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© 2011 IFRS Foundation
1The IFRS for SMEs
Topic 2.3Section 13 Inventories
Section 16 Investment PropertySec 17 Property, Plant & Equipment
Section 18 Intangible AssetsSection 27 Impairment of Assets
© 2011 IFRS Foundation
2
This PowerPoint presentation was prepared by IFRS Foundation education staff as a convenience for others. It has not been approved by the IASB. The IFRS Foundation allows individuals and organisations to use this presentation to conduct training on the IFRS for SMEs. However, if you make any changes to the PowerPoint presentation, your changes should be clearly identifiable as not part of the presentation prepared by the IFRS Foundation education staff and the copyright notice must be removed from every amended page .
This presentation may be modified from time to time. The latest version
may be downloaded from: http://www.ifrs.org/IFRS+for+SMEs/SME+Workshops.htm
The accounting requirements applicable to small and medium‑sized entities (SMEs) are set out in the International Financial Reporting Standard (IFRS) for SMEs, which was issued by the IASB in July 2009.
The IFRS Foundation, the authors, the presenters and the publishers do not accept responsibility for loss caused to any person who acts or refrains from acting in reliance on the material in this PowerPoint presentation, whether such loss is caused by negligence or otherwise.
© 2011 IFRS Foundation
3The IFRS for SMEs
Scope of
Sections 13 and 16–18
© 2011 IFRS Foundation
4Section 13 – scope
Inventories are assets:– held for sale in the ordinary course
of business (finished goods); – in the process of production for such sale
(work in process); or – in the form of materials or supplies to be
consumed in the production process or in the rendering of services (raw materials & consumables).
• Section 13 specifies accounting + reporting for inventories
© 2011 IFRS Foundation
Section 13 – scope exclusions
• Section 13 applies to all inventories, except– work in progress arising under construction
contracts– financial instruments– biological assets related to agricultural
activity and agricultural produce at the point of harvest
5
© 2011 IFRS Foundation
6Section 17 – definition of PP&E
Property, plant and equipment (PP&E) are tangible assets:
• held for – use in the production or supply of goods
or services, – for rental to others, or – for administrative purposes;
• & are expected to be used in +1 period.
© 2011 IFRS Foundation
7Section 17 – scope
• Section 17 specifies accounting & reporting for: – property, plant and equipment; and – investment property whose fair value
cannot be measured reliably without undue cost or effort on an ongoing basis.
© 2011 IFRS Foundation
8Section 16 – scopeInvestment property is 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.
• Section 16 specifies accounting & reporting for: – investment property whose fair value can
be determined reliably without undue cost or effort on an ongoing basis
© 2011 IFRS Foundation
9Section 18 – definition intangible asset
Intangible = identifiable non-monetary asset without physical substance Identifiable when:– separable, ie can be separated from the
entity & sold, transferred, licensed, rented or exchanged, either individually or together with a related contract, asset or liability, or
– arises from contractual or legal rights
© 2011 IFRS Foundation
10Section 18 – scope
• Section 18 specifies accounting & reporting for intangible assets, excluding – goodwill– financial assets– mineral rights & mineral reserves, such as
oil, natural gas and similar non‑regenerative resources
© 2011 IFRS Foundation
Sections 13 & 16–18 – scope examples
In scope of S13, S16, S17 or S18?
• Ex 1*: A trades in property (ie it buys property to sell it at a profit near-term)
• Ex 2*: B trades in transferable taxi licences
• Ex 3*: C produces wine from grapes harvested from its vineyards in a 3-year production cycle
* see example with the same number in Module 13 of the IFRS Foundation training material
11
© 2011 IFRS Foundation
Sections 13 & 16–18 –examples continued
In scope of S13, S16, S17 or S18?
• Ex 4*: D holds lubricants that are consumed by its machine in producing goods
• Ex 6*: E maintains its plant using: – a bespoke long-life cleaning machine; & – a set of low-value common tools acquired
from a local hardware store.
* see example with the same number in Module 13 of the IFRS Foundation training material
12
© 2011 IFRS Foundation
Sections 13 & 16–18 –examples continued
In scope of S13, S16, S17 or S18?
• Ex 9*: F operate a hotel from a building it owns– it rents out hotel rooms for short-stays– guest services included in the room rate =
breakfast and television– services charged for separately = other
meals, room bar, gymnasium facilities & guided tours
* see example 9 in Module 16 of the IFRS Foundation training material
13
© 2011 IFRS Foundation
Sections 13 & 16–18 –examples continued
In scope of S13, S16, S17 or S18?
• Ex 3*: G buys a building to earn rentals under an operating lease from its subsidiary. The sub sells its products from the building
• Ex 7*: H owns– a herd of cattle—breeding stock of its
agricultural activities – a tractor used to transport feed to the
herd* see example with the same number in Module 17 of the IFRS Foundation training material
14
© 2011 IFRS Foundation
Sections 13 & 16–18 –examples continued
In scope of S13, S16, S17 or S18?
• Ex 1: I owns digital films and audio recordings which it licenses to its customers
• Ex 12: In accounting for the acquisition of the net assets and operations of a competitor J recognised future economic benefits arising from assets that are not individually identified as an asset (goodwill)
15
© 2011 IFRS Foundation
Examples of classification judgements
– when unclear what purpose of acquiring property is (inventories, IP or PP&E?)
– when property owner provide ancillary services to the occupants of a property (IP or PP&E?)
– mixed use property (IP or PP&E?)– when is undue cost or effort necessary to
measure the fair value of an IP on an ongoing basis (IP or PP&E?)
16
© 2011 IFRS Foundation
17The IFRS for SMEs
Section 13 Inventoriesand
Paragraphs 27.2–27.4 (impairment of inventories)
© 2011 IFRS Foundation
18Section 13 – measurement
• Inventories in the scope of Section 13 are measured at the lower of: – cost; and – estimated selling price less costs to
complete and sell (SP-CTC&S).
© 2011 IFRS Foundation
Section 13 – measurement exemptions
• Section 13 does not apply to the measurement of inventories of – producers of agricultural and forest
products, agricultural produce after harvest, and minerals and mineral products, or
– commodity brokers and dealers
when measured at fair value less costs to sell through profit or loss
19
© 2011 IFRS Foundation
Section 13 – measurement examples
Are these inventories measured in accordance with Section 13?
• Ex 7*: A commodity broker-trader acquires wheat in anticipation of selling it in the short-term. The broker-trader measures such inventories at fair value less costs to sell
• Ex 8*: Same as Ex 7 except the broker‑trader measures inventories at cost
* see example with the same number in Module 13 of the IFRS Foundation training material
20
© 2011 IFRS Foundation
21Section 13 – cost
• Cost = costs of purchase + costs of conversion + other costs incurred in bringing the inventories to their present location and condition
© 2011 IFRS Foundation
22Section 13 – cost of purchase
• Cost of purchase = purchase price + import duties + other taxes (non-refundable in nature) + other direct costs– costs of purchase is after deducting trade
discounts, rebates etc– if purchase arrangement effectively contains an
unstated financing element, eg a difference between the purchase price for normal credit terms and the deferred settlement amount, the difference is recognised as interest expense over the period of the financing (ie it is not added to the cost of the inventories)
© 2011 IFRS Foundation
23Section 13 – examples cost of purchase
• Ex 13*: A buys a good priced at CU500 per unit from Z. Z awards A a 20% discount on orders of +100 units and 10% discount when A buys +999 units in 1 year. The discounts apply to all units acquired in a year. A buys as follows: 800 units on 1/1/20X1 and 200 units on 24/12/20X1.
On 31/12/20X1, 150 units were unsold (ie inventories of A).
* see example 13 in Module 13 of the IFRS Foundation training material
© 2011 IFRS Foundation
24Section 13 – examples cost of purchase• Ex 13 continued:
A measures the cost of the inventories in 20X1 at CU350,000 [ie 1,000 units × (CU500 list price less 30%(CU500) volume discount)], because all units purchased in the year get the full 30% discount.
• A recognises: – expense (cost of sales) of CU297,500 [ie 850
units sold × (CU500 list price less 30%(CU500) volume discount)] in profit or loss in 20X1
– asset (inventories) of CU52,500 [ie 150 units unsold × (CU500 less 30%(CU500) discount)] at 31/12/20X1.
© 2011 IFRS Foundation
25Section 13 – examples cost of purchase
• Ex 17*: A buys inventory for CU2,000,000 on 2‑year interest‑free credit. Appropriate discount rate = 10% per year.
The cost of the inventory is CU1,652,893 (ie the present value of the future payment).
Calculation: CU2,000,000 future payment ÷ (1.1)2.
* see example 17 in Module 13 of the IFRS Foundation training material
© 2011 IFRS Foundation
26Section 13 – cost of conversion
• Cost of conversion = direct costs + indirect costs (allocated production overheads)– allocated production overheads = fixed
production overheads + variable production overheads
© 2011 IFRS Foundation
27Section 13 – examples conversion costs• Ex 18*: A makes concrete blocks in
reusable moulds. Blocks dry in a drying room for 2 weeks. Dried blocks & raw mat’s stored in separate rooms.
A front-end loader (man 1) adds materials to the mixing machine operated by man 2. Casual labourers remove blocks from moulds. Man 3 supervises the factory. Man 4 does admin, finance and sales.A operates from rented premises (fixed payments). * see example 18 in Module 13 of the IFRS Foundation training material
© 2011 IFRS Foundation
28Section 13 – examples conversion cost• Ex 18 continued:
Costs of conversion include– direct costs: casual labour.– production overheads: factory rent (incl.
raw mat’s area & drying room but excl. finished goods room); staff cost of man 1,2 & 3; depreciation of equipment (front end loader, mixing machine and moulds).
© 2011 IFRS Foundation
29Section 13 – allocate production overheads
• Allocate fixed production overheads on– normal capacity if low or normal
production – actual production (units) if abnormally
high production (so that inventory is not measured above cost)
– note: unallocated overheads are expensed when incurred
• Allocate variable production overheads on actual production
© 2011 IFRS Foundation
30Section 13 – example FP overheads• Ex 20*: Fixed production (FP) overheads
= CU900,000. 200,000 units produced.
Normal capacity = 250,000 units.
Allocation rate: CU900,000 ÷ 250,000 units normal capacity = CU3.6 per unit produced.
Allocate to inventories: CU3.6 × 200,000 units = CU720,000.
Unallocated overheads of CU180,000 are expense (ie CU900,000 less CU720,000 in inventory). * see example 20 in Module 13 of the IFRS Foundation training material
© 2011 IFRS Foundation
31Section 13 – example FP overheads
• Ex 21*: Same as Ex 20 except 300,000 units produced. Normal capacity = 250,000 units.
Allocation rate: CU900,000 ÷ 300,000 units actual production = CU3 per unit produced.
Allocate to inventories: CU3 × 300,000 units = CU900,000
* see example 21 in Module 13 of the IFRS Foundation training material
© 2011 IFRS Foundation
32Section 13 – example wastage• Ex 27*: Total costs of a production run =
CU100,000 (including a cost of normal wastage of CU2,000). The weakening of operating controls while the owner-manager was in hospital caused the wastage of raw materials to increased to CU7,000 per production run. The abnormal wastage cost of CU5,000 (CU7,000 – CU2,000) is not included in the cost of inventory but recognised as an expense.
* see example 27 in Module 13 of the IFRS Foundation training material
© 2011 IFRS Foundation
33Section 13 – joint and by-products• Production process results in more than one
product being produced simultaneously – joint product, or– main product and by-product.
• Allocate joint costs on a rational and consistent basis
• If by-product is immaterial– measure by-product at selling price less costs
to complete and sell (SP-CTC&S) – deduct this amount from the cost of the main
product.
© 2011 IFRS Foundation
34Section 13 – example by-product• Ex 22*: A production process costs
CU100,000 (including allocated overheads). It mixes base chemicals to produce:– 5,000 litres of product A (sales value =
CU250,000); and– 1,000 litres of by-product C (sales value =
CU2,000).
Cost per litre of A = CU19.60 (ie CU100,000 less CU2,000 SP of C) ÷ 5,000 litres = CU19.60.
* see example 22 in Module 13 of the IFRS Foundation training material
© 2011 IFRS Foundation
35Section 13 – example joint product
• Ex 23*: Same as in Ex 22 except, instead of by‑product ‘C’ there is a joint product ‘B’. Total costs = CU300,000 to produce: – 5,000 litres of A (sales value =
CU250,000); and– 4,000 litres of B (sales value =
CU400,000).
Allocate joint process costs on relative sales values.
* see example 23 in Module 13 of the IFRS Foundation training material
© 2011 IFRS Foundation
36Section 13 – example joint product continued
• Ex 23 continued:
Cost per litre of A = CU23.08 & B = CU46.15.
Calculation A: CU250,000 SP of A ÷ CU650,000 combined SP of A & B × CU300,000 costs = CU115,385 cost of 5,000 litres of A. CU115,385 ÷ 5,000 litres = CU23.08.
Calculation B: CU400,000 SP of B ÷ CU650,000 combined SP of A & B × CU300,000 costs = CU184,615 cost of 4,000 litres of B. CU184,615 ÷ 4,000 litres = CU46.15.
© 2011 IFRS Foundation
37Section 13 – other costs• Include other costs in the cost of
inventories only to the extent that they are incurred in bringing the inventories to their present location and condition.
• Ex 25*: A manufactures individually packaged pens. The cost of the inventory includes the cost of manufacturing the pens and the individual packaging in which they are presented for sale.
* see example 25 in Module 13 of the IFRS Foundation training material
© 2011 IFRS Foundation
38Section 13 – cost formulas• Specific identification of costs if
– goods not ordinarily interchangeable or – segregated for specific projects
• Other inventories– FIFO or– weighted average (WA)
• Can use other ways if approximates cost – standard cost – retail method – most recent purchase price
© 2011 IFRS Foundation
39Section 27 – impairment of inventories• Assess at each reporting date whether
any inventories are impaired, by– comparing the carrying amount (CA) of
each item of inventory with its selling price less costs to complete and sell (SP-CTC&S)
– if CA > SP-CTC&S reduce CA to SP-CTC&S
– that reduction = impairment loss – impairment loss = expense in profit or loss
© 2011 IFRS Foundation
40Section 27 – examples impairment• Ex 1: At reporting date
– CA (cost) of raw materials = 100– replacement cost = 80 – est. selling price of finished good = 200 – est. costs to convert the raw material into
finished good = 60– est. costs to sell the finished good = 30
• Ex 2: Same as Ex 1 except est. SP = 180
© 2011 IFRS Foundation
41Section 27 – impairment exception
• Inventory is assessed for impairment item by item– only if it is impracticable to determine SP-
CTC&S item-by-item may items of inventory: –relating to the same product line that have
similar purposes or end uses; and –that are produced and marketed in the same
geographical area –be grouped for the purpose of assessing impairment.
© 2011 IFRS Foundation
42Section 27 – examples impairment• Ex 3: A has 3 items of inventory
(finished goods) that qualify for impairment testing as a group– CA (cost) 90 + 100 + 130 = 320– est. SP-CTC&S for the 3 items = 330
• Ex 4: Same as Ex 3 except – items do not qualify for impairment testing
as a group; and – est. SP-CTC&S = 110 each.
© 2011 IFRS Foundation
Section 27 – reversal of impairment
• Reverse the impairment when: –circumstances that caused inventories to
be impaired no longer exist; or –there is clear evidence of an increase in
SP-CTC&S because of changed economic circumstances
• Amount of reversal is limited to the amount of the original impairment loss
–ie CA cannot be > cost
43
© 2011 IFRS Foundation
44Section 27 – example reverse impairment• Ex 5: At 31/12/20X1
– because of a decline in economic circumstances recognised an impairment loss
on an item of inventory of 30 (ie cost = 100 & SP-CTC&S = 70)
At 31/12/20X2
– because of an improvement in economic circumstance the SP-CTC&S of that item is 120
© 2011 IFRS Foundation
45Section 13 – measurement judgements
• For cost, examples include– determining normal capacity– separating normal & abnormal wastage– allocating joint cost to joint products
–if no market for joint products at separation
–if multiple joint products and exit joint production at different stages
• For the impairment– estimating SP-CTC&S
© 2011 IFRS Foundation
46Section 13 – derecognition
• Expense inventory when– impaired– derecognised (ie when sold)
• Allocate inventory to another asset– eg inventory used as a component of self-
constructed PP&E.
© 2011 IFRS Foundation
47Section 13 – disclosure
• Disclose– accounting policies for measuring
inventories – carrying amount of inventories analysed by
class– amount expensed in the period– impairment losses recognised or reversed– amount pledged as security for liabilities
© 2011 IFRS Foundation
48The IFRS for SMEs
Section 17
Property, Plant and Equipment
(including investment property whose fair value cannot be measured reliably on an
ongoing basis)
© 2011 IFRS Foundation
49Section 17 – recognition
Recognise the cost of an item of PP&E as an asset if:– probable future benefits inflows; and– cost can be measured reliably.
© 2011 IFRS Foundation
50Section 17 – measurement
• Initial measurement of PP&E = cost– cost = purchase price + direct cost for PP&E
become capable of operating as intended + initial estimate of obligation to dismantle/remove
– cash price equivalent at the recognition date–if payment deferred beyond normal credit
terms, cost = present value of future payments
• Subsequent measurement = cost less depreciation and impairment losses
© 2011 IFRS Foundation
51Section 17 – replacing parts
• Parts that require replacement at regular intervals (eg roof and furnace’s lining) – add cost of replacement to the carrying
amount of the item if the replacement adds benefits
– if consumption pattern different, depreciate component separately over its useful life
– derecognise the parts replaced.
• Day-to-day servicing costs = expense
© 2011 IFRS Foundation
52Section 17 – exchange of assets
• Cost of PP&E acquired in exchange for a non-monetary asset = fair value unless the transaction lacks commercial substance– if fair value cannot be measured reliably,
cost = carrying amount of the asset given up
© 2011 IFRS Foundation
53Section 17 – cost• Cost of PP&E comprises:
– purchase price (incl. fees, duties & purchase taxes after deducting trade discounts & rebates)
– costs directly attributable to bring the PP&E to location & condition necessary for it to be capable of operating as intended by management: – site prep. costs, delivery & handling,
installation & assembly, & testing functions.
– initial estimate of dismantling & removing costs and site restoration.
© 2011 IFRS Foundation
54Section 17 – example cost• Ex 15*: Costs before ready for use as
intended: – purchase price = 600 (incl 50 refundable
purch tax)– costs 120 to get equip to site and to install– in 10 yrs must restore land (PV to restore =
100)– costs 135 to modify equip to operate as
intended– costs 10 to train staff to operate equip. – costs 37 for testing and final modifications
23 = operating loss after ready for use.* Adapted from example 15 in Module 17 of the IFRS Foundation training material
© 2011 IFRS Foundation
55Section 17 – depreciation• To allocate depreciable amount over
items useful life use judgement to estimate– useful life– residual value– depreciation method (eg straight-line,
diminishing balance, units of production)
• Re-evaluate estimates if change indicator– change is a change in accounting
estimate
© 2011 IFRS Foundation
56Section 17 – depreciation continued
• Depreciation begins when the PP&E is available for use– ie when it is in the location and condition
necessary for it to be capable of operating in the manner intended by management
• Depreciation stops when the PP&E is derecognised
© 2011 IFRS Foundation
57Section 17 – example depreciation
• Ex 20*: On 1/1/20X1 buy machine for CU100,000. Initial estimates & judgements: – useful life = 10 yrs & residual value = 0 – straight‑line depreciation is appropriate
At 31/12/20X5 year‑end reassess:– useful life = 24 yrs (from the date of acq)
and residual value = CU20,000– straight‑line depreciation is appropriate
* adapted from example 20 in Module 17 of the IFRS Foundation training material
© 2011 IFRS Foundation
58Section 17 – derecognition
• Derecognise PP&E on disposal or when no further benefits are expected from its use or disposal
• Gain or loss = net disposal proceeds (if any) less carrying amount– show gain or loss in profit or loss (except
for some sale & leasebacks)– gain is not revenue
© 2011 IFRS Foundation
59Section 17 – example derecognition
• Ex 35*: On 1/11/20X5 sold building for 3,500. Carrying amount = 2,000. Selling costs = 350 commission & 10 legal fees.
On 1/11/20X5 recognise gain of CU1,140 in profit or loss
[calculation: 3,500 less (2,000 + 350 + 10)]* see example 35 in Module 17 of the IFRS Foundation training material
© 2011 IFRS Foundation
60Section 17 – disclosures
• Disclose for each class of PP&E– measurement bases– depreciation methods– useful lives or depreciation rates– gross carrying amount & accumulated
depreciation (incl. impairment losses) at beginning & end of period
– reconciliation of carrying amount at beginning & end of the reporting period showing specified items (comparatives not required)
© 2011 IFRS Foundation
61Section 17 – other disclosures
• Also disclose– existence and carrying amounts of PP&E
when entity has restricted title or PP&E is pledged as security for liabilities
– amount of contractual commitments for the acquisition of PP&E
© 2011 IFRS Foundation
62The IFRS for SMEs
Section 18
Intangible Assets other than Goodwill
© 2011 IFRS Foundation
63Section 18 – recognitionRecognise the cost of intangible as asset if:
– probable future benefits inflows, and– cost can be measured reliably– the asset does not result from
expenditure incurred internally on an intangible item– cannot recognise R&D costs; internally
generated brands, logos, publishing titles, customer lists; expenditure to open new facilities or launch new products; training activities; advertising; relocating or reorganising costs.
© 2011 IFRS Foundation
64Section 18 – recognise this brand?
• Ex 1: A developed a brand that allows it to charge a premium for its products.
A maintains & enhances its brand by sponsoring local events & advertising.
• Ex 2: Same as Ex 1 except A bought brand from a competitor in a separate acquisition.
© 2011 IFRS Foundation
65
Section 18 – intangibles in business com
• Intangible asset acquired in a bus com– is normally recognised as a separate asset
–fair value can be measured reliably– however, not recognised when arises from
legal/contractual rights & fair value cannot be measured reliably because the asset either:–is not separable from goodwill; or –is separable but no history or evidence of
exchange transactions for similar assets, and otherwise estimating fair value would be dependent on immeasurable variables.
© 2011 IFRS Foundation
66Section 18 – initial measurement
• Initial measurement of intangible = cost– if separately acquired, cost = purchase
price + directly attrib. cost of preparing for intended use
– if acquired in a business combination, cost = at acquisition fair value
– if acquired in government grant, cost = fair value at the date the grant is received or receivable
Internally generated intangibles are not recognised & therefore are not measured
© 2011 IFRS Foundation
67Section 18 – example business com
Ex 3: A buys B when B’s intangibles were:
A incurred 200 to complete in-process R&D project & decides to develop the related product commercially.
CA FV
Customer list 0 50
In process R&D project 0 80
Licence to operate 100 150
Brand (trademark & brand name) 0 300
© 2011 IFRS Foundation
68Section 18 – judgements about cost
• Judgements in measuring cost include:– deferred payment—determining the
discount rate– exchange transaction—estimating fair
value if no active market for asset received or asset given up
– acquired in a business combination—estimating fair value if no active markets & judging if fair value can be measured reliably (for recognition)
– acquired by government grant—estimating fair value of if no active market
© 2011 IFRS Foundation
69Section 18 – subsequent measurement
• After initial recognition measure intangibles at cost less amortisation & impairment losses
• Similar to PP&E but– all intangibles considered to have finite useful
life– useful life not > the contractual/legal right– useful life includes renewal periods only if
evidence to support likely renewal without significant cost
– useful life = 10 yrs if cannot estimate reliably– residual value is 0, except in specified
circumstances
© 2011 IFRS Foundation
70Section 18 – estimating useful life• Ex 4: A acquires a customer list.
Expects to benefit from list for 1–3 yrs.
• Ex 5: B acquires a 5-yr airline route authority (ARA) that is renewable every 5 yrs at no cost– renewal is routine if specified rules &
regulations are complied with– B is compliant & expects to fly the route
indefinitely– an analysis of demand and cash flows
supports those assumptions
© 2011 IFRS Foundation
71Section 18 – derecognition
• Derecognise intangibles on disposal or when no further benefits are expected from its use or disposal
• Gain or loss = net disposal proceeds (if any) less carrying amount– show gain or loss in profit or loss (except
for some sale & leasebacks)– gain is not revenue
© 2011 IFRS Foundation
72Section 18 – disclosures• Disclose for each class of intangible
– line item in income statement (or SOCI or SOI&RE) in which amortisation is included
– amortisation methods– useful lives or amortisation rates– gross carrying amount & accumulated
amortisation (incl. impairment losses) at beginning & end of period
– reconciliation of carrying amount at beginning & end of the reporting period showing specified items (comparatives not required)
© 2011 IFRS Foundation
73Section 18 – other disclosures– R&D expenditure expensed in the period– existence & carrying amounts of intangible
with restricted title or pledged as security for liability
– amount of contractual commitments for the acquisition of intangibles
– (i) description, (ii) carrying amount and (iii) remaining amortisation period of individual intangible asset that is material to the entity’s financial statements
– if acquired as government grant & initially recognised at fair value―the fair value initially recognised & the carrying amount
© 2011 IFRS Foundation
74The IFRS for SMEs
Section 27
Impairment of Assets
© 2011 IFRS Foundation
75Section 27 – scope
• Section 27 specifies accounting and reporting of impairment losses of all assets except:– deferred tax assets– assets arising from employee benefits– financial assets in scope of Sections 11 & 12– assets measured at fair value
© 2011 IFRS Foundation
76Section 27 – general principles• Assets except inventories:
– at reporting date assess whether there is any indication that an asset may be impaired
– if any such indication exists, estimate the recoverable amount (RA) of the asset
– impair if carrying amount (CA) > RA– recognise impairment loss in profit or loss
• Note: if impairment indicated– review the remaining useful life, the
depreciation (amortisation) method or the residual value for the asset even if no impairment loss found
© 2011 IFRS Foundation
77Section 27 – impairment testing level• Impairment test at level of
– individual asset (if possible)– otherwise cash-generating unit (CGU)
– eg when need to calculate value in use and the individual assets do not generate cash flows by themselves
A 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.
© 2011 IFRS Foundation
78Section 27 – impairment indicators
• Consider, as a minimum:
• External sources of information in a period– asset’s market value declined significantly
> expected– significant changes in the technological,
market, economic or legal environment– market rates increased (eg effect on
discount rate)– CA of the net assets > estimated fair
value of the entity
© 2011 IFRS Foundation
79
C Section 27 – impairment indicators continued
• Internal sources of information– obsolete or physical damaged asset– significant changes in the extent or manner
in which, an asset is (or is expected to be) used– eg idle assets, plans to discontinue or
restructure operation, plans to dispose before expected, and reassessing the useful life of an asset as finite rather than indefinite.
– internal reporting indicates that the economic performance of an asset is, or will be, worse than expected (eg operating results & cash flows)
© 2011 IFRS Foundation
80Section 27 – recoverable amount
• Recoverable amount = higher of value in use (VIU) & fair value less costs to sell (FV-CTS)– if either VIU or FV-CTS > CA then no
need to determine the other– if no reason to believe VIU > FV-CTS,
then FV-CTS may be used as RA
© 2011 IFRS Foundation
81Section 27 – estimating FV-CTS
• FV-CTS = amount obtainable from the sale of an asset in an arm’s length transaction between knowledgeable, willing parties, less the costs of disposal– best evidence is a price in a binding sale
agreement in an arm’s length transaction or a market price in an active market
– if not available, estimate using best information available considering the outcome of recent transactions for similar assets within the same industry
© 2011 IFRS Foundation
82Section 27 – estimating VIU
• VIU = present value of the future net cash flows expected to be derived from an asset.
• Steps to calculate VIU:– estimate future cash flows (in & out) from
continuing use of the asset & its ultimate disposal, and
– apply appropriate discount rate to future cash flows
© 2011 IFRS Foundation
83Section 27 – estimating VIU• Reflect in calculation of VIU:
– est. future cash flows (FCFs) entity expects
– expectations about possible variations in the amount or timing of those FCFs
– time value of money (current market risk-free rate of interest)
– price for uncertainty inherent in the asset– other factors (eg illiquidity) that market
participants would adjust forAvoid double-counting in FCFs & discount
rate
© 2011 IFRS Foundation
84Section 27 – est. VIU cash flows• Estimates of FCFs include:
– cash inflows from the continuing use– cash outflows necessary to generate cash
inflows (directly attributed or allocated on reasonable & consistent basis)
– net cash flows, if any, expected from disposal at end of useful life
• May:– use recent budgets/forecasts to est. cash
flows– extrapolate beyond forecast period using
steady or declining growth rate, unless another is justified
© 2011 IFRS Foundation
85Section 27 – est. VIU cash flows continued
• Est. FCFs for asset in current condition
• Est. FCFs don’t include in/outflows from:– a future restructuring to which an entity is
not yet committed, or – improving or enhancing the asset’s
performance.
• Est. FCFs also don’t include:– cash in/outflows from financing activities,
and – income tax receipts/payments.
© 2011 IFRS Foundation
86Section 27 – est. VIU discount rate
• Discount rate/s is a pre-tax rate/s that reflect/s current market assessments of:– the time value of money (ie current
market risk-free rate of interest); and– the risks specific to the asset for which
the future cash flow estimates have not been adjusted (ie avoid double-counting).
© 2011 IFRS Foundation
87Section 27 – cash generating unit (CGU)
• Allocate impairment loss:– 1st to any goodwill allocated to the CGU– 2nd to other assets pro rata on the basis
CA of each asset in CGU– however, cannot reduce the CA of any
asset below the highest of 0, FV-CTS & VIU (if determinable)–reallocate to other assets of CGU
© 2011 IFRS Foundation
88Section 27 – example CGU impairment• Ex 1: At 31/12/20X1 CA of a CGU’s
assets = 210 (ie 150 taxis, 50 taxi licence & 10 goodwill)Impairment indicated & RA = 170. Fair value of taxis = 140.Impairment loss = 40 (ie 210 CA less 170 RA)1st allocate 10 loss to goodwill2nd allocate remaining 30 loss, ie 22.5 to taxis & 7.5 to licence (pro rata on CA)3rd reallocate 12.5 loss from taxis to licence
© 2011 IFRS Foundation
89Section 27 – goodwill
• On acquisition date goodwill is allocated to each cash-generating unit that is expected to benefit from the synergies of the business combination
• CA of partly-owned CGU is notionally adjusted for the NCI’s share of goodwill before being compared with its RA
© 2011 IFRS Foundation
90Section 27 – example goodwill• Ex 2: Goodwill of CU40 on A’s
acquisition of 75% of B’s shares on 1/1/20X1.
To reflect synergies the group allocated the goodwill 10 to A’s CGU and 30 to B’s CGU.
• For impairment testing purposes only B’s goodwill is notionally grossed up to 40 (ie additional goodwill for NCI = 10).
© 2011 IFRS Foundation
91Section 27 – goodwill continued
• If goodwill cannot be allocated to CGU/s on a non-arbitrary basis, then for the purposes of testing goodwill for impairment, the entity determines the recoverable amount of either:– the acquired entity in its entirety (if
goodwill relates to an acquired entity that has not been integrated).
– the entire group of entities, excluding any entities that have not been integrated (if the goodwill relates to an acquired entity that has been integrated).
© 2011 IFRS Foundation
92Section 27 – reversing impairment loss• General principles:
– at reporting date assess whether there is any indication that impairment has reversed
– if any such indication exists, estimate RA– reverse impairment in profit or loss if CA <
RA, but–reversal cannot increase the CA above
the CA that would have been determined (net of amortisation or depreciation) had no impairment loss been recognised in prior years.
–goodwill impairment cannot be reversed
© 2011 IFRS Foundation
93Section 27 – example reverse impairm’t
• Ex 3: Facts from Ex 1. At 31/12/20X2 CA of CGU = 120 (ie 100 taxis & 20 licence)
Impairment reversal indicated & RA estimated = 150
Potential impairment reversal = 30 (ie 150 RA less 120 CA) but limited to 20 (as follows)
1st allocate to assets pro rata on CAs, ie 5 to licence & 25 to taxis
2nd limit amt allocated to taxis to 7 (if no impairment in 20X1, CA at 20X2 = 107)
© 2011 IFRS Foundation
94Section 27 – example reversal continued
• Ex 3 continued:
3rd reallocate 18 reversal from taxis to licence
Total reversal provisionally allocated to licence = 23 (ie 5 + 18)
4th limit amt allocated to licences to 13 (if no impairment in 20X1, CA at 20X2 = 33)
5th as there are no other assets to reallocate the unallocated 10 (ie 23 less 13) reversal to, limit the total impairment reversal to 20 (ie 7 for taxis and 13 for licence)
© 2011 IFRS Foundation
95Section 27 – after reversal
• After reversing impairment loss– adjust the depreciation/amortisation
charge for the asset in future periods to allocate the asset’s revised CA, less its residual value (if any), on a systematic basis over its remaining useful life.
© 2011 IFRS Foundation
96Section 27 – impairment disclosures• Disclose separately for each of―(a)
inventories; (b) PP&E; (c) goodwill; (d) intangibles other than goodwill; (e) investments in associates; (f) investments in joint ventures: – amount of impairment losses recognised
in profit or loss & line item(s) in the income statement (or SOCI or SOI&RE) in which included.
– same for reversals of impairment losses