ACCOUNTING FOR NON-FINANCIAL ASSETS AND ASSOCIATED LIABILITIES

Transcription

1 ACCOUNTING FOR NON-FINANCIAL ASSETS AND ASSOCIATED LIABILITIES EXTRACT CPA Australia Ltd

2 CONTENTS Course overview 1 Learning objectives 1 Course content 1 Assumed knowledge 1 Knowledge assessment 1 Symbols 2 1. Introduction 3 2. General issues common to assets Terminology Recognition of an asset IFRS 13 Fair value measurement 4 3. Asset types Inventory Property, plant and equipment Investment property Intangible assets IAS Impairment of assets Objectives of IAS Scope of IAS Impairment indicators Value in use Cash-generating units Liabilities Leases IAS Borrowing costs IAS Other areas affecting assets and liabilities Foreign exchange Non-current assets held for sale Accounting for government grants relating to assets Self-assessment 50 Glossary 52 Suggested answers 54 Activities 54 Self-assessment 65 2 CPA Australia Ltd 2014

3 2. GENERAL ISSUES COMMON TO ASSETS Before we discuss the detail of the differing types of assets which entities hold, we need to look at some themes which are common to all assets. 2.1 TERMINOLOGY DEFINITION Cost the amount of cash or cash equivalents paid or the FV of the other consideration given to acquire an asset. Fair value the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm s length transaction. Control an entity controls an asset if the entity has the power to obtain the future economic benefits flowing from the underlying resource and to restrict the access of others to those benefits. The definition of fair value refers to knowledgeable, willing parties. In this context, knowledgeable means that both the willing buyer and the willing seller are reasonably informed about the nature and characteristics of the asset. A willing buyer is motivated but not compelled to buy this buyer is neither over-eager nor determined to buy at any price. A willing seller is neither an over-eager nor a forced seller, prepared to sell at any price, nor one prepared to hold out for a price not considered reasonable in current market conditions. The willing seller is motivated to sell the asset at market terms for the best price obtainable. An arm s length transaction is one between parties that do not have a particular or special relationship that makes prices of transactions uncharacteristic of market conditions. The transaction is presumed to be between unrelated parties, each acting independently. The best evidence of fair value is given by current prices in an active market for similar assets. In the absence of an active market, the entity considers information from a variety of sources, for example, discounted cash flow projections. Consider the definitions above and how they apply to the assets/liabilities on your entity s statement of financial position. DISCUSSION 2.2 RECOGNITION OF AN ASSET An item is recognised as an asset if, and only if: It is probable that future economic benefits associated with the item will flow to the entity; and The cost of the asset can be measured reliably. This is the recognition criteria in place for most of the assets we will be discussing during this course. Both elements of the criteria need to be in place in order for the asset to be recorded in the statement of financial position. 2.3 IFRS 13 FAIR VALUE MEASUREMENT IFRS 13 Fair Value Measurement explains how to measure fair value for financial reporting. It does not require fair value measurements in addition to those already required or permitted by other IFRSs and is not intended to establish valuation standards or affect valuation practices outside financial reporting. CPA Australia Ltd

4 The current situation is that some IFRSs requiring fair value contain limited guidance about how to measure fair value, whereas others contained extensive guidance and guidance was not always consistent across those IFRSs that refer to fair value. Inconsistencies in the requirements for measuring fair value and for disclosing information about fair value measurements have contributed to diversity in practice and have reduced the comparability of information reported in financial statements. IFRS 13 develops common requirements for measuring fair value and for disclosing information about fair value measurements in accordance with IFRSs and US generally accepted accounting principles (GAAP). Fair value hierarchy identified in IFRS 13 IFRS 13 allocates fair value into three levels, known as the fair value hierarchy which are described below: Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability. Level 2 inputs include the following: a) quoted prices for similar assets or liabilities in active markets; b) quoted prices for identical or similar assets or liabilities in markets that are not active; c) inputs other than quoted prices that are observable for the asset or liability, for example: i. interest rates and yield curves observable at commonly quoted intervals; ii. implied volatilities; and iii. credit spreads. d) market-corroborated inputs; Level 3 inputs are unobservable inputs for the asset or liability. Unobservable inputs shall be used to measure fair value to the extent that relevant observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. However, the fair value measurement objective remains the same, i.e. an exit price at the measurement date from the perspective of a market participant that holds the asset or owes the liability. Therefore, unobservable inputs shall reflect the assumptions that market participants would use when pricing the asset or liability, including assumptions about risk. Determination of fair value When a price for an identical asset or liability is not observable, an entity measures fair value using another valuation technique that maximises the use of relevant observable inputs and minimises the use of unobservable inputs. A fair value measurement of a non-financial asset takes into account a market participant s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. The highest and best use of a non-financial asset takes into account the use of the asset that is physically possible, legally permissible and financially feasible, as follows: A use that is physically possible takes into account the physical characteristics of the asset that market participants would take into account when pricing the asset (e.g. the location or size of a property). 4 CPA Australia Ltd 2014

5 A use that is legally permissible takes into account any legal restrictions on the use of the asset that market participants would take into account when pricing the asset (e.g. the zoning regulations applicable to a property). A use that is financially feasible takes into account whether a use of the asset that is physically possible and legally permissible generates adequate income or cash flows (taking into account the costs of converting the asset to that use) to produce an investment return that market participants would require from an investment in that asset put to that use. Highest and best use is determined from the perspective of market participants, even if the entity intends a different use. However, an entity s current use of a non-financial asset is presumed to be its highest and best use unless market or other factors suggest that a different use by market participants would maximise the value of the asset. To protect its competitive position, or for other reasons, an entity may intend not to use an acquired non-financial asset actively or it may intend not to use the asset according to its highest and best use. For example, that might be the case for an acquired intangible asset that the entity plans to use defensively by preventing others from using it. Nevertheless, the entity shall measure the fair value of a non-financial asset assuming its highest and best use by market participants. Disclosure requirements An entity shall disclose information that helps users of its financial statements assess both of the following: for assets and liabilities that are measured at fair value on a recurring or non-recurring basis in the statement of financial position after initial recognition, the valuation techniques and inputs used to develop those measurements; for recurring fair value measurements using significant unobservable inputs (Level 3), the effect of the measurements on profit or loss or other comprehensive income for the period. To meet these objectives, an entity shall consider all the following: the level of detail necessary to satisfy the disclosure requirements; how much emphasis to place on each of the various requirements; how much aggregation or disaggregation to undertake; and whether users of financial statements need additional information to evaluate the quantitative information disclosed. CPA Australia Ltd