CU-MCOM-SEM-III-International Financial Reporting Standards

Inventories refers to assets that are held for sale in the ordinary course of business. it also includes semi-finished goods intended for sale, that are in process of production and raw materials used to manufacture the above mention goods. The following are the main aspects of this standard covers: 1. Initial Recognition 2. Subsequent Measurement 3. Recognition Criteria 4. Disclosure in Financial Statements Initial Recognition: Inventories are initially recognised at costs. Cost not only comprises the purchase cost but also the conversion costs, which are the costs incurred to bring the inventories to its present condition and location, E.g., Direct Labour, Carriage Inwards. IAS 2 also allows for the capitalization of Variable and Fixed overheads as long as the Fixed overheads are allocated on a systematic and consistent basis and in respect to usual output levels. Where output is lower than expected the resulting disproportionate Overheads should be debited to the profit and loss Account. But when output is abnormally high; the fixed overhead allocated to each unit must be decreased so as not to overvalue the inventory. The valuation of work in progress on construction and service contracts falls outside IAS 2, IFRS 15 applies instead; similarly, for financial instruments, IAS 32 and IFRS 9 apply and for biological assets arising from agricultural activity, IAS 41 applies instead of IAS 2. For the capitalisation of borrowing costs in inventories, guideline in IAS 23 shall be considered. Subsequent Measurement Inventories are subsequently measured at lower of Cost or Net Realisable Value Cost. Cost includes all costs that are incurred for bringing the inventories to their present location and condition. Cost basically comprises of 3 components namely: 1. Purchase Cost: it refers to cost incurred for purchase of Raw Materials, less Rebates, Trade discount and it also includes Non-refundable duties and taxes, transportation charges, handling charges and other directly attributable costs. 2. Conversion Cost: it refers to cost incurred as Direct Production Overheads, Specific cost incurred for joint products and by-products that are used in manufacturing of goods. 3. Other Costs: it refers to ancillary charges that are incurred for bringing the inventories to their present location and condition. 51 CU IDOL SELF LEARNING MATERIAL (SLM)

As per IAS 2, Cost shall not include: 1. Abnormal amounts of wasted materials, labour and other production costs 2. Storage costs unless necessary to the production process 3. Administrative overheads that do not contribute to bringing the inventories to their present location and condition. 4. Selling cost Net realisable value (NRV): it is the estimated selling price in ordinary course of business less the estimated cost of completion and estimated costs necessary to make the sales. Review of NRV of all inventories should be carried at the end of each period to ascertain the correct valuation of inventories. IAS 2 Prescribes three methods for recording costs, they are: 1. Specific Identification: in this method, the costs are specifically identified for every item in closing value of inventories. For this method, the items should not be ordinarily interchangeable. This method is least likely possible. 2. FIFO Method (First in First Out): This method primarily works on the presumption, that goods procured first are sold first. Therefore, the inventories will contain most recent purchases. The merit of this method is that, as the stock held at closing date comprises of recent purchases, they will more probably reflect the market rate and disparity between cost and NRV will be less. 3. Weighted Average Method: This method considered the most appropriate method for valuation of inventories. The principal presumption in FIFO method for sale of goods purchased initially is improbable. Thus, the concept of weighted average has come into place. In this method, costs are valued at weighted average with units as weights and their respective purchase price. It is to be noted that IAS 2 does not permit valuation of inventories in LIFO Method (Last in First Out) Recognition Criteria: The standard mainly defines when Inventories is to be treated as Assets and on what circumstances it needs to be treated as expenses. This is provided through the recognition criteria. On a layman terms, the main scope of holding goods as inventories is to sell them in ordinary course of business and make profit. However, business entities may still consume the inventories for activities other than sale. For example, is an entity is engaged in trade of cement. For construction of its new corporate headquarters, the entity can consume its own stock held for sale. The standard clearly provides that, inventory allocated to other asset, e.g., self-constructed Asset is recognised as an expense during the useful life of that asset. Whereas, when inventories are sold, their carrying amount is recognised as an expense in the period in which related revenue is recognised. 52 CU IDOL SELF LEARNING MATERIAL (SLM)

Disclosure in Financial Statements IAS 2 prescribes disclosure requirements in respect of inventories. The standards prescribe the following information to be disclosed as part of financial statements: 1. Accounting policies adopted in measuring inventories, including the cost formula used. 2. Total carrying amount –in appropriate classifications. 3. Carrying amount at fair value less costs to sell 4. Carrying Amounts of inventories pledged as security for liabilities. 5. The value of inventories recognised as an expense. 6. The amount of any write-down or any reversal of write-down and events that led to reversal of write-down. Illustration 1: Phoenix Watch company sells watches under that Brand ‘24’. The company values its inventories at FIFO Method (First inFirst Out) as at 31st December 20XX Transactions held are given below: Purchases: March 10 x $25 each = $250 May 20 x $22 each = $440 November 15 x $25 each = $375 Sales: April8 x $25 each = $200 October 15 x $30 each = $450 Determine the value of closing inventory as of 31st December 20XX Answer: Inwards Outwards Closing Stock Month 10*$25 = $250 8*$25 = 200 10*$250 = 250 March April 20*$22 = $440 02*$25 = $50 May 02*$25 = $50 + 20*$22 = $440 53 CU IDOL SELF LEARNING MATERIAL (SLM)

October 15*$30 = $450 Total = $490 November 15*$25 = $375 07*$22 = $154 07*$22 = $154 + 15*$25 = $375 Total = $529 It is to be noted that the method of valuation is FIFO. Hence, while valuation of stock, the goods purchased first will be sold first. Illustration 2: HKEA, a furniture store has carried out its Physical verification of Stock at the end of its financial year. Included in its inventories are the following items: 1. A table that cost the company $1,250. This type of table usually sells for $1,895 but it was damaged in a flood and will therefore be sold at a significant discount. It is expected to sell for $450. 2. A wardrobe that cost the company $720 and normally sells for $995. The wardrobe has been damaged and will cost approximately £120 to repair at which point it can be sold for $750. 3. A dresser that was made to a customer’s own specifications and cost the company $1,832 to make. Unfortunately, the customer went bankrupt and could not purchase the item. Due to the unusual design the dresser was not easy to sell. After the yearend however, the company sold the dresser for $2,250 but incurred commission costs on the sale of $105 and delivery costs of $158. State the value that each of the above items will be included at in the company’s yearend inventory. Answer: AS per IAS -2 Inventories, the closing stock should be valued at lower of cost or NRV. A. Table: cost is $1,250, NRV: expected selling price is $450. This item should be valued at $450 (NRV) B. Wardrobe: cost is $720, NRV: expected selling price less repair cost ($750 - $120) i.e., $630. This item should be valued at $630 (NRV) C. Dresser: cost is $1,832, NRV: expected selling price less commission less delivery 54 CU IDOL SELF LEARNING MATERIAL (SLM)

costs ($2250 less $105 less $158) i.e., $1,987. This item should be valued at $1,832 (cost) Illustration 3: A company holds three Raw Materials for Manufacture of Item – 5906 of inventory in its warehouse at the end of its financial year. These are valued as follows: Inventory FIFO Method LIFO Method NRV (amount in $) (amount in $) (amount in $) Raw Material – X Rising agent – A 8,500.00 8,200.00 10,500.00 Catalyst – B TOTAL 1,500.00 1,700.00 1,200.00 1,230.00 1,200.00 1,450.00 11,230.00 11,100.00 13,150.00 Answers: As per IAS 2, Closing Stock is value at lower of cost or NRV. Value that is lower of FIFO and NRV can only be taken as LIFO is not permitted. Raw Material – X to be valued at $8,500.00. Rising Agent – A to be valued at $1,200.00. Catalyst – B to be valued at $1,230.00. 6.3 IAS 16 PROPERTY PLANT AND EQUIPMENT IAS 16 applies to Property, Plant, and Equipment (PPE). The standard defines PPE as \"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 [accounting] period.\" The standard does not apply to 1. assets classified as held for sale in accordance with IFRS 5 2. Non-current Assets Held for Sale and Discontinued Operations 3. Assets which require more specialized accounting, such as biological (IAS 41 Agriculture), exploration and evaluation assets (IFRS 6 Exploration for and Evaluation of Mineral Resources), mineral rights and reserves such as oil, natural gas, and similar non-regenerative resources. 55 CU IDOL SELF LEARNING MATERIAL (SLM)

Definitions  Property, plant & equipment are tangible assets that are held for use in the production, supply of goods & services & expected to be used during more than one period.  Cost is the amount of cash & cash equivalents paid or the fair value of the other consideration given to acquire an asset at the time of its acquisition & constructions.  Residual Value is the net amount which the entity expects to obtain for an asset at the end of its useful life after deducting the expected cost of disposal.  Carrying amount is the amount at which an asset is recognized in the statement of financial position after deducting any accumulated impairment losses.  Fair Value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Recognition and measurement IAS 16 prescribes that an item of PPE should be recognized (capitalized) as an asset if it is probable that the future economic benefits associated with the asset will flow to the entity and the cost of the asset can be measured reliably. Future economic benefits occur when the risks and rewards of the asset's ownership have passed to the entity. The standard also discusses the accounting treatment of parts of property, plant and equipment which may require replacement at regular intervals and the capitalization of inspection costs. Items of property, plant and equipment should be measured at cost, which includes its original purchase price, any costs necessary to bring the asset to the location and condition for its intended use (e.g., site preparation, delivery and handling, installation, related professional fees for architects and engineers), and the estimated cost of dismantling and removing the asset and restoring the site. Measurement after recognition IAS 16 permits two accounting models for measurement of the asset in periods after its recognition, namely the cost model and the revaluation model. Under the cost model, the carrying amount of the asset is measured at cost less accumulated depreciation and eventual impairment (like inventory’s Lower of cost or NRV). Under the cost model, the impairment is always recognized (debited) as expense. Under the revaluation model, the asset is carried at its revalued amount, being its fair value at the date of revaluation less subsequent depreciation and impairment, provided that fair value can be determined reliably. 56 CU IDOL SELF LEARNING MATERIAL (SLM)

If a revaluation results in an increase in value, it should be credited to equity (through other comprehensive income), unless it represents the reversal of a revaluation decrease of the same asset previously recognized as an expense, in which case it should be recognized as income. An asset should also be impaired in accordance with IAS 36 Impairment of Assets if its recoverable amount falls below the carrying amount. Recoverable amount is the higher of an asset's fair value less costs to sell and its value in use (estimate of future cash flows the entity expects to derive from the asset). An impairment cost under the revaluation model is treated as a revaluation decrease (decrease of other comprehensive income) to the extent of previous revaluation surpluses. Any loss that takes the asset below historical depreciated cost is recognized in the income statement. Depreciation: The depreciable amount (cost less residual value) should be allocated on a systematic basis over the asset's useful life. That is, the mark-down in value of the asset should be recognized as an expense in the income statement every accounting period throughout the asset's useful life. The useful life of the asset is determined by considering expected usage, physical wear, and tear, technical or commercial obsolescence arising from changes in production or market demand and legal limits on its use. In addition, the depreciation in each accounting period of the asset's useful life should reflect the pattern which the asset's economic benefits are expected to be consumed by the entity. Derecognition Items of property, plant and equipment are derecognized on disposal or when no future economic benefit is expected from its use. An entity should recognize any gain or loss on disposal in its income statement. The gain or loss on disposal is the difference between the proceeds received in exchange for the asset disposed and the carrying amount at the time of disposal. Disclosure IAS 16 requires an entity to disclose in its financial statements for each class of PPE: 1. the basis for measuring carrying amount. 2. the depreciation method(s) used. 3. the useful lives or depreciation rates 4. the gross carrying amount and accumulated depreciation and impairment losses. 5. a reconciliation of the carrying amount at the beginning and the end of the period, showing: a. additions b. disposals 57 CU IDOL SELF LEARNING MATERIAL (SLM)

c. acquisitions through business combinations d. revaluation increases or decreases. e. impairment losses f. reversals of impairment losses g. depreciation h. net foreign exchange differences on translation i. other movements Depreciation IAS 16 requires the depreciable amount of a depreciable asset to be allocated on a systematic basis to each accounting period during the useful life of the asset. Every part of an item of property, plant & equipment with a cost that is significant in relation to the total cost of the item must be depreciated separately. There are situations where, over a period, an asset has increased in value, i.e., its current value is greater than the carrying amount in the financial statements. You might think that in such situation it would not be necessary to depreciate the asset. The standard states, however, that this is irrelevant, and that depreciation should still be charged to each accounting period, based on the depreciable amount, irrespective of a rise in value. An entity is required to begin depreciating an item of property, plant and equipment when it is available for use and to continue depreciating it until it is derecognized even if it is idle during the period. The following factors should be considered when estimating the useful life of a depreciable asset:  Expected physical wear and tear.  Obsolescence  Legal or other limits on the use of the assets Once decided, the useful life should be reviewed at least every financial year end and depreciation rates adjusted for the current and future periods if expectations vary significantly from the original estimates. The effect of the change should be disclosed in the accounting period which the change takes place. Residual value is the estimated value of depreciable assets at the end of its useful life. Depreciable amount is net of residual value. If the residual value is greater than the carrying amount, then in this case depreciation charge is zero. In case of land & buildings, these are separable assets and are separately accounted for, even when they are acquired together: 58 CU IDOL SELF LEARNING MATERIAL (SLM)

– Land normally has an unlimited useful life and is therefore not depreciated. – Buildings normally have a limited useful life and are depreciable asset. Where land has limited useful life (e.g., a landfill site, mine, quarry) it is depreciated. Methods of charging depreciation straight line method, reducing balance method, sum-of-the digits method, machine hour method. The depreciation method selected should be applied consistently from period to period unless altered circumstances justify a change. When the method is changed, the effect should be quantified and disclosed and the reason for the change should be stated. Change of policy is not allowed simply because of the profitability situation of the entity. Scientific Pharma Limited (SPL) is a manufacturer of pharmaceutical products. In January 2015, one of its plants suffered a major break down. It was repaired at a cost of $ 1.5 million but the production capacity was reduced significantly. The plant was ready for production on June 30, 2015. At that time the company’s engineers advised that the plant could be used at a reduced level for 3 years only. The factory was estimated to have a recoverable amount of $19,277,000 at June 30, 2015 Other related information is as under: 1. The plant was imported at FOB price of € 800,000. The payment was made at the time of shipment on July 1, 2005 at $ 52 per €. Other charges including installation cost amounted to $ 7 million. Installation of the plant was completed on December 31, 2005 and commercial production commenced from April 1, 2006. 2. The company uses straight line method of deprecation. Depreciation is charged from the month the asset is available for use up to the month prior to disposal. At the time of purchase, the estimated useful life of the plant was estimated at 15 years whereas the salvage value was estimated at $ 2.0 million. 3. Based on the report of a professional independent valuer, the plant was revalued on July 1, 2010 at $ 45 million. There was, however, no change in estimated useful life of the plant. 4. The factory remained closed from April 1 to June 30, 2012 due to law-and-order situation. 5. The salvage value has not changed since it was first estimated at the time of purchase. Give accounting Entries for the year ended June 30, 2015. Give all the necessary calculations. (Ignore taxation) Answer: 30.06.2015 Dr. Repair and maintenance expenses 1,500 59 CU IDOL SELF LEARNING MATERIAL (SLM)

Cr. Account payable / Bank 1,500 (Repair cost of major break down of the plant) 30.06.2015 Dr. Depreciation expense (WN1) 4,095 Cr. Accumulated depreciation 4,095 (Depreciation expense for the year) 30.06.2015 Revaluation surplus (WN2) 989 Retained earnings 989 (Incremental depreciation credited to retained earnings) 30.06.2015 Revaluation Surplus (Impairment loss) (WN1) 5,247 Property, plant, and equipment 5,247 (Impairment of plant due to break down – see Exp Note 1 below) WN1 – Plant Amount in $ 000 41,600 1. FOB price (€ 800,000 at $ 52) 2. Other charges including installation cost 7,000 3. Total (1+2) 48,600 4. Accumulated depreciation (1-1-2006 to 30-6-2010) (48,600-2,000)/15 years = $ 3,106 x 4.5 years (13,980) 5. WDV as on 30-6-2010 (3-4) 34,620 6. Revaluation surplus (45,000-34,620) 10,380 7. Revalued amount as of July 1, 2010 (5+6) 45,000 8. Accumulated depreciation (1-7-2010 to 30-6-2015) (45,000-2,000)/ 10.5 years = $ 4,095 x 5 years (20,476) 9. WDV as on 30-6-2015 (7-8) 24,524 10. Impairment loss 5,247 11. Recoverable amount (10-11) 19,277 60 CU IDOL SELF LEARNING MATERIAL (SLM)

WN2 – Revaluation surplus on impairment date 1. Revaluation surplus 10,380 2. Transferred to retained earnings (01.07.2010 to 30.06.2015) 10,380/10.5 years = $ 989 x 5 years (4,945) 2. Revaluation surplus balance on impairment date (1-2) 5,435 Exp Note 1 Since impairment loss is less than the revaluation surplus on impairment date, the full amount of impairment would be adjusted against the revaluation surplus. 6.4 IAS 20 ACCOUNTING FOR GOVERNMENT GRANT IAS 20 Accounting for Government Grants and Disclosure of Government Assistance outlines how to account for government grants and other assistance. Government grants are recognized in profit or loss on a systematic basis over the periods in which the entity recognizes expenses for the related costs for which the grants are intended to compensate, which in the case of grants related to assets requires setting up the grant as deferred income or deducting it from the carrying amount of the asset. IAS 20 applies to all government grants and other forms of government assistance. However, it does not cover government assistance that is provided in the form of benefits in determining taxable income. It does not cover government grants covered by IAS 41 Agriculture, either. The benefit of a government loan at a below-market rate of interest is treated as a government grant. Accounting Treatment of Government Grants A government grant is recognized only when there is reasonable assurance that (a) the entity will comply with any conditions attached to the grant and (b) the grant will be received. The grant is recognized as income over the period necessary to match them with the related costs, for which they are intended to compensate, on a systematic basis. Non-monetary grants, such as land or other resources, are usually accounted for at fair value, although recording both the asset and the grant at a nominal amount is also permitted. Even if there are no conditions attached to the assistance specifically relating to the operating activities of the entity (other than the requirement to operate in certain regions or industry sectors), such grants should not be credited to equity. A grant receivable as compensation for costs already incurred or for immediate financial 61 CU IDOL SELF LEARNING MATERIAL (SLM)

support, with no future related costs, should be recognized as income in the period in which it is receivable. A grant relating to assets may be presented in one of two ways: as deferred income, or by deducting the grant from the asset's carrying amount. A grant relating to income may be reported separately as 'other income' or deducted from the related expense. If a grant becomes repayable, it should be treated as a change in estimate. Where the original grant related to income, the repayment should be applied first against any related unamortized deferred credit, and any excess should be dealt with as an expense. Where the original grant related to an asset, the repayment should be treated as increasing the carrying amount of the asset or reducing the deferred income balance. The cumulative depreciation which would have been charged had the grant not been received should be charged as an expense. Disclosure of government grants The following must be disclosed: Accounting policy adopted for grants, including method of balance sheet presentation nature and extent of grants recognized in the financial statements unfulfilled conditions and contingencies attaching to recognized grants. 6.5 SUMMARY  IAS 2 defines inventories as assets which are: held for sale in the ordinary course of business, in the process of production for such sale, or. in the form of materials or supplies to be consumed in the production process or rendering of services.  The cost of inventories includes all costs of purchase, costs of conversion (direct labour and production overhead) and other costs incurred in bringing the inventories to their present location and condition.  The objective of IAS 16 is to prescribe the accounting treatment for property, plant, and equipment. The principal issues are the recognition of assets, the determination of their carrying amounts, and the depreciation charges and impairment losses to be recognised in relation to them.  Depreciation of PPE. IAS 16 defines depreciation as 'the systematic allocation of the depreciable amount of an asset over its useful life'. The 'depreciable amount' is the cost of an asset, cost less residual value, or other amount (for example the revaluation of the asset).  The objective of IAS 20 is to prescribe the accounting for, and disclosure of, Government Grants and other forms of government assistance. 62 CU IDOL SELF LEARNING MATERIAL (SLM)

 IAS 20 applies to all government grants and other forms of government assistance. However, it does not cover government assistance that is provided in the form of benefits in determining taxable income.  It does not cover government grants covered by IAS 41 Agriculture, either. The benefit of a government loan at a below-market rate of interest is treated as a government grant. 6.6 KEY WORDS  Property, plant & equipment are tangible assets that are held for use in the production, supply of goods & services & expected to be used during more than one period.  Cost is the amount of cash & cash equivalents paid or the fair value of the other consideration given to acquire an asset at the time of its acquisition & constructions.  Residual Value is the net amount which the entity expects to obtain for an asset at the end of its useful life after deducting the expected cost of disposal.  Carrying amount is the amount at which an asset is recognized in the statement of financial position after deducting any accumulated impairment losses.  Fair Value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  FIFO - First in First Out  LIFO – Last in First Out 6.7 LEARNING ACTIVITY 1. Learn about various Inventory Valuation Method ___________________________________________________________________________ _______________________________________________________________ 2. Visit nearby University and collect about active government grant programs. ___________________________________________________________________________ _______________________________________________________________ 6.8 UNIT END QUESTIONS 63 A. Descriptive Questions CU IDOL SELF LEARNING MATERIAL (SLM)

Short Questions 1. Explain the term ‘inventories’ as defined by IAS 2, Inventories 2. What is Depreciation? 3. Accounting Treatment of Government grants 4. Is LIFO Method Accepted as per IAS 2. List various valuation methods 5. Define PPE as per IAS 16 Long Questions 1. State which costs should be included, and which should be excluded when measuring the value of inventories. 2. Albert Johnson is the Managing Director and major shareholder of Johnson & Johnson Limited, a Wholesale Spices Dealer. He appoints you as Stock Auditor for valuation of inventories. The inventories at the close of business on 31st December 20XX were valued at cost at $49,477. However, included in this balance were some items which had cost $8,200 but it is estimated that they could now be sold for only $4,800. The purchases figure includes items to the value of $2,000 which Mrs. Grace, the Chief Marketing Manager took for use as gifts during New Year time. Provide your observations and final inventory value as on 31st December, 20XX 3. On 1 October 20X6, Omega began the construction of a new factory. Costs relating to the factory, incurred in the year ended 30 September 20X7, are as follows: Amount in ’000 1. Purchase of the land $10,000 2. Costs of dismantling existing structures on the site $ 500 3. Purchase of materials to construct the factory $ 6,000. 4. Employment costs (Note 1) $1,800. 5. Production overheads related to the construction (Note 2) $1,200. 6. Allocated general administrative overheads $ 600. 7. Architects’ and consultants’ fees related to the construction $ 400. 8. Costs of relocating staff who are to work at the new factory $ 300. 9. Costs relating to the formal opening of the factory $ 200. 10. Interest on loan to partly finance the construction of the factory (Note 3) $ 1,200. 64 CU IDOL SELF LEARNING MATERIAL (SLM)

Note 1 The factory was constructed in the eight months ended 31 May 20X7. It was brought into use on 30June 20X7. The employment costs are for the nine months to 30 June 20X7. Note 2 The production overheads were incurred in the eight months ended 31 May 20X7. They included an abnormal cost of $200,000, caused by the need to rectify damage resulting from a gas leak. Note 3 Omega received the loan of $12m on 1 October 20X6. The loan carries a rate of interest of 10% per annum. Note 4 The factory has an expected useful economic life of 20 years. At that time, the factory will be demolished, and the site returned to its original condition. This is a legal obligation that arose on signing the contract to purchase the land. The expected costs of fulfilling this obligation are $2m. An appropriate annual discount rate is 8%. 4. On 1 March 2013 Yucca acquired a machine from Plant under the following terms (amount in $): 1. List price of machine 82,000. 2. Import duty 1,500. 3. Delivery fees 2,050. 4. Electrical installation costs 9,500. 5. Pre-production testing 4,900. 6. Purchase of a five-year maintenance contract with Plant 7,000. In addition to the above information Yucca was granted a trade discount of 10% on the initial list price of the asset and a settlement discount of 5% if payment for the machine was received within one month of purchase, Yucca paid for the plant on 25 March 2013. How should the above information be accounted for in the financial statements? 5. Construction of Malli Silks’ new store began on 1 April 20XX. The following costs were incurred on the construction: Amount in $ ’000. 1. Freehold land 4,500 2. Architect fees 620 3. Site preparation 1,650 65 CU IDOL SELF LEARNING MATERIAL (SLM)

4. Materials 7,800 5. Direct labour costs 11,200 6. Legal costs 2,400 7. General overheads 940 The store was completed on 1 January 20X1 and brought into use following its grand opening on the1 April 20X1. BNK Fincorp issued a $25m unsecured loan on 1 April 20XX to aid construction of the new store (which meets the definition of a qualifying asset per IAS 23 Borrowing Cost hence can be capitalized). The loan carried an interest rate of 8% per annum and is repayable on 1 April 20X4. Calculate the amount to be included as property, plant, and equipment in respect of the new store and state what impact the above information would have on the statement of profit or loss for the year ended 31 March 20X1. B. Multiple ChoiceQuestions 1. Talent management is a process involves a. Attracting and Retaining High-Quality Employees b. Developing Their Skills, c. Continuously Motivating Them to Improve Their Performance. d. All of these 2. Talent Management is a _________________ Process a. Constant Process b. Planned Process c. Retrospective Process d. None of these 3. The primary focus of Talent Management is to create a. a support for organization strategy b. Satisfied Work force c. Motivated Work Force d. Matching model for organization strategy 66 CU IDOL SELF LEARNING MATERIAL (SLM)

4. Talent Management focus to create a workforce who will _______________________ a. Compete with each other b. Work beyond expectation c. Gain knowledge d. Stay in the organization for the long run 5. It is not enough to expect that just because ____________, you are managing talent. a. you have an HR department b. You have good Employees c. You pay good Compensation d. Your culture is supportive Answers 1 – d, 2 – a, 3 – c, 4 – d, 5 – a 6.9 REFERENCES Textbooks:  Doupnik, T. and Perera, H., International Accounting, McGraw-Hill.  International Financial Reporting Standards, Vol. I & II, Taxman Publications. Reference Books:  Nobes, C. and Parker, R., Comparative International Accounting, Prentice Hall.  Rathore, S., International Accounting, Prentice Hall India.  Saudagaran, S. M. International Accounting: A User Perspective, CCH, Inc. Website:  www.ifrs.org  www.mca.gov.in  www.icai.org 67 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT – 7 IAS RELATING TO ASSETS-II Structure 7.0. LearningObjectives 7.1. Introduction 7.2. Borrowing costs 7.3. Leases. 7.4. Intangible assets 7.5. Investment properties 7.6. Summary 7.7. Learning Activity 7.8. Unit End Questions 7.9. References 7.0 LEARNING OBJECTIVES After studying this unit, you will be able to:  Identify qualifying asset for capitalization.  Describe components of borrowing cost.  Learn about Lease.  Evaluate Intangible Assets  Explain about Investment Properties. 7.1 INTRODUCTION In this unit we shall learn about Intangible Assets as per IAS 38. Tangible Fixed Assets are dealt in Unit 6, IAS 16 Plant Property and Equipment. Borrowing Cost as per IAS 23 and Leases of Assets as per IFRS 16, and Investment Properties as per IAS 40. 7.2. BORROWING COSTS The core principle of IAS 23 Borrowing Costs is that the entity should capitalize borrowing costs if they are directly attributable to the acquisition, construction, or production of a qualifying asset. Other borrowing costs are expensed in profit or loss. There are 3 essential issues dealt in this standard: 68 CU IDOL SELF LEARNING MATERIAL (SLM)

1. What are qualifying assets? 2. What can we capitalize? 3. How do you capitalize? Qualifying Asset Qualifying assets are assets that take a substantial period of time to get ready for their intended use or sale. Note here that IAS 23 does not say it must necessarily be an item of a property, plant, and equipment under IAS 16. It can also include some inventories or intangibles, too. What is a substantial period of time? Well, that is not defined in IAS 23, so here the entity needs to apply some Ordinary Prudence. Normally, if an asset takes more than 1 year to be ready, then it would be qualifying. What can be capitalize? IAS 23 specifically mentions 3 types of borrowing costs that can be capitalized: 1. Interest expenses (refer to the effective interest method under IFRS 9/IAS 39) 2. Finance charges on finance leases under IAS 17 3. Exchange differences on borrowings in foreign currencies, but only those representing the adjustment to interest costs. However, IAS 23 is pretty silent on some types of expenses and there are doubts whether they are borrowing costs or not, for example: Interest cost on derivatives used to manage interest rate risk on borrowings; Dividends payable on preference shares (or other types of shares classified as liabilities); Gains or losses arising from early repayment of borrowings, etc. How to capitalize? IAS 23 differentiates between capitalizing borrowing costs on general borrowings and specific borrowings. 1. Specific borrowings: If the entity borrowed some funds specifically for the acquisition of a qualifying asset, then the capitalization is easy. The entity can simply capitalize the actual costs incurred less any income earned on the temporary investment of such borrowings. 2. General borrowings: Now, there is more trouble with capitalizing general borrowings, as the entity need to prepare a bit more calculations. General borrowings are those funds that are obtained for various purposes and they are used (apart from these other purposes) also for the acquisition of a qualifying asset. In this case, entity need to apply so-called capitalization rate to the borrowing funds on that asset, calculated as the weighted average of the borrowing costs applicable to general pool. 69 CU IDOL SELF LEARNING MATERIAL (SLM)

Specific clarification in IAS 23 1: Can the entity capitalize interest cost in the cost of inventories? It depends. In most cases, inventories do not take a substantial period to get ready and in this case no, the entity cannot capitalize. But here, there are some examples of inventories that can take a substantial period to complete: 1. Wine, cheese, or whiskey that matures in bottle or cask for a long period of time. 2. Large items of equipment, such as aircraft, ships etc. In this case, you can capitalize borrowing cost. While you have no choice for PPE (the entity has to capitalize), Entity has a choice for inventories: either Capitalize, or expense in profit or loss A/c. 2: Can the entity capitalize foreign exchange loss on specifically borrowed money in a foreign currency? No, the entity cannot do it fully. IAS 23 says that exchange differences on foreign currency borrowings are a borrowing cost to the extent that they are regarded as an adjustment of interest cost. The entity can capitalize the difference between the interest on the foreign currency loan and the hypothetical interest expense in your own (functional currency) because that is regarded as borrowing cost. The rest must be expensed in profit or loss. 3: Can the entity capitalize interest cost on intercompany loan for qualifying assets? Yes, in the separate financial statements of the borrowing company. However, where there is consolidated financial statements, because based on the intercompany relationship (subsidiary or associate), the intercompany loan might be eliminated. Also, often, these loans are provided interest-free. Under IFRS 9, you should recognize almost all financial instruments at their fair value (sometimes plus transaction cost) and if a subsidiary gets an interest-free loan from a parent, its nominal amount is not at fair value. Therefore, a subsidiary need to set the fair value of the loan received using the market interest rates and book the difference between the loan’s fair value and the cash received in profit or loss (based on the substance of a transaction). Then, interest expense calculated by the effective interest method is capitalized. The loan is interest-free, but the entity still needs to capitalize some borrowing cost on it. 7.3. LEASES IFRS 16 is a new International Financial Reporting Standard for lease accounting which came into force on 1 January 2019. It replaced the existing IAS 17 accounting standard and was introduced by the International Accounting Standards Board (IASB). IFRS 16 takes a totally new approach to accounting for leases, called the ‘right-of-use’ model. This means that if a company has control over, or right to use, an asset they are renting, it is classified as a lease for accounting purposes and, under the new rules, must be 70 CU IDOL SELF LEARNING MATERIAL (SLM)

recognised on the company’s balance sheet. This no longer allows for significant financial liabilities to be held off-balance sheet, as permitted for certain types of leases (operating leases) under the previous rules. The objective is to ensure that companies report information for all of their leased assets in a standardised way and bring transparency on companies’ lease assets and liabilities. As with other changes to accounting standards, companies will also need to produce a set of comparative accounts for the prior year. Since accounting for leases under IFRS 16 results in substantially all leases being recognised on a lessee’s balance sheet, the evaluation of whether a contract is (or contains) a lease becomes even more important than it is under IAS 17 and IFRIC 4. In practice, the main impact will be on contracts that are not in the legal form of a lease but involve the use of a specific asset and therefore might contain a lease – such as outsourcing, contract manufacturing, transportation, and power supply agreements. Currently, this evaluation is based on IFRIC 4; however, IFRS 16 replaces IFRIC 4 with new guidance that differs in some important respects. A contract can be (or contain) a lease only if the underlying asset is ‘identified’. Having the right to control the use of an identified asset means having the right to direct, and obtain all of the economic benefits from, the use of that asset. These rights must be in place for a period of time, which may also be determined by a specified amount of use. Put simply, if the customer controls the use of an identified asset for a period of time, then the contract contains a lease. This will be the case if the customer can make the important decisions about the use of the asset in a similar way it makes decisions about the use of assets it owns outright. In such cases, the customer (i.e., the lessee) is required to recognise these rights on its balance sheet as a ‘right-of-use’ asset. In contrast, in a service contract, the supplier controls the use of any assets used to deliver the service and so there is no right-of-use asset to recognise. Is there an identified asset? An identified asset is an asset that is either:  explicitly identified in the contract, or  is implicitly specified by being identified at the time that the asset is made available for use by the customer. Even if an asset is explicitly specified, a customer does not have the right to use an identified asset if the supplier has a substantive substitution right throughout the period of use. What is a substantive substitution right? A substantive substitution right exists if the supplier has the practical ability to substitute alternative assets throughout the period of use and the economic benefits of substituting the asset would exceed the cost (or in other words, the supplier will benefit economically from 71 CU IDOL SELF LEARNING MATERIAL (SLM)

substituting the asset). When the asset is located at the customer’s premises, the costs associated with substituting the asset are likely to be higher, making it less likely that the supplier would economically benefit from making a substitution. The assessment of whether a supplier’s substitution right is substantive is based on facts and circumstances present at inception of the contract. This means that the customer ignores events that are not likely to occur in future such as:  an agreement by a future customer to pay an above-market rate for use of the asset.  the introduction of new technology that is not substantially developed at inception of the contract.  a substantial difference between the performance or customer’s use of an asset, and the use or performance considered likely at inception of the contract, and  a substantial difference between the actual market price of the asset during the period of use, and the market price considered likely at inception of the contract. If the supplier has the right or obligation to substitute the asset for repair purposes or to provide routine maintenance services (e.g., to allow it to install a technical upgrade that has become available), a customer is not precluded from having the right to use an identified asset. A customer is also not required to perform an exhaustive search to determine if a supplier has a substantive substitution right. If a customer cannot readily determine whether a supplier has such a right, it may conclude that a right does not exist. On transition to IFRS 16, both lessees and lessors can choose whether to apply the new lease definition to all of their contracts or apply transitional relief from reassessing whether contracts in place at the date of initial application are, or contain, a lease. If an entity chooses to apply this relief, then the new lease definition will be applied to contracts entered into or modified on or after the date of initial application (1 January 2019 for calendar year end entities). 7.4 INTANGIBLE ASSETS IAS 38 Intangible Assets outlines the accounting requirements for intangible assets, which are non-monetary assets which are without physical substance and identifiable (either being separable or arising from contractual or other legal rights). Intangible assets meeting the relevant recognition criteria are initially measured at cost, subsequently measured at cost or using the revaluation model, and amortized on a systematic basis over their useful lives (unless the asset has an indefinite useful life, in which case it is not amortized). IAS 38 was revised in March 2004 and applies to intangible assets acquired in business combinations occurring on or after 31 March 2004, or otherwise to other intangible assets for annual periods beginning on or after 31 March 2004. 72 CU IDOL SELF LEARNING MATERIAL (SLM)

IAS 38 applies to all intangible assets other than:  Financial assets (see IAS 32 Financial Instruments: Presentation)  Exploration and evaluation assets (see IFRS 6 Exploration for and Evaluation of Mineral Resources)  Expenditure on the development and extraction of minerals, oil, natural gas, and similar resources  Intangible assets arising from insurance contracts issued by insurance companies.  Intangible assets covered by another IFRS, such as intangibles held for sale (IFRS 5 Non-current Assets Held for Sale and Discontinued Operations), deferred tax assets (IAS 12 Income Taxes), lease assets (IAS 17 Leases), assets arising from employee benefits (IAS 19 Employee Benefits (2011)), and goodwill (IFRS 3 Business Combinations). Intangible asset: an identifiable non-monetary asset without physical substance. An asset is a resource that is controlled by the entity because of past events (for example, purchase or self-creation) and from which future economic benefits (inflows of cash or other assets) are expected. Thus, the three critical attributes of an intangible asset are: identifiability control (power to obtain benefits from the asset) future economic benefits (such as revenues or reduced future costs) Identifiability: an intangible asset is identifiable when it: is separable (capable of being separated and sold, transferred, licensed, rented, or exchanged, either individually or together with a related contract) or arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity or from other rights and obligations. Examples of intangible assets  patented technology,  computer software,  databases and trade secrets  trademarks, trade dress,  newspaper mastheads,  internet domains video and audiovisual material (e.g., motion pictures, television programs)  customer lists  mortgage servicing rights 73 CU IDOL SELF LEARNING MATERIAL (SLM)

 licensing,  royalty and standstill agreements  import quotas.  franchise agreements  customer and supplier relationships (including customer lists)  marketing rights Intangibles can be acquired: by separate purchase as part of a business combination by a government grant by exchange of assets by self-creation (internal generation) Recognition Recognition criteria. IAS 38 requires an entity to recognize an intangible asset, whether purchased or self-created (at cost) if, and only if: It is probable that the future economic benefits that are attributable to the asset will flow to the entity; and the cost of the asset can be measured reliably. This requirement applies whether an intangible asset is acquired externally or generated internally. IAS 38 includes additional recognition criteria for internally generated intangible assets (see below). The probability of future economic benefits must be based on reasonable and supportable assumptions about conditions that will exist over the life of the asset. The probability recognition criterion is always considered to be satisfied for intangible assets that are acquired separately or in a business combination. If recognition criteria not met. If an intangible item does not meet both the definition of and the criteria for recognition as an intangible asset, IAS 38 requires the expenditure on this item to be recognized as an expense when it is incurred. Business combinations. There is a presumption that the fair value (and therefore the cost) of an intangible asset acquired in a business combination can be measured reliably. An expenditure (included in the cost of acquisition) on an intangible item that does not meet both the definition of and recognition criteria for an intangible asset should form part of the amount attributed to the goodwill recognized at the acquisition date. Reinstatement. The Standard also prohibits an entity from subsequently reinstating as an intangible asset, later, an expenditure that was originally charged to expense. Initial recognition: research and development costs Charge all research cost to expense. Development costs are capitalized only after technical and commercial feasibility of the asset for sale or use have been established. This means that the entity must intend and be able to 74 CU IDOL SELF LEARNING MATERIAL (SLM)

complete the intangible asset and either use it or sell it and be able to demonstrate how the asset will generate future economic benefits. If an entity cannot distinguish the research phase of an internal project to create an intangible asset from the development phase, the entity treats the expenditure for that project as if it were incurred in the research phase only. Initial recognition: in-process research and development acquired in a business combination. A research and development project acquired in a business combination is recognized as an asset at cost, even if a component is research. Subsequent expenditure on that project is accounted for as any other research and development cost (expensed except to the extent that the expenditure satisfies the criteria in IAS 38 for recognizing such expenditure as an intangible asset). Initial recognition: internally generated brands, mastheads, titles, lists, Brands, mastheads, publishing titles, customer lists and items similar in substance that are internally generated should not be recognized as assets. Initial recognition: computer software Purchased: capitalize Operating system for hardware: include in hardware cost Internally developed (whether for use or sale): charge to expense until technological feasibility, probable future benefits, intent, and ability to use or sell the software, resources to complete the software, and ability to measure cost. Amortization: over useful life, based on pattern of benefits (straight-line is the default). Initial recognition: certain other defined types of costs The following items must be charged to expense when incurred: Internally generated goodwill start-up, pre-opening, and pre-operating costs training cost advertising and promotional cost, including mail order catalogues relocation costs. For this purpose, 'when incurred' means when the entity receives the related goods or services. If the entity has made a prepayment for the above items, that prepayment is recognized as an asset until the entity receives the related goods or services. Initial measurement Intangible assets are initially measured at cost. Measurement after acquisition: cost model and revaluation models allowed. An entity must choose either the cost model or the revaluation model for each class of intangible asset. Cost model. After initial recognition intangible assets should be carried at cost less accumulated amortization and impairment losses. 75 CU IDOL SELF LEARNING MATERIAL (SLM)

Revaluation model. Intangible assets may be carried at a revalued amount (based on fair value) less any subsequent amortization and impairment losses only if fair value can be determined by reference to an active market. Such active markets are expected to be uncommon for intangible assets. Examples where they might exist: production quotas fishing licenses taxi licenses Under the revaluation model, revaluation increases are recognized in other comprehensive income and accumulated in the \"revaluation surplus\" within equity except to the extent that they reverse a revaluation decrease previously recognized in profit and loss. If the revalued intangible has a finite life and is, therefore, being amortized the revalued amount is amortized. Classification of intangible assets based on useful life Intangible assets are classified as: Indefinite life: no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the entity. Finite life: a limited period of benefit to the entity. Measurement after acquisition: intangible assets with finite lives The cost less residual value of an intangible asset with a finite useful life should be amortized on a systematic basis over that life: The amortization method should reflect the pattern of benefits. If the pattern cannot be determined reliably, amortize by the straight-line method. The amortization charge is recognized in profit or loss unless another IFRS requires that it be included in the cost of another asset. The amortization period should be reviewed at least annually. Expected future reductions in selling prices could be indicative of a higher rate of consumption of the future economic benefits embodied in an asset. The standard contains a rebuttable presumption that a revenue-based amortization method for intangible assets is inappropriate. However, there are limited circumstances when the presumption can be overcome: The intangible asset is expressed as a measure of revenue; and it can be demonstrated that revenue and the consumption of economic benefits of the intangible asset are highly correlated. 7.5 INVESTMENT PROPERTY IAS 40 Investment Property applies to the accounting for property (land and/or buildings) held to earn rentals or for capital appreciation (or both). Investment properties are initially measured at cost and, with some exceptions. may be subsequently measured using a cost model or fair value model, with changes in the fair value under the fair value model being recognised in profit or loss. IAS 40 was reissued in December 2003 and applies to annual periods beginning on or after 1 76 CU IDOL SELF LEARNING MATERIAL (SLM)

January 2005. Definition of investment property Investment property is property (land or a building or part of a building or both) held (by the owner or by the lessee under a finance lease) to earn rentals or for capital appreciation or both. Examples of investment property: land held for long-term capital appreciation land held for a currently undetermined future use building leased out under an operating lease vacant building held to be leased out under an operating lease property that is being constructed or developed for future use as investment property. The following are not investment property and, therefore, are outside the scope of IAS 40. property held for use in the production or supply of goods or services or for administrative purposes property held for sale in the ordinary course of business or in the process of construction of development for such sale (IAS 2 Inventories) property being constructed or developed on behalf of third parties (IAS 11 Construction Contracts) owner-occupied property (IAS 16 Property, Plant and Equipment), including property held for future use as owner-occupied property, property held for future development and subsequent use as owner- occupied property, property occupied by employees and owner-occupied property awaiting disposal property leased to another entity under a finance lease In May 2008, as part of its Annual improvements project, the IASB expanded the scope of IAS 40 to include property under construction or development for future use as an investment property. Such property previously fell within the scope of IAS 16. Other classification issues Property held under an operating lease. A property interest that is held by a lessee under an operating lease may be classified and accounted for as investment property provided that: the rest of the definition of investment property is met the operating lease is accounted for as if it were a finance lease in accordance with IAS 17 Leases the lessee uses the fair value model set out in this Standard for the asset recognised. An entity may make the foregoing classification on a property-by-property basis. Partial own use. If the owner uses part of the property for its own use, and part to earn rentals or for capital appreciation, and the portions can be sold or leased out separately, they are accounted for separately. Therefore, the part that is rented out is investment property. If the portions cannot be sold or leased out separately, the property is investment property only if the owner-occupied portion is insignificant. Ancillary services. If the entity provides ancillary services to the occupants of a property held by the entity, the appropriateness of classification as investment property is determined by the 77 CU IDOL SELF LEARNING MATERIAL (SLM)

significance of the services provided. If those services are a relatively insignificant component of the arrangement as a whole (for instance, the building owner supplies security and maintenance services to the lessees), then the entity may treat the property as investment property. Where the services provided are more significant (such as in the case of an owner- managed hotel), the property should be classified as owner-occupied. Intracompany rentals. Property rented to a parent, subsidiary, or fellow subsidiary is not investment property in consolidated financial statements that include both the lessor and the lessee, because the property is owner-occupied from the perspective of the group. However, such property could qualify as investment property in the separate financial statements of the lessor if the definition of investment property is otherwise met. Recognition Investment property should be recognised as an asset when it is probable that the future economic benefits that are associated with the property will flow to the entity, and the cost of the property can be reliably measured. Initial measurement Investment property is initially measured at cost, including transaction costs. Such cost should not include start-up costs, abnormal waste, or initial operating losses incurred before the investment property achieves the planned level of occupancy. [IAS 40.20 and 40.23] Measurement subsequent to initial recognition IAS 40 permits entities to choose between: a fair value model, and a cost model. One method must be adopted for all of an entity's investment property. Change is permitted only if this results in a more appropriate presentation. IAS 40 notes that this is highly unlikely for a change from a fair value model to a cost model. Fair value model Investment property is remeasured at fair value, which is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Gains or losses arising from changes in the fair value of investment property must be included in net profit or loss for the period in which it arises. Fair value should reflect the actual market state and circumstances as of the balance sheet date. The best evidence of fair value is normally given by current prices on an active market for similar property in the same location and condition and subject to similar lease and other contracts. In the absence of such information, the entity may consider current prices for properties of a different nature or subject to different conditions, recent prices on less active markets with adjustments to reflect changes in economic conditions, and discounted cash flow projections based on reliable estimates of future cash flows. 78 CU IDOL SELF LEARNING MATERIAL (SLM)

There is a rebuttable presumption that the entity will be able to determine the fair value of an investment property reliably on a continuing basis. However: If an entity determines that the fair value of an investment property under construction is not reliably determinable but expects the fair value of the property to be reliably determinable when construction is complete, it measures that investment property under construction at cost until either its fair value becomes reliably determinable, or construction is completed. If an entity determines that the fair value of an investment property (other than an investment property under construction) is not reliably determinable on a continuing basis, the entity shall measure that investment property using the cost model in IAS 16. The residual value of the investment property shall be assumed to be zero. The entity shall apply IAS 16 until disposal of the investment property. Where a property has previously been measured at fair value, it should continue to be measured at fair value until disposal, even if comparable market transactions become less frequent or market prices become less readily available. Cost model After initial recognition, investment property is accounted for in accordance with the cost model as set out in IAS 16 Property, Plant and Equipment – cost less accumulated depreciation and less accumulated impairment losses. Transfers to or from investment property classification Transfers to, or from, investment property should only be made when there is a change in use, evidenced by one or more of the following: commencement of owner-occupation (transfer from investment property to owner-occupied property) commencement of development with a view to sale (transfer from investment property to inventories) end of owner-occupation (transfer from owner-occupied property to investment property) commencement of an operating lease to another party (transfer from inventories to investment property) end of construction or development (transfer from property in the course of construction/development to investment property When an entity decides to sell an investment property without development, the property is not reclassified as inventory but is dealt with as investment property until it is derecognised. The following rules apply for accounting for transfers between categories: for a transfer from investment property carried at fair value to owner-occupied property or inventories, the fair value at the change of use is the 'cost' of the property under its new classification for a transfer from owner-occupied property to investment property carried at fair value, IAS 16 should be applied up to the date of reclassification. Any difference arising between the carrying amount under IAS 16 at that date and the fair value is dealt with as a revaluation under IAS 16 for a transfer from inventories to investment property at fair value, any difference between the fair value at the date of transfer and it previous carrying amount 79 CU IDOL SELF LEARNING MATERIAL (SLM)

should be recognised in profit or loss when an entity completes construction/development of an investment property that will be carried at fair value, any difference between the fair value at the date of transfer and the previous carrying amount should be recognised in profit or loss. When an entity uses the cost model for investment property, transfers between categories do not change the carrying amount of the property transferred, and they do not change the cost of the property for measurement or disclosure purposes. Disposal An investment property should be derecognised on disposal or when the investment property is permanently withdrawn from use and no future economic benefits are expected from its disposal. The gain or loss on disposal should be calculated as the difference between the net disposal proceeds and the carrying amount of the asset and should be recognised as income or expense in the income statement. Compensation from third parties is recognised when it becomes receivable. Disclosure Both Fair Value Model and Cost Model Whether the fair value or the cost model is used if the fair value model is used, whether property interests held under operating leases are classified and accounted for as investment property if classification is difficult, the criteria to distinguish investment property from owner-occupied property and from property held for sale the extent to which the fair value of investment property is based on a valuation by a qualified independent valuer; if there has been no such valuation, that fact must be disclosed the amounts recognised in profit or loss for: rental income from investment property direct operating expenses (including repairs and maintenance) arising from investment property that generated rental income during the period direct operating expenses (including repairs and maintenance) arising from investment property that did not generate rental income during the period the cumulative change in fair value recognised in profit or loss on a sale from a pool of assets in which the cost model is used into a pool in which the fair value model is used restrictions on the realisability of investment property or the remittance of income and proceeds of disposal contractual obligations to purchase, construct, or develop investment property or for repairs, maintenance, or enhancements. Additional Disclosures for the Fair Value Model: a reconciliation between the carrying amounts of investment property at the beginning and end of the period, showing additions, disposals, fair value adjustments, net foreign exchange differences, transfers to and from inventories and owner-occupied property, and other changes significant adjustments to an outside valuation (if any) if an entity that otherwise uses the fair value model measures an item of investment property using the cost model, 80 CU IDOL SELF LEARNING MATERIAL (SLM)

certain additional disclosures are required. Additional Disclosures for the Cost Model the depreciation methods used the useful lives or the depreciation rates used the gross carrying amount and the accumulated depreciation (aggregated with accumulated impairment losses) at the beginning and end of the period a reconciliation of the carrying amount of investment property at the beginning and end of the period, showing additions, disposals, depreciation, impairment recognised or reversed, foreign exchange differences, transfers to and from inventories and owner-occupied property, and other changes the fair value of investment property. If the fair value of an item of investment property cannot be measured reliably, additional disclosures are required, including, if possible, the range of estimates within which fair value is highly likely to lie. 7.5 SUMMARY 7.6 LEARNING ACTIVITY 1. Learn more about NFRA and record your observation, for implementation of NFRA in full scale. _____________________________________________________________________ _____________________________________________________________________ 2. Lean about XBRL reporting in context of Indian companies. _____________________________________________________________________ _____________________________________________________________________ 7.7 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. What is Exposure Draft? 2. What is Discussion Paper? 3. Examine the applicability of IFRS in United States of America. 4. What are the advantages of Taxonomies? 5. Which class of companies is NFRA applicable? Long Questions 81 CU IDOL SELF LEARNING MATERIAL (SLM)

1. Explain in detail the standard setting process. 2. Discuss the need for NFRA. 3. Having uniform reporting framework increases comparability. Critically Analyse. 4. Explain International Harmonization. 5. Distinguish between Exposure Draft and Discussion Paper. B. Multiple ChoiceQuestions 1. XBRL Means? a. Xtensible Business Result List b. Xtra Business Report List c. eXtensible Business Reporting Language d. eXtraordinary Business Reporting Language 2. Section 132 of Companies Act, 2013 speaks about a. Accounting Standards b. National Financial Reporting Authority c. Annual Auditing Requirements d. Accounting Principles and Double entry System 3. ________ is an international independent audit regulator. a. IFIAR. b. IASB c. FASB d. IFRS Foundation. 4. _________ makes information computer readable. a. XBRL b. IFRS c. Taxonomy d. Tagging 82 CU IDOL SELF LEARNING MATERIAL (SLM)

5. Standard setting process has _________ number of phases? a. Three b. Two c. Four d. Six Answers: 1 – c, 2 – b, 3 – a, 4 – d, 5 – a 7.8 REFERENCES Textbooks:  Doupnik, T. and Perera, H., International Accounting, McGraw-Hill.  International Financial Reporting Standards, Vol. I & II, Taxman Publications. Reference Books:  Nobes, C. and Parker, R., Comparative International Accounting, Prentice Hall.  Rathore, S., International Accounting, Prentice Hall India.  Saudagaran, S. M. International Accounting: A User Perspective, CCH, Inc. Website:  www.ifrs.org  www.mca.gov.in  www.icai.org 83 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT – 8 IAS RELATING TO ASSETS-II Structure 8.0. LearningObjectives 8.1. Introduction 8.2. Agriculture 8.3. impairment of assets 8.4. exploration for and evaluation of mineral resources 8.5. Summary 8.6. Learning Activity 8.7. Unit End Questions 8.8. References 8.0 LEARNING OBJECTIVES After studying this unit, you will be able to:  Identify qualifying asset for capitalization.  Explain components of borrowing cost.  Learn about Lease.  Evaluate Intangible Assets  Understand about Investment Properties. 8.1 INTRODUCTION In this unit we shall learn about IAS 41 Agriculture, IAS 36 Impairment of Asset and IFRS 6 Exploration for and Evaluation of Mineral Resources 8.2. AGRICULTURE IAS 41 Agriculture sets out the accounting for agricultural activity – the transformation of biological assets (living plants and animals) into agricultural produce (harvested product of the entity's biological assets). The standard generally requires biological assets to be measured at fair value less costs to sell. IAS 41 was originally issued in December 2000 and first applied to annual periods beginning on or after 1 January 2003. 84 CU IDOL SELF LEARNING MATERIAL (SLM)

Objective The objective of IAS 41 is to establish standards of accounting for agricultural activity – the management of the biological transformation of biological assets (living plants and animals) into agricultural produce (harvested product of the entity's biological assets). Scope IAS 41 applies to biological assets with the exception of bearer plants, agricultural produce at the point of harvest, and government grants related to these biological assets. It does not apply to land related to agricultural activity, intangible assets related to agricultural activity, government grants related to bearer plants, and bearer plants. However, it does apply to produce growing on bearer plants. Initial recognition An entity recognises a biological asset or agriculture produce only when the entity controls the asset as a result of past events, it is probable that future economic benefits will flow to the entity, and the fair value or cost of the asset can be measured reliably. [IAS 41.10] Measurement Biological assets within the scope of IAS 41 are measured on initial recognition and at subsequent reporting dates at fair value less estimated costs to sell, unless fair value cannot be reliably measured. [IAS 41.12] Agricultural produce is measured at fair value less estimated costs to sell at the point of harvest. [IAS 41.13] Because harvested produce is a marketable commodity, there is no 'measurement reliability' exception for produce. The gain on initial recognition of biological assets at fair value less costs to sell, and changes in fair value less costs to sell of biological assets during a period, are included in profit or loss. [IAS 41.26] A gain on initial recognition (e.g., as a result of harvesting) of agricultural produce at fair value less costs to sell are included in profit or loss for the period in which it arises. [IAS 41.28] All costs related to biological assets that are measured at fair value are recognised as expenses when incurred, other than costs to purchase biological assets. IAS 41 presumes that fair value can be reliably measured for most biological assets. However, that presumption can be rebutted for a biological asset that, at the time it is initially recognised, does not have a quoted market price in an active market and for which alternative fair value measurements are determined to be clearly unreliable. In such a case, the asset is measured at cost less accumulated depreciation and impairment losses. But the entity must still measure all of its other biological assets at fair value less costs to sell. If circumstances 85 CU IDOL SELF LEARNING MATERIAL (SLM)

change and fair value becomes reliably measurable, a switch to fair value less costs to sell is required. [IAS 41.30] Guidance on the determination of fair value is available in IFRS 13 Fair Value Measurement. IFRS 13 also requires disclosures about fair value measurements. Other issues The change in fair value of biological assets is part physical change (growth, etc) and part unit price change. Separate disclosure of the two components is encouraged, not required. [IAS 41.51] Agricultural produce is measured at fair value less costs to sell at harvest, and this measurement is considered the cost of the produce at that time (for the purposes of IAS 2 Inventories or any other applicable standard). [IAS 41.13] Agricultural land is accounted for under IAS 16 Property, Plant and Equipment. However, biological assets (other than bearer plants) that are physically attached to land are measured as biological assets separate from the land. In some cases, the determination of the fair value less costs to sell of the biological asset can be based on the fair value of the combined asset (land, improvements and biological assets). [IAS 41.25] Intangible assets relating to agricultural activity (for example, milk quotas) are accounted for under IAS 38 Intangible Assets. Government grants Unconditional government grants received in respect of biological assets measured at fair value less costs to sell are recognised in profit or loss when the grant becomes receivable. [IAS 41.34] If such a grant is conditional (including where the grant requires an entity not to engage in certain agricultural activity), the entity recognises the grant in profit or loss only when the conditions have been met. [IAS 41.35] Disclosure Disclosure requirements in IAS 41 include: 86 CU IDOL SELF LEARNING MATERIAL (SLM)

aggregate gain or loss from the initial recognition of biological assets and agricultural produce and the change in fair value less costs to sell during the period* [IAS 41.40] description of an entity's biological assets, by broad group [IAS 41.41] description of the nature of an entity's activities with each group of biological assets and non-financial measures or estimates of physical quantities of output during the period and assets on hand at the end of the period [IAS 41.46] information about biological assets whose title is restricted or that are pledged as security [IAS 41.49] commitments for development or acquisition of biological assets [IAS 41.49] financial risk management strategies [IAS 41.49] reconciliation of changes in the carrying amount of biological assets, showing separately changes in value, purchases, sales, harvesting, business combinations, and foreign exchange differences* [IAS 41.50] * Separate and/or additional disclosures are required where biological assets are measured at cost less accumulated depreciation [IAS 41.55] Disclosure of a quantified description of each group of biological assets, distinguishing between consumable and bearer assets or between mature and immature assets, is encouraged but not required. [IAS 41.43] If fair value cannot be measured reliably, additional required disclosures include: [IAS 41.54] description of the assets an explanation of why fair value cannot be reliably measured if possible, a range within which fair value is highly likely to lie depreciation method useful lives or depreciation rates gross carrying amount and the accumulated depreciation, beginning and ending. If the fair value of biological assets previously measured at cost subsequently becomes available, certain additional disclosures are required. [IAS 41.56] Disclosures relating to government grants include the nature and extent of grants, unfulfilled conditions, and significant decreases expected in the level of grants. [IAS 41.57] 8.3. IMPAIRMENT OF ASSETS IAS 36 Impairment of Assets seeks to ensure that an entity's assets are not carried at more than their recoverable amount (i.e., the higher of fair value less costs of disposal and value in use). With the exception of goodwill and certain intangible assets for which an annual impairment test is required, entities are required to conduct impairment tests where there is an indication of impairment of an asset, and the test may be conducted for a 'cash-generating unit' where an asset does not generate cash inflows that are largely independent of those from other assets. IAS 36 was reissued in March 2004 and applies to goodwill and intangible assets acquired in business combinations for which the agreement date is on or after 31 March 2004, and for all 87 CU IDOL SELF LEARNING MATERIAL (SLM)

other assets prospectively from the beginning of the first annual period beginning on or after 31 March 2004. Objective of IAS 36 To ensure that assets are carried at no more than their recoverable amount, and to define how recoverable amount is determined. Scope IAS 36 applies to all assets except: [IAS 36.2] inventories (see IAS 2) assets arising from construction contracts (see IAS 11) deferred tax assets (see IAS 12) assets arising from employee benefits (see IAS 19) financial assets (see IAS 39) investment property carried at fair value (see IAS 40) agricultural assets carried at fair value (see IAS 41) insurance contract assets (see IFRS 4) non-current assets held for sale (see IFRS 5) Therefore, IAS 36 applies to (among other assets): land buildings machinery and equipment investment property carried at cost intangible assets goodwill investments in subsidiaries, associates, and joint ventures carried at cost assets carried at revalued amounts under IAS 16 and IAS 38 Key definitions [IAS 36.6] Impairment loss: the amount by which the carrying amount of an asset or cash-generating unit exceeds its recoverable amount Carrying amount: the amount at which an asset is recognised in the balance sheet after deducting accumulated depreciation and accumulated impairment losses Recoverable amount: the higher of an asset's fair value less costs of disposal* (sometimes called net selling price) and its value in use Fair value: the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (see IFRS 13 Fair Value Measurement) Value in use: the present value of the future cash flows expected to be derived from an asset or cash-generating unit 88 CU IDOL SELF LEARNING MATERIAL (SLM)

Identifying an asset that may be impaired At the end of each reporting period, an entity is required to assess whether there is any indication that an asset may be impaired (i.e.,it carrying amount may be higher than its recoverable amount). IAS 36 has a list of external and internal indicators of impairment. If there is an indication that an asset may be impaired, then the asset's recoverable amount must be calculated. [IAS 36.9] The recoverable amounts of the following types of intangible assets are measured annually whether or not there is any indication that it may be impaired. In some cases, the most recent detailed calculation of recoverable amount made in a preceding period may be used in the impairment test for that asset in the current period: [IAS 36.10] an intangible asset with an indefinite useful life an intangible asset not yet available for use goodwill acquired in a business combination Indications of impairment [IAS 36.12] External sources: market value declines negative changes in technology, markets, economy, or laws increases in market interest rates net assets of the company higher than market capitalisation Internal sources: obsolescence or physical damage asset is idle, part of a restructuring or held for disposal worse economic performance than expected for investments in subsidiaries, joint ventures or associates, the carrying amount is higher than the carrying amount of the investee's assets, or a dividend exceeds the total comprehensive income of the investee These lists are not intended to be exhaustive. [IAS 36.13] Further, an indication that an asset may be impaired may indicate that the asset's useful life, depreciation method, or residual value may need to be reviewed and adjusted. [IAS 36.17] Determining recoverable amount If fair value less costs of disposal or value in use is more than carrying amount, it is not necessary to calculate the other amount. The asset is not impaired. [IAS 36.19] If fair value less costs of disposal cannot be determined, then recoverable amount is value in use. [IAS 36.20] For assets to be disposed of, recoverable amount is fair value less costs of disposal. [IAS 36.21] Fair value less costs of disposal Fair value is determined in accordance with IFRS 13 Fair Value Measurement Costs of 89 CU IDOL SELF LEARNING MATERIAL (SLM)

disposal are the direct added costs only (not existing costs or overhead). [IAS 36.28] Value in use The calculation of value in use should reflect the following elements: [IAS 36.30] an estimate of the future cash flows the entity expects to derive from the asset expectations about possible variations in the amount or timing of those future cash flows the time value of money, represented by the current market risk-free rate of interest the price for bearing the uncertainty inherent in the asset other factors, such as illiquidity, that market participants would reflect in pricing the future cash flows the entity expects to derive from the asset Cash flow projections should be based on reasonable and supportable assumptions, the most recent budgets and forecasts, and extrapolation for periods beyond budgeted projections. [IAS 36.33] IAS 36 presumes that budgets and forecasts should not go beyond five years; for periods after five years, extrapolate from the earlier budgets. [IAS 36.35] Management should assess the reasonableness of its assumptions by examining the causes of differences between past cash flow projections and actual cash flows. [IAS 36.34] Cash flow projections should relate to the asset in its current condition – future restructurings to which the entity is not committed and expenditures to improve or enhance the asset's performance should not be anticipated. [IAS 36.44] Estimates of future cash flows should not include cash inflows or outflows from financing activities, or income tax receipts or payments. [IAS 36.50] Discount rate In measuring value in use, the discount rate used should be the pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the asset. [IAS 36.55] The discount rate should not reflect risks for which future cash flows have been adjusted and should equal the rate of return that investors would require if they were to choose an investment that would generate cash flows equivalent to those expected from the asset. [IAS 36.56] For impairment of an individual asset or portfolio of assets, the discount rate is the rate the entity would pay in a current market transaction to borrow money to buy that specific asset or 90 CU IDOL SELF LEARNING MATERIAL (SLM)

portfolio. If a market-determined asset-specific rate is not available, a surrogate must be used that reflects the time value of money over the asset's life as well as country risk, currency risk, price risk, and cash flow risk. The following would normally be considered: [IAS 36.57] the entity's own weighted average cost of capital the entity's incremental borrowing rate other market borrowing rates. Recognition of an impairment loss An impairment loss is recognised whenever recoverable amount is below carrying amount. [IAS 36.59] The impairment loss is recognised as an expense (unless it relates to a revalued asset where the impairment loss is treated as a revaluation decrease). [IAS 36.60] Adjust depreciation for future periods. [IAS 36.63] Cash-generating units Recoverable amount should be determined for the individual asset, if possible. [IAS 36.66] If it is not possible to determine the recoverable amount (i.e., the higher of fair value less costs of disposal and value in use) for the individual asset, then determine recoverable amount for the asset's cash-generating unit (CGU). [IAS 36.66] The CGU 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. [IAS 36.6] Impairment of goodwill Goodwill should be tested for impairment annually. [IAS 36.96] To test for impairment, goodwill must be allocated to each of the acquirer's cash-generating units, or groups of cash-generating units, that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units or groups of units. Each unit or group of units to which the goodwill is so allocated shall: [IAS 36.80] represent the lowest level within the entity at which the goodwill is monitored for internal management purposes; and not be larger than an operating segment determined in accordance with IFRS 8 Operating Segments. 91 CU IDOL SELF LEARNING MATERIAL (SLM)

A cash-generating unit to which goodwill has been allocated shall be tested for impairment at least annually by comparing the carrying amount of the unit, including the goodwill, with the recoverable amount of the unit: [IAS 36.90] If the recoverable amount of the unit exceeds the carrying amount of the unit, the unit and the goodwill allocated to that unit is not impaired If the carrying amount of the unit exceeds the recoverable amount of the unit, the entity must recognise an impairment loss. The impairment loss is allocated to reduce the carrying amount of the assets of the unit (group of units) in the following order: [IAS 36.104] first, reduce the carrying amount of any goodwill allocated to the cash-generating unit (group of units); and then, reduce the carrying amounts of the other assets of the unit (group of units) pro rata on the basis. The carrying amount of an asset should not be reduced below the highest of: [IAS 36.105] its fair value less costs of disposal (if measurable) its value in use (if measurable) zero. If the preceding rule is applied, further allocation of the impairment loss is made pro rata to the other assets of the unit (group of units). Reversal of an impairment loss Same approach as for the identification of impaired assets: assess at each balance sheet date whether there is an indication that an impairment loss may have decreased. If so, calculate recoverable amount. [IAS 36.110] No reversal for unwinding of discount. [IAS 36.116] The increased carrying amount due to reversal should not be more than what the depreciated historical cost would have been if the impairment had not been recognised. [IAS 36.117] Reversal of an impairment loss is recognised in the profit or loss unless it relates to an evalued asset [IAS 36.119] Adjust depreciation for future periods. [IAS 36.121] Reversal of an impairment loss for goodwill is prohibited. [IAS 36.124]Disclosure Disclosure by class of assets: [IAS 36.126] impairment losses recognised in profit or loss impairment losses reversed in profit or loss which line item(s) of the statement of comprehensive income impairment losses on revalued assets recognised in other comprehensive income impairment losses on revalued assets reversed in other comprehensive income Disclosure by reportable segment: [IAS 36.129] impairment losses recognised impairment losses reversed Other disclosures: If an individual impairment loss (reversal) is material disclose: [IAS 36.130] 92 CU IDOL SELF LEARNING MATERIAL (SLM)

events and circumstances resulting in the impairment loss amount of the loss or reversal individual asset: nature and segment to which it relates cash generating unit: description, amount of impairment loss (reversal) by class of assets and segment if recoverable amount is fair value less costs of disposal, the level of the fair value hierarchy (from IFRS 13 Fair Value Measurement) within which the fair value measurement is categorised, the valuation techniques used to measure fair value less costs of disposal and the key assumptions used in the measurement of fair value measurements categorised within 'Level 2' and 'Level 3' of the fair value hierarchy* if recoverable amount has been determined on the basis of value in use, or on the basis of fair value less costs of disposal using a present value technique*, disclose the discount rate * Amendments introduced by Recoverable Amount Disclosures for Non-Financial Assets, effective for annual periods beginning on or after 1 January 2014. If impairment losses recognised (reversed) are material in aggregate to the financial statements as a whole, disclose: [IAS 36.131] main classes of assets affected main events and circumstances Disclose detailed information about the estimates used to measure recoverable amounts of cash generating units containing goodwill or intangible assets with indefinite useful lives. [IAS 36.134-35] 8.4 EXPLORATION FOR AND EVALUATION OF MINERAL RESOURCES IFRS 6 Exploration for and Evaluation of Mineral Resources has the effect of allowing entities adopting the standard for the first time to use accounting policies for exploration and evaluation assets that were applied before adopting IFRSs. It also modifies impairment testing of exploration and evaluation assets by introducing different impairment indicators and allowing the carrying amount to be tested at an aggregate level (not greater than a segment). IFRS 6 was issued in December 2004 and applies to annual periods beginning on or after 1 January 2006. Definitions Exploration for and evaluation of mineral resources means the search for mineral resources, including minerals, oil, natural gas and similar non-regenerative resources after the entity has obtained legal rights to explore in a specific area, as well as the determination of the technical feasibility and commercial viability of extracting the mineral resource. [IFRS 6. Appendix A] Exploration and evaluation expenditures are expenditures incurred in connection with the exploration and evaluation of mineral resources before the technical feasibility and commercial viability of extracting a mineral resource is demonstrable. [IFRS 6. Appendix A] 93 CU IDOL SELF LEARNING MATERIAL (SLM)

Accounting policies for exploration and evaluation IFRS 6 permits an entity to develop an accounting policy for recognition of exploration and evaluation expenditures as assets without specifically considering the requirements of paragraphs 11 and 12 of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. [IFRS 6.9] Thus, an entity adopting IFRS 6 may continue to use the accounting policies applied immediately before adopting the IFRS. This includes continuing to use recognition and measurement practices that are part of those accounting policies. Impairment IFRS 6 effectively modifies the application of IAS 36 Impairment of Assets to exploration and evaluation assets recognized by an entity under its accounting policy. Specifically: Entities recognizing exploration and evaluation assets are required to perform an impairment test on those assets when specific facts and circumstances outlined in the standard indicate an impairment test is required. The facts and circumstances outlined in IFRS 6 are non- exhaustive and are applied instead of the 'indicators of impairment' in IAS 36 [IFRS 6.19-20] Entities are permitted to determine an accounting policy for allocating exploration and evaluation assets to cash-generating units or groups of CGUs. [IFRS 6.21] This accounting policy may result in a different allocation than might otherwise arise on applying the requirements of IAS 36 If an impairment test is required, any impairment loss is measured, presented, and disclosed in accordance with IAS 36. [IFRS 6.18] Presentation and disclosure An entity treats exploration and evaluation assets as a separate class of assets and make the disclosures required by either IAS 16 Property, Plant and Equipment or IAS 38 Intangible Assets consistent with how the assets are classified. [IFRS 6.25] IFRS 6 requires disclosure of information that identifies and explains the amounts recognized in its financial statements arising from the exploration for and evaluation of mineral resources, including: [IFRS 6.23–24] its accounting policies for exploration and evaluation expenditures including the recognition of exploration and evaluation assets the amounts of assets, liabilities, income and expense and operating and investing cash flows arising from the exploration for and evaluation of mineral resources. 8.5 SUMMARY 94 CU IDOL SELF LEARNING MATERIAL (SLM)

8.6 LEARNING ACTIVITY 1. Learn more about NFRA and record your observation, for implementation of NFRA in full scale. ___________________________________________________________________________ _______________________________________________________________ 2. Lean about XBRL reporting in context of Indian companies. ___________________________________________________________________________ _______________________________________________________________ 8.7 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. What is Exposure Draft? 2. What is Discussion Paper? 3. Examine the applicability of IFRS in United States of America. 4. What are the advantages of Taxonomies? 5. Which class of companies is NFRA applicable? Long Questions 1. Explain in detail the standard setting process. 2. Discuss the need for NFRA. 3. Having uniform reporting framework increases comparability. Critically Analyse. 4. Explain International Harmonization. 5. Distinguish between Exposure Draft and Discussion Paper. B. Multiple ChoiceQuestions 1. XBRL Means? a. Xtensible Business Result List b. Xtra Business Report List c. eXtensible Business Reporting Language d. eXtraordinary Business Reporting Language 2. Section 132 of Companies Act, 2013 speaks about 95 CU IDOL SELF LEARNING MATERIAL (SLM)

a. Accounting Standards b. National Financial Reporting Authority c. Annual Auditing Requirements d. Accounting Principles and Double entry System 3. ________ is an international independent audit regulator. a. IFIAR. b. IASB c. FASB d. IFRS Foundation. 4. _________ makes information computer readable. a. XBRL b. IFRS c. Taxonomy d. Tagging 5. Standard setting process has _________ number of phases? a. Three b. Two c. Four d. Six Answers: 1 – c, 2 – b, 3 – a, 4 – d, 5 – a 8.8 REFERENCES Textbooks:  Doupnik, T. and Perera, H., International Accounting, McGraw-Hill.  International Financial Reporting Standards, Vol. I & II, Taxman Publications. 96 CU IDOL SELF LEARNING MATERIAL (SLM)

Reference Books:  Nobes, C. and Parker, R., Comparative International Accounting, Prentice Hall.  Rathore, S., International Accounting, Prentice Hall India.  Saudagaran, S. M. International Accounting: A User Perspective, CCH, Inc. Website:  www.ifrs.org  www.mca.gov.in  www.icai.org 97 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT – 9 IAS RELATING TO LIABILITIES Structure 9.0. LearningObjectives 9.1. Introduction 9.2. Provisions, Contingent Assets and Contingent Liabilities 9.3. Share based Payments. 9.4. Income Taxes 9.5. financial instruments 9.6. Summary 9.7. Keywords 9.8. Learning Activity 9.9. Unit End Questions 9.10. References 9.0 LEARNING OBJECTIVES After studying this unit, you will be able to:  Identify qualifying asset for capitalization.  Understand components of borrowing cost.  Learn about Lease.  Evaluate Intangible Assets  Understand about Investment Properties. 9.1 INTRODUCTION In this unit we shall learn about Provisions, contingent liabilities and contingent assets, employee benefits, share-based payments, income taxes, financial instruments. 9.2. PROVISIONS, CONTINGENT ASSEST AND CONTINGENT LIABILITIES IAS 37 Provisions, Contingent Liabilities and Contingent Assets outlines the accounting for provisions (liabilities of uncertain timing or amount), together with contingent assets (possible assets) and contingent liabilities (possible obligations and present obligations that 98 CU IDOL SELF LEARNING MATERIAL (SLM)

are not probable or not reliably measurable). Provisions are measured at the best estimate (including risks and uncertainties) of the expenditure required to settle the present obligation, and reflects the present value of expenditures required to settle the obligation where the time value of money is material. IAS 37 was issued in September 1998 and is operative for periods beginning on or after 1 July 1999. Objective The objective of IAS 37 is to ensure that appropriate recognition criteria and measurement bases are applied to provisions, contingent liabilities and contingent assets and that sufficient information is disclosed in the notes to the financial statements to enable users to understand their nature, timing and amount. The key principle established by the Standard is that a provision should be recognized only when there is a liability i.e., a present obligation resulting from past events. The Standard thus aims to ensure that only genuine obligations are dealt with in the financial statements – planned future expenditure, even where authorized by the board of directors or equivalent governing body, is excluded from recognition. Scope IAS 37 excludes obligations and contingencies arising from: [IAS 37.1-6] financial instruments that are in the scope of IAS 39 Financial Instruments: Recognition and Measurement (or IFRS 9 Financial Instruments) non-onerous executory contracts insurance contracts (see IFRS 4 Insurance Contracts), but IAS 37 does apply to other provisions, contingent liabilities and contingent assets of an insurer items covered by another IFRS. For example, IAS 11 Construction Contracts applies to obligations arising under such contracts; IAS 12 Income Taxes applies to obligations for current or deferred income taxes; IAS 17 Leases applies to lease obligations; and IAS 19 Employee Benefits applies to pension and other employee benefit obligations. Key definitions [IAS 37.10] Provision: a liability of uncertain timing or amount. Liability: present obligation as a result of past events settlement is expected to result in an outflow of resources (payment) Contingent liability: a possible obligation depending on whether some uncertain future event occurs, or a present 99 CU IDOL SELF LEARNING MATERIAL (SLM)

obligation but payment is not probable or the amount cannot be measured reliably Contingent asset: a possible asset that arises from past events, and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity. Recognition of a provision An entity must recognize a provision if, and only if: [IAS 37.14] a present obligation (legal or constructive) has arisen as a result of a past event (the obligating event), payment is probable ('more likely than not'), and the amount can be estimated reliably. An obligating event is an event that creates a legal or constructive obligation and, therefore, results in an entity having no realistic alternative but to settle the obligation. [IAS 37.10] A constructive obligation arises if past practice creates a valid expectation on the part of a third party, for example, a retail store that has a long-standing policy of allowing customers to return merchandise within, say, a 30-day period. [IAS 37.10] A possible obligation (a contingent liability) is disclosed but not accrued. However, disclosure is not required if payment is remote. [IAS 37.86] In rare cases, for example in a lawsuit, it may not be clear whether an entity has a present obligation. In those cases, a past event is deemed to give rise to a present obligation if, taking account of all available evidence, it is more likely than not that a present obligation exists at the balance sheet date. A provision should be recognized for that present obligation if the other recognition criteria described above are met. If it is more likely than not that no present obligation exists, the entity should disclose a contingent liability, unless the possibility of an outflow of resources is remote. [IAS 37.15] Measurement of provisions The amount recognized as a provision should be the best estimate of the expenditure required to settle the present obligation at the balance sheet date, that is, the amount that an entity would rationally pay to settle the obligation at the balance sheet date or to transfer it to a third party. [IAS 37.36] This means: Provisions for one-off events (restructuring, environmental clean-up, settlement of a lawsuit) are measured at the most likely amount. [IAS 37.40] Provisions for large populations of events (warranties, customer refunds) are measured at a probability-weighted expected value. [IAS 37.39] Both measurements are at discounted present value using a pre-tax discount rate 100 CU IDOL SELF LEARNING MATERIAL (SLM)