Financial Reporting

1. APPLICATION OF IFRS
(IND AS) FOR TRANSACTIONS
Unit -2

2. SYLLABUS
IAS 16 & IAS 40- Tangible Non current
assets & Investment property
IAS 38 – Intangible assets
IAS 36- Impairment
IAS 23- Borrowing Cost
IAS 2 & 41- Inventory & Biological
Assets
IAS 37 – Provisions
IAS 12- Tax
IAS 21- Foreign exchange rates
IFRS 16- Leasing
IFRS 9- Financial Instruments
EPS
NCA HELD FOR SALE
IFRS 13- Fair Value
IFRS 15- Revenue
Deferred income

3. •IAS 16- Tangible NCA
( PPE-Property, Plant &
Equipment)

7. IAS 16- TANGIBLE NCA
( PPE-PROPERTY, PLANT &
EQUIPMENT)
• What are PPE’s?
They are tangible assets held by an entity for more than one accounting
period for use in the production or supply of goods or services, for rental
to others or for administrative purposes.
RECOGNITION :
It is recognized as an asset when:
1. It is probable that future economic benefits associated with the asset
will flow into the entity AND
2. The cost of the asset can be measured reliably.

8. MEASUREMENT
Initial : An item of PPE should initially be measured at its cost:
- Cost involved in bringing the asset into working condition.
- Initial capital costs ( cost of site prep, delivery cost, installation cost, borrowing costs etc.)
- Revenue costs should be written off as incurred.
- Dismantling costs ( PV of these costs should be capitalised, with an equivalent liability set up. )

9. SUBSEQUENT EXPENDITURE
• Subsequent expenditure should only be capitalized if
1. It enhances the economic benefits provided by the asset .
2. It relates to an overhaul or major inspection of the asset.
3. It is replacing a component of a complex asset.( the replaced
component will be derecognized). A complex asset is an asset made
up of a number of components, which each depreciate at different
rates).
All others should be recognized in the SOPL . ( general repairs)

11. ACCOUNTING TREATMENT
• Choice of accounting treatment
1. Cost model 2. Revaluation model
1. COST MODEL : PPE is valued at ‘Cost – accumulated depreciation’
2. REVALUATION MODEL: PPE carried at
‘Revalued amount – subsequent accumulated depreciation’

12. • Gains or losses from Revaluation ?
Revaluation gains are recorded as a component of OCI .
This gain is then carried in a revaluation surplus within equity.
This revaluation surplus is a capital reserve and not permitted to be distributed to shareholders.
Revaluation losses ( impairment) are recognized in the SOPL.
A revaluation loss can be deducted from a previous revaluation gain on the same asset and then be
taken to the OCI .
Excess impairment is then recorded as an ‘impairment’ expense in the SOPL.

14. * DEPRECIATION ON REVALUED
ASSETS
• Depreciation must be charged on remaining useful life of asset.
• The depreciation charge must go to the SOPL for the year.
• Sometimes, an annual reserves transfer will be made from revaluation
surplus  retained earnings to compensate for the additional
depreciation charged on the revalued amount compared to the cost.
This transfer should be shown in the SOCIE.

15. * DISPOSAL OF REVALUED NON-
CURRENT ASSETS
• The profit or loss on disposal of a revalued NCA should be calculated as the difference between net
sale proceeds and the carrying amount.
P/L= Sale proceeds- carrying amount
1. Account for it in the SOPL for the period in which it occurs.
2. Balances on revaluation surplus relating to this asset should now be transferred to the retained
earnings.

16. IAS 40- INVESTMENT PROPERTY
• Investment property is a land or a building , ‘held to earn rentals or for
capital appreciation or both’, rather than for use by the entity or for sale
in the ordinary course of business.
X Owner occupied property not included in the definition.

17. • Investment properties should be measured initially at COST.
• Choice of accounting treatment
1. Cost model 2. Fair value model
1. COST MODEL : investment property is valued at ‘Cost – accumulated
depreciation’
2. FAIR VALUE MODEL: Investment property is
- Revalued to the fair value at the end of each year.
- Gain or loss goes to the SOPL
- No depreciation is charged on the asset.

18. If an asset is transferred from property, plant and equipment to investment
property and the fair value model for investment property is used:
• The asset must first be revalued per IAS 16 (creating a revaluation
surplus in equity) and then transferred into investment property at fair
value.
If the cost model is used for investment properties:
• The asset is transferred into investment properties at the current carrying
amount and continues to be depreciated.

19. If an asset is transferred from investment property to property, plant and
equipment and the fair value model for investment property is used:
• Revalue the property first per IAS 40 (taking the gain or loss to the
statement of profit or loss) and then transfer to property, plant and
equipment at fair value.
If the cost model is used for investment properties:
• The asset is transferred into property, plant and equipment at the current
carrying amount and continues to be depreciated.

20. IAS 38- INTANGIBLE ASSETS
• 'An intangible asset is an identifiable non-monetary asset
without physical substance’
• licences and quotas
• intellectual property, e.g. patents and copyrights
• brand names
• trademarks

21. IAS 30- INTANGIBLE ASSETS
• For an asset to be identifiable IAS 38 Intangible Assets states that it
must fall into one of two categories:
1 It is separable – the asset can be bought or sold separately from the rest
of the business
2 It arises from legal/contractual rights – this will arise as part of
purchasing an entire company.
It must also meet the normal definition of an asset:
• controlled by the entity as a result of past events (normally by
enforceable legal rights)
• a resource from which future economic benefits are expected to flow
(either from revenue or cost saving).

22. RECOGNITION
• To be recognised in the financial statements, an intangible asset must
meet
• 'the definition of an intangible asset, and
• meet the recognition criteria' of the framework (IAS 38, para 18) – it is
probable that future economic benefits attributable to the asset will flow to
the entity – the cost of the asset can be measured reliably. If these criteria
are met, the asset should be initially recognised at cost.

23. MEASUREMENT
• There is a choice between:
• the cost model • the revaluation model.
COST MODEL : it is valued at ‘Cost – amortization- any impairment losses’
An intangible asset with a finite useful life must be amortised over that life,
normally using the straight-line method with a zero residual value.
An intangible asset with an indefinite useful life:
• should not be amortised
• should be tested for impairment annually, and more often if there is an actual
indication of possible impairment.

24. MEASUREMENT
The revaluation model
• The intangible asset may be revalued to a carrying amount of fair value less subsequent
amortisation and impairment losses.
• Fair value should be determined by reference to an active market.

25. INTERNALLY-GENERATED INTANGIBLE
ASSETS
Generally, internally-generated intangible assets cannot be capitalised, as the
costs associated with these cannot be identified separately from the costs
associated with running the business.
The following internally-generated items may never be recognised:
• goodwill ('inherent goodwill’)
• brands
• mastheads
• publishing titles

26. IAS 36-IMPAIRMENT OF INDIVIDUAL
ASSETS
• The objective is to set rules to ensure that the assets of an entity 'are carried at no more
than their recoverable amount’
• An asset is impaired if its recoverable amount is below the value currently shown on the
statement of financial position – the asset’s current carrying amount.
• Recoverable amount is taken as the higher of
• fair value less costs to sell (net realisable value), and
• value in use.

27. DEFINITION OF A CGU
• A CGU is defined as 'the smallest identifiable group of assets that generates cash inflows that are
largely independent of the cash inflows from other assets’
• The impairment calculation
The impairment calculation is done by:
• assuming the cash generating unit is one asset
• comparing the carrying amount of the CGU to the recoverable amount of the CGU.
Deal with any specifically impaired assets first, then impair the CGU.
IAS 36 requires that an impairment loss attributable to a CGU should be allocated to write down the
assets in the following order:
1. Purchased goodwill
2. The other assets (including other intangible assets) in the CGU on a prorate basis based on the
carrying amount of each asset in the CGU.

28. EXAMPLE

30. IND AS 2 – INVENTORIES
• DEFINITION
Inventories are assets
1. Held for sales in ordinary course of business (finished goods);
2. In the process of production for such sale (work in progress);
3. 3. In the form of materials and supplies to be consumed in the production process or in
rendering the services (Raw Materials).

31. •Valuation
Inventories are valued at the lower of cost or net realisable value.
Cost shall include:
Costs of purchase, (including import duties, non-refundable taxes, transportation and handling
charges net of trade discount and rebates received)
Costs of conversion, (include all fixed and variable manufacturing overheads)
Other costs incurred in bringing the inventories to their present location and condition
Cost does not include:
Abnormal loss Storage Cost (unless such cost are necessary)
Administrative Overheads
Selling Costs
Net Realisable Value is the estimated selling price in the ordinary course of business less the
estimated cost of completion and the estimated costs necessary to make the sale

32. • DISCLOSURE
a) Accounting policies adopted for measuring inventories;
b) b) Total carrying amount of inventories and the amount of classification;
c) c) Inventories carried at fair value less costs to sell;
d) d) Amount of inventories recognised as an expense;
e) e) Write-down of inventories recognised as an expense;
f) f) Amount of any reversal of any write-down;
g) g) Circumstances or events that led to the reversal of write-down of
inventories;
h) h) Inventories pledged as security for liabilities.

33. IND AS 41- BIOLOGICAL ASSETS
• This Standard is applied to agricultural produce, which is the harvested
produce of the entity’s biological assets, at the point of harvest. Thereafter,
Ind AS 2 Inventories or another applicable Standard is applied. Accordingly,
this Standard does not deal with the processing of agricultural produce after
harvest; for example, the processing of grapes into wine by a vintner who has
grown the grapes. While such processing may be a logical and natural
extension of agricultural activity, and the events taking place may bear some
similarity to biological transformation, such processing is not included within
the definition of agricultural activity in this Standard

34. • A biological asset is a living animal or plant.
A biological asset should be recognised if:
• It is probable that economic benefits will flow to the entity
• The cost or fair value of the asset can be reliably measured, and
• The entity controls the asset.

35. • Recognition and measurement
Initial measurement is at:
• Fair value less any estimated 'point of sale' costs
• If there is no fair value, then the cost model should be used.
Subsequent measurement:
• Revalue to fair value less point of sale costs at year-end, taking
any gain or loss to the statement of profit or loss.

36. IND AS 23- BORROWING COSTS
• Borrowing Cost means ‘Interest and other cost’ which is
incurred by an enterprise for the arrangement and then
allocation of funds.
• The following amounts should be considered while computing Borrowing Cost-
• Interest on Long term and short term Borrowed funds.
• Finance Charges incurred under Finance Lease.
• Exchange differences with regard to foreign exchange borrowings.

37. Qualifying Asset is an asset that takes Substantial period of time to get ready for its
intended use or further sale.
Qualifying assets may be of any of the following type depending on the condition-
• Intangible assets under development
• Inventories other than routine stock /common stock
The following are not qualifying assets-
• Inventories which are produced or manufactured within a short period of time, and
• Assets which are not ready for use or sale at the time of acquisition.

38. •Recognition
An entity shall capitalize those borrowing costs that are in regard to the
acquisition, production and construction of the qualifying asset included
as a part of the cost of that asset.
Any expenses of borrowing cost incurred other than above shall be
written off as an expense in the year in which they occur.

39. • Commencement of capitalisation
Capitalisation of borrowing costs should commence when all of the
following conditions are met:
• expenditure for the asset is being incurred
• borrowing costs are being incurred
• activities that are necessary to prepare the asset for its intended
use or sale are in progress.

40. Cessation of capitalisation
Capitalisation of borrowing costs should cease when either:
• 'substantially all the activities necessary to prepare the
qualifying asset for its intended use or sale are complete’ OR
• construction is suspended, e.g. due to industrial disputes.