carried at revalued amount in
accordance with another Standard e.g IAS 16
60. CASH-GENERATING UNITS AND
GOODWILL
If it is not possible to estimate the recoverable
amount of the individual asset, an entity shall
determine the recoverable amount of the cash-
generating unit to which the asset belongs
61. continued
Note:-
o Cash-generating units shall be identified consistently from
period to period for the same asset or types of assets, unless a
change is justified.
o For the purpose of impairment testing, goodwill acquired in a
business combination shall, from the acquisition date, be
allocated to each of the acquirer’s cash generating units.
o A cash-generating unit to which goodwill has been allocated
shall be tested for impairment annually
62. continued
o The impairment loss shall be allocated to reduce the
Carrying amount of the assets of the unit (group of
units) in the following order:
(a) first, on goodwill
(b) then, to the other assets on pro rata basis
o In allocating an impairment loss in accordance an
entity shall not reduce the carrying amount of an
asset below the Highest of:
(a) its fair value less costs of disposal
(b) its value in use ,and (c) zero.
63. continued
Example
A machine has suffered physical damage but is still working,
although not as well as before it was damaged. The machine’s fair
value less costs of disposal is less than its carrying amount. The
machine does not generate independent cash inflows.
The smallest identifiable group of assets that includes the
machine and generates cash inflows that are largely independent
of the cash inflows from other assets is the production line to
which the machine belongs. The recoverable amount of the
production line shows that the production line taken as a whole is
not impaired.
64. continued
Assumption 1: budgets/forecasts approved by management reflect no
commitment of management to replace the machine.
Assumption 2: budgets/forecasts approved by management reflect a
commitment of management to replace the machine and sell it in the near
future.
Cash flows from continuing use of the machine until its disposal are estimated
to be negligible.
Can we recognized impairment loss?
65. REVERSING AN IMPAIRMENT
LOSSAn entity shall assess at the end of each reporting period whether there is any
indication that an impairment loss recognized in prior periods for an asset other
than goodwill may no longer exist or may have decreased.
External sources of information:-
The increase in asset values, Favorable change in technological,
market, economic or legal environment in which the entity
operates, the decrease in market interest rate or market rate of
return on investment
Internal sources of information:-
Increase in performance, Favorable plan change made by
the management
,
66. continued
An impairment loss recognized in prior periods for an asset other
than goodwill shall be reversed if, and only if, there has been a
change in the estimates used to determine the asset’s
recoverable amount since the Last impairment loss was
recognized.
Note:-
a reversal of an impairment loss shall not exceed the carrying
amount of the asset that was in the prior period
A reversal of an impairment loss for an asset other than goodwill
shall be recognized immediately in profit or loss, unless the asset
is carried at revalued amount in accordance with another
67. continued
Reversing an impairment loss for a cash-generating unit:-
A reversal of an impairment loss for a cash-generating unit shall be allocated to the
assets of the unit, except for goodwill, pro rata with the carrying amounts of those
assets.
In allocating a reversal of an impairment loss for a cash-generating unit the carrying
amount of an asset shall not be increased above the lower of:
(a) its recoverable amount and
(b) the carrying amount of the asset in the prior period
Reversing an impairment loss for goodwill- An impairment loss recognized for goodwill
shall not be reversed in a subsequent period.
68. Cost model
example
»1 January 2011 you buy a machine
» cost = $1 million
» useful life = 10 years
» depreciation method = straight-line
» nil residual value
»31 December 2014 the recoverable amount =
$300,000
»31 December 2016 the recoverable amount of
the machine = $800,000
69. Disclosure
An entity shall disclose the following for each class of assets:
the amount of impairment losses recognized in profit
or loss
the amount of reversals of impairment losses
recognized in profit or loss
Explanation of the events and circumstances that
contributed to the impairment loss or reversal
