Case study 2 - World Banksiteresources.worldbank.org/EXTCENFINREPREF/... · Case study 2 non-financial assets Vienna, 3 June 2013 Michael Wells, Director, IFRS Education Initiative,

The views expressed in this presentation are those of the presenter,

not necessarily those of the IASB or IFRS Foundation.

© 2012 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

International Financial Reporting Standards

Case study 2

non-financial assets

Vienna, 3 June 2013

Michael Wells, Director, IFRS Education Initiative, IASB

2 2

© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

The requirements are set out in International Financial Reporting Standards (IFRSs), as issued by the IASB at 1 January 2013 with an effective date after 1 January 2013 but not the IFRSs they will replace.

Disclaimer: The IFRS Foundation, the authors, the presenters and the publishers do not accept responsibility for any loss caused by acting or refraining from acting in reliance on the material in this PowerPoint presentation, whether such loss is caused by negligence or otherwise.

Framework-based approach for applying IFRS

©IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

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• What are the economics of the phenomenon (eg

transaction or event)?

• What information about the phenomenon is

relevant for informing resource allocation

decisions by existing and potential investors and

lenders who cannot require information directly

and that can be faithfully represented etc?

• Then consider IFRS requirements

• Make judgements to develop accounting policy

• Make judgements and estimates to apply the

requirements with rigour and consistency

© IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

4 4 Examples—economics

For each acquisition below choose 1 of: (a) business combination; or (b) separate asset purchase?

• Freelands

• Sealands

• WoXy Safaris Is the expenditure on the medical research center:

(a) donation to university;

(b) joint arrangement with university; or

(c) Open Safari’s assets and Open Safari’s research and development expenditure?


5 5 Examples—economics continued

Is Open Safari’s interest in Sealands casino hotel:

(a) passive investment; or

(b) operating a casino business?

Sealands holiday homes—is Open Safari:

(a) selling goods; or

(b) rendering construction services?


6 6 Examples—economics continued

Is Open Safari’s successful bid at auction in 20X9 for the black rhinos: (a) provision of a service;

(b) purchase of inventory; or

(c) purchase of biological asset for use in agricultural activity? Is Open Safari’s successful bid at auction in 20X9 for the white rhinos (a) provision of a service;

(b) purchase of inventory; or

(c) purchase of biological asset for use in agricultural activity?


7 7 Examples—identifying assets

Are the following items Open Safari’s assets? For each item below choose 1 of: (a) yes; (b) no, no controlled resource; or (c) no, no expected FEBs. • Sealands—fish, whales etc in the sea • Freelands—pre-existing wild animals • Open Safari—assembled workforce • Animals captured on Freelands and released

on Sealands • WoXy Safaris—bees • WoXy Safaris—quaggas • WoXy Safaris—elephants


8 8

Examples—identifying assets

continued

Are the following items Open Safari’s assets?

For each item below choose 1 of: (a) yes; (b) no, no

controlled resource; or (c) no, no expected FEBs.

• Auction 20X9—black rhino purchased

• Auction 20X9—white rhino purchased

• Open Safari brand

• WoXy brand

• Open Safari website


The views expressed in this presentation are those of the

presenter, not necessarily those of the IASB or IFRS Foundation

Asset classification (which IFRS applies?)

© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org


10 Examples—asset classification

Which IFRS classification of asset?

For each item below choose 1 of:

(a) inventory; (b) PPE; (c) intangible; (d) investment property; (e) biological asset in agricultural activity; or (f) financial asset

• Freelands—land

• WoXy—land planted with plantation

• Sealands—land

• WoXy—bees

• WoXy—quaggas

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11 Examples—asset classification continued

Which IFRS classification of asset? For each item below choose 1 of: (a) inventory; (b)PPE; (c) intangible; (d) investment property; (e) biological asset in agricultural activity; or (f) financial asset • Sealands—introduced caged animals

• Sealands—introduced fenced animals

• WoXy + Freelands—tourist carrying elephants and horses

• Sealands—casino equipment

• purchased customer list

• WoXy—wax sheets

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• It can be difficult to determine whether

particular biological assets are engaged in

agricultural activity and therefore in the scope of

IAS 41—eg the animals of some zoos.

• Sometimes it is difficult to identify investment

property (IAS 40). In such cases an entity

develops criteria so that it can exercise that

judgement consistently

• eg, owner of a hotel transfers some responsibilities

to third parties under a management contract (PPE

or investment property?)

12 Judgements and estimates (IAS 40)





Asset recognition concepts

© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org


14 Examples—recognition

Recognise the asset? For each item below choose 1 of: (a) yes; (b) no, FEBs not probable; or (c) no, cannot measure with reliability • Open Safari brand • WoXy brand • Goodwill on acquiring WoXy • Expenditures to restore WoXy brand • Sealands casino licence (government grant) • Medical research centre—PPE • Medical research centre—research expenditure • Medical research centre—development expenditure • Contract to sell timber at a fixed price at specified

future date (timber prices falling)



15 15 Examples—unit of account

How many separate items for recognition?

• WoXy—elephants

(a) ‘herd’ as a whole

(b)individual elephants

• WoXy—bees

(a)all 500 swarms collectively

(b)each swarm

(c) individual bees


16 16 Examples—unit of account continued


• Sealands—unsold beachfront homes

(a)all unsold homes collectively

(b)each unsold home separately

(c) each unsold home as two separate

items—roofs separate from main

structure


17 17 Examples—unit of account continued


• Sealands—casino hotel

(a) collectively (building, casino equipment and fittings)

(b) separate building from casino equipment, from fittings

(c) separate building, multiple separate items of casino equipment and multiple separate items of fittings

(d) it depends…




Measurement



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Examples— measurement ‘economics’

Which currency is Open Safari’s functional currency?

Choose one of (a) to (f) below:

(a)Euro

(b)British pound

(c) South African rand

(d)Africanian Zollar

(e)US dollar

(f) Any currency that Open Safari chooses

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Examples— measurement ‘economics’ continued

• Why did the IASB conclude that it would be highly unlikely that an entity can justify a change in accounting policy for investment property from the fair value model to the cost model?

• Why did the IASB conclude that fair value measurement was most appropriate measurement attribute for biological assets in agricultural activity?

• What is the ‘economics’ of depreciation?

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Example—measurement at initial recognition

At what amount are the animals released on Sealands (captured on Freelands) measured when first recognised?

(a)nil

(b)expenditure on capture and relocation

(c) capture date fair value

(d)capture date fair value less estimated costs to sell

(e) it depends…

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22 Example—depreciation

Residual value of spacecraft at 31/12/20Y0? (a) nil

(b) CU10 million

(c) CU10 million less expected costs of disposal

(d) amount would get on 31/12/20Y0 less estimated costs of disposal, if already 5 years old and in the condition expected at the end of 20Y5.

(e) amount would get on 31/12/20Y0 less estimated costs of disposal, if already flown 100 flights and in condition expected after 100 flights.

(f) present value of CU10 million less estimated costs of disposal.

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23 Example—depreciation continued

Must any components of the spacecraft be depreciated separately? (a) no

(b) yes, the inspection component must be depreciated separately from the other components of the spacecraft (ie 2 components).

(c) yes, the inspection component and the soft furnishings component must each be depreciated separately from the other components (ie 3 components).

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Which depreciation method must be used for the spacecraft? (a) management choose depreciation method.

(b) straight line method for both the inspection component and other component.

(c) units of production method for both the inspection component and other component.

(d) revenue-based depreciation for both the inspection component and other component.

(e) straight line for the inspection component and units of production (based on the number of flights) for other component.

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At 31/12/20Y0 spacecraft’s useful life is? (a) service component = 2 years; and other

component = 150 voyages.

(b) service component = 2 years; and other component = 100 voyages.

(c) service component = 2 years; and other component = 4 years.

(d) 100 voyages for entire spacecraft.

(e) 150 voyages for entire spacecraft.

(f) 4 years for entire spacecraft.

(g) 5 years for entire spacecraft.

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26 26

Examples—measurement after recognition

How to measure fair value of

1. Sealands casino building?

2. WoXy plantation?

3. animals (eg buffaloes and rhinos on Sealands)?

• Cost of some items includes significant estimates

• what is cost?

• costs allocations

• cost of dismantling, removal, restoration

• costs of self constructed assets

• Depreciation represents the consumption of the assets service potential in the period. Measuring requires:

• identifying significant components to be depreciated separately

• estimating useful life and residual value

• identifying the depreciation method that reflects most closely the consumption of the service potential of the item of PPE

• Determining the classes of assets (eg PPE)

27 Judgements and estimates, cost


• When using the most recent market transaction price to measure fair value: identifying the most recent market transaction price and evaluating whether economic circumstances have changed significantly.

• When using market prices for similar assets: adjusting the prices to reflect differences.

• When using sector benchmarks (eg the value of cattle expressed per kilogram of meat): adjusting to reflect differences.

• When using DCF model: estimating the expected future net cash inflows and the discount rate.

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Judgements and estimates, fair value





Derecognition

Derecognition of PPE

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• IAS 16.67 specifies: the carrying amount of an

item of PPE shall be derecognised:

(a) on disposal; or

(b) when no future economic benefits are

expected from its use or disposal.

• Note: derecognition of PPE does not necessarily

occur when the asset no longer satisfies the

conditions specified for its initial recognition. In

particular, derecognition of PPE does not necessarily

coincide with the loss of control of the asset.


31 Examples—derecognition

• When does Open Safari derecognise the elephant bull released onto Freelands?

(a)when the bull is released

(b)when the bull first walks off Freelands

(c)when the bull dies

(d)never

(e)it depends…

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Presentation and disclosure


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Presentation and disclosure ‘concepts’

• Objective of financial reporting

• Financial statements portray financial effects of

transactions and events by: – grouping into broad classes (the elements, eg asset)

– sub-classify elements (eg assets sub-classified by their

nature or function in the business)

• IAS 1 – need not provide a specific disclosure if the information

is not material

– application of IFRSs with additional disclosures when

necessary results in a fair presentation (faithful

representation of transactions, events and conditions)

– do not offset assets & liabilities or income & expenses



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Examples— measurement ‘economics’

Which currency is Open Safari’s presentation currency?

Choose one of (a) to (f) below:

(a)Any currency that Open Safari chooses

(b)Euro

(c) British pound

(d)South African rand

(e)Africanian Zollar

(f) US dollar

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Thank You

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Case study 2 - World Banksiteresources.worldbank.org/EXTCENFINREPREF/... · Case study 2 non-financial assets Vienna, 3 June 2013 Michael Wells, Director, IFRS Education Initiative,