1 REVENUE – IAS18

1.1 Arising from

Includes goods produced/purchased for resale egs merchandise purchased by a retailer land and property held for resale.

Typically involves performance of a contractually agreed task over an agreed period of time.

Interest – charges for use of cash/cash equivalents or amounts due Royalties – charges for use of long-term assets eg patents, trademarks, copyrights and computer software Dividends – distributions of profits to equity holders.

1.2 Definitions

• Revenue – gross inflow of economic benefits arising in the course of ordinary activities when those inflows result in increases in equity, other than increases relating to contributions from equity participants.
• Fair value – the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.

1.3 Measurement of revenue

• At fair value of the consideration received or receivable.
• Taking into account trade discounts and volume rebates allowed.

1.4 Disclosure

• Accounting policies adopted for revenue recognition
• Amount of each significant category of revenue recognised during the period
• Amount of revenue from exchanges of goods or services.

Illustration – Nestlé 1997

Accounting policies (extract)

Valuation methods and definitions

Sales to customers

Sales to customers represent sales of products and services rendered to third parties, net of sales rebates and sales taxes.

2 SALE OF GOODS

2.1 Revenue recognition criteria

• Significant risks and rewards of ownership are transferred to the buyer

• Neither continuing managerial involvement nor effective control over goods sold are retained
• The amount of revenue can be measured reliably
• It is probable that economic benefits associated with the transaction will flow to enterprise
• Costs (to be) incurred in respect of the transaction can be measured reliably.

3 RENDERING OF SERVICES

3.1 "Percentage completion method"

• When outcome of transaction can be estimated reliably, associated revenue should be recognised by reference to the "stage of completion of the transaction" at the balance sheet date.

3.2 Revenue recognition

• All the following need to be measured reliably
• Amount of revenue
• Stage of completion at balance sheet date
• Costs incurred and costs to complete.
• Associated economic benefits are probable.

4 INTEREST, ROYALTIES AND DIVIDENDS

4.1 Revenue recognition criteria

• It is probable that economic benefits will flow to the enterprise
• The amount of the revenue can be measured reliably.

4.2 Recognition bases

• Interest – a time-proportion basis
• Royalties – an accrual basis in accordance with the substance of the agreement
• Dividends – when the shareholder’s right to receive payment is established (eg when cash is received or when dividends are declared).

1 INTANGIBLE ASSETS

1.1 Definitions

• Intangible asset – identifiable, non-monetary assets without physical substance held for
• use in the production or supply of goods or services
• rental to others
• administrative purposes.

• Asset – a resource
• controlled by an enterprise as a result of past events
• from which future economic benefits are expected to flow.

1.2 Examples

• Computer software
• Patents
• Copyrights
• Motion picture films
• Licences
• Franchises
• Intellectual property
• Trade marks

1.3 Exceptions

• Mineral rights
• Expenditure on exploration, development and extraction of minerals, oil, natural gas.

2 GOODWILL

2.1 Definitions

• The difference between the cost of acquiring a business and the fair value of identifiable assets and liabilities acquired.

2.2 Two types

Purchased/Acquired	Non-purchased/ Internally generated
Arises as a result of a purchase transaction (eg in management buy-out or take-over).	Exists but is not recognised because there has been no transaction to ascertain its value.

2.3 Valuation methods

• Value enterprise as a whole and deduct fair value of individual assets and liabilities.

• The valuation of the enterprise as a whole may be

• a market value (eg shares traded on an active market)

• a discounted or net present value

• a multiple of earnings or profits.

2.4 Alternative accounting treatments of purchased goodwill

	2.4.1 Arguments for	2.4.2 Arguments against
Immediate write-off	Consistent with treatment of internally generated goodwill Goodwill is not separately realisable imprudent to carry as an asset.	Worth of goodwill has been established over-prudent not to recognise asset paid for Goodwill will not be worthless while enterprise is a going concern.
Capitalise and carry at purchase price (unless value impaired)	Goodwill does not "depreciate" in value in normal course of business (as do tangible assets) Write-off is only necessary if net realisable value falls to less than cost Expenditure incurred in generating and maintaining goodwill (eg staff training) is expensed to write-off goodwill results in a "double charge" against profits.	Goodwill has a finite (albeit unknown) life which can be estimated Purchased goodwill will deteriorate over time as the factors (eg personnel) which generated it are replaced.
Capitalise and amortise over useful life	Recognises goodwill as an asset Amortisation matches cost of asset with the revenue which it helps to generate Purchased goodwill will be replaced within 10 years (say).	Inconsistent (and therefore incomparable) with accounting treatment of inherent goodwill (which is not recognised). Any amortisation period is arbitrary.

3 EXPENDITURE ON RESEARCH AND DEVELOPMENT [IAS 38]

3.1 Recognition of an intangible asset

3.1.1 Criteria

• Future economic benefits are probable
• Cost can be measured reliably.

3.1.2 Difficulties

• Identifying the point in time when there is an identifiable asset that will generate probable future economic benefits
• Distinguishing the cost of an internally generated asset from cost of generating goodwill or running day-to-day operations.

3.2 Asset generation

• Internal generation of an asset should be classified into
• a "research phase"
• a "development phase".
• If these phases cannot be distinguished, expenditure on an internal project to create an intangible asset is treated as if it were incurred in the research phase only.

3.3 Definitions

• Research – original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding.
• Development – the application of research findings or other knowledge to a plan or design for the production of new or substantially improved
• materials
• devices
• products
• processes
• systems
• services

prior to the commencement of commercial production or use.

3.4 Examples of activities

Aiming to obtain new knowledge Seeking applications of research findings Seeking and evaluating product or process alternatives Formulating and designing possible new or improved product or process alternatives.

· Design, construction and testing · pre-production prototypes and models · chosen alternative materials, processes, etc · Designing tools, jigs, moulds and dies involving new technology · Design, construction and operating a pilot plant

· Engineering follow-through in an early phase of commercial prod^n · Quality control during commercial prod^n, incl routine product testing · Trouble-shooting commercial prod^nbreakdowns · Routine refining or otherwise improving existing products · Adapting an existing capability eg to a particular customer’s requirement · Seasonal/periodic design changes to existing products · Routine design of tools, jigs, moulds and dies.

3.5 Cost of an internally generated intangible asset

3.5.1 Initial measurement

An intangible asset should be measured initially at cost.

• Cost – the sum of the expenditure incurred from the date when the intangible asset first meets the recognition criteria
• Re-instatement of expenditure previously recognised as an expense is PROHIBITED.

3.5.2 Components

Cost comprises all expenditure can be directly attributed, or allocated on a reasonable and consistent basis, to creating, producing and preparing the asset for its intended use.

Expenditure on materials and services consumed Salaries, wages and other employment related costs of personnel engaged in generating the asset Other directly attributable expenditure eg amortisation of patents and licences Necessary overheads eg depreciation of property, plant and equipment, insurance premium, rent, etc.

Selling costs Admin and general overheads (unless directly attributed to preparing the asset for use) Inefficiencies and operating losses incurred before planned performance is achieved Staff training to operate asset.

4 EXPENDITURE ON RESEARCH

4.1 Accounting standard

• No intangible asset should be recognised.
• Expenditure should be recognised as an when it is incurred.
• Not to be recognised as part of the cost of an intangible asset at a later date.

4.2 Other items that will not give rise to an intangible asset

• Starting up an operation/business
• Training
• Advertising/promotion
• Relocation.

5 EXPENDITURE ON DEVELOPMENT

5.1 Accounting standard

• An intangible asset arising from development should be recognised IF, and ONLY if, ALL the following recognition criteria can be DEMONSTRATED.

5.2 Asset recognition criteria

• Technical feasibility of completing the intangible asset
• Intention to complete and use or sell the intangible asset
• Ability to use or sell
• Existence of a market for the output of the intangible asset (or the intangible asset itself) or internal use
• Adequate resources exist/are available, to complete the development and use or sell the intangible asset
• Attributable expenditure can be measured reliably during development.

5.3 Amortisation period

5.3.1 Accounting standard

• The depreciable amount should be allocated on a systematic basis over the best estimate of useful life.
• Presumed unlikely to exceed 20 years from the date when the asset is available for use.
• Commences when the asset is available for use.

5.3.2 Factors to consider

• Carrying amount is reduced to reflect consumption of economic benefits over time.
• Making reference to
• expected usage of the asset
• typical produce life cycles for the asset
• technical obsolescence
• stability of industry and market demand
• expected competition
• maintenance required
• period of control
• dependency on useful lives of other assets.

5.4 Amortisation method

5.4.1 Accounting standard

• Method should reflect pattern of consumption.
• Use straight-line if pattern cannot be determined reliably.
• Recognise amortisation charge as an expense.

5.4.2 Review

• At least at each financial year end and change
• period (if expected useful life significantly different)
• method (to reflect a changed pattern)

by adjusting the amortisation charge for current and future periods.

5.5 Residual value

• Assumed to be zero unless there is
• a commitment by a third party to purchase the asset at the end of its useful life, or
• an active market for the asset.

Example 1

On 1 April 1998 Brook plc established a new research and development unit to acquire scientific knowledge about the use of synthetic chemicals for pain relief. The following expenses were incurred during the year ended 31 March 1999.

(1) Purchase of building for $400,000. The building is to be depreciated on a
straight line basis at the rate of 4% per annum on cost.

(2) Wages and salaries of research staff $2,355,000.

(3) Scientific equipment costing $60,000 to be depreciated using a reducing
balance rate of 50% per annum.

Required

Calculate the amount of research and development expenditure to be recognised as an expense in the year ended 31 March 1999.

6 DISCLOSURE

6.1 General, by class

• Useful lives or amortisation rates used
• Amortisation methods used
• Gross carrying amount and accumulated amortisation at beginning and end of period
• A reconciliation of the carrying amount at the beginning and end of the period showing
• additions
• retirements/disposals
• revaluation increase/decrease
• impairment losses
• amortisation.

6.1.1 Classes

• Brand names
• Publishing titles
• Computer software
• Recipes, designs and prototypes
• Intangible assets under development.

6.2 Other

• If amortisation over > 20 years, the reasons and factors
• The aggregate amount of R&D expenditure recognised as an expense during the period.

6.3 Encouraged

• A description of fully amortised asset still in use
• A description of significant intangible assets not recognised because they do not meet the recognition criteria

1 SCOPE

1.1 IAS 16

• This Standard applies to all property, plant and equipment (except when another IAS requires or permits otherwise).

1.2 Exclusions

• Forests and similar regenerative natural resources
• Mineral rights, the exploration for and extraction of minerals, oil, natural gas, etc.

1.3 Definitions

• PROPERTY, PLANT AND EQUIPMENT – Tangible assets
• held for use in production or supply of goods or services
• expected to be used during more than one period.
• DEPRECIATION – Systematic allocation of depreciable amount over an asset’s useful life
• DEPRECIABLE AMOUNT – Cost (or other amount substituted for cost) less residual value.
• USEFUL LIFE – Either
• period of time over which an asset is expected to be used, or
• number of production or similar units expected to be obtained.
• COST – Amount of cash/cash equivalents paid or fair value of other consideration given to acquire an asset at the time of its acquisition or construction.
• RESIDUAL VALUE – Net amount expected to be obtained for an asset at the end of its useful life after deducting expected costs of disposal.
• FAIR VALUE – Amount for which an asset could be exchanged between knowledgeable, willing parties in an arm’s length transaction.
• IMPAIRMENT LOSS – Amount by which the carrying amount of an asset exceeds its recoverable amount.
• CARRYING AMOUNT – At which an asset is recognised in the balance sheet after deducting any accumulated depreciation thereon.

2 RECOGNITION OF PROPERTY, PLANT AND EQUIPMENT

2.1 Criteria

• It is probable that future economic benefits associated with the asset will flow to the enterprise.
• Cost of the asset to the enterprise can be measured reliably. This is usually readily satisfied because exchange transaction evidencing purchase identifies cost.

3 INITIAL MEASUREMENT AT COST

3.1 Components of cost

• Purchase price, including import duties and non-refundable purchase taxes (deduct trade discounts and rebates).
• Directly attributable costs of bringing the asset to working condition, egs
• cost of site preparation
• initial delivery and handling costs
• installation costs
• professional fees (eg architects and engineers)
• estimated cost of dismantling/removing the asset and restoring the site (to the extent that it is recognised as a provision under IAS 37).

4 SUBSEQUENT EXPENDITURE

4.1 Accounting treatment

• Add to carrying amount when it is probable that future economic benefits will exceed those originally assessed.
• Otherwise expense in period incurred.

4.2 Examples of improvements

• Modification of plant to extend its useful life (including increase in capacity).
• Upgrading machine parts to achieve a substantial improvement in quality of output.
• Adopting new production processes enabling a substantial reduction in operating costs.

4.3 Repairs or maintenance

• Made to restore or maintain future economic benefits originally assessed therefore expense when incurred (eg servicing or overhauling plant and equipment).

5 MEASUREMENT SUBSEQUENT TO INITIAL RECOGNITION

5.1 Benchmark treatment

• Carry at cost less any accumulated depreciation (and any accumulated impairment losses).

5.2 Allowed alternative treatment

• Carry at a revalued amount, being fair value at the date of the revaluation less any subsequent accumulated depreciation (and subsequent accumulated impairment losses).

6 REVALUATIONS

6.1 Land and buildings

• Fair value is usually market value (normally appraised by professionally qualified valuers).

6.2 Plant and equipment

• If no evidence of market value (eg because of specialised nature or items are rarely sold) value at depreciated replacement cost.

6.3 Frequency

• Depends on movements in fair values. When fair value of a revalued asset differs materially from carrying amount, a further revaluation is necessary.

6.4 Accumulated depreciation and 6.5 Classes

• At the date of the revaluation is either
• restated proportionately with change in gross carrying amount so that carrying amount after revaluation equals its revalued amount
• eliminated against gross carrying amount and the net amount restated to the revalued amount.

• Entire class to which an asset belongs should be revalued, eg
• land and/or buildings
• machinery
• ships
• aircraft
• motor vehicles
• furniture and fixtures and/or office equipment.

• May be revalued on a rolling basis within a short period of time provided revaluations are kept up to date.

6.6 Increase/decrease

• Increase should be credited directly to equity under heading "revaluation surplus".
• Decrease should be recognised as an expense.
• The revaluation surplus may be transferred directly to retained earnings when the surplus is realised (eg on disposal of the asset).

7 DEPRECIATION

7.1 Accounting standards

• Depreciable amount should be allocated on a systematic basis over useful life.
• Depreciation method should reflect the pattern in which the asset’s economic benefits are consumed.
• Depreciation charge for each period should be recognised as an expense unless it is included in the carrying amount of another asset (eg a conversion cost under IAS 2 or a development cost under IAS 38).

7.2 Useful life

• Factors to be considered
• expected usage (eg expected capacity or physical output)
• expected physical wear and tear (depends on operational factors eg number of shifts, repair and maintenance programme, etc)
• technical obsolescence arising from
• changes or improvements in production, or
• change in market demand for product or service output
• legal or similar limits on the use (eg expiry dates of related leases).
• Asset management policy may involve disposal of assets after a specified time therefore useful life may be shorter than economic life.
• Review useful life periodically and, if expectations differ significantly, adjust depreciation charge for current and future periods
• Repair and maintenance policy may also affect useful life (eg by extending it or increasing residual value

7.3 Land and buildings

• Separable assets are dealt with separately for accounting purposes, even when they are acquired together.

Normally has an unlimited life not depreciated

· Limited life depreciable assets

7.4 Depreciation methods

7.4.1 Examples

• Straight-line a constant charge over useful life
• Reducing (diminishing) balance a decreasing charge over useful life
• Sum-of-the-units charge based on expected use or output.

7.4.2 Review

• Review periodically and, if significant, change method. Account for as a change in accounting estimate (per IAS 8) and adjust depreciation charge for current and future period.

8 RETIREMENTS AND DISPOSALS

8.1 Accounting treatment

• Balance sheet – Eliminate on disposal or when permanently withdrawn from use and no future economic benefits are expected
• Income statement – Recognise gain or loss (difference between estimated net disposal proceeds and carrying amount)
• Exchanges of similar assets – no gain or loss results
• Assets retired from active use and held for disposal are carried at the carrying amount as at the date when the asset is retired

9 DISCLOSURE

9.1 For each class

• Measurement bases used for determining gross carrying amount
• Depreciation methods used
• Useful lives or the depn rates used
• Gross carrying amount and accumulated depreciation (aggregated with accd impairment losses) at beginning and end of period
• A reconciliation of carrying amount at beginning and end of period showing
• additions
• disposals
• increases or decreases resulting from revaluations
• impairment losses recognised/reversed during the period
• depreciation
• other movements.

9.2 Other

• Existence and amounts of restrictions on title, and assets pledged as security
• Accounting policy for estimated costs of restoring sites
• Expenditures on account of assets in the course of construction
• Amount of commitments for the acquisition of property, plant and equipment.

9.3 Items stated at revalued amounts

• Basis used
• Effective date of revaluation
• Whether an independent valuer was involved
• Nature of any indices used to determine replacement cost
• Carrying amount of each class of asset that would have been included in the financial statements had the assets been carried under the benchmark treatment (ie at cost less depreciation and impairment losses)
• Revaluation surplus, indicating movement for period and any restrictions on distribution of balance to shareholders.

9.4 Encouraged

• Carrying amount of temporarily idle assets
• Gross carrying amount of any fully depreciated assets that are still in use
• Carrying amount of assets retired from active use and held for disposal
• When the benchmark treatment is used, the fair value of property, plant and equipment (when materially different from carrying amount).