ACCA DIPAC Inventories - Borrowing Costs - Employee Benefits - N-C Assets Held For Sale

1 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework Presentation Revenue - Change in Acc Policies Income Tax.
CONTENTS:
TO BE SCANNED IN STILL .......................................................................................................................................................................................................... 3 NON-CURRENT ASSETS HELD FOR SALE & DISCONTINUED OPERATIONS .............................................................................................................. 4 INTRO: ......................................................................................................................................................................................................................................................................4 DEFINITIONS: ........................................................................................................................................................................................................................................................4 CURRENT /NON-CURRENT DISTINCTION ...............................................................................................................................................................................................4 SCOPE: ......................................................................................................................................................................................................................................................................5 CLASSIFICATION OF AN ASSET/ DISPOSAL GROUP AS HELD FOR SALE: ..................................................................................................................................5 RECOGNITION ............................................................................................................................................................................................................................................................5 MEASUREMENT .........................................................................................................................................................................................................................................................6 Costs to sell & time VALUE OF MONEY .................................................................................................................................................................................................... 7 CHANGES TO THE PLAN TO SELL: ............................................................................................................................................................................................................ 7 MEASUREMENT FOR EACH DIFFERENT TYPE .................................................................................................................................................................................. 7 GAIN OR LOSS ON DISPOSAL: ...................................................................................................................................................................................................................... 10 DEFERRED TAX: ................................................................................................................................................................................................................................................ 10 DISCOSURE & PRESENTATION: N-C ASSETS HELD FOR SALE .................................................................................................................................................. 11 EMPLOYEES BENEFITS IAS 19 , IFRIC 14 , AC504 ............................................................................................ ERROR! BOOKMARK NOT DEFINED. SCOPE ......................................................................................................................................................................................................... ERROR! BOOKMARK NOT DEFINED. SHORT TERM EMPLOYEE BENEFITS ........................................................................................................................................... ERROR! BOOKMARK NOT DEFINED. POST EMPLOYMENT BENEFITS : ................................................................................................................................................... ERROR! BOOKMARK NOT DEFINED. 1- Post employment benefits : DEFINED CONTRIBUTION PLANS ..................................................................................Error! Bookmark not defined. 2- post employment benefits :DEFINED BENEFIT PLANS .................................................................................................Error! Bookmark not defined. OTHER LONG TERM EMPLOYEE BENEFITS.............................................................................................................................. ERROR! BOOKMARK NOT DEFINED. TERMINATION BENEFITS................................................................................................................................................................. ERROR! BOOKMARK NOT DEFINED. PRESENTATION & DISCLOSURE .................................................................................................................................................... ERROR! BOOKMARK NOT DEFINED. IAS23 BORROWING COSTS .................................................................................................................................................................................................... 12 BACKGROUND: ............................................................................................................................................................................................................................................... 12 CORE PRINCIPLE........................................................................................................................................................................................................................................... 12 SCOPE: ............................................................................................................................................................................................................................................................... 12 DEFINITIONS: ................................................................................................................................................................................................................................................ 12 RULES OF CAPITALISATION ..................................................................................................................................................................................................................... 12 RECOGNITION:............................................................................................................................................................................................................................................... 12 METHOD ........................................................................................................................................................................................................................................................... 16 TAX IMPLICATIONS of CapITALISTAION OF BORROWINGS: ...................................................................................................................................................... 20 DISCLOSURE: .................................................................................................................................................................................................................................................. 21 PROS and CONS of CAPITALISING BORROWING COSTS ............................................................................................................................................................... 21 LECTURER NOTES ........................................................................................................................................................................................................................................ 21 INVENTORIES IAS 2: (AC108),CIRCULAR 09/06 IFRS 8 OPERATING SEGMENTS (ISSUED NOVEMBER 2006)* IMPROVEMENTS TO IFRSS (ISSUED MAY 2008).THE FOLLOWING INTERPRETATION REFERS TO IAS 2: SIC-32 INTANGIBLE ASSETSWEB SITE COSTS .............................................................................................................................................................................................. 23 Special Things to remember: .................................................................................................................................................................................................................... 23 Definitions: ...................................................................................................................................................................................................................................................... 23 Recent important changes ........................................................................................................................................................................................................................ 23 1)background:................................................................................................................................................................................................................................................ 23 (2)Nature of Inventories ............................................................................................................................................................................................................................ 23 (3)measurement of inventories:.............................................................................................................................................................................................................. 24 (4)Determining the cost of inventories ................................................................................................................................................................................................ 24
2 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework Presentation Revenue - Change in Acc Policies Income Tax. COMPREHENISIVE EXAMPLE: GO THROUGH THIS TO GET THE IDEA AGAIN .................................................................................................................... 35
To be scanned in still
1. 2. Government grants :grants related to income section : see example of complex salaries on page 328 gaap text. SCAN it in !
NON-CURRENT ASSETS HELD FOR SALE & DISCONTINUED OPERATIONS
INTRO:
1. 2. 3. 4. IFRS 5 deals with these 2 tpoics. Discontinued operations are required mainly to be treated separate from other stuff so one can see the economic impact on the firm. Dsiclosure from other statements do not apply to these 2 items, ONLY IFRS 5, unless the IAS specifically states that it requires disclosures on disposal groups- held for sale n-c assets or discontinued operations. Note : there are 3 headings in the Fin Stats: a. N-C Assets Classified as Held for Sale b. N-C Assets Classified as held for Distribution c. Liabilities Classified as Held for Sale d. ( do you get N-C as well as Current 1-liabilities held for distribution and also 2-liabilities held for sale ????)
DEFINITIONS:
1. 2. 3. 4. 5. THESE ARE AT THE BACK OF THE IFRS 5. , NOT AT THE FRONT LIKE USUALLY. cash-generating unit :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. component of an entity Operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity. costs to sell The incremental costs directly attributable to the disposal of an asset (or disposal group), excluding finance costs and income tax expense. CURRENT ASSET An entity shall classify an asset as current when: a. (a) it expects to realise the asset, or intends to sell or consume it, in its normal operating cycle; b. (b) it holds the asset primarily for the purpose of trading; c. (c) it expects to realise the asset within twelve months after the reporting period; or d. (d) the asset is cash or a cash equivalent (as defined in IAS 7) unless the asset is restricted from being exchanged or used to settle a liability for at least twelve months after the reporting period. discontinued operation A component of an entity that either has been disposed of or is classified as held for sale and: a. (a) represents a separate major line of business or geographical area of operations, b. (b) is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations or c. (c) is a subsidiary acquired exclusively with a view to resale. DISPOSAL GROUP A group of assets to be disposed of, by sale or otherwise, together as a group in a single transaction, and liabilities directly associated with those assets that will be transferred in the transaction. The group includes goodwill acquired in a business combination if the group is a cash-generating unit to which goodwill has been allocated in accordance with the requirements of paragraphs 8087 of IAS 36 Impairment of Assets (as revised in 2004) or if it is an operation within such a cash-generating unit. fair value The amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arms length transaction. firm purchase commitment An agreement with an unrelated party, binding on both parties and usually legally enforceable, that a. (a) specifies all significant terms, including the price and timing of the transactions, and b. (b) includes a disincentive for non-performance that is sufficiently large to make performance highly probable. highly probable Significantly more likely than probable. non-current asset An asset that does not meet the definition of a current asset. probable More likely than not. recoverable amount The higher of an assets fair value less costs to sell and its value in use. value in use The present value of estimated future cash flows expected to arise from the continuing use of an asset and from its disposal at the end of its useful life.
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CURRENT /NON-CURRENT DISTINCTION

1. 2. Note : a n-c asset is anything that is NOT a current asset : and a current asset is the following: CURRENT ASSET An entity shall classify an asset as current when:
5 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework Presentation Revenue - Change in Acc Policies Income Tax. (a) it expects to realise the asset, or intends to sell or consume it, in its normal operating cycle; (b) it holds the asset primarily for the purpose of trading; (c) it expects to realise the asset within twelve months after the reporting period; or (d) the asset is cash or a cash equivalent (as defined in IAS 7) unless the asset is restricted from being exchanged or used to settle a liability for at least twelve months after the reporting period. Note: Point (c) above -12 mnths gives impression that any n-c asset to be sold in next 6 mnths is classified as current THIS IS NOT THE CASE.IFRS 5 makes it clear that it MUST first meet ALL the requirements of IFRS5 before it is classified as Current , n amely as a held for sale asset. Note: SAME thing applies to a N-C asset bought specifically just to re-sell it may seem to be point (B) above- held tpo be traded- but once again this is not the case ,it MAY NOT be classified as current unless it fulfils ALL the conditions of IFRS 5. a. b. c. d.
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SCOPE:
1. EXCLUSIONS from SCOPE : certain assets are excluded from 1 rule: a. CLASSIFACTION & PRESENTATION REQUIREMENTS for : all assets which fall under IFRS 5 must follow this, EVEN THE ONES excluded for measurements purposes. (only special requirements for disclosure of measurements of excluded assets are added, else ONLY IRFS 5 disclosure requirements are used, no other IAS at all!) b. MEASUREMENT REQUIREMENTS : All assets except ones below to be measured per IFRS 5 : because: 1-these are ALREADY held at fair value recognized in P&L OR 2- alternatively because their fair value is difficult to determine. (eg: insurance,deferred tax,employee benefits) i. DISPOSAL GROUPS containing these: if a disposal group has only these below in it , it is treated as an exclusion, but if it has just 1 n-c asset that is not excluded as those below are THEN THE WHOLE GROUP OF ASSETS IS TREATED AS NOT EXCLUDED, AND THIS BELOW HERE DOES NOT COUNT.so that reverses this scope exclusion. ii. Deferred Tax Assets (difficult to determine fair value) iii. Employee Benefits Assets (difficult to determine fair value) iv. Insurance Contractual Rights under insurance contracts assets. (difficult to determine fair value) v. Financial Assets : in scope of IAS 39 (already at fair value) vi. Agricultural Assets : N-C assets held at fair value less costs to sell per IAS41. (already at fair value) vii. Investment Property accounted per fair value model : per IAS 40 if it is held using the cost model its measurement is NOT exclude from IFRS 5, only the fair value model one is (already at fair value) DISPOSAL GROUPS : per definition above, a. can incl. a few CGUs or 1 CGU , or even just a few assets out of a CGU it does not matter. It also incl. The liabilities with those assets eg if buyer is required to take over the related installment sale liabilites of asset. b. It can also just be any group of assets that are to be sold in 1 transaction, even some shares + property + machine even if not part of a CGU. For IFRS 5 to apply , at least 1 of the assets in a disposal group MUST first be a N-C asset, even though a disposal group may incl. any number of Current assets + liabilites or N-C liabilities with it. HELD FOR DISTIBUTION TO OWNERS: if the assets are not to be sold but given to owners, THIS IFRS 5 still applies to them.same!
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CLASSIFICATION OF AN ASSET/ DISPOSAL GROUP AS HELD FOR SALE:

1. 2. SINGLE ASSET IS : moved to N-C Assets held for Sale, it is removed from the heading in SFP where it was, and transferred to Current Assets" under a new heading called N-C Assets Classified as Held For Sale DISPOSAL GROUP IS TRANSFERRED: it goes to its own line Disposal Groups Classified As Held For Sale. a. A disposal group MUST all be disposed in a SINGLE TRANSACTION, not separately , or it is not a disposal group. b. A disposal group can also be a CGU- cash generating unit but only if meant to be disposed in a SINGLE TRANSACTION. c. ANY LIABILITIES TRANSFERRED WITH A DISPOSAL GROUP : MUST go to Liabilites Classified as Held for Sale as a separate line item!!!! (NOT to Liability disposal groups held for sale, but JUST Liabilities Classified as Held for Sale. d. Any Goodwill that is attached to a Cash generating Unit is also included in the amount transferred to held for sale heading for disposal groups(can goodwill be attached to just 1 assest, if it is say splity from a CGU later or if ti forms its own CGU?)
Recognition
1. 2. An asset shall be classified as Held for Sale if its carrying amount will be recovered principally through a sale transaction, rather than through continuing use.(see conditions in own notes , to be thus classified eh within 12 mnts etc) An asset shall be classified as Held for Distribution when the entity is committed to distribute the asset ( or disposal group ) to its
6 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework Presentation Revenue - Change in Acc Policies Income Tax. owners. (see conditions in own notes , to be thus classified eg: within 1 year etc.) 3. CONDITIONS TO BE CLASSIFIED AS HELD FOR SALE : IFRS 5 a. Available for immediate sale : (subject only to usual +customary terms for such items no other terms) b. Highly Probable : sale must be highly probable (see definition back of IFRS 5) Characeristics of HIGHLY PROBABLE i. Mngmnt committed to plan :Apporopriate level of mngmnt committed to plan ii. Program to locate buyer : Active program to locate buyer & complete sale started iii. Reasonable price : Actively marketed at reasonable price for its fair value. iv. Unlikely Plan is withdrawn OR that Significant changes to plan : v. Expect sale completed in 12 mnths 1 yr , only following exceptions to this allowed: 1. Delay caused by events outside control 2. Sufficient evidence entity remains committed to plan to sell. vi. A newly acquired n-c asset: must first meet the criteria of IFRS 5 before it can be classified as held for sale . But IFRS 5 allows usually within 3 months per textbook. allows a certain time to meet all these criteria in the case of new purchase of a N-C asset bought just to re-sell: since it may be difficult to meet all the criteria at date of purchase (eg difficult to be actively marketing it on date of purchase already), provided the 1 year criteria is met at that date and provided it is highly probable that the other criteria will be met within the usually within 3 months per textbook. Note: if a replacement asset first needs to be constructed OR if certain operations need to be ceased before it can be disposed of, it is NOT allowed to be classified as Held for Sale yet. d. See Appendix B of IFRS 5 for examples of where an extension is allowed.(is point C in appendix B- unforeseen circumstances- is could not get a buyer yet but expect to soon or started a new project and had no time later on to OR similar good enough? How do you decide? IF CONDITIONS TO BE CLASSIFIED AS HELD FOR SALE ONLY MET AFTER REPORTING DATE: a. Then it MAY NOT be moved to held for sale( non-adjusting post-balance sheet event) b. It must however be disclosed in the Notes if FinStats have not yet been authorized for issue by that time.(as in issued already) DISPOSAL OF A SUBSIDIARY : a. IF part or all of subsidiarys shares are to be sold, so that it will become a IAS39 Investment (ie control is lost) OR gone completely, then question is : must all the assets &liabilities be calssified as held for sale or only the shares held? b. Ans: All the assets & liabilities must be classified as Held For Sale (in the Group Statements) If the IFRS 5 criteria are all met. (this is because parent will no longer control these assets) N-C ASSETS HELD FOR DISTRIBUTION TO OWNERS: a. These are assets to be distributed as DIVIDENDS to the owners. b. They go in their own heading : N-C Assets Classified as held for Distribution c. All principles applying to for sale also apply to for distribution d. CONDITIONS TO BE CLASSIFED AS HELD FOR DISTRIBUTION i. Available Immediately : Must be Available Immediately in present condition for distribution ii. Highly probable : must be highly probable (need to consider probability of shareholder approval as well here -note) 1. Criteria to be met to be Highly Probable: a. Actions Initiated already : to complete the distribution b. In 1 year /12 mnths: expected to be completed by then c. Unlikely Plan is withdrawn OR that Significant changes to plan : N-C ASSETS THAT ARE TO BE ABANDONED : a. You may not classify it as Held For Sale because its value is to be recovered by continuing use (per IFRS 5 vertabim). b. It could however be presented as a discontinued operation if those rules are met c. An Entity shall not account for a N-C asset that has been temporarily taken out of use as if it had been Abandoned per IFRS 5.. NEWLY AQUIRED ASSETS : a. A newly acquired n-c asset: must first meet the criteria of IFRS 5 before it can be classified as held for sale . But IFRS 5 allows usually within 3 months per textbook. allows a certain time to meet all these criteria in the case of new purchase of a N-C asset bought just to re-sell: since it may be difficult to meet all the criteria at date of purchase (eg difficult to be actively marketing it on date of purchase already), provided the 1 year criteria is met at that date and provided it is highly probable that the other criteria will be met within the usually within 3 months per textbook. c.
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Measurement
1. The general measurement rule : is that it is measured at LOWER of CARRYING AMOUNT or FAIR VALUE LESS COSTS TO SELL. a. Held for sale items: Costs to Sell : disposal costs excl. finance costs & income tax expense. (so incl sales commission But excl. capital gains tax)
7 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework Presentation Revenue - Change in Acc Policies Income Tax. b. c. d. Held for distribution items : Costs to Distrubute: here you DO NOT use costs to sell but costs to distribute so items held to be distributed to the owners are valued at fair value LESS costs to distribute Carrying amount is (after accumulated depreciation is minused from cost ! note) Any assets excluded by scope of IFRS5 (eg insurance contractual rights) are to be measured by their own IAS measurement rules, not these, although they are still classified as held for sale assets same as any others.
COSTS TO SELL & TIME VALUE OF MONEY

1. 2. If the asset is to be held for longer than 12 months, then the costs to sell must be brought to PV using a suitable discount rate. This assets costs to sell then always get calc. using the time value of money from now on, till it is sold - you never change back. a. So if costs to sell are calc. using PV because it is estimated that an asset will be sold after 18 mnths (and criteria of I FRS 5 are still met because reason for delay is out of control of entity) , and at end of fin year after say the first 12 mnths have passed, it is estimated that here are only 6 mnths left before asset is sold , you re-calc. this PV of costs to sell again and use the new PV again you do not just say forget the PV and use straight costs to sell cause it is now less than 12 mnths left. - no, you make a new PV of 6 mnths. But the whole process is only initiated by a initial going over of the 12 mnths limit, otherwise you never use PV of costs to sell. Note: this is only costs to sell, NOT of amount of impairment of asset , just the costs to sell portion. Question : a. when will this time evr go over 12 mnths ( see txtbk pg 729 bottom underlined) since you only find out at year end that it could not be sold, then maybe it will be sold in the next 12 mnths . And if it seems loger than 12 mnths then criteria will not be met, so it cannot be classified as held for sale anyway??? b. If after first 12 mnths asset is still not sold, but you only notice at year end after 12 mnths have passed- then say ypou are not sure when the asset will be sold but are hoping within in the next 12 mnths do you start with PV of costs to sell just because 12 mnths have already passed , or NOT at all, I mean MUST there first be an estimate of over 12 mnths, OR must you have just gone over the 12 mnths limit for this PV rule to start working???
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CHANGES TO THE PLAN TO SELL:

1. If an entity decided not to sell an asset that is held as held for sale anymore, then the following must happen: a. It must be reclassified OUT of held for sale back into its old heading under its old IAS . b. All profit/loss on c. Depreciation ONLY starts again from date of Un-Classification as held for sale, so even if you adjust the original cost less adjusted depreciation because that amount is lower than the fair val .less cost to sell and use that as your new value, you do not write that amount of adjusted depreciation up in PPE table or depreciation account ad depreciation that only starts after it is transferred to new account out of held for sale assets - you write it up as Profit /Loss on Declassifation as held for sale or ??????? or what???? d. Re-measurement: i. Asset out of scope of IFRS 5 : the value will of course remain the same. ii. Asset in scope of IFRS 5 : 1. It must be re-measured at the LOWER of : a. Recoverable amount per IAS 36 Impairment , at date of reclassification b. Its Carrying amount before classification as held for sale , adjusted for any 1-depreciation 2amortisations 3- revaluations that would have been recognised had the asset not been held as held for sale. 2. Any difference/adjustment must be recognized in Profit & Loss in the period in which the criteria are no longer met , UNLESS it is an item of PPE or intangible asset THAT IS CARRIED using the REVALUATION MODEL, then it is to be accounted for as a Revaluation increase or decrease, NOT a P&L adjustment. Ques: (if the new amount happens to be original cost less adjusted depreciation because that amount is lower than the fair val .less cost to sell , do you record that depreciation in depreciation account / PPE table or not? So would it go in revaluation count ? or if cost mdel is used in plain P&L other expenses?what would you call the account : revluation on de-classification or acc.depr. if it is not a reversal of impairment . And if it is a reversal of impairment or a plain impairment , what does it get called then in the ledger?ie asset contra) or See example 28.18 in textbk, gripping GAAP, they say depreciation only starts from AFTER it is unclassified)
MEASUREMENT FOR EACH DIFFERENT TYPE

1. Measurement methods for assets outside scope of IFRS 5: a. Inventory: NRV(Net Realizable Value) this is a CURRENT asset , so because of that reason it does not fall in scope of IFRS 5. b. Investment Property : IAS40 Fair value : note: 1-do not incl. cost of disposal and 2- can go up or down to any level, not limited by any former carrying amount or cost or anything. c. Assets Acquired in Business Combination : these are measured at FAIR VALUE on initial recognition. This does not include cost of disposal like for held for sale assets though. d. Financial assets in scope of IAS39: (eg :Share investment) : seems like fair value or something
8 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework Presentation Revenue - Change in Acc Policies Income Tax. e. f. g. h. 2. a. Employee benefits : ?? Deferred tax : ??? N-C agricultural assets per IAS 41 : Fair value less costs to sell. Insurance contracts contractual rights :IFRS 4 ??? MEASUREMENT OF INDIVIDUAL N-C ASSET INSIDE MEASUREMENT SCOPE (ie: assets not excluded from scope) AT RE-CLASSIFICATION DATE : i. Immediately before re-calssification as held for Sale: , JUST BEFORE YOU RECLASSIFY , THE ASSET must be remaeasured using its original normal IAS method so depreciation/revaluation etc must all be brought up to date asmper original IAS of that asset. You also continue with relevant IAS depreciating or amortising as needed up to date of transfer. ii. On and after classification : 1. Then transfer it to CURRENT ASSETS c lassified as held for sale under its own heading ASSETS CLASSIFIED AS HELD FOR SALE 2. Immediately thereafter re-measure at lower of 1- carrying amount(after depreciation) OR 2-fair value LESS COSTS TO SELL. ( note in investment property it is not less costs to sell, but here it is!) 3. Thereafter it is NOT depreciated any further. RECOGNITION OF IMPAIRMENT LOSSES: i. If the fair value less costs to sell is lower than carrying Amount at re-classification date, then the new reduction is to be handled as an INPAIRMENT LOSS. ii. DO you test for impairment on re-classification date? It is authors opinion that Impairment is ONLY tested at End of Year per IAS20 ,(except for special types of assets) , so no, you do NOT test for impairment when this happens , just write the asset down to its new value using the impairment method if this fair value less costs to sell is lower than carrying amount. iii. Although IFRS 5 is not very clear on the issue per txtbk, it seems as though every impairment should be recognized in P&L, even if asset is carried at a revalued amount(ie If carrying amount is from an old revaluation , you DONT first decrease the revaluation surpluss.account anymore, you recognize any impairment directly in P&L. (is this correct?then when you sell the asset you can optionally write out reval.surpluss. to retained earnings or do you write this rev surpl.out to ret.earn. on classification as held for sale date?) iv. ALL ASSETS EXCLUDED FROM SCOPE SEEM TO STATE IN THEIR IAS THAT THEY MUST BE TESTED FOR IMPAIRMENT, (not just at year end ) JUST BEFORE RE-CLASSIFICATION AS HELD FOR SALE. So there should not be any reason to have to impair them (although there may be a reason to bring them down to fair values less costs to sell-that is different to impair) just after reclassification. BUT all assets that are included in scope do not have this condition in their IAS, so they could be written down AFTER, if fair value less costs to sell of the asset is lower than carrying amount.(is this true- see GAAP txtbk pg 725 TOP.) 1. (SEE printing error 4000 instead of 5000 on page 724 bottom)
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SUBSEQUENT MEASUREMENT AFTER RECLASSIFIACTION DATE: i. At year end : If it falls in the scope of IFRS 5 , IFRS 5 rules say it must be remeasured and TESTED FOR IMPAIRMENT at end of every year (same as rule for impairment!) to lower of the 2 amounts. This will again be recorded as an impairment if below carrying amount , and also if carrying amount is from an old revaluation , you DONT first decrease the revaluation surplus.account anymore, you recognize any impairment directly in P&L . ii. REVERSAL OF AN IMPAIRMENT LOSS: ONLY for those assets that fall in scope of IFRS 5 : You may reverse any impairment losses previously recorded from AFTER asset was classified as Held for Sale as well as those from BEFORE it was classified as Held for Sale up to the normal limits (1-BEFORE held for sale reclassification :up to cost less original depreciation rate 2-AFTER reclassification : up to carrying amount at reclassification date). But you may NOT reverse any revaluations. 1. THIS IS a matter of IMPAIRMENT TESTING only nothing else at all. So authors opinion is you do not reverse any former impairments at date of first classification as Held for Sale unless that is a end of year date, because impairment testing for most assets tales place at end of year only (except some special assets) . So you dont do any impairment testing and thus no reversals unless it is a end of year date.
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MEASUREMENT OF INDIVIDUAL N-C ASSET OUTSIDE MEASUREMENT SCOPE (ie: excluded from scope) This ones measurement is done as per the IAS that applies to that type of asset , not IFRS 5 at all. This goes for impairments as well as for revaluations or other. b. SUBSEQUENT MEASUREMENT: This must also be done at the method per IAS that applies. Impairments & Revaluations( if held at revaluation method) + depreciation/amortistion (??is this true??)etc at year end are all NOT per IFRS 5 but per applicable IAS. Eg: for investment property, if the fair value goes up OR down it would be revalued at that amount in the books, and costs to sell would not be included ,because it is not in IFRS 5, but goes as per IAS 40 Investment property where costs to sell are not incl, and fair value can go up or down without worrying about original carrying amount etc.(for IFRS 5 assets it may only go down, not up except for impairment reversal!) a. MEASUREMENT OF DISPOSAL GROUP INSIDE MEASUREMENT SCOPE (ie: not excluded from scope)this is a VERY trick one:
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9 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework Presentation Revenue - Change in Acc Policies Income Tax. a. Immediately before + on date of re-classification as held for Sale: , all assets in disposal group MUST be re-measured using their normal IAS method JUST BEFORE they are re-classified- so all depreciation / revaluation etc must be brought up to date.(1MAY you and 2- MUST you revalue assets that are held using revaluation model on this day or not?) i. ALL ASSETS EXCLUDED FROM SCOPE SEEM TO STATE IN THEIR IAS THAT THEY MUST BE TESTED FOR IMPAIRMENT, (not just at year end ) JUST BEFORE RE-CLASSIFICATION AS HELD FOR SALE. So there should not be any reason to have to impair them (although there may be a reason to bring them down to fair values less costs to sell -that is different to impair I dont think this is true, not after reclassi fasction! True or not?)), just after reclassification. BUT all assets that are included in scope do not have this condition in their IAS, so they could be written down AFTER, if fair value less costs to sell of the asset is lower than carrying amount.(is this true- see GAAP txtbk pg 725 TOP.) 1. (SEE printing error 4000 instead of 5000 on page 724 bottom) ii. So investment property in an incuded group ,should be changed ON THAT DATE up/down to its fair value. And inventory must be changed to its Net Realizable Value.(NRV). all before the re-classifaction. (Impairments are seemingly not done unless there is an indication of impairment for a special type of asset eg indefinite intangible assets then but what about revaluations?) iii. On re-classification date: they are from now on all measured per IFRS 5 . The rule is that if even 1 asset in the disposal group falls within IFRS 5 scope then ALL the assets in the disposal group MUST be treated using IFRS 5 measurement methods. BUT if not one asset in group falls in IFRS 5 scope, then they are all each measured individually using their original respective IASs .- eg investment property etc. iv. Note: if on classification date, there is any impairment of the whole DISPOSAL GROUP of assets, this impairment can only come from the assets incl. in scope of IFRS 5, because all assets excl. from scope seem to have it in their IAS that they must be tested for IMPAIRMENT just before re-classification as Held for Sale- so ANY IMPAIRMENT ON CLASSIFICATION DATE , on first measurement at IFRS 5 standards just afterwards , must ONLY first come off goodwill, then come off ONLY assets incl. In scope, not assets excl. out of scope of IFRS 5. v. Special Note: note that if the GROUP has an impairment as a whole, you NEVER use the fair values of individual assets in this step, the group one is dominant then . So then you just adjust the assets to equal the new group impaired etc . value . 1. So if ON CLASSIFICATION DATE after first remeasuremnt at IFRS5 standards , that it happens that the DUE to the accountant deciding on an IMPAIRMENT of the disposal group as a whole, (here you can decide to impair individually or as a group of course- depending which is more accurate) ,so then that in a group the assets are worth LESS than singly one by one and you have to then adjust each assets book value accordingly, it (difference) MUST come off assets in scope of IFRS 5, not those outside scope, to bring down to the Disposal Group value. NOTE: this applies only if you actually impair the group itself as a whole. [what happens here: ?? is this true (I dont think it is true !!)If you were talking about cost of disposal of the group as a whole and try to bring down assets value singly for that, you must first look carefully at how each asset O UTSIDE scope was treated individually for cost of disposal or whatever ,- eg: : IAS 40 investment property does not ever incl. cost of disposal , so you might have apportion to Disposal Group estimated disposal costs to investment property when you do the second round of IFRS 5 re-measurement each year all other up/downs get treated in the same complex way of course.- ps dont do this , I dont think my idea is right here!!!] vi. Note: Impairing a CGU (cash generating unit) : 1. Goodwill:Any Impairmant loss must first be allocated to goodwill of the CGU, thereafter to the remaining assets in proportion to their carrying amounts ( the same rules as above apply of course still for either in or / out of scope assets. 2. the rule in IAS 40 impairments that says individual asssets in a DISPOSAL GROUP cannot be written down to below what their individual NRV is , from impairment that comes from impairing a CGU (cash generating unit) as a disposal group as a whole then filtering it down , DOES not apply to IFRS 5 impairments . Here you may write it down because here it is impossible that he individual assets ever get sold separately if they are in a DISPOSAL GROUP so the group must be impaired as a whole and it may filter down and let assets go below individual NetRepl.Val., since if they were ever to be sold singly they MAY NOT BE in a disposal group. vii. Subsequent Remeasurement: on subsequent measurement of held for sale assets in a disposal group (end of every fin year) 1. 1st : remeasure all assets & liabilities OUTSIDE scope of IFRS 5 singly using their original IFRSs.: this will include 1-adding interest on liabilites to the liability if unpaid yet, 2-revaluation and 3-impairment and also 4DEPRECIATION/AMORTISATION :(is this all true 1 to 4?) 2. 2nd : after you have done this , NOW again remeasure all those amounts AS WELL AS all the assets that do fall in the scope of IFRS 5, using the IFRS 5 method- ie lower of carrying amount OR fair.val less costTOsell. This will usually be a value placed on the group as whole, so perhaps an impairment of the whole group, that must be apportioned between the assets themselves. (what happens if all IFRS5 scope assets go below zero- do you start impaling the assets outside scopethen too or what? Do you still bring the group total impairment value down to this ne w reversal or not- so only down to level of zero for all assets inside scope????) 3. How do you journalise the disposal group ? do you have a separate account for the individual assets as well as a separate account for the disposal group or what ? how is this done? I mean joulnalised 4. How do you transfer the mark to market reserve , as well as any revaluation surplus and any other thing, to held for sale? Do they stay in equity or go to n-c assets? 5. If an asset is over 18 mnths, does held for sale go to n-c or to current assets a. Special Note: note that if the GROUP has an impairment as a whole, you NEVER use the fair values of individual assets in this step, the group one is dominant then . So then you just adjust the assets individual values to equal the
10 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework Presentation Revenue - Change in Acc Policies Income Tax. new group impaired etc . value . When you change the individual assets values to reflect the new estimation/impairment of the GROUP value , You do NOT change the value of the assets OUTSIDE scope of IFRS 5 because they are already at correct levels since they are measured individually in the first step above. So you ONLY apply these whole group changes to assets in the group that fall WITHIN the scope of IFRS 5 even if their value falls far below their individual fair value. AND NOTE : when you apportion the group value or group total impairment to the Assets within scope of IFRS 5 , the value they may fall to is NOT LIMITED TO THEIR individual fair value less costs to sell ,they may fall below this all the way down to a value of zero. Just the assets out of scope never get any group impairment or group impairment reversal apportioned to them- they do their own thing.
b.
c.
viii. Reversal Of an Impairment Loss: a. This is even trickier: if a disposal group rises in value then any previous impairments to the group singly or as a whole , may be reversed, BUT only up to the the limit of the amount that it was previously impaired by as whole group, [or as assets individually, whether per IAS 36 impairments before the classification as held for sale or per IFRS 5 after is this true or not? ]. THIS APPLIES ONLY to assets in scope, assets outside scope do not get affected by group impairment or reversal, since they are measured separately in 1st step per their own IAS before 2nd step of IFRS 5 measurment , on first day as well as every year thereafter. ( So Those not in scope do NOT go up or down , and those in scope can go i. as far down as zero from any group impairment apportionment it dosnt matter what their true fair value less costs to sell is , ii. but may only go up as far as any group impairments did to each one individually, or any previous IAS 36 Impairments did to them before they became held for saleAND NOT TO ABOVE THEIR INDIVIDUAL Fair Value less costs to sell of each asset at current date. 2. .( can previous revaluations/ devaluations for those assets using revaluations method, also count as impairments for these?) P.S if a group impairment causes assets in scope to ALL go below zero where does the balance go to?since it may not go to assets outside scope?) 3. Impairment on Goodwill may never be reversed in Goodwill itself, if goodwill went down before from an impairment of the group, but any amount by which Goodwill ever did go down from impairment of the group may be reversed in the assets in scope themselves later- so goodwill only EVER goes down in IFRS 5, but the assets go up and down.
5. a.
MEASUREMENT OF DISPOSAL GROUP OUTSIDE MEASUREMENT SCOPE (ie: not excluded from scope) All assets are treated the same as rules for other types : i. Before re-classifcation : to be re-maeasured just before using original ISA of that asset ii. Just After re-classification : assets outside scope do NOT get remeasured again using IFRS 5 standards, but assets in scope do of course.
GAIN OR LOSS ON DISPOSAL:

1. On date of de-recognition ( ie: date of sale ) , any gain/loss over/under the Held for Sale value you have in the b ooks, must be accounted for in profit & loss as per usual.
DEFERRED TAX:
1. CLASSIFICATION / DE-CLASSIFICATION AS NON-CURRENT ASSETS HELD FOR SALE : Any change in the classification of assets from their normal SFP heading & IAS statement into Non-Current Assets Held for Sale heading in IFRS 5 or visa-versa will result in a Possible change in the carrying amount /accounting valuation of the asset to or from : last carrying amount etc. VS fair value less costs of disposal . The TAX BASE will however remain the same, so any adjustment to the current carrying amount will result in a temporary difference necessitating provision for deferred tax. (see pg 732 gaap for example- [P.S : example pg 731 uses 30% not 14% for CGT watch out]) a. Impairment losses /gains : are always accounted for in Profit & Loss for Non-Current Assets Held for Sale the related tax movement must also be in P&L. b. Movement out of held for sale for asset accounted for using the revaluation model ( except for 1 case: unless it is a transfer back out of held for sale into normal SFP asset heading eg PPE or Intangible assets etc, and the asset in there is accounted for using the revaluation model- then any once-off change goes revaluations acc. so then the deferred tax must also be done in revaluations which is in OCI (Other Comprehensive Income). c. CGT : capital gains tax:
11 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework Presentation Revenue - Change in Acc Policies Income Tax. i. VERY IMPORTANT : RECOUPMENT : when a machine is sold, any RECOUPMENT up to the level of the BASE COST , (not Original base cost, but todays base cost left over after all wear&tear deductions etc.) will be recouped at 29% - the NORMAL TAX RATE. But any capital gains OVER this tax base amount will be taxed at 14.5 % (50% x value X 29%).(Is this exactly true?) Since deferred tax must reflect the consequences that will follow the manner in which entity expects to recover the carrying amount of the asset , it is suggested by txtbk that all assets NOT in held for sale must use NORMAL TAX (28% in SA) and all assets in Held for sale must use normal tax up to Original Tax Base Cost (when asset was acquired ) at normal tax rate 29% and capital gains tax CGT at 14.5% for any potential capital gains over the current TAX BASE. (50% of assets at 29% = 14.5%) . %).(Is this exactly true?) ii. Movement into/out of held for sale : (see CGT above) So when going INTO held for sale, the following 2 rules apply: , and when going OUT of you must first reverse any CGT at 14.5 % still left in Deferred Tax in Other Comprehensive Income ,then put in in Deferred Tax in P&L , and then only reduce/increase the Deferred Tax in P&L for any incr/decr. in the valuation of the asset actually resulting from the move OUT of held for sale .(is this true?what you figured here ?) 1. Deferred Tax on CGT :any change in deferred tax from CGT is done in OCI : (Other Comprehensive Income). And NOT in P&L (why?) 2. Deferred tax on potential Recoupment :any deferred tax on the recoupment up to the level of ORIGINAL Tax Base when asset was bought, must go to P&L but not any above level of that tax base.
DISCOSURE & PRESENTATION: N-C ASSETS HELD FOR SALE

1. SFP : a. b. In CURRENT ASSETS : N-C Assets And Disposal Groups Held For Sale (not in N-C Assets!.) LIABILITIES: Liabilities Associated With Disposal Groups Classified As Held For Sale in liabilities (may not be set off against assets) (can this be in current as well as non-current liabilities? Also what about single assets not in a disposal group- do their liabilities also go in here? Eg money owed on a car still etc? or what kind of liabilities?) c. Separate: EQUITY: Revaluation Reserve Relating To N-C Assets Classified As Held For Sale( where does this come from ? only from the transfer from outside held for sale or can you do revaluations inside held for sale?) d. COMPARATIVES : note: they are not restated for effect of n-c assets reclassified as held for sale in current year- so they will be Non current assets for last years comparatives and CURRENT for this years held for sale (how do you show this do you move last years N-C figure to this years Current Assets held for sale comparatives heading?) SCI: Separately any CUMULATIVE income/expense recognized in Other Comprehensive Income relating to a held for sale asset or group. Eg : mark to market reserve OR revaluation surplus.( does this go in notes or in SCI? is it ONLY for the current years additions/minus ? do you have a heading for LAST years revaluation surplus left in the OCI in the notes or something or NOT? And where would rev. supluss come from then in SCI for current year???) NOTES: a. In its own separate number and heading in notes: both analysis & descriptions together in 1 note. i. AN ANALYSIS of the major classes of assets & liabilities held for sale. (just : 1-Assets each Class + Amounts[eg Vehicles R5000] 2- Liabilities each class + Amounts) (can also all go on face of SFP) ii. A DESCRIPTION : a writing of :Only any assets added to held for sale in CURRENT YEAR , -this year : 1. ?? not sure Impairments for the year of last/previous years assets added to held for sale (does this go in here or not? Or does this just go in impairments note?) 2. New Assets Added : a. Name of asset/group b. Reason & facts of disposal c. Expected 1-time & 2-manner of disposal d. Impairment loss/ reversal on re-classification, as well as the heading in SCI it is. 3. If applicable, the reportable segment : in which the n-c asset is presented in accordance with IFRS 8 Operating Segments 4. Change of Plan : deciding to take assets out of held for sale a. Reason & facts b. Effect on operations of current & any prior periods presented
2.
3.
Ias23 BORROWING COSTS

BACKGROUND:
1. UNTIL 1 MAR 2007 entities could choose to put borrowing costs as expense or capitalize it for certain asset stuff, now today from 1 MAR 2007 it MUST be capitalized if that would be possible at all to make it same as US GAAP
CORE PRINCIPLE IAS23.1 : Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset form part of the cost of that asset. Other borrowing costs are recognised as an expense. SCOPE: The standard deals with borrowing costs , but does not apply to any of the following(some other standard might apply to these): IAS23.3 The Standard does not deal with the actual or imputed cost of equity, including preferred capital not classified as a liability.(non-redeemable pref.shares) IAS23.4 An entity is not required to apply the Standard to borrowing costs directly attributable to the acquisition, construction or production of: (a) a qualifying asset measured at fair value, for example a biological asset; or (b) inventories that are manufactured, or otherwise produced, in large quantities on a repetitive basis. DEFINITIONS:
1.
BORROWING COSTS DEFINITION :are interest and other costs that an entity incurs in connection with the borrowing of funds. 2. A QUALIFYING ASSET DEFINITION: is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale. RULES OF CAPITALISATION 1)QUALIFYING ASSETS: 1. There are 2 types of assets that do NOT QUALIFY : 1- those that IAS23 does not deal with, but may qualify in another IAS and 2- those that simply do not qualify at all. a. The IAS 23 Standard does NOT DEAL WITH : (but may qualify in another IAS standard) i. equity :The actual or imputed cost of equity, including preferred capital not classified as a liability. ii. fair value :qualifying assets measured at fair value, for example a biological asset; or iii. inventories :that are manufactured, or otherwise produced, in large quantities on a repetitive basis. b. The Following simply DO NOT AT ALL QUALIFY : i. Financial assets, and (??? What types are these, just equity shares or what?) do /could redeemeable pref shares qualify somehow?) ii. inventories that are manufactured, or otherwise produced, over a short period of time, are not qualifying assets. (only those that take long eg wine/ships are included!) iii. Assets that are ready for their intended use or sale WHEN ACQUIRED are not qualifying assets. 2. Note: assets must take a substantially long time to complete , ( per IAS23 you must use own judgement) , and if they are ready for sale/use when acquired they are not qualifying assets. 3. IAS23.7 Depending on the circumstances, any of the following may be qualifying assets: a. (a) inventories b. (b) manufacturing plants c. (c) power generation facilities d. (d) intangible assets e. (e) investment properties. f. Self contructed investment properties or assets. RECOGNITION:
1.
IAS 23.8 : An entity shall capitalise borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset. An entity shall recognise other borrowing costs as an expense in the period in which it incurs them.
Recognition: Borrowing costs RECOGNITION rules for borrowing costs THEMSELVES 1. IAS23. 10 a. b. c. d. THE RECOGNITION RULE for borrowing costs themselves : The borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset ARE THOSE BORROWING COSTS THAT WOULD HAVE BEEN AVOIDED IF THE EXPENDITURE ON THE QUALIFYING ASSET HAD NOT BEEN MADE. e. When an entity borrows funds specifically for the purpose of obtaining a particular qualifying asset, the borrowing costs that directly relate to that qualifying asset can be readily identified. f.
THIS RULE QUALIFIED FURTHER : IAS 23.11 It may be difficult to identify a direct relationship between particular borrowings and a qualifying asset and to determine the borrowings that could otherwise have been avoided. Such a difficulty occurs, for example, when the financing activity of an entity is coordinated centrally. Difficulties also arise when a group uses a range of debt instruments to borrow funds at varying rates of interest, and lends those funds on various bases to other entities in the group. Other complications arise through the use of loans denominated in or linked to foreign currencies, when the group operates in highly inflationary economies, and from fluctuations in exchange rates. As a result, the determination of the amount of borrowing costs that are directly attributable to the acquisition of a qualifying asset is difficult and the exercise of judgement is required. 2. The RECOGNITION CRITERIA OF ASSETS must also be met for the borrowing costs themselves ie: a. Probabity of Inflow : It must be probable that economic benefits will flow to the entity due to the borrowing costs b. Reliable Measurement :The borrowing cost must be capable of reliable measurement 3. COMMENCE/SUSPEND/CEASE (IAS23.17,20,22) a. COMMENCE:when all following are present (SEE IAS23.27) i. Expenditure for the asset are being incurred (buying bolts, paying workers etc) ii. Borrowing costs being incurred iii. Activities to prepare asset for intended use are in progress. b. SUSPEND : (IAS23.20) : when active development cease due to i. 2-LONG period not short period : MAIN REASON so do not suspend for short periods. ii. NOT factors beyond CONTROL , (if it is beyond control, it does not lead to suspension usually) (eg: bad planning is in the control of , it is not beyond control of) iii. 3- UNEXPECTED not EXPECTED reasons (like if interruption is an integral part of process, then expected and do not suspend) c. CEASE: (IAS 23.22)for each separate part of or complete asset when activities complete and ready for sale/usage as planned by directors.. 4. BORROWING COSTS MAY INCLUDE: interest on loans/overdrafts, amortization of discounts&premiums related to borrowings,amortization of ancilliary costs incurred to arrange borrowings,finance charges iro finance leases,exchange difference arising from foreign currency borrowings only protion relating to the interest charge. HOW RECOGNITION METHOD WORKS FOR BORROWING COSTS
5.
BORROWING COSTS DEFINITION :are interest and other costs that an entity incurs in connection with the borrowing of funds. 6. IAS23.6 : BORROWING COSTS MAY INCLUDE: (a) interest expense calculated using the effective interest method as described in IAS 39 Financial Instruments: Recognition and Measurement; AS PER TEXTBOOK : this includes: (1)interest on bank overdrafts & short & long term borrowings. (b) [deleted]
7. 8.
9.
10.
(c) [deleted] (d) finance leases : finance charges in respect of finance leases recognised in accordance with IAS 17 Leases; and (e) exchange differences : arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs. AS PER TEXTBOOK it also includes: a. Amortisation of Discounts or Premiums related to borrowings. b. Amortization of ancilliary costs related to borrowings eg: a levy INVESTMENT INCOME FROM BORROWINGS : when using borrowings to finance the asset, any investment income(interest) on the amount loaned after you put it in your own bank, must be DEDUCTED from the interest to be capitalized(it reduces it) a. LESSEN OVERDRAFT : similar to this is if you-instead of investing it- put these funds temporarily in another overdraft etc account to lessen the interest to be paid for that period then this savings in interest must also be deducted- it reduces the amount to be capitalized as well. Low Interest loans or Credit Term beyond normal market credit terms granted: textbook says one should work out the market interest and use this imaginary amount as the borrowing interest capitalized , in the same way that one works out the discount granted when someone gives you 6 mnths to pay and you have to write it up as a interest payment even when there is no interest being charged- ie deemed interest(per IAS 39 effective market interest method means you do this). So you divide your cost into an interest part & a principle part, all by yourself, and capitalize the interest part separately instead of just using the cost(same effect, just more writing takes place , in the end!) Complex financial instruments eg convertible or redeemable instruments : here the requirements of IAS39 are followed and the interest element (substance over form) MAY qualify for capitalization. a. CAPITALISATION RATE : USING WEIGHTED AVERAGE INTEREST RATE: vertabim per : IAS 23 14 To the extent that an entity borrows funds generally and uses them for the purpose of obtaining a qualifying asset( eg : for a central finance dept , using mix of debentures, loans at different rates etc etc), the entity shall determine the amount of borrowing costs eligible for capitalisation by applying a capitalisation rate to the expenditures on that asset. The capitalisation rate shall be the weighted average of the borrowing costs applicable to the borrowings of the entity that are outstanding during the period, other than borrowings made specifically for the purpose of obtaining just that one asset b. General Rule : You use the would have been avoided if the expenditure on the qualifying asset had not been made rule see General Rule above- to decide which borrowing costs to include in calc. and which not.
c. WHEN /TIMING OF EXPENDITURE: it is important to consider when the expenditure on asset was incurred. If expenditure is incurred evenly throughout period, a weighted average of expenditure( this is another weighted set of figures ) for period is calculated.- SEE EXAMPLE IN TXTBOOOK
d.
Total exceeds amount borrowed : The amount of borrowing costs that an entity capitalises during a period shall not exceed the amount of borrowing costs it incurred during that period. this means in
complications with multiple things/loans /rates averages etc one must watch out for this (in consolidated statements , this limit is established with reference to the consolidated amnt of borrowing costs)
e. Part specific/part general : If part of finance raised for the asset was ONLY for that asset, and the other half came from a pool of loans&debentures etc, then you use the weighted average only for the portion it applies to, and the interest rate/interest charges from the specific loan for only that asset for the half it applies to, then just add the 2 together to get the total u add to the assets cost. f. Subsidiary/Parent :.ias 23.12 : In some circumstances, it is appropriate to include all borrowings of the parent and its subsidiaries when computing a weighted average of the borrowing costs; in other circumstances, it is appropriate for each subsidiary to use a weighted average of the borrowing costs applicable to its own borrowings. g. To make It Easier : for some calc. types, you can use the the 1-average carrying amount of the asset 2during a period, 3-including borrowing costs previously capitalised, and multiply this by the weighted average interest to get the interest charged . (if the entire asset was funded by borrowings and you are trying to work out its interest) per IAS 23.18 :The average carrying amount of the asset during a period,
including borrowing costs previously capitalised, is normally a reasonable approximation of the expenditures to which the capitalisation rate is applied in that period. .(what does this mean vertabim word by word ias 23.18- and how can
you include previously capitalised borrowing costs if they were from another load that was paid off already/or if you are paying off the interest separately as it becomes due???) 11. VALUE of ASSET BECOMES HIGHER THAN NRV (net realizable value- if sold now): : EXCESS OF THE CARRYING AMOUNT OF THE QUALIFYING ASSET OVER RECOVERABLE AMOUNT : IAS 23.16 When the carrying amount or the expected ultimate cost of the qualifying asset exceeds its recoverable amount or net realisable value, YOU still
CONTINUE CAPITALISING as usual, but you then afterwards the carrying amount is written down or written off in accordance with the requirements of other Standards. In certain circumstances, the amount of the write-down or write-off is written back (reversed again after it was written down ie if NRV value goes up again) in accordance with those other Standards.- means if the borrowing costs Added to the asset cost become higher than Net realizable value, you must FIRST add these borrowing costs to the asset as an accounting procedure, then AFTER this you write down the carrying amount of the asset to NRV as per required in other IAS s about assets & inventories. Recognition: Commencement of Capitalisation 1. (.17) An entity shall begin capitalising borrowing costs as part of the cost of a qualifying asset on the commencement date. The commencement date for capitalisation is the date when the entity first meets all of the following conditions: a. it incurs expenditures for the asset; b. it incurs borrowing costs; and (date of specific loan/date draw down on mortgage loan/date overdraft used per textbook : what happens if the loan is taken out 3 mnths before the activities commence, when you start capitailsation 3 mnths later do you include all the interest charged in those 3 months , or is that just a P/L expense gone?)+ and what happens when ypu only use half the money this year and the rest next year but you are still paying interest this year on next years usage part. So what do you do? capitalize all the interest(not half) this year or next years half next year only, or for next years half only use the part of interest from the date you spend the money on the asset or how?) ANSWER: see note 1 in METHOD heading below c. it undertakes activities that are necessary to prepare the asset for its intended use or sale. 2. DATE OF COMMENCEMENT :If a loan was taken out 3 months ago and expenditure on the asset only occurred 3 months later ie today, then you only capitalize the interest from 3 months ago if ACTIVITIES NECESSARY FOR THE PREPARATION OF ASSET FOR INTENDED USE OR SALE did actually take place for the whole 3 months even special admin work or something SO you only START capitalizing from DATE ACTIVITIES ACTUALLY STARTED. 3. EXPENDITURES : a. Expenditures mean : (.18) on a qualifying asset include only those expenditures that have resulted in payments of cash, transfers of other assets or the assumption of interest-bearing liabilities. (reduced by gov.grants) b. Grants&Progress Payments :Expenditures are reduced by any progress payments received and grants received in connection with the asset (see IAS 20 Accounting for Government Grants and Disclosure of Government Assistance). c. Capitalisation Rate : see weighted average method explained above . 1. ACTIVITIES MEANS : (.19) The activities necessary to prepare the asset for its intended use or sale encompass more than the physical construction of the asset. They include technical and administrative work prior to the commencement of physical construction, such as the activities associated with obtaining permits prior to the commencement of the physical construction. However, such activities exclude the holding of an asset when no production or development that changes the assets condition is taking place. For example, borrowing costs incurred while land is under development are capitalised during the period in which activities related to the development are being undertaken. However, borrowing costs incurred while land acquired for building purposes is held without any associated development activity do not qualify for capitalisation.
Recognition: Suspension of Capitalisation
1. 20 An entity shall suspend capitalisation of borrowing costs during extended periods in which it suspends active development of a qualifying asset.
(General rule is , i. CONTROL : if event is beyond control of mngmnt then it is NOT suspended, if not beyond control eg: incorrect planning/inefficiencies then it IS usually suspended. ii. UNEXPECTED :Another point to consider is it UNEXPECTED ? If yes suspend, if Not capitalize. iii. LONG/SHORT TIME PERIOD : taken in conjunction with the above , if it is for a long time SUSPEND, if short DO NOT SUSPEND) 21 An entity may incur borrowing costs during an extended period in which it suspends the activities necessary to prepare an asset for its intended use or sale. Such costs are costs of holding partially completed assets and do not qualify for capitalisation. However, an entity does not normally suspend capitalising borrowing costs during a period when it carries out substantial technical and administrative work. An entity also does not suspend capitalising borrowing costs when a temporary delay is a necessary part of the process of getting an asset ready for its intended use or sale. For example, capitalisation continues during the extended period that high water levels delay construction of a bridge, if such high water levels are common during the construction period in the geographical region involved. a.
2.
3. 4.
Recognition: Cessation of Capitalisation 1. IAS23. 22 An entity shall cease capitalising borrowing costs when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete. (not when sold or used, but just when ready) 2. 23 An asset is normally ready for its intended use or sale when the physical construction of the asset is complete even though routine administrative work might still continue. If minor modifications, such as the decoration of a property to the purchasers or users specification, are all that are outstanding, this indicates that substantially all the activities are complete. 3. 24 When an entity completes the construction of a qualifying asset in parts and each part is capable of being used while construction continues on other parts, the entity shall cease capitalising borrowing costs when it completes substantially all the activities necessary to prepare that part for its intended use or sale. 4. 25 A business park comprising several buildings, each of which can be used individually, is an example of a qualifying asset for which each part is capable of being usable while construction continues on other parts. An example of a qualifying asset that needs to be complete before any part can be used is an industrial plant involving several processes which are carried out in sequence at different parts of the plant within the same site, such as a steel mill.
Note: see example above- 1) it it does not say when the loan is repaid, go to the end of the fin year for finance costs incurred but cpitalisation of course might stop sooner(if asset is ready sooner) 2- use this format above for all your calculations 3-watch for 1st or 31st jan - !!! METHOD
1. JOURNALISING : you first send it to Dr INTEREST EXPENSE contra Cr BANK asset then after that you go and write it OUT of interest expense and INTO the asset account which is to be capitalized.This is best so you can see what happened in your records , so you dont write it direct from cr bank to dr asset eg b uilding account. NOTE 1: CAPITALISE ALL INTEREST OR ONLY SOME OF CHARGES : on money lent for the job must be CAPITALISED. So if you lent 100 last year and only used half last year - and then again half this year toward the assets completion then you must still capitalize ALL the interest on the FULL (100) amount every year- not just on the part of the loan you actually used that year. NOTE 2 : DEDUCTING INTEREST EARNED CALCULATION : You must deduct any interest you earned on funds you borrowed previously while you kept it in the bank meanwhile. If it says in question 2400 of loan of 4000 was used toward asset this year, and SPENT EVENLY THROUGHOUT THE YEAR, then : you have 2 amounts that earned interest this year the 4000-
2.
3.
17 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework Presentation Revenue - Change in Acc Policies Income Tax. 2400=1600 * interest earned, which was not spent , and the 2400/2 part of the money that was this year -as the part of money actually spent that was in the bank and earned interest(logically if spent evenly throughout year then it would have spent HALF its time in the bank earning interest- mathematicly) so 2400/2 * interest rate = interest earned. SO FINAL ANSWER IS [2400/2 + (4000-2400) ] * interest rate. BUT IF THE MONEY WAS SPENT AT BEGINNING OF YEAR, THEN THERE WOULD BE NO INTEREST EARNED ON IT IN THE BANK, OR IF AT END OF YEAR, THEN IT WOULD BE A FULL YEARS INTEREST. - So this is a bit complex- watch out for it. NOTE 3: BANK OVERDRAFT INCURRED EVENLY THROUGHOUT YEAR: IN THE SAME WAY THAT do the interest above , if it says incurred evenly throughout the year and does not give you the actual interest charged by bank , then yo u just say AMOUNT USED/2 * interest rate because mathematicly you only pay interest for half the year on the amount it was used evenly throughout the year(just a dof trick to work it out) otherwise if dates are given for each usage then these dates must be used to calc. it all exactly- one by one- no dof tricks. THERE ARE 3 METHODS WITH 2 OPTIONS EACH: a. SPECIFIC LOAN i. Evenly costs incurred evenly throughout period ii. Specific Dates costs incurred on specific dates b. BANK OVERDRAFT & MORTGAGE LOAN i. Evenly ii. Specific Dates c. GENERAL POOL i. Evenly ii. Specific Dates
4.
5. 6.
7. SPECIFIC LOAN METHOD: a. EVENLY INCURRED EXPENSES : If it says 80 expenses were incurred evenly throughout period,and 100 was loaned for full period at 20%, excess was invested at 10% : To get the amount you were able to invest :you just divide the expenses by half and subtract it from loan amount to get amount that was invested for that FULL year to earn interest .-statisticly divide /2 means you even out the expenses incurred evenly throughout the year ie at begin year you had 100 to invest but at end only 20- so if you average it out you get the right answer basicly . You can also do it like scan below- (same method, just different route.) i. OR you can do it like this:
1. Investment at begin year : 20 2. Investment at end year : 100 3. Average investment for year :(100-20)= 80 4. Interest Income : 80*10%= 8 b. A bank Overdraft : works the same, if they say evenly incurred just divide expenses by /2 to get the amount you use to * by interest rate to get interest on bank overdraft for year.
c. You just do it as normal see example below.
8. BANK OVERDRAFT /MORTGAGE LOAN METHOD:

a. A bank Overdraft : if they say evenly incurred just divide expenses by /2 to get the amount you use to * by interest rate to get interest on bank overdraft for year.it statisticly evens out the amounts incurred to give you an average figure to use.
b. 9. GENERAL POOL OF FUNDS METHOD:

a. Allways REM : to add the interest from the last period(or quarter year) to the [total amount * interest rate] that you use to work out the interest for the next period- so it is interest on interest that you are working with, (unless the interest is paid off each period to the lenders for any one part of the general pool of funds, then interest on that interest is not calculated for that part ,only on the other part!) Interest rate changes half way through period: Weighting Over Amounts: recheck all this , it seems you do it differently. You take the interest total paid / total of all loaned amounts but each separate 1-loan amount added and 2-interest paid added is weighted by time used eg 3/12 mnths. see example scanned=- where different amounts are used, you weight the %interest rate by amount/total amounts * rate.- And add all the answers up to get weighted average.(average them out over amount/total amounts) Weighting Over Time: - in addition to weigting over amounts, you must ALSO weight thoi samount over time as well so if one of the loans was only obtained part way through the period you multiply only that specific loans particular calculation by the fraction of the total time it was there for ie: {that loan amount/total loans * interest rate } by the [days/total days] that loan was there in that period- ie the fraction of the total time it was incurring interest .REM if you are working it out in per quarters it is months/ 3 and for half year intervals it is months/ 6 , and FOR YEAR it is months/12 (or days/365) etc. So your table should basicly look like this for a weighted average interest calculation:
b.
c.
d.
e.
Amount R100
Interest rate 5%
Time fraction Eg 1/12 mnths
Weighted rate 100/600*5*1/12
R300 R200 600
10% 8%
12/12 12/12
300/600*10*12/12 200/600*8*12/12 total
OR YOU CAN DO IT LIKE THIS:
10.COMBINATION OF THE TWO METHODS: a. Borrowing costs of specific loans , are capitalized separately from the weighted average of a pool of loans.- they are 2 different
b. things. So the specific loans rate is not included in the weighted average calculation. The specific loans are utilized first , then the balance is attributed to general loans.
11.GROUP STATEMENTS
a. In intergroup transactions problems may arise in complex situations to identify the loan on which the capitalization rates will be determined, since different subsidiaries borrow in different markets and then re-lend to different companies in the group on different bases.
b. c. d.
In consolidated statements the borrowing rates of the loans made to the group by outside parties are used- NOT the rates and bases that subsidaries and parents used to lend to each other. Usually each subsidiary uses the rates applicable TO ITS LOANS.
FOR SUBSIDIARIES OWN FIN STATS: uses the rates applicable to its own loans ONLY- so even if parent lent it to subsidiary, you use the rate the parent charged you, not the rate the parent lent it from someone else at in order to lend it to you. e. For CONSOLIDATED FIN STATS: here you go and make a brand new calculation for all subsidiaries loans who capitalized any interest from intergroup loans , and write things in and out all over the place. SO THE SUBSIDIARY AND PARENT WILL HAVE DIFFERENT AMOUNTS THAT THEY CAPITALISE FOR THE ASSET, AND THUS DIFFERENT VALUES FOR THE SAME ASSET- this is just a mathematical thing for some weird perspective idea behind it all. There are 2 parts to this ConsFinStats. situaton i. INTEREST CAPITALISED FROM INTERGROUP LOANS : You do not capitalize interest from intergroup loans in the cons.fin.stats., only in the subsidiaries own stats. So any of this interest must be removed in the ConsFinStats, And taken out of the assets value got from the subsidiaries books where it was capitalized to , for the purposes of putting the asset in the cons.fin.stats. ONLY.- so it will be capitaised in the subsidiaries books but ZERO will be capitalised in the cons.fin.stats-it is removed.JOURNALISING : write it out of asset account from subsidiary (call it Capital Expenditure SFP) and back into interest expense account in the consolidation journal entries. ii. AND IF THE PARENT LENT FROM ANOTHER LENDER AND RELENT TO SUBSIDIARY: You must not use the rate the parent charged to the sudsidiary , you use the rate the parent lent it from another
lender at. So effectively you remove the parents interest charged to subsidiary completely and substitute it with the interest charged to the parent from outside lender.METHOD: 1. Make a new calc. for the subsidiaries loan using the either the pool of funds method where all loans of subsidiary and parent were general, not specific, or the specific method or the combination of specific and general method depending on type. Whether 1 entity in group lent 200@2%, another 500@5% and another 700@8% and the subsidiary itself lent from them in turn, you just regard all the borrowing by the others as if it were borrowed by the group to fund one of the groups assets, so you re-calc the weighted average from this and apply it to the amount the subsidiary lent from the other intergroup companies, to get your interest you capitalize in the ConsFinStats. 2. Remember all specific loans go first at the rate charged by the outside lender, then the general part of loans go next , at the weighted rate for all general loans of the ENTIRE GROUP unless different pools of loans are specified. See complication in part of example scanned in below. a. JOURNALISING: you just write the difference between the 2 not full amount out, then new amount back in) see example below-(out of the asset account (Capital Expenditure SFP) it was capitalized to and back into the interest expense account in the consolidation journal entries for the purpose of the consolidation.
12.FOREIGN EXCHANGE DIFFERENCES: a. You only include per IAS23.6e : a(e) exchange differences arising from foreign currency borrowings to the extent that they
are regarded as an adjustment to interest costs. ,
b. c.
Tsomewhow the book says it is prudent to use the LOCAL equivalent interest rate to work out what the interst capitalized should be , but they limit it to certain amounts and things- not understood- see example- (why do they limit it to 40000- what do they actually charge here now? How does this work? Pg 524 twxtbook) METHOD : ???
TAX IMPLICATIONS OF CAPITALISTAION OF BORROWINGS:
DISCLOSURE: 1. Per (only this) :IAS23.26 An entity shall disclose: a. the amount of borrowing costs capitalised during the period; and
b.
the capitalisation rate used to determine the amount of borrowing costs eligible for capitalisation. (where a weighted average rate is used)
2. Textbook says the policy must also be disclosed under accounting policy see example below scanned in.
3. There are 3 sections it goes in fin stats: a. 1- Accounting policy section of notes for capitalization of borrowings policy b. FINANCE COSTS section of notes (SCI) for weighted rate + difference recon of borrowing costs incurred vs capitalized see example below c. PPE TABLE section of NOTES (SFP) : for borrowing costs capitalised must be a separate line item here, apart from the line item for the ADDITIONS where the actual expenditure that the borrowing costs financed must go.
PROS AND CONS OF CAPITALISING BORROWING COSTS

1. Pros a. PART OF ACQUISITION COSTS b. Matching concept c. Cost of assets purchased VS self made more comparable(all costs of purchasing are included ie: interest) Cons a. Linking borrowing costs to particular assets is arbitrary b. Same assets could have different values , depending on finance method c. SCI no longer comparable.
2.
LECTURER NOTES
INVENTORIES IAS 2:
*
(AC108), circular 09/06 IFRS 8
Operating Segments (issued November 2006 ) Improvements to IFRSs
(issued May 2008).The following Interpretation refers to IAS 2: SIC-32 Intangible Assets Web Site Costs
SPECIAL THINGS TO REMEMBER:

1. 2. 3. 4. Inventories :To calc Vat charged on a price that already includes VAT you say 14/114 * amount NOT 14/100 A volume rebate (like a trade discount) is calculated without VAT , NOT on the Sale Price incl. Vat. For joint products: you take the RATIO of {SALES PRICE* qty of each in Production batch } of product A : B coverted to a percentage/100 and use this as the ratio to divide the total cost of production up into separate cost of A and separate cost of B. [ Write downs to NRV & reversals of NRV , and losses due to theft etc, any discount granted and discount received ] must all (all these) be included in COST OF SALES from now on with new IAS RSA interpretation.
DEFINITIONS:
1.
INVENTORIES :are assets:

(a) held for sale in the ordinary course of business; (b) in the process of production for such sale; or (c) in the form of materials or supplies to
2.
Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary
to make the sale. Ie : cost of completion + fair value less costs to sell
3.
Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arms length transaction.
RECENT IMPORTANT CHANGES
Write downs to NRV & reversals of NRV and losses due to theft etc, any discount received must all be included in COST OF SALES from now on ( since =/- 2005) . Also discount granted must come off revenue.( this all refers to early payment discount as well as trade discount) see circular 09/06.
1.
1)BACKGROUND:
1. 1. One of the 2 main components of monetary assets. so very important The Standard describes 2 things: 1.1. How to determine cost of inventory 1.2. What Useful & understandable info. to be provided in the Fin stats. There are 2 categories of exclusion from the standard:these are special cases due to trade usage developed over a long period of time ie or other reasons, and for each one must refer to the relevant IFRS. Howevcer other aspects of AC108- inventories could probably still apply here anyway !Eg Note that AC108.3 requires requires changes in value of inventorue excluded from its measurement requirements to be recogmnised in profit or loss for the period of the change.The following are the categories: 2.1. Entirely excluded 2.1.1. Eg: WIP in construction contracts (AC137 incl. directly related service contracts, and contracts for the destrcuion or restoration of assets. 2.1.2. Eg: Agricltural Produce at the point of harvest, and biological assets related to agricultural activity. (IAS 41) 2.1.3. Financial Instruments AC125/133/144 &IFRS 7) 2.2. Excluded only for the measurement requirements. 2.2.1. Producers of agricultural & forest products, agricultural produce after harvest &minerals & mineral products (only at net realizable value well established practice in industry when measured at net realizable value changes in that value are recognized in profit or loss for that period of change 2.2.2. Commodity broker traders fair value less cost to sell changes to these values are also recognised in the period of change.
2.
(2)NATURE OF INVENTORIES
1. AC108.6 :Inventories include all items Intangible or Tangible : 1.1. Held for sale in the ordinary course of business 1.2. In the process of production for such sale 1.3. Consumed during the production of saleable goods & services (eg shampoo in a hair salon) 1.4. To include the cost of labour and other expenses such as supervision or attributable service provider costs not yet invoiced eg interim audit costs???? does end of year audit also go to inventory??? AC108.6 :The decision to classify as Inventory or other type of Asset relates to its PURPOSE. Eg is it a showroom stock vehicle or managers transport.
2.
(3)MEASUREMENT OF INVENTORIES:
1. 2. 3. 4. Inventory is always measured at lower of cost and net realizable value. Generally all costs of inventories in SFP are carried forward to next to the following accounting period until the related revenue is generated(closing inventory to incl. all costs eg labour etc.). Consignment: the item stays part of stock until it is SOLD by the consignee. So it will still be part of closing stock at end of year. Conditions like : customer may return goods in 14 days : the item stays part of stock until the 14 days are up, even if it is in the customers house already. So it will still be part of closing stock at end of year.(you esimate possiblereturns and tigether ith rcognising revenue, only send part that will probabaly not be claimed to cost of sales, the probalae claims go to inventory/are notrecognosed as revenue. To measure the inventory as per the above requires the following 4 steps: (each is discussed in the headings below) 6.1. DETERMINING THE COST of inventories 6.2. APPLYING A COST ALLOCATION TECHNIQUE TO MEASURE THE COST OF INVENTORY 6.3. DETERMINING A NET REALIZABLE 6.4. RECORDING THE LOWER OF COST AND NET REALIZABLE VALUE IN THE FINANCIAL STATEMENTS.
5. 6.
(4)DETERMINING THE COST OF INVENTORIES GENERAL FORMAT:

1.1.1.1. Includes: Historical Cost of Inventories Includes: 1.1.1.1.1. Purchasing costs 1.1.1.1.2. Conversion costs 1.1.1.1.3. Other costs incurred in bringing inventoriues to their current location. 1.1.1.2. Excludes: Cost of Inventories Excludes: 1.1.1.2.1. Abnormal spillage of 1-raw materials or 2-abnormal spillage of labour or 3-of other production costs in bringing inventory to current location & condition. 1.1.1.2.2. Fixed production costs not allocated to production on grounds that normal capacity and not actual capacity was used as basis of allocation..The portion not allocated is written off in profit&loss section of SCI 1.1.1.2.3. Storage costs, unless such costs are necessary in the production process prior to a further production stage. 1.1.1.2.4. Administrative expenses not related to the location and condition of the inventories. 1.1.1.2.5. Selling expenses. (AC108.16)
PURCHASING COSTS:
1.1.1.3. Note :When working out discount for paying in less than eg 30 days(settlement discount) if the com-pany has the intention of paying within 30 days then this is taken off the cost price AND not recorded as OTHER Income in the SCI. ! note this weird new type of thing!(how does this work , what is the IAS /IFRS number?) 1.1.1.4. Includes: Purchasing Costs Includes: 1.1.1.4.1. Purchase price of finshed goods or raw materials 1.1.1.4.2. Import duties & other taxes othe than those subsequently recoverable from the taxman eg VAT 1.1.1.4.3. Transport Costs 1.1.1.4.4. Handling costs 1.1.1.4.5. Other costs directly attributable to acquisition of inventories 1.1.1.5. Excludes: Purchase Price Excludes ( the following are deducted if included) 1.1.1.5.1. Trade discounts and also Cash and Settlement ( eg 5 % off if paid in 30 days etc.) discounts in terms of CC 09/06. 1.1.1.5.2. Rebates & similar items such as subsidies on purchases, 1.1.1.6. More Notes on Purchasing costs: 1.1.1.6.1. FOREIGN EXCHANGE : Imported inventories settled in foreign currency are recognized at the spot rate ruling at the transaction date per AC112 NOTE :if the goods are sent on consignment , and on top of that the final customer is given 2 weeks in which he may return the item after sale YOU only use the spot rate on the date of after the 2 weeks AND after it has been sold by the consignee. 1.1.1.6.2. If in terms of AC133 if the transaction qualifies as a forecast transaction or unrecognized firm commitment that is covered by a fair value ( par 89(b) ) hedge or a cash flow hedge (par 98(b) ), the exchange fluctuation on the underlying derivative before the transaction date may form part of the cost of inventory. 1.1.1.7. Includes : CONVERSION COSTS: 1.1.1.7.1. These are allocated to inventory include:costs directly related to the production of the inventoryeg direct labour, as well as fixed overheads allocated to inventory and variable overheads allocated. 1.1.1.7.2. Variable production overhead costs: these are allocated based on the actual use of the production facilities by each product in inventory, per IAS2. 1.1.1.7.3. Fixed production overhead costs BASED ON NORMAL CAPACITY, not neccessarily the current years output. 1.1.1.7.3.1. DEPRECIATION 1.1.1.7.3.2. MAINTENANCE of BUILDING and machines 1.1.1.7.3.3. Factory MNGMNT and 1.1.1.7.3.4. Factory ADMINISTRATION 1.1.1.7.4. WAGES OF WORKERS ON STRIKE ARE NOT ALLOWED AS CONVERSION COSTS- THEY MUST BE EXPENSED IMMEDIATELY. 1.1.1.7.5. More notes on conversion costs:
1.1.1.7.6. The standard adopts in effect the full absorbtion cost approach, on the assumption that a clear distinction between fixed and variable costs exists. 1.1.1.7.7. NORMAL CAPACITY : Fixed overheads are normally allocated based on the NORMAL CAPICTY in UNITS of the company, but if the ACTUAL units produced was HIGHER than the Normal capacity, that higher actual figure must be in order to PREVENT INVENTORY BEING MEASURED ABOVE COST. 1.1.1.7.8. s (par 13) production expected to be achieved over a number of periods or seasons under normal circumstances, taking into account the loss of capacity resulting from planned maintenance. HOWEVER the actual level may be used if it approximates normal capacity that year. 1.1.1.7.9. The cost of NORMAL spillage also forms part of conversion costs, but not abnormal. 1.1.1.7.10.JOINT- PRODUCT : products produced simultaneously in a production process if the costs of conversion cannot be identified separately a rational & consistent allocation basis should be used relative sales value of products at finshed stage or at stage of origination may be appropriate ( par 14) For joint products: you take the RATIO of {SALES PRICE* qty of each in Production batch of product A : B coverted to a Percentage/100 and use this as the ratio to divide the total cost of production up into separate cost of A and separate cost of B. .(SEE EXAMPLE SCANNED IN BELOW) 1.1.1.7.10.1. Sales price is the one to use, not any other prices etc ,for unisa. 1.1.1.7.11.BY - PRODUCT: The value of the latter is usually immaterial .consequently no cost is usually allocated to the by-product and the proceeds from the sale of these products, or their net realizable value, is deducted from the cost of the main product.So if they are still in inventory and not sold yet, their NRV is deducted from the carrying amount of the main product. So -in effect- the Sales Price of the by-product is its Cost Price . 1.1.1.7.12.Value here. This is only allowed where the by-product is IMMATERIAL basicly (???immatereial in cost or just plain disregarded or how???.what % is seen as immaterial)The objective of this standard which goes against the general rule of lower of cost or net-realisable value is to provide an expedient and cost-effective solution, and recognize a generally accepted practice in the valuing of products.(SEE EXAMPLE SCANNED IN BELOW)
OTHER COSTS:
1.1.1.8. Included in the cost of inventories are also all other costs incurred in bringing the inventories to current location & condition.: 1.1.1.9. INTEREST: where where an entity purchases inventories on deferred settlement terms , and the arrangement effectively contains a financing element, the element is recognized as interest expense over the period of financing, so IS NOT INCLUDED IN TH COST OF INVENTORIES.(AC108.18) The required accounting that it (IFRS about interest) indicated typically gives rise
to an adjustment to the amount of revenue recognised on a sale, or the cost of purchase of an item of inventory.(vertabim circular09/06) Even if normal credit terms allow just 7 or even 30 days interest free credit,this must be taken into account as a finance charge and thus also a reduction in cost price and raise an increase in finance charges. 1.1.1.10. EFFECTIVE INTEREST METHOD : the method of calculating the interest in these cases where one must presume interest to have been charged , is the effective interest method in IAS 39. 1.1.1.1. Costs of designing products : for a particular customer can be included likr for a once of product.. 1.1.1.2. Necessary storage costs : in the production process are also included (eg cheese making)( but not storage costs which are NOT necessary for the production production process) 1.1.1.3. Sales expense : NOT included , this is a period cost 1.1.1.4. Admin Expense not incurred in bringing item to present location/condition: usually NOT included , this is a period cost 1.1.1.5. Packaging materials :Not included, this is a selling expense.like a parcel brown paper,but a plastic designed special display box or protective box???? Make a Q out of this, not done yet! 1.1.1.6. Special circumstances :In the following special circumstances costs not normally included are to be included :see IAS 2 for details Eg:, Borrowing costs relating to inventories where substantially long aging periods are required eg wine, 1.1.1.7. It may sometimes be appropriate to incl. other non-production overheads in the cost of closing inventies, per IAS2.15
1.1.1.8. Consignment: the item stays part of stock until it is SOLD by the consignee. So it will still be part of closing stock at end of year. 1.1.1.9. Conditions like : customer may return goods in 14 days : the item stays part of stock until the 14 days are up, even if it is in the customers house already. So it will still be part of closing stock at end of year.- in practiceyou estimate the % ofreturns and work from this.
Harvested biological assets

1. Per ias 2 AND ias 41 agriculture, stuff just harvested gets done at initial recognoition at fair valyue less costs to sell. But before harvest measurement is NOT in scope of IAS2 at all , but of IAS41.
COST OF INVENTORY COSTS for SERVICE PROVIDER: IAS 2( AC108.19)

1.1.1.10. Inventory costs of service providers in the SFP are those of work completed where revenue has not yet been recognized. 1.1.1.11. METHOD : inventory that is carried over to the next year is ONLY costs/amounts spent on the project that HAVE NOT BEEN INVOICED ie: NOT YET RECORDED AS REVENUE. This only happens if a job is eg 3/4 finished BUT say you have put in more [labour hrs+other costs] than previously ESTIMATED as should have been used for that part (3/4) of the job. So you cannot recognize the extra of the job as revenue YET- ie you cannot charge for it because it is not done yet, so the EXTRA ESTIMATED [labour hours+costs] cannot be matched to any revenue yet, because you havnt reached the end of the job yet - so it cannot be applied as COST OF SALES in the current period. So anything spent over and above the cost of sales then goes to INVENTORY and is carried over to next fin period( because it could happen that a lot of the work for the next year has already been done now and the whole thing evens out later-you dont know. But even if it is not likely this happens, you still use this method to apportion costs as per the standard- you must research it deeper to work out any special circumstances that might be a problem here!) See example scanned in below:9not in example , how can you match costs to revenue if the costs have not been incurred yet- say now the costs were less than the costs that are estimated to match the revenue earned so far? Pg59decriptive acc. book 1.1.1.12. Included : 1.1.1.12.1.Such inventories are measured at cost of production : eg labour and other costs of personnel directly engaged in providing the service, incl. supervisory personell & attributable overheads. 1.1.1.13. Excluded : 1.1.1.13.1. labour & other costs relating to sales & general administrative personell are not included- these are period costs. 1.1.1.13.2.Does not include profit margins or NON-ATTRIBUTABLE OVERHEADS. (IAS2) AC 108.19
REBATES
1. REBATES : The IFRIC agreed that IAS 2(AC 108) requires only those rebates and discounts that have been received as a
reduction in the purchase price of inventories to be taken into consideration in the measurement of the cost of the inventories. Rebates that specifically and genuinely refund selling expenses would not be deducted from the costs of inventories. 1.1. If a rebate is promised if you buy over 200 items ove r a year, then you deduct the rebate if you think you will buy more, or dont deduct it if you think you wont. Subseqeuntly when one actually finds out / or if your estimate changes then you do an adjusting journal entry.
SETTLEMENT DISCOUNTS
1. 2. IF A SETTLEMENT DISCOUNT is offered of 10% if paid in 30 days: you deduct the discount if you think you will pay early , and dont deduct it if you think you wont. Later an adjusting journal is done if it is done differntly. It is seen same as a trade discount or rebate- you deduct it from inventory COST.: So if item cost 100 and 10% discount was offered if paid in 30 days, then you journalise ONLY 90 Inventory CONTRA 90 Creditor , NOT 100. The 10 just dissapears , it does not go to discount received ! If you dont pay in time you just do an adjusting journal.
DEFERRED SETTLEMENT TERMS :

1. Journal :
1.1. Dr Inventory 1.1.1. CR Credittor 1.2. THEN MONTHLY :d 1.3. Dr Finance Costs Expense 1.3.1. Cr Creditor 1.4. If you pay early or somethimng differnt, then adjusting journal entries must just be made. 1.5. One could perhaps create a provision CONTRA creditor for the full amount and Dr Provision Cr Interest Expense each month . This is where the seller offers the buyer that he only pays in eg 12 months time, but the interest he must pay on the credit is already included in the price that the seller quotes to him in this way. What does buyer do?- write off interest included in the price as a period cost or include it in inventories cost? In fact, the whole thing is actually due to : IFRS 9 REQUIRES EXACTLY : that the PAYABLE must be shown at its FAIR VALUE ( this is PV here ) if the effests of disounting are MATERIAL. Textbook says MATERIAL means if normal payemnt terms are 3 mnths, then this is seen as IMMATERIAL , but as soon as it goes over the normal credit term, this is seen as MATERIAL, then the FULL PERIOD (not excluding any normal credit term but the full period ) must discounted to PV to show the PAYABLE at its fair value. They do not talk of the Inventory really , the whole thing comes into it from them aiming at the PAYABLE s fair value ISA 2.18 read with circular 9/2006 par 30 : The purchaser should recognize the inventory at the present value of the amount payable at the end of the settlement term , assuming the time value of money is material : The interest percentage to be used is calculated as per the effective interest method (IAS 39) Circular 9/2006 requires that the normal credit term should be incl uded in period over which the amount is discounted- as it forms part of the financing provided to the buyer. Be careful if it says the buyer normally extends 30 days free credit. You just ignore this and use the whole period if the question says an interest rate of 10% is similar to the market rate on similar credit arrangements.(how does this work? See the example on page 58 of textbook IFRS (301) example 4.3)BELOW
2.
3.
4.
5.
ALLOCATION OF OVERHEAD COSTS:

1. 2. Note: any production overheads or direct labour/material costs must get included in closing inventory. Fixed overheads are normally allocated based on the NORMAL CAPICTY in UNITS of the company, but if the ACTUAL units produced was HIGHER than the Normal capacity, that higher actual figure must be in order to PREVENT INVENTORY BEING MEASURED ABOVE COST.- however if actual was lower you still use NORMAL CAPACITY. Note: any fixed or variable overheads, or direct labour or materials that are added ie included to closing inventory at year end MUST NOT GO TO EXPENSES IN SCI, it has been basicly capitalisedsort of, so it is Journalised as: taken out/reversed out of expense account and put into the inventory account. So it goes to SFPas inventory not SCI as expense.(youy never paid anyt hingyou just did an asset swop ie money for expense, eg: electricity , swapped for inventory in closing inventory. Note: UNISA EXRCISE + IAS 2 sem to say any under-allocated overheads MUST be addedto cost of sales, NOT expensedas a separate underallocationof overheads expense in the P&L. SEE EXAMPLE scanned in BELOW FOR METHOD:
3.
4. 5.
5.1.1.1. There is a big problem with allocation of production & overhead costs and the application of cost formulae in auditing. These can/are usually subject to manipulation in practice.The choice of cost formulae a can change profit &EPS a lot. 5.1.1.2. The following 2 are the worst : the distinction between the 2 is sometimes confusing. Production costs do ALLWAYS form part of inventories & Other overheads do not form part of inventories except in exceptional circumstances.. 5.1.1.2.1. Production 5.1.1.2.2. Other overhead costs: Indirect material & labour , rates & taxes of a factory,depreciation on production machinery,administration of a factory itself. 5.1.1.2.3. PRODUCTION OVERHEAD COSTS 5.1.1.2.3.1. Allways form part of costs of inventory 5.1.1.2.3.2. Only those production overhead costs involved in bringing inventories to current location & condition. 5.1.1.2.3.3. Fixed & Variable costs are included per the full absorbtion cost approach accepted in the standard. 5.1.1.2.3.4. Variable Costs : easy to determine, relates to no. of units produced usually. 5.1.1.2.3.5. Fixed Overheads :(see IAS 2(AC108) .13. ( these are not easy to determine) : 5.1.1.2.3.5.1. Normal Capacity of production plant is used as a basis, not the actual capacity. (average over no. of seasons , not just the max capacity normally attainable) 5.1.1.2.3.5.1.1. if prod. levels are very high in A YEAR you use the current years high rate not the normal average rate -just so inventory is not measured at above cost. 5.1.1.2.3.5.1.2. If prod. Levels very low in a certain time : overhead recovery rate is NOT revised, instead the under-recovered portion is charged to the SCI as a PERIOD COST , forming part of cost of inventory expensevertabim ??? ---ie COST OF SALES ,not separate expense. 5.1.1.2.3.5.2. Actual Capacity : may be used where it approximates normal capacity more or less. 5.1.1.2.4. production overhead costs: Indirect material & labour , rates & taxes of a factory,depreciation on production machinery,administration of the factory itself. (vertabim) 5.1.1.2.5. OTHER OVERHEAD COSTS 5.1.1.2.5.1. Only form part of cost of inventory in exceptional circumstances (hardly ever) 5.1.1.2.5.2. Criteria for these costs forming part of inventories or not 5.1.1.2.5.2.1. If relationship between production & other functions is an indirect one it does not form part of production costs, 5.1.1.2.5.2.2. Cannot be seen as being necessary to bringing inventories to their current location & condition 5.1.1.2.5.3. Exceptions to this rule : 5.1.1.2.5.3.1. Where other overhead costs CLEARLY relate to bringing inventories to current location & condition eg: design costs, certain R&D costs 5.1.1.2.5.3.2. Storage costs necessary in production process prior to further production.eg the maturation of cheese. 5.1.1.2.5.3.3. Eg:Borrowing costs relating to inventories where substantially long aging periods are required eg wine 5.1.1.2.5.4. Eg office rental, salaries of admin personell,selling & marketing costs, R&D , financial management , marketing, . These items are referred to as expenses-NOT included in inventory costs..
1)Techniques for calculating Inventory costs :

1. Other than the actual cost explained above, various techniques can be used to calc. cost of inventories:2 methods are as follows: 1- Standard Cost 1. 2. The IFRS allows companies to use the Standard Costing method to calculate cost of inventories. This method may be used for convenience as long as the inventory values determined in this way approximate the actual cost.
3. A regular review is required of the standard costs where conditions change, eg times of rising costs. 1- Retail method 1. 2. 3. 4. This method is suited to entities that do not maintain complete rcords of purchases and inventories. Inventory values are determined at end of reporting period , by determining the selling price which is reduced by the average profit margein to determine the approximate cost. Eg if markup = 25% , then cost is = Total Inventory Stocktake at selling price X 100/125 = Cost price. This method can only be used if the profirt margins of homogenous groups of products are known. Any current special offers must be calculated separately. As with the standard cost method, this method as a basis may only be applied where the actual results approximate the actual cost.
2)Cost Formulae
IAS2 Ac108 requires that the same cost formula be used for items in the same category even if in different geographical regions or part of different subsidiaries of the Group. But one may use different methods for different types of categories eg : a-metals melting and b-selling welding rods 2. As per IAS 2 .23 to .27 , only 3 methods may be used to determine cost of inventory. 2.1. FIFO (FIRST IN FIRST OUT) 2.1.1. First items in are the first items to be sold. The oldest prices go to the SCi. This is the most popular method used by listed companies in SA today 2.1.2. If the FIFO method is used the Periodic or Perpetual Inventory system will give the same result. 2.1.3. this method is appropriate to interchangeable items of large volumes. 2.2. WEIGHTED AVERAGE COSTS 2.2.1. This method is also appropriate to interchangeable items of large volumes. 2.2.2. If the periodic inventory sytem is used the result calculated will be different to if the perpetual inventory syatem is used . This is because the averages are calculated after each transaction in the perpetual and only once on the periodic so they will differ.This does not matter - any system can be used.But if the FIFO method is used both will give same result. 2.2.3. Periodic :To calc. weighted average take total of ALL this years cost price Div. by total of all this years opening inventory + purchases then multiply by number of items left at year end to get the total weighted average cost.(dont just calc. it separately for the year end leftover stockpile and its related matched cost- rather do ALL MOVEMENT FOR THE YEAR to get the weighted cost price ie all purchases plus opening balance.. 2.2.4. Perpetual : after each purchase OR sale the TOTAL weighted average cost price is re-calculated again each time separately-so it changes all the time. 2.2.4.1. It is permissible to either calc. the weighted average on a periodic basis (?once a month?) OR as each shipment is delivered/received ,depending on the circumstances of the entity. 2.2.4.2. REM: when you do this method, rem that for the as each shipment is received method in perpetual you do it like this: 2.2.4.2.1. A SALE : every time there is a sale you decrease the amount of units but they stay at the same weighted price that they were just before the sale a change in units in inventory does not affect the weighted price, ONLY a purchase changes the weighted price NEVER a sale(importrant cause it can get confusing here). 2.2.4.2.2. A PURCHASE ;you calc. a new weighted avg every time a purchase is made. REM to use the lst weighted avg. of all stock calc. just after the last purchase as the cost of inventory still in stock when you calc. a new weighted avg., so :NB: very NB, at the time of a new purchase when you want to recalc. the new weighted avg, , you do not go back and use or recalc. any of the old purchase prices you only use 2 two zwei numbers in the new weighted avg calc EVER ONLY the old weighted avg just calculated just after the last purchase for inventory actually still in stock -never mind how many have been sold in the meantime AND the new purchase price for new inventory bought- just get the weitged avg. of thses 2 nujbers and you are Golden! 1. 2.3. SPECIFIC IDENTIFICATION. 2.3.1. Per standard this method allocates costs to separately identifianble items of inventoty, usually of high value. Specificly good for items manufactured to order or ites not easily interchangeable. NOT suitable for large volumes of interchangeable items. 2.4. OTHER COST FORMULA 2.4.1. The LIFO and formula based on last purchase prioce is NOT sanctioned by IAS2. LIFo works well in SCI but bad in SFP because it is very old prices for inventory left over usually, thats why it is not allowed.
DETERMINING NET REALISABLE VALUE (IAS2)

1. Definition: Net realizable value is the estimated selling price that could be realized in the normal course of business,less the estimated costs to be incurred in order to complete the product and make the sale. 2. METHOD : To calc. NRV the following to amounts are needed: (IAS2) 2.1. Answer = [Estimated Selling Price in the Normal Course of Business.] 2.2. LESS : [Costs to make the Sale] : (incl. selling + marketing + freight out) ie: Costs to Complete the inventory + Trade & other Discounts allowed + Advertising + Sales Commmision + Packaging costs + Freight in & out. 2.3. This is done : on an item by item basis, or where appropriate a group by group basis where items they relate to 1-same product range 2- similar purposes /end uses 3-marketed in same geographical area.It should be noted that finished goods or inventory of shoes are probably not product ranges. 3. Raw materials: If raw material are to be used to make something , and the finished product less conversion costs gives less than the cost of the raw materials, then the Raw Material s must be WRITTEN DOWN to NRV, EVEN IF THEIR OPEN MARKET VALUE IS THE SAME AS THEIR COST PRICE- this is because they WILL be sold in the form of the finished product, and not as raw materials and inside the finshed product theu are worth less. 4. Note: with this method you DO incl. selling&marketing&distribution&freight out costs, unlike with normal cost of sales where this is left out. 5. If there is a forward contract : at year end for next year for some items, at a lower price than what the items cost is , then they must be brought down to NRV in the books at end of year since the contrac effectively means they are devalued 6. REVERSALS : if circumstances change, the previous write-down to NRV must be reversed. However the reversal is limited to to the original write-down, as assets can not be restated above their original cost. The new value must again be at lower of cost or NRV. This reversal does not go to P&L as a profit , INSTEAD it must REDUCE THE COST OF SALES for the period in which the reversal took place. That is it it reduces this cost of sales ONLY, it is not seen as a profit. 7. EXCEPTIONS: as per 7.1. IAS2.32 : one exception is raw materials or supplies that will be incorporated in the finished product are not written down below cost IF the finished product is expected to realize the cost or more,(in opinion of Textbook Author insufficient guidance is given on : if finished product will be sold at below cost whether supplies should be writtendown to NRV : but he says by implication it seems they should be written-down in this way as well)Thus caution should be exercised where selling price is very dependant on cost of raw materials and their prices drop significantly. 7.2. IAS2.14 : By-products in a production process normally have no cost price- the costs are all allocated to the primary product usually. So in this case the by-product should be valued at NRV. 7.3. IAS2 Inventory acquired for construction of Plant & Equipment : such inventory(raw-materials) is written down only as the plant&equipment depreciate, after the costs of materials have been incorporated in the cost of the plant & equipment(making your own machines) , not before this, while it is still in inventory waiting to be used on the project- if its NRV changes during this time for some reason you do NOT have to write it down just leave it.. 8. Estimates of NRV should be based on Most Reliable Estimate available at time of estimating.If it is difficult to estimate NRV due to lack of info. on costs necessary to make the sale, the current replacement value can be used as a possible solution. (See IAS2 or 10) 9. Indications of possible adjustments to NRV: damaged inventory, partially/wholly obsolete inventory, decline in selling prices, increases in estimated costs to completion,incr.in selling costs. 10. Extra Notes :PER IAS 10 (AC107) : such estimates to take into account changes in price &cost after the period under review, in accordance with standard ,to the extent the that events confirm conditions existing at the end of the reporting period.Any expected losses on firm sales contracts in excess of inventory qtys : see IAS10 : for binding sales contracts at different price to normal- any excess inventory above binding sales contract volume required should be valued at normal prices, and contract price for the rest.
11. Extra Notes : PER IAS 37(AC130) if inventory qtys are less than qty required for firm purchase co ntracts, then onerous contracts may arise and the provisions of IAS 37 (AC130) will apply. 12. Note :Raw Materials to be used in production of finished goods : you DO NOT write down raw materials which have a NRV lower than cost, if they are to be used to produce a finished product which will have a selling price above cost. The following are all treated differently: 12.1. STATIONARY & CONSUMABLES : they are NOT WRITTEN DOWN even if NRV is below cost, , as it is taken that they are used in operations, ??which of course leads to some sort of finished goods/services.- ( as long as your finished goods are sold at above cost- otherwise ????) 12.2. WIP Work in progress : NOT written down if NRV is below cost , as long as finished goods are sold at above cost. 12.3. PACKAGING MATERIAL : this is treated as selling expenses, so it is not seen as contributing toward cost of finished product, so IT IS WRITTEN DOWN if NRV is below cost.(what about a tub for margarine, or a heat sealed pack for sweets, or the very fancy packaging and pictures for toys?-does all stock of this type of packaging get written down at the end of every year- where is the line between selling expenses and cost of product with the tub for margarine ??) 13. Net realisable value refers to: the net amount that an entity expects to realise from the sale of inventory in the ordinary course of business, less costs to sell.. Fair value reflects the amount for which the same inventory could be exchanged between knowledgeable and willing buyers and sellers in the marketplace. The former is an entity-specific value; the latter is not. Net realisable value for inventories may not equal fair value less costs to sell.
lower of cost and nrv

1. This requirement of IAS2 that inventories be valued at the lower of cost or NRV at the end of the Acc. Period and carried over to next period, relates to the fact that if inventory cannot be sold at a profit/cost then this loss should be recognized , in accordance with the Realisation Concept, as soon as probable it will occour &can be measured.The write off- is then recognized and shown as a loss in the SCI.
RECOGNITION OF EXPENSE IAS2.34

1. 2. 3. An expense is recognized when inventory is sold and the revenue is recognized. This happens immediately in perpetual system and at year end only in periodic sys. This recognising of an expense in IAS2 usually specifically means that the expense is to be included in the cost of sales itself for the year., not include in closing inventory NOR to separately under other expenses eg administrative expenses in the SCI Write down to NRV: 3.1. is an expense recognized directly in the SCI it must go into Cost of Sales for the Period it is written downin. These write downs must be disclosed separately in the SCI , it is important to distinguish between these and inventory losses that do NOT have to be disclosed separately.(these arise where physical stockcount does not equal supposed inventory records.inventory losses must also form part of Cost of Sales for the period they were discovered in, but need not be disclosed separately. 3.2. Reversals of NRV are recognized as Reduction in cost of inventory expense , ad are ALSO RECOGNISED DIRECTLY IN COST OF SALES for the period 3.3. Reversals of NRV as well as ordinary write-downs to NRV also need to be disclosed separately (in the notes in profit &loss statement). 3.4. They are also to form part of the cost of sales in the period they get reversed in. A netting of the total inventory cost against total inventory NRV is not permitted by IAS2 , one must do it on an item by item or group by group basis because unrealized profits & losses may not be netted against each other.( so unrealized expense is not netted against unrealized profit)
4.
Note abnormal spillage and losses etc are minused here(in brackets) , so it is NOT added to cost of inventory but taken OUT.
LOSSES, DUE TO THEFT ETC . :(Difference in Inventory Stockcount Vs Inventory Records)

1. 1. 2. 3. 4. 5. 6. 7.
Losses must be recorded as an expense, - they are DR losses and CR inventory I think
TAXATION IMPLICATIONS
Trading stock is in Sect 11a,22,22a of inc.Tax Act of 1962 Most important aspects as follows: Trading stock may be shown at lower of cost or NRV LIFO may not be used, UNLESS inventories are securities Inventory acquired free of charge : to be valued at Market Value on date of aquisition.Special rules apply to inventories got from Schemes of Arrangement,Reconstruction and Amalgamation. Trading Stock INCLUDES all inventories per IAS2 . This means it is to INCLUDE eg: spares & consumables eg unused stationary,maintenance spares,fuel,lubricants and cleaning agents kept by an enetity to be used in operation. Deferred tax may have to be provided for differences between inventories for tax or for accounting purposes.(ie for acc. Purposes we usually include cleaning materials ,stationary etc as ib=nventories anyway, so there will usually be no problem here, but there may arise a special case where there cou;d be a difference between tax & acc. purposes and here deferred tax might have to be used.
DISCLOSURE
SCI : amount of inventories recignised as an expense during the period ie Cost Of Sales. This will also include : unallocated production overheads, wirte downs to NRV ,reversals of write-downs, 2) SFP : total carrying amount of inventories as item. 3) NOTES: a) Accounting Policies : i) In note 1 of NOTES, do all the accounting policies used for Inventories, incl. the cost formula eg FIFO/retai/std/weighted avg. ii) ALSO state in the same written line, : That they are stated at the lower of cost and NRV , that cost price incl. direct costs of conversion, overheads var & also portion of fixed overheads based on normal operating capacity. ALSO any write down to NRV is recognized in P&L. b) Classifications: SFP note to Inventories item in SFP : in own heading : eg 5 INVENTORIES: divide inventory into all its common
1)
34 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework Presentation Revenue - Change in Acc Policies Income Tax. classifications: Common classifications of inventories are merchandise, production supplies, materials, work in progress and finished goods. Carrying amount of inventories carried at fair value less costs to sell : ie in repect of commodity brokers. ( does it go in in same inventory note?.) d) Security : Carrying amount of inventories pledged as security for a debt etc. (in same inventory note. I think??) e) Profit before Tax note: i) Write downs recognosed as an expense ii) Reversals of write downs recognized as a reduction of cost of sales ( what happens if there is no cost of sales that year?) iii) The events/reason that led to a reversal of a write down (also in profit before tax note yes or no?) c)
36 The financial statements shall disclose:
(1) the accounting policies adopted in measuring inventories, including the cost formula used; (2) the total carrying amount of inventories and the carrying amount in classifications appropriate to the entity; Common classifications of inventories are merchandise, production supplies, materials, work in progress and finished goods. The inventories of a service provider may be described as work in progress. (c) the carrying amount of inventories carried at fair value less costs to sell( this is eg in the case of commodity brokers where selling costs are included as a trade usage over the years, and accepted by IFRS as such) (d) the amount of inventories recognised as an expense during the period (just the cost of sales figure?or also discount separately etc) (e) the amount of any write-down of inventories recognised as an expense in the period in accordance with paragraph 34; (typically done in Profit before tax note.) (f) the amount of any reversal of any write-down that is recognised as a reduction in the amount of inventories recognised as expense in the period in accordance with paragraph 34;(where does this go?) (g) the circumstances or events that led to the reversal of a write-down of inventories in accordance with paragraph 34; and(where exactly?) (h) the carrying amount of inventories pledged as security for liabilities.(where) 37 Information about the carrying amounts held in different classifications of inventories and the extent of the changes in these assets is useful to financial statement users. Common classifications of inventories are merchandise, production supplies, materials, work in progress and finished goods. The inventories of a service provider may be described as work in progress. 38 The amount of inventories recognised as an expense during the period, which is often referred to as cost of sales, consists of those costs previously included in the measurement of inventory that has now been sold and unallocated production overheads and abnormal amounts of production costs of inventories???is this ONLY standard costing .over/under all ocation of overheadsThe circumstances of the entity may also warrant the inclusion of other amounts,such as distribution costs NOTE : If the SCI is presented in the Functional form instead of the Nature form as shown below , then (1) as per IAS 2 somehow the costs of the functional expenses have to also be disclosed elsewhere in the Fin Stats, and (2) also somehow there is something weird with the cost of sales disclosure not being comparable with other entities because they may have a different method of arraying these costs ?????how does this work?
COMPREHENISIVE EXAMPLE: GO THROUGH THIS TO GET THE IDEA AGAIN

ACCA DIPAC Inventories - Borrowing Costs - Employee Benefits - N-C Assets Held For Sale

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ACCA DIPAC Inventories - Borrowing Costs - Employee Benefits - N-C Assets Held For Sale

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1 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework Presentation Revenue - Change in Acc Policies Income Tax.

NON-CURRENT ASSETS HELD FOR SALE & DISCONTINUED OPERATIONS

10. 11. 12. 13. 14.

CURRENT /NON-CURRENT DISTINCTION

CLASSIFICATION OF AN ASSET/ DISPOSAL GROUP AS HELD FOR SALE:

COSTS TO SELL & TIME VALUE OF MONEY

CHANGES TO THE PLAN TO SELL:

MEASUREMENT FOR EACH DIFFERENT TYPE

GAIN OR LOSS ON DISPOSAL:

DISCOSURE & PRESENTATION: N-C ASSETS HELD FOR SALE

Ias23 BORROWING COSTS

Recognition: Suspension of Capitalisation

c. You just do it as normal see example below.

8. BANK OVERDRAFT /MORTGAGE LOAN METHOD:

b. 9. GENERAL POOL OF FUNDS METHOD:

Time fraction Eg 1/12 mnths

Weighted rate 100/600*5*1/12

R300 R200 600

300/600*10*12/12 200/600*8*12/12 total

OR YOU CAN DO IT LIKE THIS:

TAX IMPLICATIONS OF CAPITALISTAION OF BORROWINGS:

PROS AND CONS OF CAPITALISING BORROWING COSTS

(AC108), circular 09/06 IFRS 8

Operating Segments (issued November 2006 ) Improvements to IFRSs

SPECIAL THINGS TO REMEMBER:

INVENTORIES :are assets:

(4)DETERMINING THE COST OF INVENTORIES GENERAL FORMAT:

Harvested biological assets

COST OF INVENTORY COSTS for SERVICE PROVIDER: IAS 2( AC108.19)

DEFERRED SETTLEMENT TERMS :

ALLOCATION OF OVERHEAD COSTS:

1)Techniques for calculating Inventory costs :

DETERMINING NET REALISABLE VALUE (IAS2)

lower of cost and nrv

RECOGNITION OF EXPENSE IAS2.34

LOSSES, DUE TO THEFT ETC . :(Difference in Inventory Stockcount Vs Inventory Records)

36 The financial statements shall disclose:

COMPREHENISIVE EXAMPLE: GO THROUGH THIS TO GET THE IDEA AGAIN

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Weighted rate 100/60051/12

300/6001012/12 200/600812/12 total