sifrs class lides_WS_2013_2014

1(L)+(C) International Financial ReportingPreliminary meeting Setting the scene

Alexander Herbst: International Financial Reporting 2

Contact I

Alexander Herbst

c/o Alpen-Adria-Universitt KlagenfurtFaculty of Management and Economics

Department of Financial ManagementFinance Taxation AccountingUniversittsstrae 65-679020 Klagenfurt am Wrthersee, Austria

++43-463-2700-4026 ++43-463-2700-99-4026 [email protected] www.aau.at/ifm and www.aau.at/im only upon prior registration by email E.1.18, main building, south annex, level 1

How to get to my office: http://bit.ly/WayToMyOffice

dewey.81

2 Alexander Herbst: International Financial Reporting 3

Contact II


E.1.18, main building, south annex, level 1, access via E.1.18a, behind the glass door

Contact III


Semester Course ECTS Type

1

Principles of International Business

International Economics

International HRM and Organizational Behaviour

2

2

L

LC

International Marketing


Cases in International Marketing

3

3

L

C

International Entrepreneurship and Innovation Management

International Entrepreneurship

Cases in International Entrepreneurship

3

3

L

C

International Financial Management

International Financial Reporting

Cases in International Financial Reporting

3

3

L

C

Cultural Skills in SEE and CEE

Cultural Skills and Economic Issues in SEE and CEE

Study Excursion to SEE or CEE

3

2

LC

EX

Options 3

Course plan I



2

Principles of International Law 2 L


International Consumer Behaviour and Communication 3 L

International Entrepreneurship and Innovation Management

Innovation Management in International Context 3 L

International Financial Management

International Financial Instruments 3 L

Electives I: Specialisation in International Management (two of three)

Cases in International Consumer Behaviour and Communication (3 ECTS)

Cases in Int. Innovation Management (3 ECTS)

Cases in International Financial Instruments (3 ECTS)

3

3 ?

C

C ?



Short Time Study Abroad in SEE/CEE

2

8

LC

EX

Options 3

Course plan II


B.S., M.B.A., J.D. Kurt Wagner B.A., M.A.(International Financial Instruments)

Born and raised in the Midwestern U.S. State of Illinois

Master of business administration degree in finance and a Bachelor of science degree in marketing

Juris doctor degree, magna cum laude, from Southern Illinois University School of Law

American business lawyer and former U.S. diplomat

External lecturer at the Department of English and American Studies and the Institute of Financial Management at the Alpen-Adria-Universitt Klagenfurt in the field of corporate

governance, corporate and organizational culture, private equity (entrepreneurial finance)

and business presentation skills

Editor-in-Chief of the Southern Illinois University Law Journal

Author of articles on tax, immigration, law and investment topics in legal and investment periodicals

International focus is on international business transactions, tax law, cross border M & As, business immigration and visas, and protection of intellectual property



3

Global Cultural Skills 6 SE

Full Semester Abroad (Not Home Country and Not Country of Mother Tongue)

Electives II: Advanced Cultural Skills (Two of Four)

Politics and Economics (4.5 ECTS)

Culture and History (4.5 ECTS)

Language Skills (4.5 ECTS)

Gender Issues in Culture and Business (4.5 ECTS)

9

Electives III: Advances in International Management (two of three)

International Marketing (4.5 ECTS)

International Entrepreneurship and Innovation Management (4.5 ECTS)

International Financial Management (4.5 ECTS)

4.5

4.5 ?

Course plan III


Course plan IV

Masters Thesis out of:

- International Marketing

- International Innovation Management and Entrepreneurship

- International Financial Management

accompanied by a specific (!) research seminar


4

Masters Thesis 24 ?

(specific) Research Seminar 6 ? SE

Examination Before a Committee (2 subjects)


[Almost] Full version:

2 Lectures (6 ECTS)

2 Courses (6 ECTS)

[Electives (4.5 ECTS)]

Options

Light/soft core version:

2 Lectures (6 ECTS)

1 Course (3 ECTS)

NOTE THE WORKLOAD!

Hard core version:

2 Lectures (6 ECTS)

2 Courses (6 ECTS)

Electives (4.5 ECTS)

Master's Thesis

Research Seminar

in combi-

nation

only!


Course target

Core considerations:

Necessary background one should have to use international financial statements

Decision-makers perspective (What do the numbers mean? How can one interpret the figures?)

Knowledge about:

Basic principles of international financial accounting

Elements of international financial statements

Recognition and measurement of events in international financial statements

Outside of this scope:

Knowledge only to be used by a preparer of international financial statements

Legal issues as they might only be relevant for tax consultants, auditors, CPA

Comprehensive comparison of international financial accounting regulations (-> part of specialisation: electives, research seminar, masters thesis)


Mission statement II


Mission statement III

A book is a mirror: when a monkey looks in, no apostle

can look out

Never ever learn things by heart in accounting


Thinking of accounting - mental exercise I

Three people are eating at a restaurant. The waiter gives them the bill,which totals up to $ 30. The three people decide to share the expense

equally ($ 10 each), rather than figure out how much each really owes.

The waiter gives the bill and the $ 30 to the manager, who sees that theyhave been overcharged. The real amount should be $ 25.

He gives the waiter five $ 1 bills to return to the customers, with therestaurant's apologies.

But, the waiter is a dishonest man. He puts $ 2 in his pocket, and returns$ 3 to the customers.

Now, each of the three customers has paid $ 9, for a total of $ 27. Add the$ 2 that the waiter has stolen, and you get $ 29. But, the original bill was $

30.

???? What happened to the missing dollar ????


..:

.

Assumed previous knowledge

Expected level of knowledge:

Basic knowledge of at least one conceptual framework for financial reporting

Basic knowledge of the general financial accounting cycle

Being familiar with the basic accounting terminology in English (!):

Debits, credits, accounting equation, double-entry-system,

journalizing, posting, trail balance, adjusting/closing entries,

Literature covering the expected knowledge/terminology:

Pre-reading material (Moodle!)

Further literature available in the library:

Berry, Financial Accounting Demystified, Mc-Graw-Hill, New York 2011.

Wood/Robinson, Frank Wood's book-keeping and accounts, 7/E,

Financial Times Prentice Hall, Harlow 2009.

Cox, Business accounts: for first level accounting and book-keeping,

3/E, Osborne, Worcester 2009.

Smith, Introductory financial accounting and reporting, Open Univ. Press,

Maidenhead 2010.


#Lecture

08:00 11:00 amMaster

copyTopics

Cases

08:00 -11:00 am

0 Thu, Oct 03, 2013 Pre-reading Preliminary information meeting setting the scene

1 Tue, Oct 22, 2013 1 50What is financial reporting? Users of financial information,

individual/consolidated financial statements

Thu, Dec 5, 2013

2 Wed, Oct 23, 2013 51 129

Global environment of accounting, causes and examples of

international differences, international harmonization, global

accounting standards (IAS/IFRS vs. US-GAAP), different versions of

IAS/IFRS

3 Thu, Oct 24, 2013 130 170Enforcement/endorsement of IAS/IFRS in Europe/CEE/SEE, legal

issue: IFRS-System of rules, components of financial statements,

statement of financial position, property/plant/equipment Fri, Dec 6, 2013

4 Fri, Oct 25, 2013 171 184 Intangible assets, accounting for leases

5 Mon, Dec 2, 2013 185 206Financial assets (cash, recievables, debt investments, equity

investments)Mon, Jan 13, 2014

6 Tue, Dec 3, 2013 207 280Inventories, long-term construction contracts, equity, current and

non-current liabilities, provisions, contingenciesTue, Jan 14, 2014

7 Wed, Dec 4, 2013 281 331Statement of profit or loss and other comprehensive income,

statement of cash flows, presentation and disclosure in financial

reporting (notes, segment reports, auditing, ), exam revisionWed, Jan 15, 2014

[8] [Thu, Jan 16, 2014] - [Alternate date]

Course calendar I


Course calendar II


Study guide I

Pre-reading

before classes

Revision: Basics of financial accounting QUIZ (!) In preparation of lecture

Attend the lecture Short presentation of particular topic

Reinforce the

learning matter

by checking your knowledge by answering TOF-Questions by working through the assignments

Attend the

case course

to remove ambiguities that have arisen during reinforcement to present/compare your answers of the review exercises

to b

e r

eitera

ted f

or

each t

opic

Final exam

preparation Revision of course content [(L)+( C)]

10


bitly.com/IFRSV1

bitly.com/IFRSV2

Study guide II


Courseware

Moodle: (https://moodle.aau.at/course/view.php?id=11500; IFRS)

Course materials:

Pre-reading material + master copy of textbook

PDF of Power Point presentation, cases

Most relevant official annual reports

Glossaries, PwC-Study, videos, doing business

Upload-forum for solutions to assignments

Fellow mailing list & contact details

Stuff to be bookmarked:

Standards: http://ec.europa.eu/internal_market/accounting/

Auditing: http://ec.europa.eu/internal_market/auditing/

TOF-Questions: bitly.com/IFRSV1 and bitly.com/IFRSV2

IFRS around the globe: bitly.com/IFRSbyCOUNTRY

Check @edu.aau.at continuously!

11


Further reading I

Literature

at AAUK

Kothari/Barone, Advanced Financial Accounting: An International Approach, Financial Times Prentice Hall, Harlow 2011.

Mackenzie/Coetsee/Njikizana/Chamboko, Wiley Interpretation and Application ofInternational Financial Reporting Standards 2011, Wiley, Hoboken 2011.

Nobes, International Accounting and Comparative Financial Reporting, Elgar, Cheltenham1999.

Roberts/Weetman/Gordon, International Corporate Reporting, A Comparative Approach, 4/E,Financial Times Prentice Hall, Harlow 2010.

Atrill/McLaney, Financial Accounting for Decision Makers, 6/E, Financial Times Prentice Hall,Harlow 2011.

Glautier, Accounting: Theory and Practice, 8/E, Financial Times Prentice Hall, Harlow 2011.

Pratt, Financial Accounting in an Economic Context: Study Guide, 8/E, International StudentVersion, Wiley, Hoboken 2011.

You are NOT encouraged to refer to older versions of textbooks

considering IFRS have gone through tremendous modifications in recent years!


Further reading II

Databases,

eJournals at

www.aau.at/ub

SpringerLink, Web of Science, Science direct (International Journal ofAccounting; Journal of Accounting and Public Policy; Accounting, Organizations

and Society; Advances in Accounting; Journal of Accounting Education, ) Elsevier, Emerald, Business Source Premier, Ebsco Host WISO (DerBetrieb, Kapitalmarktorientierte Rechnungslegung), Rechtsdatenbank

Free eBooks www.bookboon.com/uk

Websites

EU: http://ec.europa.eu/internal_market/accounting/

IASB: www.iasb.org.uk FASB: www.fasb.org

EFRAG: www.efrag.org PWC: www.pwc.com/IFRS

KPMG: www.kpmg.co.uk/ifrs EY: www.ey.com/ifrs; www.iasplus.com

12


Further reading III

Accounting

terminology

Comprehensive English Glossary: Obenaus/Weidacher, New Handbook of Business English, Keywords in Context, Linde, Wien 2006.

Comprehensive German Glossary: Grnberger, English for Accountants, 2/E, Linde, Wien 2006.

bitly.com/DictionaryAccounting (NTSHXN)

Langenscheidt online dictionaries (via www.AAU.at/UB - databases)

Publishers

www.wiley.com

www.mcgraw-hill.com

www.pearsonhighered.com


Lecture:

Voluntary presence

Interaction is welcome, but wont be graded

Final written exam:

open and/or multiple choice questions

45 minutes, 45 points

1 point equates to 1 minute of working time

50 % pass mode

Grading procedure I

Performance record (L)

Points Grade

45 40.5 1

40 35.5 2

35 29.5 3

29 22.5 4

22 0 5

13


Cases:

Knock-out criteria:

Presence below 100 % Revision course: Repetitorium International Management

Possibility to catch up on missed lessons by answering additional questions in written form

Up to 10 points for active participation:

Willing to present assignments announced in the previous lecture

Voluntary presenters will be selected directly in class

Statements will be graded with up to 10 points

Up to 90 points depending on final written exam performance:

Open questions, (brief) exercises, problems to solve,

90 minutes, 90 points, 1 point equates to 1 minute of working time

Grading procedure II

Performance record (C)

Points Grade

100 88.5 1 88 75.5 275 62.5 3 62 49.5 4

49 0 550 % pass mode in total


1st examination:

(L) January 31, 2014, 08:00 am 09:00 am

(C) January 31, 2014, 09:00 am 11:00 am

ZEUS (de)registration until: January 31, 2014, 06:00 am

2nd examination:

(L) February 28, 2014, 08:00 am 09:00 am

(C) February 28, 2014, 09:00 am 11:00 am

ZEUS (de)registration until: February 28, 2014, 06:00 am

Final examinations

!!! You have the right to use legal texts without annotations !!!

14


Any questions?

Enjoy your first semester!All the best!

15

(L) International Financial Reporting


Crossword puzzle

16


1 Fundamental terms in accounting


Main users of financial information

Enterprise

Owners Investors

Employees

Lenders Suppliers

CustomersGovernmentPublicInvestment

analysts

Competitors Managers

17


Umbrella term accounting

Financial accounting*Preparation/disclosure of financial statements

Management/managerial/cost accountingProcess of dealing with financial information to plan/control/evaluate a companys operations

AccountingSystem to help clients allocating scarce economic resources efficiently by providing information, i. e.:

Identifying and capturing relevant financial information Measuring and recording the financial information collected in a systematic manner Analysing and interpreting the financial information collected Communicating (i.e. reporting) the information about an entity to interested parties

* in the wider sense


Financial accounting Areas of difference Cost accounting

Mandatory Legal requirement Voluntarily

Follows Generally Accepted Accounting Principles Regulations No regulations

Backward looking Time orientation Forward looking

Emphasis is on summaries of financial

consequences of past activitiesNature of reports produced Emphasis is on decisions affecting the future

Objectivity and verifiability of data are emphasized

Mostly based on monetary termsRange/quality of information

Relevance to decision making is emphasized

Reports contain information of non-financial nature

(volume of inventories, output/employee, ...)

Summarized data for entire entity Level of detail Detailed reports about departments, products,

Annual reporting, half-yearly/quarterly reports Reporting interval Daily, weekly or monthly basis

Reports to those outside the entity

(tax authorities, regulators, )Consumers of reports Reports to the management

Financial accounting* vs. cost accounting

* in the wider sense

18


From bookkeeping to financial reporting

Bookkeeping Financial accounting* Financial reporting

Character:

Accounting basis

Process of recording events

To be done by:

Bookkeepers

Junior accountants

Character:

Preparation of individualfinancial statements

Statement of financial position

Statement of profit or loss and other comprehensive income

Statement of cash flows

Statement of changes in equity

Notes

To be done by:

C. management accountants

Senior/chief accountants

Company/head accountants

Character:

Preparation of group accounts and disclosure of further information voluntarily or due to regulatory rule

Presidents letter, chairmans foreword

Chief executives statement, businessstrategic review, prospectuses

Managements forecasts, social or environmental impact statements

To be done by:

Executive/head accountant,accounting director

Members of supervisory board, chief financial officer (UK) = vice-president -Finance (US), chief executive officer (UK) = president (US)

C. public accountant, c. tax advisor

* in the narrower sense


Purpose of financial reporting

Providing financial information about reporting entity that is useful to users in making decisions

19


What the public thinks accountants should do

What accountants think they can do

Avoidance of financial catastrophes

Avoidance of fraud and errors:

- Internal control system

- Sarbanes-Oxley-Act

Providing full information:

- Non-financial measurements

- Forward-looking information

- Soft assets

-

Expectations gap


2 Individual versus consolidated financial statements

20


Type of inter-company

relationship

Situation of control

(in the form of amount

of voting rights)

Qualification of shareholdings

(title of line item within

the balance sheet)

Compulsory group accounts

(if no exemption exists)

(Group) accounting

method

1 Control > 50 %Subsidiary

(no specific line item/goodwill)Yes

Full consolidation,

acquisition method

(IFRS 3, 10, 12)

2 Significant influence >= 20 %Associated company

(equity-method investment)Yes

Equity method

(IAS 28, IFRS 11, 12)

3 No real influence < 20% Financial investment

(financial asset)No

Fair value, or at cost

(IAS 39/IFRS 9 (>=2015))

Inter-company relationship

c

o

m

p

l

e

x

i

t

y

Out of scope - joint ventures:

Contractual arrangement whereby two or more partiesundertake an economic activity that is subject to joint control

Independent companies

Share of: assets, distribution channels,

Relations in individual financial statements:

Recognized as financial assets

Benchmark of carrying amount market value at stock exchange

Dividends are recognized as income in income statement


Why groups exist

Economies of scale

Elimination or reduction of competition

and risk

Tax advantages

Group performance

21


Direct forms of control/influence:

Amount of voting rights

Power to govern the financial and operating

policies under an agreement

Power to appoint/remove the majority of

the members of the board of directors

Indirect forms of control/influence

Exemption from preparing group accounts:

The parent is itself a wholly-owned subsidiary

The ultimate or any intermediate parent of the

parent produces consolidated financial

statements

Structures and control

Indirectly controlled/influenced subsidiaries/associated

companies

Directly controlled/influenced subsidiaries/associated

companies

Parent/holding company P

S1

S3 S4

S2

S5

Group

accounts

Individual

financial

statements


Full consolidation - acquisition method IFRS 3 Business combinations, IFRS 10 Consolidated financial statements, IFRS 12 disclosure of interest in other entities

1st step:

Adjust recognition criteria and

measurements in individual financial

statements of subsidiaries to uniform

principles

2nd step:

Full aggregation of financial statements of

all subsidiaries

3rd step: 4th step:

Remove intra-group balances and intra-group

transactions

5th step:

= Consolidated group financial statements

First consolidation:

a) Recognition/fair value

adjustments of net-assets

of subsidiary

b) Identify goodwill

c) Identify NCI

d) Remove investment in/

equity of subsidiaries

Subsequent consolidation:

- follow-up of recognition/

fair value adjustments

on first consolidation

- Deduct impairment loss

22


Balance sheet of H as at December 31, 2X04 (amounts in )

Non-current assets 25,000

Net current assets 23,000

Total assets 48,000

Share capital 16,000

Retained earnings 27,000

Non-current liabilities 5,000

Shareholders equity and liabilities 48,000

On January 1, 2X05, H acquired 100 % of the 10,000 1 ordinary shares in S at 1.60 per share in cash and gained control. The fair value of the net assets of S at that date

was the same as the book value.

Acquisition method 1st example IIFRS 3 Business combinations, IFRS 10 Consolidated financial statements, IFRS 12 disclosure of interest in other entities


Balance sheets of H and S on January 1, 2X05 (amounts in )

H S

Non-current assets 25,000 12,000

Investment in S 16,000 -

Net current assets 7,000 (*) 5,000

Net assets 48,000 17,000

Share capital 16,000 10,000

Retained earnings 27,000 5,000

Non-current liabilities 5,000 2,000

Shareholders equityand liabilities 48,000 17,000

(*) 23,000 before the acquisition of S less 16,000 for the consideration paid in cash to acquire S.

Acquisition method 1st example IIIFRS 3 Business combinations, IFRS 10 Consolidated financial statements, IFRS 12 disclosure of interest in other entities

23


H S Adjustments Consolidated

B/S B/S Dr Cr balance sheet

EUR EUR EUR EUR EUR

Non-current assets 25,000 12,000 37,000

Investment in S 16,000 - 16,000

Goodwill 1,000 1,000

Net current assets 7,000 5,000 12,000

Net assets 48,000 17,000 50,000

Share capital 16,000 10,000 10,000 16,000

Retained earnings 27,000 5,000 5,000 27,000

Non-current liabilities 5,000 2,000 7,000

Shareholders equity

and liabilities 48,000 17,000 16,000 16,000 50,000

Acquisition method 1st example IIIIFRS 3 Business combinations, IFRS 10 Consolidated financial statements, IFRS 12 disclosure of interest in other entities


Acquisition method 1st example IVIFRS 3 Business combinations, IFRS 10 Consolidated financial statements, IFRS 12 disclosure of interest in other entities

24


Non-controlling interest:

If parent company does not own all the shares of subsidiary

Minority interest = non-controlling interest

Non-controlling interestIFRS 3 Business combinations, IFRS 10 Consolidated financial statements, IFRS 12 disclosure of interest in other entities


Balance sheet of Halbert SpA (H) as at 31 December 2X09 is shown below:

On 1 January 2X10, Halbert SpA (H)

acquired 80 % of the 10,000 1ordinary shares in Settimo SpA (S)

for 1.60 per share in cash andgained control.

Fair value of non-current assets of

Settimo SpA at that date was

12,400.

Acquisition method 2nd example IIFRS 3 Business combinations, IFRS 10 Consolidated financial statements, IFRS 12 disclosure of interest in other entities

25


Acquisition method 2nd example IIIFRS 3 Business combinations, IFRS 10 Consolidated financial statements, IFRS 12 disclosure of interest in other entities


Intragroup balances will require adjustments to ensure that the consolidated statements do not

double count assets and/or liabilities and do not contain an intragroup profit or loss!

Example:

- H sells goods to S for 10,000, which cost H 6,000.

- S sells those goods to a third party (T) for 13,000.

- The group has made a total profit of EUR 7,000.

- No adjustments are needed!

Intragroup balances IIFRS 3 Business combinations, IFRS 10 Consolidated financial statements, IFRS 12 disclosure of interest in other entities

H S T

Profit = 7,000

Profit = 4,000 Profit = 3,000Group accounts

26


H S Adjustments Consolidated

Dr Cr balance sheet

Inventory - 5,000 2,000 3,000

Retained earnings 4,000 1,500 - 2,000 3,500

Example modification:

- Half of the goods are unsold by S by the year end

- Tax burden can be ignored

Intragroup balances IIIFRS 3 Business combinations, IFRS 10 Consolidated financial statements, IFRS 12 disclosure of interest in other entities

H S T

Consolidated profit = 3,500 (Cogs: 3,000 -> external revenue: 6,500)

Profit = 4,000 Profit = 1,500Group accounts


A method of accounting whereby the investment is initially recognized at cost and adjusted thereafter for the post-

acquisition change in the investors share of the investee!

First consolidation:

Investment is recorded at cost

Only one line item in consolidated income statement/balance sheet

Goodwill:

Positive: not separately recognized (to be tested for impairment later on)

Negative: recognized as income in the income statement

Subsequent consolidation:

Investors share of the investees profit or loss is

Recognized in the investors income statement

Added/substracted from the carrying amount of the investment in the balance sheet

Dividends received are substracted from the carrying amount

Equity method IAS 28 investments in associates and joint ventures,IFRS 11 joint arrangements, IFRS 12 disclosure of interest in other entities

27


Present status:Gamma plc is the parent of several wholly-owned subsidiaries. On July 1, 2X10, Gamma plc acquired 30 % of the ordinary

shares of Delta Ltd for 140,000. Delta Ltd had retained earnings of 100,000 on that date and all assets and liabilities were carried at fair value. Delta Ltd has issued no shares since Gamma plc acquired its 30 % holding.

Equity method example IIAS 28, IFRS 11, IFRS 12

Income statements Balance sheets

Statements of changes in equity


Consolidation:

Delta Ltd is an associate of Gamma plc. Cost of investment: 140,000

Fair value of 30 % of net assets of Delta Ltd on July 1, 2X08: 30 % 300,000 = 90,000.

Goodwill of 50,000 (not shown separately)

Equity method example IIIAS 28, IFRS 11, IFRS 12

Consolidated income statementConsolidated balance sheet

Consolidated statement of changes in equity

28


Note:

Associated company is represented by a single line item! ( acquisition method!)

Carrying amount of investment in consolidated financial statement:

differs from carrying amount in individual financial statement

Benchmarks are different: market value of shares versus equity ratio

Equity method example IIIIAS 28, IFRS 11, IFRS 12


Practical example I

29


Practical example II


Practical example III

30


Check your knowledge

bitly.com/GroupAccounts

(note the capital letters)

Practice questions

ambiguities can be eliminated in the next unit


3 Global environmentof financial accounting

31


Accounting the language of business

Global markets

Global finance

Global accounting

World markets are becoming increasingly intertwined

Merchandise exports as percentage of gross domesticproduct in Germany 38.9 %, in UK 25 %, ...

International equity investment:

- Portfolio diversification internationally

- Higher profit at foreign stock exchanges

Foreign stock market listing:

- Need to raise additional equity finance

- Listing to support reputation of product in overseas markets

- Listing to provide equity for overseas acquisition

- Large foreign ownership may protect company from takeover

International demand/supply of equity is based on accounting information

Group accounts: easier to prepare if individual financial statements are based on the same laws -> International/unified accounting standardsL

ink b

etw

een t

he locati

on o

f th

e c

om

pany a

nd t

he

locati

on o

f th

e c

onsu

mer/

capit

al m

ark

et

is loose

nin

g


The political and economic system:- Liberal-democratic system/associated with capitalist system -> market-based accounting

- Egalitarian-authoritarian system/centrally planned economic system -> output-related accounting

The legal system:- Common/case law (UK, US)

- Code law (continental Europe)

The taxation system:- Tax rules and financial reporting rules are kept entirely independent of each other (UK)

- System with many of the financial reporting rules being used for taxation and vice versa (AT)

The corporate financial system:- Equity finance accounting rules are more forward-looking

- Debt finance accounting rules are more conservative, to protect creditors

The accounting profession:- Strength of professional body

- Independence of professional body

Other issues: accidents of history (Sarbanes-Oxley-Act)

Causes of national accounting differences

32


Balance sheet approaches following conservatism or optimism:

- Capitalization versus recognition as expense:- R&D expenditures, goodwill- Borrowing costs on construction assets

- Recognition of profit:- Only on final settlement or on the completion of - Long-term construction contracts

- Usage of nominal values versus (discounted) present values:- Provisions (possible liability against themselves/third parties) - Long-term liabilities

- Measurement of assets:- At amortized cost- At fair value

- Use/no use of statutory/legal reserves:- Set up out of declared profits- Protection of creditors above normal rules on capital maintenance

Examples of national accounting differences I

Effects of transition from HGB (GER) to IFRS (selected example):


Balance sheet layout:- Assets displayed in order of decreasing/increasing liquidity- Arrangements of all debits and credits:

- Two-sided balance sheet - Report form

- Calculation of net (current) assets (=financial position)

Usage of different English language accounting terms

Layout of income statement:- By-nature format combines costs as total purchases,

total depreciation, total wages, - By-function format combines by stage of production,

cost of sales, administrative/distribution costs,

Examples of national accounting differences II

33


Practical example

Annual report M & S, p. 58:- Increasing liquidity- Report form- Net assets- In spit of UK -> IFRS terms!


Reasons for coping with classification schemes of accounting systems:- Description of main accounting rules/practices- Possibility to check differences and similarities quickly- Starting point for further investigations

Classification studies of:- DArcy, Fitzgerald, Gray, Hatfield, Lewis, Nobes- Oldham, Ordelheide, Roberts- -> see references

Classification schemes of accounting systems

34


4 International harmonization and standardization of financial reporting


International bodies of harmonization/standardization

B o d i e s

International Accounting

Standards Board (IASB)

Financial Accounting Standards Board (FASB);

Securities and Exchange Commission (SEC)

US-GAAP

European Union

Directives

(4th/7th Directive)

National standards

Regulation

(1606/2002)

IAS/IFRSIAS/IFRS

Harmonization Standardization

Convergence

Standardization Standardization

www.sec.govwww.fasb.org

35


IASB as a part of the IFRS Foundation

22

IFRS Foundation: - Not-for-profit body- Raises funds to support

operations of IASB

IASB:- www.iasb.org- Domicile: London (GB)- 9 of 14 Board member

votes are needed to issuea new IFRS

(formerly SIC)

(formerly IAS)

Private body


Open and transparent due process

Endorsement:- Private body without law-making power- Adoption of standards to be done by

legislature of individual country(-> Endorsement in EU)

Enforcement:- Verification of compliance- To be done by federal agencies

of respective country

36


Framework

citation: framework.#

framework.43 or F.43

Standards (IAS # / IFRS #)

International Accounting Standards

International Financial Reporting Standards

citation: IFRS 6.13 / .13 / IAS 36.A1

um

bre

lla te

rm IF

RS

Interpretations (SIC # / IFRIC #)

Standing Interpretations Committee

Int. Financial Reporting Interpretations Committee

citation: SIC 10 / IFRIC 1

accompanying material

ED #

exposure

draft

BC #

basis of

consultation

IE #

illustrative

example

IFRS #

standard

Level o

f deta

il

com

pulso

riness

Hierarchy of IFRS I

Types of pronouncements


Hierarchy of IFRS II

www.iasb.org

37


Nature of IFRS for SMEs:- Self-contained, globally recognised standard- Similar to full IFRS, but less complex- Standard is focused on reporting needs of most SMEs

Full standards versus IFRS for SMEs:- Standards not relevant to SMEs have been omitted- IFRS for SMEs only allow the easier option of full standards

Specification of SMEs:- Any company of any size- Without public accountability:

- No securities are publicly traded- Not a financial institution

- Usage of financial statements for external users

Advantages:- Easier to set up group accounts by parent company- Improved access to capital, comparability, - Less complex, real alternative for private companies (US),

IFRS for Small and Medium-sized Entities I


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IFRS for Small and Medium-sized Entities II

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IFRSs around the world leading standards bitly.com/IFRSbyCOUNTRY

IFRS around the globe I


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IFRS around the globe II

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Directly binding for all member states Passes directly into the law of the nation No need for a member state to incorporate regulation in national law Example: IAS-Regulation (1606/2002)

Expected to be incorporated in national laws Options are offered and can be selected by countries Examples: 4th / 7th Council Directives

Issued for a particular purpose Only binding for the persons to whom it is addressed

Do not have binding force

Levels of legislation in the EU

Regulations

Directives

Decisions

Recommendations and opinions


The 4th Directive regarding individual financial statements:

- Standard formats for:- Balance sheet (see master copy)- Profit and loss account (see master copy)

- Setting out accounting principles/options for valuation:- Going concern principle, - Potential losses are to be taken into account, - Fair value option

The 7th Directive regarding group accounts:

- Similar content as 4th Directive

- Has more/less lost its significance due to IAS/IFRS

Directives for limited liability companies

40


IAS/IFRS-Standards endorsed by the EUmust be applied:

By companies governed bythe law of Member State

Regarding their consolidated accounts

If securities are admitted to trading on a regulated market of any Member

State

Regulated markets are defined in Council Directive 93/22/EEC

Article 4 - Regulation EC 1606/2002Obligation

Regulation EC 1606/2002 I

IAS-Regulation allows member states to:

Require or permit non-publicly traded companies to present consolidated

financial statements based on IAS/IFRS

Require or permit (non-)publicly traded companies to present legal entity

financial statements based on IAS/IFRS

Article 5 - Regulation EC 1606/2002Option


Regulation EC 1606/2002 II

41


Standard published in the Journal enters into force on the day laid down in the

Regulation itself (http://ec.europa.eu/internal_market/accounting)

Endorsement I

3. Advice to

Commission (4D/7D)

EFRAG

(European Financial Reporting

Advisory Group)

[www.efrag.org]

5. Commission

(prepares a draft endorsement Regulationbased on the advice of EFRAG/SARG)

IASB

[www.iasb.org]

1.

Pro

posa

l

4. SARG(Standards Advice Review Group checks

EFRAG advice if well-balanced/objective)

IFRIC (SIC)

[part of www.iasb.org]

IFRS Foundation

7. European Parliament + Council of the European Union

(3 months to oppose the adoption of the draft)

8. Journal

6. ARC

(Standards Advice Review Group votes on the Commission proposal)

2a. Standard issuing 2b. Interpretations issuing


Endorsement II

42


Endorsement III

Time-lags: EU-IFRS IASB-IFRS


EnforcementThe European Supervisory Architecture - Transparency Directive (2004/109/EC)

[Austrian] Review Panel

[privately organised,

examining financial

reporting, active body]

[Austrian] Financial

Market Authority

[sovereign authority,

report of suspected cases]

Entity with financial statements based von IAS/IFRS

Auditing

(auditors report; audit certificate)

(International

Standards on

Auditing (ISA))

ESMA (European Securities and Markets Authority)

[formerly CESR - Committee of European Securities Regulators]

43


Global standards I

Harmonization - no parallel statement

International Financial Reporting Standards

IAS/IFRS

[Int. Accounting Standards/

Int. Financial Reporting Standards]

US-GAAP

[US-Generally Accepted

Accounting Principles]


Nordwalk Agreement of IASB/FASB (2002):- Commitment to the convergence of US-GAAP and IAS/IFRS- Elimination of differences between two standards- Development of common high quality standards

Global standards II

SEC:- Agreement of US and European regulators (2008):

- To recognize each others standards for listing - To eliminate reconciliation requirements

- Policy statement (2010):- Timeline for potential adoption of IFRS in US (!)- IAS/IFRS global standard

44


Global standards IIIhtt

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Chapter 1 Except questions: 1, 2

Self-test quizzes

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Chapter 1 Except questions:

1, 5, 7, 12, 14, 15, 17

Additional self-test quizzes

bitly.com/IFRSV1


45


5 International financial statements based on IAS/IFRS


Parts of financial statements

46


Parts of financial statements IIAS 1.10; SIC 15, 29, 32; IFRIC 1

Presentation of financial statements


Statement of profit or loss and other

comprehensive income



Notes, segment report

Net asset position,

financial status

Earning position

Amendments

Amendments

Financial status




(= balance sheet)


Non-current

assets

Current assets(liquid assets)

Equity

Non-current

liabilities

+ Revenues - Expenses

= Net profit or loss

+/- Other comprehensive income

= Total comprehensive income

Opening balance of liquid assets

+ Incoming payments

- Outgoing payments

= Closing balance of liquid assets

Statement of profit or loss and

other comprehensive income

Current liabilities

Notes(Amendments)

Opening balance of equity

+ Increase of equity (shareholder)

- Decrease of equity (shareholder)

+ Total comprehensive income

= Closing balance of equity

Exte

rnal

financin

g

In-h

ouse

financin

g

Parts of financial statements IIIAS 1.10; SIC 15, 29, 32; IFRIC 1

47




Minimum line items IAS/IFRS balance sheetIAS 1.54 Presentation of financial statements

Assets Equity and Liabilities

Total Total

48


Order and format of balance sheetIAS 1 presentation of financial statements

Assets

a) Non-current assets

b) Current assets

Total Total

Equity

Liabilities

a) Non-current liabilities

b) Current liabilities


Liq

uid

ity

Solv

ency

Fundamental commitment:- Distinction between current/non-current assets/liabilities or- Order line items based on liquidity

Method that provides more relevant information is to be used

Balance sheet


Practical example

49


Minimum line items IAS/IFRS balance sheetIAS 1 Presentation of financial statements


Total Total


PP&E is defined as tangible long-lived assets that are held for use in production or supply of goods

and services, for rentals to others, or for administrative purposes, not for resale; they are

expected to be used during more than one period and possess physical substance.

Examples: - Property: land

- Plant: building structures (offices, factories, warehouses)

- Equipment: machinery, furniture, tools

Outside of this scope:- Leases(IAS 17)

- Biological assets (IAS 41)

- Non-current assets held for sale and discontinued operations (IFRS 5)

-

Property, Plant, Equipment IIAS 16; SIC 13, 21, 29, 32; IFRIC 1, 4

50


Initial costs - acquisition or manufacturing costs:(Including borrowing & dismantling and removing costs)

1st Option - cost model: Cost allocation, no revaluation

Various depreciation methods

Residual value, starting point

Component depreciation

2nd Option revaluation model: Valuation of assets at fair value

Establishing an unrealized gain

Using revaluation surplus

Option only for asset groups

Trigger event -> impairment test (IAS 36)(Compulsory recognition of impairment loss, usage of cash generating units)

Property, Plant, Equipment IIIAS 16; SIC 13, 21, 29, 32; IFRIC 1, 4


Forms of measurement

Acquisition value = manufacturing cost/expenses

(= Original cost or historical cost, measuring the

price of obtaining the asset and bringing it to the

location and condition necessary for its intended

use)

(Depreciated) book value = carrying value

Residual (book) value

Fair value (IFRS 13 2012)

(= 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 (i.e., an exit price))

Examples:

Current cost (share price)

Present value

Forms of measurementFramework.99, IFRS 13

51


Initial value of acquired assets:

+ Purchase price

+ Incidental acquisition costs

- Trade discounts and rebates

+ Subsequent acquisition expenses

+ Borrowing costs

+ Removal expenses, disposal fees

= Total acquisition costs

Acquisition/manufacturing costs IIAS 16, IAS 2

Initial value of self-constructed assets:

+ Prime costs:

Direct material costs

Direct labour costs

+ Production overheads:

Variable (+fixed) indirect material costs

Variable (+fixed) indirect labour costs

= Total manufacturing costs

Including: borrowing costs; excluding:

abnormal amounts, general/administrative

overheads, cost of distribution,


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Acquisition/manufacturing costs IIIAS 16, IAS 2

52


IAS 23 requires capitalizing borrowing costs

Qualifying assets:

Require a substantial period of time to get ready for use

Capitalization period:

Begins when:

Expenditures for the asset have been made

Interest costs are being incurred

Ends when the asset is substantially complete and ready for use

Capitalize the lesser of:

Actual interest costs

Avoidable interest

Borrowing costs IIAS 23; IFRIC 1


Example:

Blue Corporation borrowed $ 200,000 at 12 % interest from State Bank on Jan. 1, 2X11, for the

specific purposes of constructing special-purpose equipment to be used in its operations.

Construction on the equipment began on Jan. 1, 2X11, and the following expenditures were made

prior to the projects completion on Dec. 31, 2X11:

Other general debt existing on Jan. 1, 2X11:

$ 500,000, 14 %, 10-year bonds payable

$ 300,000, 10 %, 5-year note payable

Borrowing costs IIIAS 23; IFRIC 1

Actual expenditures:

Jan. 1, 2X11 $ 100.000

Apr. 30, 2X11 $ 150.000

Nov. 1, 2X11 $ 300.000

Dec. 31, 2X11 $ 100.000

Total expenditures $ 650.000 Capitalize the borrowing costs according to IAS 23!

53


Practical example:

At December 31, 2X11, Shalla discloses the amount of interest capitalized either as part of the income

statement or in the notes accompanying the financial statements.

Borrowing costs IIIIAS 23; IFRIC 1


A company must recognize an environmental liability (provision) when it has an existing legal

obligation associated with the retirement of a long-lived asset and when it can reasonably estimate

the amount of the liability (provision)

Examples:

Decommissioning nuclear facilities

Dismantling, restoring and reclamation of oil and gas properties

Certain closure, reclamation and removal costs of mining facilities

Recognition and allocation:

Capitalization of present value of estimated future costs on associated asset

Record of a liability equal to the estimated present value of obligation

Depreciation of the carrying amount of the asset including the capitalized dismantling costs

Accrual of interest expense by increasing the environmental liability

Dismantling and removing costs IIAS 16.16 (c)

54


Example:

On January 1, 2X10, Wildcat Oil Company erected an oil platform in

the Gulf of Mexico. Wildcat is legally required to dismantle and

remove the platform at the end of its useful life, estimated to be five

years. Wildcat estimates that dismantling and removal will cost

$1,000,000. A 10 % discount rate is estimated. Wildcat uses the

straight-line method.

Prepare the journal entries to record the environmental liability.

Dismantling and removing costs IIIAS 16.16 (c)


Cost model IIAS 16; SIC 13, 21, 29, 32; IFRIC 1, 4

Usage of depreciation/amortization/depletion as an accounting process of allocating the cost of (in-)tangible

assets to expense in a systematic and rational manner to those periods expected to benefit from the use of the

asset

Computed depreciation/amortization/depletion expenses are reported in the income statement

No revaluation is intended (-> revaluation method)

Import

ant

glo

ssary

:

Regular allocation of costs:

- Long-lived tangible assets = depreciation expense

- Intangibles = amortization expense

- Extracting industry = depletion expense

Extraordinary depreciation/value adjustment of current assets:

- Write down = decrease carrying value

- Write off = reduce carrying value to zero

55


Factors involved in the depreciation process:

Depreciation base

Depreciation start

Estimation of useful life

Methods of depreciation/amortization/depletion:

- Straight-line method

- Activity method

- Diminishing/accelerating methods

- IFRS Outlier: component depreciation

Cost model IIIAS 16; SIC 13, 21, 29, 32; IFRIC 1, 4


Example:

EuroAsia Airlines purchases an airplane for 100,000,000 on January 1, 2X11. The airplane has a useful life of 20

years and a residual value of 0. EuroAsia uses the straight-line method of depreciation for all its airplanes.

EuroAsia identifies the following components, amounts, and useful lives.

Compute the depreciation expense for EuroAsia for 2X11.

Component depreciation:

IFRS requires that each part of an item of property, plant, and equipment that is significant to the total cost of

the asset must be depreciated separately

Cost model IIIIAS 16; SIC 13, 21, 29, 32; IFRIC 1, 4

56


Annual re

port, A

ustria

n A

irlines, 2

008, 1

05.

Cost model practical example IIAS 16; SIC 13, 21, 29, 32; IFRIC 1, 4


Annual re

port, A

ustria

n A

irlines, 2

008, 1

06.

Cost model practical example IIIAS 16; SIC 13, 21, 29, 32; IFRIC 1, 4

57


All assets (besides inventories (IAS 2), assets arising from construction contracts (IAS 11), financial

assets (IAS 32), investment property (IAS 40), biological assets (IAS 41), ) have to be impaired whena company is not able to recover the assets carrying amount either through using it or by selling it

On an annual basis, companies review the asset for indicators of impairments - a decline in the

assets cash-generating ability through use or sale

Impairment indicators - trigger events:

Market value of asset has declined significantly

Significant changes in the technological, market,

economic or legal environment of entity

Tremendous changes of market interest rates

Impairment shall be recognized immediately in loss

Impairment test recognizing impairments IIAS 36; SIC 32; IFRIC 1, 10


Impairment test recognizing impairments IIIAS 36; SIC 32; IFRIC 1, 10

Case 1: Assume that Cruz Company

performs an impairment test for its

equipment. The carrying amount of Cruzs

equipment is $ 200,000, its fair value less

costs to sell is $ 180,000, and its value-in-

use is $ 205,000.

Case 2: Assume the same information for

Cruz Company except that the value-in-use

of Cruzs equipment is $ 175,000 rather

than $ 205,000.

58


Recoverable amount of the impaired asset is higher than the carrying amount

in a future year

Impairment loss has to be reversed

Increased carrying amount (after reversal of impairment loss) of an asset shall

not exceed the carrying amount that would have been determined if no

impairment loss had been recognized for the asset in prior years ( revaluationmethod)

Reversal shall be recognized immediately in profit

Impairment test reversal of impairment loss IIAS 36; SIC 32; IFRIC 1, 10


Example:

Tan Company purchases equipment on January 1, 2X10, for

$ 300,000, useful life of three years, and no residual value. On

December 31, 2X10, Tan records an impairment loss of $ 20,000. At

the end of 2X11, Tan determines that the recoverable amount of the

equipment is

a) $ 96,000.

b) $ 102,000.

Prepare the journal entries to record the impairment loss in 2X10

and the reversal of the impairment loss in 2X11.

Impairment test reversal of impairment loss IIIAS 36; SIC 32; IFRIC 1, 10

59


Cash generating unit (CGU): An assets cash generating unit is the smallest group of assets thatincludes the asset and generates cash inflows that are largely independent of the cash inflows from

other assets or groups of assets.

Usage if:

A single asset generates cash flows only

in combination with other assets

It is not possible to assess a single

asset for impairment

Impairment test cash generating unitsIAS 36; SIC 32; IFRIC 1, 10

CGU facility:(subsidiary)

Goodwill

Assets


Annual re

port, A

ustria

n A

irlines, 2

008, 1

06.

Impairment test practical exampleIAS 16; SIC 32; IFRIC 1, 10

60


Revaluation model IIAS 16; SIC 13, 21, 29, 32; IFRIC 1, 4

Companies may value groups (Land; land/buildings; machinery; ships; aircraft; motor vehicles;

furniture/fixtures; equipment) of (in-)tangible assets after acquisition at fair value

Recognition of revaluation:

- Assets can be revaluated beyond the carrying amount/historical costs

- Revaluation beyond amortized cost is recognized as an unrealized gain

- Unrealized gain is often referred to as a revaluation surplus

- Gains on revaluation do not affect the net income of a given year

- Unrealized gain increases other comprehensive income

- Other comprehensive income is a part of the statement of profit/loss + other comprehensive income

- Gains on revaluation increase equity, but not net income

- Under no circumstances can the revaluation surplus have a negative balance

- Revaluation has to be carried out at least every 3 years

- Cost model is used to balance assets in years between revaluation

- Revaluation surplus is transferred to retained earnings based on the remaining useful life


Example revaluation of land:

Assume that Unilever Group purchased land on January 1, 2X10, that cost 400,000. Unilever decides

to report the land at fair value in subsequent periods.

On December 31, 2X10, an appraisal of the land indicates that its fair value is 520,000.

The lands fair value at December 31, 2X11 is 380,000.

On December 31, 2X12, Unilevers land value increases to 415,000.

On January 2, 2X13, Unilever sells the land for 415,000.

Prepare the journal entries.

Revaluation model IIIAS 16; SIC 13, 21, 29, 32; IFRIC 1, 4

61


Example revaluation of depreciable assets:

Assume that Nokia purchases equipment for 1,000,000 on January 2, 2X10. The equipment has a

useful life of 5 years, is depreciated using the straight-line method of depreciation, and its residual

value is zero. Nokia chooses to revalue its equipment to fair value over the life of equipment.

Nokia employs an independent appraiser, who determines that the fair value of equipment

at December 31, 2X10 is 950,000.



Prepare the journal entries.

Revaluation model IIIIAS 16; SIC 13, 21, 29, 32; IFRIC 1, 4


Intermediate Feedback

62


Grants are:

Assistance received from a government in the form of transfers of resources to a company

In return for past or future compliance

With certain conditions relating to the operating activities of the company

IFRS requires grants:

To be recognized in income (income approach) on a systematic basis that matches them

With the related costs that they are intended to compensate

Two options to record grants:

Credit the deferred grant revenue for the subsidy and amortize

the deferred grant revenue over the useful life of the asset

Credit the asset for the subsidy and depreciate the

remaining carrying value over the useful life of the asset

Outlier: government grants IIAS 20; SIC 10


Example:

AG Company received a

500,000 subsidy from thegovernment to purchase lab

equipment on January 2, 2X11.

The lab equipment cost is

2,000,000, has a useful life offive years, and is depreciated

on the straight-line basis.

Government grants are not

recognized as equity as

conditions must be met!

Outlier: government grants IIIAS 20; SIC 10

Opti

on 1

Opti

on 2

63


Finance lease

A lease that transfers substantially all of the benefits

and risks of property ownership

Lessee capitalizes the lease

Records an asset and a liability equal to the present value of the rental payments

Records depreciation on the leased asset

Treats the lease payments as consistent of interest and principal

Operating lease

Leases that do not transfer substantially all the benefits

and risks of ownership

No asset/liability is recorded

Lease payments are rental expenses

Outlier: Leases IIAS 17; SIC 15, 27, 29, 32; IFRIC 4

A lease is a contractual agreement between a lessor and a lessee, that gives the lessee

the right to use specific property, owned by the lessor, for a specified period of time.


Criteria for a finance lease:

Outlier: Leases IIIAS 17; SIC 15, 27, 29, 32; IFRIC 4

64


Outlier: Leases IIIIAS 17; SIC 15, 27, 29, 32; IFRIC 4

Off-balance-sheet financing:

Keeping obligations off the

statement of financial position

New exposure draft:

Right to use approach


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Outlier: Leases IVIAS 17; SIC 15, 27, 29, 32; IFRIC 4

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Total Total


Characteristics:- Identifiable (??? goodwill ???)

- Lack of physical substance

- Not monetary assets

- Normally classified as non-current asset

Examples: - Trademarks

- Computer software, patents

- Copyrights, motion picture films

- Fishing licences, marketing rights

-

Outside of this scope:- Inventories (IAS 2); construction contracts (IAS 11)

- Leases (IAS 17)

-

Intangible assets IIAS 38; SIC 29, 32; IFRIC 4

66


Initial costs - acquisition or manufacturing costs:(Including borrowing costs )

1st Option - cost model: Cost allocation, no revaluation

Various amortization methods

Residual value, starting point

2nd Option revaluation model: Valuation of assets at fair value

Establishing an unrealized gain

Using revaluation surplus

Only for whole class of intangible assets

Trigger event -> impairment test (IAS 36)(Compulsory recognition of impairment loss, usage of cash generating units)

Intangible assets IIIAS 38; SIC 29, 32; IFRIC 4


Expense

Research phase Development phase Utilisation phase

Development stages of internally created intangible assets

Feasibility Completion, ready for sale/use, economic viability

Intangible assets IIIIAS 38; SIC 29, 32; IFRIC 4

Begin

Research activities: Original

and planned investigation

undertaken with the prospect

of gaining new scientific or

technical knowledge

Examples: Laboratory re-

search aimed at discovery of

new knowledge, searching for

applications of new research

findings, .

Development activities: Application of

research findings to design new or

substantially improved materials, devices,

products, processes, systems, or services

before the start of commercial production

Examples: Design of possible

product, construction of

prototypes,

67


Intangible assets IVIAS 38; SIC 29, 32; IFRIC 4

Other costs similar to R & D costs:

Start-up costs for a new operation

Initial operating losses should be expensed as incurred

Advertising costs

Companies spend considerable sums on research and development:




Total Total

68


Investment propertyIAS 40



Chapter 10 except 8-12; 14-15

Chapter 11 except 6; 13-15; 17

Chapter 12 except 2, 3, 10

Self-test quizzes

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Chapter 12 except 4, 5, 7, 11, 21


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69




Total Total


Definition:

Any contract that gives rise to a financial asset of one entity

and a financial liability or equity interest of another entity

Umbrella term for financial assets and financial liabilities

Categories of financial assets:

Contractual right to receive cash from another party

Equity investment of another company

Cash and cash equivalents

Out of consideration:

Accounting for derivative instruments

Financial instruments that derive their value from values of other assets

Examples: financial forwards, options, swaps

Financial instrumentsIAS 32, 39; IFRS 7; SIC 12, 27; IFRIC 2, 5, 9, 10, 11

Financial instruments

Financial assets

70


Financial assets legal position: < 2015


Definition:

Cash:

Most liquid assets

Examples: coins, bank notes, cashiers checks, bank drafts, saving accounts,

Cash equivalents:

Short-term, highly liquid investments, readily convertible to cash

Examples: commercial papers, money market funds,

Recognition & measurement:

Par value has to be capitalized

(Re)valuation is subject to currency fluctuations

Cash and cash equivalentsIAS 32, 39; IFRS 7; SIC 12, 27; IFRIC 2, 5, 9, 10, 11

71


Definition:

Claims held against customers and others (employees, subsidiaries, ) for goodsand services (trade receivables) or money (non-trade or other receivables)

Current receivables (to be collected within a year); non-current receivables

with a long-term maturity)

Recognition:

Exchange price has to be recognized (price stated in the invoice)

Immediate reductions are not recognized in the accounting records

Measurement:

Receivables are reported at the cash realizable value

Bad debt and uncollectible receivables must be written down/off

Sub-account called allowance for doubtful accounts is used

Trade and other receivablesIAS 32, 39; IFRS 7; SIC 12, 27; IFRIC 2, 5, 9, 10, 11


Category CharacteristicsValuation approach and reporting on the

statement of financial position

Income effects and reporting on the

statement of profit or loss and other

comprehensive income

Trading investment

Debt/equity securities

Not held-for-collection

Part of a trading strategy

Investments shown at fair value

Current assets

Interest/dividends are recognized as revenue

Unrealized holding gains/losses are included

in net income

Available-for-sale

investment

Debt/equity securities

Non-trading segment

Catchall element

Investments shown at fair value

Current or long-term assets

Unrealized holding gains/losses are a

separate component of stockholders equity

Interest/dividends are recognized as revenue

Unrealized holding gains and losses are NOT

included in net income, but in

other comprehensive income

Held-to-maturity

investment

Debt securities ONLY

Held-for-collection of

contractual cash flow until

maturity

Investments shown at amortized cost

Current or long-term assets

Interest is recognized as revenue

Fair value at closing date is basically irrelevant

Impairment loss is only recorded in

case of a permanent loss of future cash flows

Equity method

and/or

consolidation

Equity securities ONLY

Significant influence/control

Holdings greater than 20 %

Full-consolidation or equity-method

(as discussed in chapter 2)

(Other) financial assetsIAS 32, 39; IFRS 7; SIC 12, 27; IFRIC 2, 5, 9, 10, 11

IASB expects transfers between categories to be rare!

72


Example:

On November 3, 2X11, Republic Corporation purchased ordinary shares of three companies (of Burberry at 259,700,of Nestl at 317,500 and of St. Regis Pulp Co. at 141,350), each investment representing less than a 20 % interest.

On December 6, 2X11, Republic receives a cash dividend of 4,200 on its investment in the ordinary shares of Nestl.At December 31, 2X11, Republics equity investment portfolio has the following fair value: Burberry 275,000, Nestl 304,000 and St. Regis Pulp Co. 104,000. On January 23, 2X12, Republic sold all of its Burberry ordinary shares,receiving 287,220.

Record the

investments on November 3, 2X11.

receipt of the cash dividend on December 6, 2X11.

revaluation on December 31, 2X11.

sale of the shares on January 23, 2X12.

Trading investmentsIAS 32, 39; IFRS 7; SIC 12, 27; IFRIC 2, 5, 9, 10, 11


Example:

On December 10, 2X11, Republic Corporation purchased 1,000 ordinary shares of Hawthorne Company for 20.75 per

share (total cost: 20,750). The investment represents less than a 20 % interest. Hawthorne is a distributor for

Republic products in certain locales, the laws of which require a minimum level of share ownership of a company in

that region. The investment in Hawthorne meets this regulatory requirement.

On December 27, 2X11, Republic receives a cash dividend of 450 on its investment in the ordinary shares of

Hawthorne Company. At December 31, 2X11, Republics investment in Hawthorne has a fair value of 24,000. On

December 20, 2X12, Republic sells all of its Hawthorne Company ordinary shares receiving net proceeds of 22,500.

Record the

investment on December 10, 2X11.

receipt of the cash dividend on December 27, 2X11.

revaluation on December 31, 2X11.

sale of the shares on December 20, 2X12.

Available-for-sale investmentsIAS 32, 39; IFRS 7; SIC 12, 27; IFRIC 2, 5, 9, 10, 11

73


Example I:

Robinson Company purchased $ 100,000 of 8 % bonds of Evermaster Corporation on January 1, 2X11, at a discount,

paying $ 92,278. The bonds mature January 1, 2X16 and yield 10 %; interest is payable each July 1 and January 1. The

schedule of interest revenue and bond discount amortization according to the effective-interest method is as follows:

Assume that Robinson Company sells its investment on November 1, 2X13, at 99.75 plus accrued interest.

Record the

investment and the receipt of the first semi annual interest payment on July 1, 2X11. accrual of the interest on December 31, 2X11.

Held-to-maturity investments IIAS 32, 39; IFRS 7; SIC 12, 27; IFRIC 2, 5, 9, 10, 11


Example II:

At December 31, 2X10, Mayhew Company has a debt investment in Bellovary Inc., purchased at par for $ 200,000. The

investment has a term of four years, with annual interest payments at 10 %, paid at the end of each year (the

historical effective-interest rate is 10 %). This debt investment is classified as held-for-collection.

Use the following information to record the loss on impairment.

Held-to-maturity investments IIIAS 32, 39; IFRS 7; SIC 12, 27; IFRIC 2, 5, 9, 10, 11

74


Financial assets legal position: >= 2015


1 2

3

(available for sale)

(held-to-maturtiy)

(Other) financial assetsIAS 32; IFRS 7, 9; SIC 12, 27; IFRIC 2, 5, 9, 10, 11

Trading strategy

YesNo

= equity security

75


Annual re

port, W

olfo

rd, 2

010/2011, 8

8 a

nd 9

3.

Financial instruments practical example IIAS 32, 39 (< 2015); IFRS 7, 9 (>=2015); SIC 12, 27; IFRIC 2, 5, 9, 10, 11


Financial instruments practical example IIIAS 32, 39 (< 2015); IFRS 7, 9 (>=2015); SIC 12, 27; IFRIC 2, 5, 9, 10, 11

Annual re

port, W

olfo

rd, 2

010/2011, 1

15.

76




Total Total


Classification:

Non-current assets that are no longer used in the production process

Non-current assets available for immediate sale in the given period

High probability of sale is indicated somehow (management plans, )

Specific regulations:

Presentation: non-current assets must be presented separately in the balance sheet

Measurement:

Initial measurement: former carrying amount is used for reclassification

Subsequent measurement:

No depreciation/amortization is used (similar to the treatment of inventories)

Usage of the lower of (initial) carrying amount and fair value less costs to sell

The value-in-use plays no role ( impairment test!)

Generally write downs and write ups are always recognized in the income statement

Non-current assets held for saleIFRS 5

77



Chapter 17 except 7-11, 14,

Self-test quizzes

bitly.com/IFRSV2

Chapter 17 except 7-11, 16-21


bitly.com/IFRSV2





Total Total

78


Definition:

Items held for sale

Goods to be used in the production of goods to be sold

Balance sheet items:

Merchandising company:

One inventory account

Purchase goods in form ready for sale

Manufacturing company:

Raw materials

Work in process

Finished goods

Out of consideration:

Construction contracts (IAS 11)

Agricultural produce, biological assets (IAS 41)

Inventories IIAS 2; SIC 32

Inventory cost flow:


Initial measurement:

Acquisition costs

Manufacturing costs

Subsequent measurement:

First step - physical inventory:

Near the end of the (fiscal) year

Verification of the inventory records

Final result: amount of physical goods on hand

Second step computation of ending inventory at historical cost:

Assumption of inventory cost flow is needed to handle price fluctuations during the period

Cost flow methods: specific identification method, average cost method, FIFO principle

COGS reduce the initial balance of the inventory account to the level of the ending inventory at historical cost

Cost of goods sold (COGS) are charged to expense

Inventories IIIAS 2; SIC 32

79


Inventories IIIIAS 2; SIC 32

Third step impairment of stocks:

Compulsory usage of lower-of-cost-or-net realizable value (LCNRV)

Net realizable value: estimated selling price less estimated costs to complete and estimated costs to make a sale

Compulsory recovery of inventory loss, reversal is limited to amount of original write-down

Write-downs and write-ups affect the net income


Example 1 - Macarty Corporation:

Macarty Corporation has an unfinished goods inventory with a cost of 50,000. The estimated sales price is 55,000,

estimated cost of completion is 3,500, and estimated cost to sell is 2,500. Compute the amount of inventory write-

down.

Example 2 - Ricardo Company:

Use the following inventory data for Ricardo Company to revaluate the inventories on December 31, 2X11.

Ending inventory (at historical cost): 82,000

Ending inventory (at NRV): 70,000

Assume that in the subsequent period, market conditions change, such that the net realizable value increases to a)

74,000 and b) 84,000. Record the entries for the revaluation of the inventories in 2X11 and 2X12.

Inventories IVIAS 2; SIC 32

80


Definition:

Contract specifically negotiated for the construction of an asset or a combination of assets that are closely

interrelated or interdependent in terms of their design, technology and function or their ultimate purpose or use

Construction of a bridge, building, pipeline, road, ship, tunnel,

Specific methods of revenue recognition must be used

Percentage-of-completion method (PoC-method):

To be used, if total contract revenue/costs can be measured reliably as well as both the contract costs to complete

the contract and the stage of contract completion at the end of each period can be measured reliably

A continuous sale occurring as the work progresses is assumed

Revenues are recognized according to progression, i. e. proportional gains are recognized in years of construction

Exemption: a contract loss on an unprofitable contract must immediately be recognized in the current period

Construction contracts I IAS 11; SIC 27, 32


accumulated revenues

31.12.20X0

accumulated expenses

31.12.20X1 31.12.20X2

End

1.1.20X0

Beginning >

33 %

66 %

100 %

Balance reflects the

cumulative (sub-)gain

Calculation for revenue to be recognized

using the PoC-method

Construction contracts II IAS 11; SIC 27, 32

81


Cost-recovery (zero-profit) method:

To be used, if conditions for using the percentage-of-completion method cannot be met

Revenues are recognized only to the extent of costs incurred

No gross profit is recognized in years of construction

Total profit is recognized at point of sale/at the date of delivery (=final acceptance)

Construction contracts III IAS 11; SIC 27, 32


Example:

KC Construction Company has a contract to construct a 4,500,000 bridge at an estimated cost of 4,000,000. The

contract is to start in July 2X10, and the bridge is to be completed in October 2X12. The following data pertain to the

construction period:

2X10 2X11 2X12

Costs to date: 1,000,000 2,916,000 4,050,000

Estimated costs to complete: 3,000,000 1,134,000 -

Advance payments: 750,000 1,750,000 2,000,000

Conduct the necessary entries to record the construction contract according to the

a) PoC-method

b) Zero-profit-method.

Construction contracts IVIAS 11; SIC 27, 32

82


Annual re

port, S

TRABAG

SE, 2

010, 1

48.

Construction contracts practical example IIAS 11; SIC 27, 32


Annual re

port, S

TRABAG

SE, 2

010, 1

59.

Construction contracts practical example IIIAS 11; SIC 27, 32

83


Annual report, STRABAG SE, 2010, 151.

Construction contracts practical example IIIIAS 11; SIC 27, 32


Minimum line items IAS/IFRS balance sheet

Documents

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