CORPORATEREPORTING

TOPICONE: Briefoverviewoftheregulatoryreportingand conceptualframeworks conceptual frameworks Accounting for Asset Acquisitions AccountingforAssetAcquisitions Measurement of Property Plant & Equipment post MeasurementofProperty,Plant&Equipmentpost acquisition
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OVERVIEWOFTHEREGULATORYREPORTING FRAMEWORK
EntitiesOtherthanPrivateEntitieshavelegislative responsibilities(CompaniesAct1965,FinancialReportingAct responsibilities (Companies Act 1965 Financial Reporting Act 1997)toprepareexternalfinancialreports Theneedsofexternalusersareprotectedbyminimum reportingrequirementswhichincludethecontentsof reporting requirements which include the contents of financialstatements FinancialReportingFoundation(FRF)
O OversightroleovertheMASB i ht l th MASB

TheMalaysianAccountingStandardsBoard(MASB)
Developsandissuesaccountingandfinancialreporting standardsinMalaysia(complianceismandatoryunders26Dof d d i l i ( li i d d f FinRepAct) Implementedaplanforconvergence(i.e.fullcompliance)with IFRStobecompletedby1January2012 IFRS to be completed by 1 January 2012 Rationaleistoprovideworldwideconsistencyinthepreparation offinancialstatements

The focus of this subject: to consider particular FRS that are Thefocusofthissubject:toconsiderparticularFRSthatare mostrelevanttothepreparationofGeneralPurposeFinancial Statements

OVERVIEWOFTHECONCEPTUALFRAMEWORK OVERVIEW OF THE CONCEPTUAL FRAMEWORK

Nat re and p rpose sits o tside of the act al FRS Natureandpurpose:sitsoutsideoftheactualFRS butsetsouttheconceptsthatunderliethe preparationandpresentationoffinancial preparation and presentation of financial statementstoexternalusers Outlinesthefollowing: g
Usersandtheirneeds Objectivesoffinancialstatements Qualitativecharacteristicsoffinancialstatements Elementsoffinancialstatements Recognitionandmeasurementoftheseelements Recognition and measurement of these elements

CORPORATEREPORTING
PARTONE: AccountingforAssetAcquisitions f
FRS116:Property,Plant&Equipment FRS3:BusinessCombinations FRS138:IntangibleAssets

Deegan references
Ch4&Ch8pp250253,268279

OBJECTIVES
Bytheendofthissessionyoushouldbeableto: ExplainthenatureofPPEandtherecognitionand measurementcriteriaforPPE RecordtheacquisitionofPPE Explainthenatureofabusinesscombination Recognise andmeasurethenetassetsacquiredunder theacquisitionmethodforabusinesscombination Recordtheacquisitionofabusinesscombination Explainthenatureofgoodwillacquiredinabusiness combinationandhowitfitsintheframeworkof intangibleassets intangible assets
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ASSETACQUISITIONS
Businesses generally acquire PPE to capacity BusinessesgenerallyacquirePPEtocapacity Note: PPE vs Inventory / Receivables Note:PPEvs Inventory/Receivables Types of acquisitions: Typesofacquisitions: IndividualPPEitem(s) A business combination Abusinesscombination Controlofanotherentity

FRS116 FRS3 FRS 3 FRS127

Thenatureoftheacquisitionwilldictatetherecognition andmeasurement and measurement

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FRS116:Property,PlantandEquipment FRS 116: Property Plant and Equipment

Definedinpara6:
tangibleitemsthat: (a)areheldforuseintheproductionorsupplyofgoodsor services,forrentaltoothers,orforadministrativepurposes; and (b)areexpectedtobeusedduringmorethanoneperiod

Key features: Keyfeatures:

Tangible(i.e.physicalassets) Used as part of operating activities Usedaspartofoperatingactivities Noncurrent

FRS116:Property,PlantandEquipment FRS 116: Property Plant and Equipment

Recognition(para 7)
Thecostofanitemofproperty,plantand equipmentshallberecognised asanassetif,and onlyif; (a)itisprobablethatfutureeconomicbenefits ( )i i b bl h f i b fi associatedwiththeitemwillflowtotheentity;and (b)thecostoftheitemcanbemeasuredreliably. (b) th t f th it b d li bl

Costvs value evenifFVcanbemeasured,ifcostcannot thenanassetshallnotberecognised(someexceptions) then an asset shall not be recognised (some exceptions)
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FRS116:Property,PlantandEquipment FRS 116: Property Plant and Equipment

Recognitionissues(capitalisingvswritingoff Recognition issues (capitalising vs writingoff costs)
Sparepartscarriedasinventoryandrecognisedin Spare parts carried as inventory and recognised in P&Lasconsumed Othercostsofarecurringnaturetoserviceand Other costs of a recurring nature to service and maintainPPEarerecognisedasR&Mexpensein P&L(notincludedincarryingamountofPPE) Costsofmajoroverhaul(includingmajor replacementcomponents)maybeincludedinCA (orrecognisedasseparateasset) CostsofimprovementsareincludedinCA
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FRS116:Property,PlantandEquipment FRS 116: Property Plant and Equipment

M MeasurementatRecognition(para15) R ii ( 15)
AnitemofPPEthatqualifiesforrecognitionasan assetshallbemeasuredatitscost. h ll b d i

DefinitionofCost (para6)
theamountofcashorcashequivalentspaidor thefairvalueoftheotherconsiderationgivento acquireanassetatthetimeofitsacquisitionor construction t ti

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FRS116:Property,PlantandEquipment FRS 116: Property, Plant and Equipment

Examplesofconsideration
C h Cash Agreementtopayoutortakeoveraloan/other debt Credit(debtfinance) Iss e of shares (eq it finance) Issueofshares(equityfinance) Anycombinationofthese

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FRS116:Property,PlantandEquipment FRS 116: Property, Plant and Equipment

ElementsofCost ThecostofPPEcomprises: (a)itspurchaseprice,includingimportdutiesand nonrefundabletaxes,afterdeductingtradediscounts andrebates; (b)anycostsdirectlyattributable tobringingtheasset tothelocationandconditionnecessaryforittobe capableofoperatinginthemannerintendedbymgt; capable of operating in the manner intended by mgt; and (c)theinitialestimateofcostsofdismantlingand (c) the initial estimate of costs of dismantling and removingtheitemandrestoringthesite(attheend oftheusefullife)
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FRS116:Property,PlantandEquipment FRS 116: Property, Plant and Equipment

E Examplesofdirectlyattributablecosts: l f di tl tt ib t bl t employeecostsarisingfromconstructionor acquisition costsofsitepreparation delivery and handling costs deliveryandhandlingcosts installationandassemblycosts costsoftestingtoensureproperfunction t f t ti t f ti professionalfees(legal,brokerage) Generally,costsofanonrecurringnature e.g.insuranceduringdeliveryvs annualinsurance i d i d li li
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FRS116:Property,PlantandEquipment FRS 116: Property, Plant and Equipment

Oth i Otherissues RecognitionofcostsintheCAofanitemofPPE ceasewhentheitemisinthelocationand cease when the item is in the location and conditionnecessaryforittobecapableof operatinginthemannerintendedbymgt p g y g (regardlessofwhetherornotitemhasbeen broughtintouse) Financecostsarenotcapitalisedunlesstheitem satisfiesthecriteriaforaqualifyingasset

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FRS116:Property,PlantandEquipment FRS 116: Property, Plant and Equipment

Q lif i Qualifyingassets t Para5:...Anassetthatnecessarilytakesa substantialperiodoftimetogetreadyforits substantial period of time to get ready for its intendeduse Para 8: An entity shall capitalise borrowing costs Para8:Anentityshallcapitaliseborrowingcosts thataredirectlyattributabletotheacquisition, constructionorproductionofaqualifyingassetas partofthecostofthatasset

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FRS116:Property,PlantandEquipment
LectureExample:DeterminethecostofPPE(assumesalestax of10%applies) of 10% applies) KLLtdpurchases2ndhandequipment Vendorsoriginalcost=RM100,CA=RM60 Vendor soriginalcost RM100,CA RM60 MarketvalueofequivalentequipmentRM55 KLLtdpaysvendorRM30,000andissues4,000ordinary sharescurrentlytradingatRM6.25 KLLtdincursadditionalsalestaxexclusive costsasfollows: delivery RM1,500 Installation RM1,000 transitinsurance i i RM500 00 annualinsurance RM1,200
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FRS116:Acquiringagroupofassets
Whereanentitymakesasinglepurchaseofagroupof q assetsnotdeemedabusinesscombination theacquirer: measuresthecostaccordingtotheFVofthe consideration allocatesthiscosttothenonmonetaryassetsonthe basisoftheirrelativeFVsatthedateofpurchase Lectureexample:KLLtdacquireslandandfarm machineryforRM450,000(GSTexcl).Thefairvaluesof theseitemsareasfollows: h i f ll Land RM350,000 Tractor RM120,000 Accessories RM30,000
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FRS116:Acquiringagroupofassets
TheFVoftheconsiderationisRM450,000 The FV of the assets acquired is RM500 000 TheFVoftheassetsacquiredisRM500,000 Aseachassetneedstoberecordedseparatelyweneedto determineacostforeachbasedontheirrelativefair determine a cost for each based on their relative fair values Item FV@acq q Relativecost Land 350,000 Tractor 120,000 , Accessories 30,000 500,000 ,

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FRS3:BusinessCombinations FRS 3: Business Combinations

Id tif i Identifyingabusinesscombination(para 3) b i bi ti ( Anentityshalldeterminewhetheratransactionor otherbusinesseventisabusinesscombination other business event is a business combination Iftheassetsacquiredarenotabusiness,the reportingentityshallaccountforthetransaction reporting entity shall account for the transaction asanassetacquisition(=>FRS116asperprevious twoslides)

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FRS3:BusinessCombinations FRS 3: Business Combinations

D fi iti Definitions(AppendixA) (A di A) Business Anintegratedsetofactivitiesand assetsthatiscapableofbeingconductedand assets that is capable of being conducted and managedforthepurposeofprovidingareturn in theformofdividends,lowercostsorother f f , economicbenefitsdirectlytoinvestorsorother owners Businesscombination Atransactionorother eventinwhichanacquirer obtainscontrolofone ormorebusinesses. b i

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FRS3:BusinessCombinations FRS 3: Business Combinations

Theentityshallaccountforeachbusiness Th tit h ll tf hb i combinationbyapplyingtheacquisitionmethod. Thisrequires: This requires: a) identifyingtheacquirer(whogetscontrol) b) determining the acquisition date (when control is determiningtheacquisitiondate(whencontrolis obtained) c) recognising and measuring the identifiable assets andmeasuring theidentifiableassets acquired,theliabilities assumedandanynon controllinginterestintheacquiree;and d) recognising andmeasuring goodwill oragain frombargainpurchase
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FRS3:BusinessCombinations FRS 3: Business Combinations

Impliedbythepreviousslideisthatabusinessmay I li d b th i lid i th t b i beacquiredbyeither: A direct acquisition whereby the acquirer Adirectacquisition wherebytheacquirer purchasesassetsandliabilitiesfromtheacquiree andtheassetsandliabilitiesarenowabsorbed intotheacquiringentity Anindirectacquisition wherebytheacquirer obtainsacontrollinginterestinanotherentity (andthereforeitsassets)bypurchasingsharesof theacquireeorsharesoftheparentofthe h i h f h f h acquiree
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FRS3:BusinessCombinations FRS 3: Business Combinations

Ourfocusfornowisthedirectacquisition(=>non O f f i th di t i iti ( controllinginterestnotrelevantyet) Recognition Para 10 As of the acquisition date the acquirer Para10:Asoftheacquisitiondate,theacquirer shallrecognise,separatelyfromgoodwill,the identifiableassetsacquired(and)theliabilities identifiable assets acquired (and) the liabilities assumed

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FRS3:BusinessCombinations FRS 3: Business Combinations

AppendixA:Definitions A di A D fi iti Anassetisidentifiable ifiteither: i isseparablei.e.capableofbeingseparatedor bl i bl f b i d dividedfromtheentityandsold(or)transferred regardlessofwhethertheentityintendstodo regardless of whether the entity intends to do so;or arises from contractual or other legal rights, arisesfromcontractualorotherlegalrights, regardlessofwhetherthoserightsare transferableorseparablefromtheentity

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FRS3:BusinessCombinations FRS 3: Business Combinations

Measurement M t Theacquirershallmeasuretheidentifiableassets acquiredandtheliabilitiesassumedattheir acquired and the liabilities assumed at their acquisitiondatefairvalues. AppendixA:definitions Fair value the amount for which an asset could Fairvalue theamountforwhichanassetcould beexchanged,oraliabilitysettled,between knowledgeable,willingpartiesinanarmslength g , gp g transaction.

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FRS3:BusinessCombinations FRS 3: Business Combinations

Acquisitionrelatedcosts(para 53) Acquisitionrelatedcostsarecoststheacquirer incurstoeffectabusinesscombination.Those costsincludefindersfees,professionaland consultingfees(includingvaluationfees). Th Theacquirershallaccountfor(such)costsas i h ll t f ( h) t expensesintheperiodsinwhichtheyare incurredandtheservicesarereceived(exceptfor incurred and the services are received (except for costsassociatedwithissuingdebtorequity securities). NotedifferencewithFRS116 partofdirectly attributablecostsandincludedincostofasset
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FRS3:BusinessCombinations FRS 3: Business Combinations

Goodwill G d ill Para32:Theacquirershallrecognise goodwillasof theacquisitiondatemeasured astheexcessof(a) the acquisition date measured as the excess of (a) over(b)below: a) The consideration transferred (by the acquirer Theconsiderationtransferred(bytheacquirer referSlide8) b) The net of the acquisitiondate amounts of the Thenetoftheacquisition dateamountsofthe identifiableassetsacquiredandtheliabilities assumed Goodwill=ConsiderationlessFVNA NB:FVNA=FVof(A L)
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FRS3:BusinessCombinations FRS 3: Business Combinations

Goodwill definedinAppendixA G d ill d fi d i A di A Anasset representingthefutureeconomic benefitsarisingfromotherassetsacquiredina benefits arising from other assets acquired in a businesscombination thatarenotindividually identifiedandseparatelyrecognised p y g GoodwillrepresentsFEBthattheacquirerbelieves willflowfromthenetassetsacquired(eitherin ill fl f th t t i d ( ith i theirownrightorwhenaddedtoacquirersexisting assets) TheseFEBarenotindividuallyidentifiable,butthe acquirerwaspreparedtopayforthem q p p p y
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FRS3:BusinessCombinations FRS 3: Business Combinations

Bargainpurchases B i h Para34:Occasionallyanacquirerwillmakea bargainpurchase,whichisabusiness bargain purchase which is a business combinationinwhichtheamountinparagraph 32(b)exceedstheaggregateoftheamounts ( ) gg g f specifiedinparagraph32(a). theacquirershallrecognisetheresultinggainin profitorlossontheacquisitiondate.Thegain shallbeattributedtotheacquirer. Gainonbargainpurchase=FVNAlessConsideration
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FRS3:BusinessCombinations FRS 3: Business Combinations

Consideration>FVofNAacquired C id ti FV f NA i d =>GoodwillrecognisedasanassetinBS G d ill i d i S Consideration<FVofNAacquired (orFVofNAacquired>Consideration) =>Gainonbargainpurchaserecognisedasrevenue inP&L i P&L

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FRS3:BusinessCombinations
LectureExample YLtdsbooksdisclosethefollowing: GrossAssets=RM45m(excludingcash) Liabilities=RM20m XLtdagreestoacquirethenetassetsofYLtdforRM27m cash h DirectorsofXLtdplaceafairvalueonYLtdsnet assetsofRM22m assets of RM22m XLtdincursadditionalcosts(e.g.legalandvaluation fees)directlyattributabletotheacquisitionofRM1m DirectorsofXbelievetheseassetsandliabilities satisfythedefinitionofabusiness
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FRS3:BusinessCombinations
X LTD - GENERAL JOURNAL Date Details Asset # 1 Asset # 2 Asset # 3 Liabilities Acquisition of net assets DR 42m CR

20m

Acquisition-related costs
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FRS3:BusinessCombinations
Issueswhenrecognising assetsacquiredatFV: ReceivablesofRM150,WDV=RM145,FV=RM140 Recognise bookvalueofgrossreceivables,raise provisionfordifferenceb/wGA&FV

DepreciableNCA:GA=RM500,WDV=RM350,FV= RM400 Recognise FV,ignoreanyaccumulateddepn

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FRS3:BusinessCombinations
SamescenarioaspreviouslyexceptXLtdagreestoacquire thesharecapitalofYLtdforRM27m the share capital of Y Ltd for RM27m XLtdnowcontrolsYLtdandrecognises sharesacquiredas anasset an asset

X LTD - GENERAL JOURNAL Date Details DR CR

Acquisition of shares in Y Ltd

NB:Goodwillnotrecognised untilconsolidation
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FRS3:BusinessCombinations
OriginalexamplewithconsiderationofRM18m
X LTD - GENERAL JOURNAL Date Details DR CR

Asset # 1 Asset # 2 Asset # 3 Liabilities

42m 20m

Acquisition of net assets A i iti f t t

Closing entry

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FRS3:BusinessCombinations
Disclosures The acquirer shall disclose information that enables Theacquirershalldiscloseinformationthatenables userstoevaluatethenatureandfinancialeffectof abusinesscombinationthatoccursduringthecurrent period AppendixBprovidesanextensivelistofspecificitems fordisclosure(foreachacquisition)asguidanceto for disclosure (for each acquisition) as guidance to preparers
Detailsofacquiree q Dateofacquisition Mgtsreasonforacquisition Natureofconsideration Detailsofnetassetsacquired Goodwillorgainonpurchase Goodwill or gain on purchase
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FRS138:IntangibleAssets
Definitionofintangibleassets (para 8) Anidentifiable,nonmonetary assetwithout p y physicalsubstance Monetaryassets moneyheldandassetsto bereceivedinfixedordeterminableamounts be received in fixed or determinable amounts ofmoney(e.g.cash,receivables)

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ExamplesofIntangibleAssets p g
Patents(protectinganinvention) Trademarks(distinctivenameorsymbole.g.Coke,golden arches) Registerednames(McDonalds) i d ( ld ) Copyrights(intellectualproperty) Mastheads(typicalinmedia NewIdea,WomensDay) Research&development(R&D) Theseareallidentifiable Theycanbeseparatedfromtheentityandsold,or Theyarisefromcontractualorotherlegalrights
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FRS138:IntangibleAssets
Wheredoesgoodwillfitintothisframework? FRS 3 definition of goodwill FRS3definitionofgoodwill Anassetrepresentingfutureeconomicbenefitsthatare notcapableofbeingindividuallyidentifiedand p f g y f separatelyrecognised Futureeconomicbenefitsofgoodwill Para11:(Goodwill)representsapaymentmadebythe acquirerinanticipationoffutureeconomicbenefits Product name and reputation Productnameandreputation Relationshipswithsuppliers,staff,customers Location of business & markets Locationofbusiness&markets Distributionchannels

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FRS138:IntangibleAssets
Control Acquirerhasthepowertoobtainthefuturebenefits andrestricttheaccessofotherstothosebenefits Reliablemeasurement Theacquirerhaspaidforit(musthaveabeliefthat somefuturebenefitwillflowfrompayinganamount inexcessofFVNA)inanarmslengthtransaction betweenawillingbuyerandseller b t illi b d ll

GoodwillexhibitsFB,C&RMbutisaspecialcase
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FRS138:IntangibleAssets FRS 138 I t ibl A t

I t Internallygeneratedgoodwillshallnotberecognisedas ll t d d ill h ll t b i d anasset.(para48) Goodwill must be purchased (either direct or indirect Goodwillmustbepurchased(eitherdirectorindirect acquisition) Internal goodwill may exist but it cannot be Internalgoodwillmayexist,butitcannotbe recognised Recognition criteria Recognitioncriteria Futurebenefit? Control? Reliablemeasurement?

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SUMMARY
PPErecognised onacquisitionatcost Cost includes purchase price non refundable taxes and Costincludespurchaseprice,nonrefundabletaxesand costsdirectlyattributabletogettingassettothelocation andconditionnecessaryforittobecapableofoperating and condition necessary for it to be capable of operating inthemannerintendedbymgt Businesscombinationsrecognised onacquisitionat g q acquisitiondatefairvalues(purchasecostsrecognised as expenses) Goodwillonacquisitionrecognised asassetat consideration>fairvalueofnetassets Gainonacquisitionrecognised asrevenueat consideration<FVNAandtakentoP&L
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CORPORATEREPORTING
PARTTWO: MeasurementofPPEpostacquisition f
FRS116:Property,Plant&Equipment FRS136: ImpairmentofAssets

Deegan reference
Chapter6

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OBJECTIVES
Attheendofthissessionyoushouldbeableto: explainthealternativewaysinwhichPPEcanbe measuredafterinitialrecognition d f l recordincrementsanddecrementsunderthe revaluationmodel l ti d l explain,calculateandrecordanimpairmentloss explainandapplythereportingimplicationsof l i d l th ti i li ti f revaluationsandimpairmentadjustments

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FRSRELEVANCE FRS RELEVANCE

FRS 116: Property Plant and Equipment FRS116:Property,PlantandEquipment
Recognition Measurement at recognition Measurementatrecognition Measurementafterrecognition Revaluations Depreciation g Derecognition

FRS136:ImpairmentofAssets p
Identification,recognitionandmeasurement AsitrelatestoPPE

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FRS116:Property,PlantandEquipment p y, q p
Para6definition:Property,plantandequipmentare tangibleitemsthat: (a)areheldforuseintheproductionorsupplyof goodsorservices,forrentaltoothers,orfor d i f l h f administrativepurposes;and (b) (b)areexpectedtobeusedduringmorethanone t dt b dd i th period. Para15:(atrecognition)shallbemeasuredatcost But values of PPE are likely to change over time => how ButvaluesofPPEarelikelytochangeovertime=>how relevantarecarryingamountsbasedoncost?

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MEASUREMENTAFTERRECOGNITION
Para29:Anentityshallchooseeitherthecostmodelor therevaluationmodelasitsaccountingpolicyandshall applythatpolicytoanentireclassofPPE l h li i l f PPE Mgtchoiceb/wcostandrevaluationmodel g / Isappliedonaclassbyclassbasis Chosen method must be applied to all assets in that class Chosenmethodmustbeappliedtoallassetsinthatclass Ensuresconsistencyacrosssimilarassets,limits opportunisticmeasurement pp Canchoosedifferentmethodfromclasstoclass

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DEFINITIONOFACLASSOFPPE DEFINITION OF A CLASS OF PPE

Para 37: a grouping of assets of a similar nature and 37:agroupingofassetsofasimilarnatureand useinanentitysoperations.Thefollowingareexamples ofseparateclasses: f p land land&buildings land & buildings machinery ships aircraft motorvehicles t hi l furniture&fixtures officeequipment ffi i Whyisclassification important? i ? Consistencyinvaluations Objectivity(scopefor Manipulation)

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THECOSTMODEL
P Para30 30 Afterrecognitionasanasset,anitemofPPEshallbe carried at its cost less any accumulated depreciation atitscost lessanyaccumulateddepreciation andanyaccumulatedimpairmentlosses Mgtmakesconsciouschoicenotto revaluePPE Depreciation applied based on cost Depreciationappliedbasedoncost AssetssubjecttoimpairmenttestunderFRS136

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THEREVALUATIONMODEL THE REVALUATION MODEL

Para31 Afterrecognitionasanasset,anitemofPPEwhose f ii i f h fairvaluecanbemeasuredreliablyshallbecarriedat arevaluedamount,beingitsfairvalueatthedateof a revalued amount being its fair value at the date of therevaluationlessanysubsequent accumulated depreciationandsubsequentaccumulated p q impairmentlosses. Management makes conscious choice to revalue PPE Managementmakesconsciouschoiceto revaluePPE Depreciationappliedbasedonrevaluedamount(=> referencetosubsequent) reference to subsequent) AssetssubjecttoimpairmenttestunderFRS136 (commontobothmethods) (common to both methods)

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FAIRVALUE FAIR VALUE

Para6definition ..theamountforwhichanassetcouldbeexchanged betweenknowledgeable,willing partiesinanarms lengthtransaction length transaction Para 32: Obtaining valuations Para32:Obtainingvaluations Aquotedmarketpriceinanactiveandliquidmarket L & B usually determined from marketbased L&B usuallydeterminedfrommarket based evidencebyappraisalthatisnormallyundertakenby professionallyqualifiedvaluers P&E marketvaluedeterminedbyappraisal(from directors)

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FREQUENCYOFREVALUATION
P Para31(contd) 31 ( td) Revaluationsshallbemadewithsufficientregularity toensurethatthecarryingamountdoesnotdiffer to ensure that the carrying amount does not differ materiallyfromthatwhichwouldbedetermined usingfairvalueattheendofthereportingperiod. gf f p gp Para 34 suggests every 3 to 5 years unless frequency of Para34suggestsevery3to5yearsunlessfrequencyof significantchangesisthoughttowarrantmoreoftenor whenevercircumstancesarisewhereFVisthoughttobe materiallydifferenttoCA

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TYPESOFREVALUATIONS
Revaluation > CA => Incremental i.e. upwards Revaluation < CA =>Decremental i e downwards i.e. After revaluation, new CA is the revalued amount

REVALUED AMOUNT

EXISTING CARRYING AMOUNT

REVALUEDAM OUNT

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ACCOUNTINGFORTHEINCREMENT ACCOUNTING FOR THE INCREMENT

Increment = FV less CA prior to revaluation (not Increment=FVlessCApriortorevaluation(not applicableundercostmodel) para 39:
Ifanassetscarryingamountisincreasedasaresultofa revaluation,theincreaseshallberecognised inother comprehensiveincomeandaccumulatedinequityunder theheadingofrevaluationsurplus.(Moretocome)

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ACCOUNTINGFORAREVALUATION ACCOUNTING FOR A REVALUATION

Para 35: When an item of PPE is revalued any Para35:WhenanitemofPPEisrevalued,any accumulateddepreciationatthedateofrevaluationis treatedinoneoftwoways: y (a)Thegrossmethod ( ) (b)Thenetmethod The distinction between the two is in the treatment Thedistinctionbetweenthetwoisinthetreatment ofaccumulateddepreciation

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THENETMETHOD
Para35anyaccumulateddepreciationatthedateof revaluationis (b)eliminatedagainstthegrosscarryingamountofthe assetandthenetamountrestatedtotherevalued d h d h l d amountoftheasset. Afterthisprocess: A Accum d =zero depn Asseta/cbalance=revaluedamount S b Subsequentdepn calculationsbasedonnew d l l i b d revaluationamount

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LECTUREILLUSTRATION1.1:Incremental revaluation
D il f Detailsofanasseton31December2011: 31 D b 2011 EQUIPMENT(grossamount) ACCUMULATEDDEPRECIATION CARRYINGAMOUNT 625,000 250,000 375,000

Thedirectorshaveadoptedtherevaluationmodelforthisclass ofasset.Ithasbeendeterminedthatthefairvalueofthis f t It h b d t i d th t th f i l f thi equipment,obtainedbyindependentvaluation,isRM450,000. Therehavebeennopriorrevaluations. There have been no prior revaluations

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GROSSMETHOD
Para35anyaccumulateddepreciationatthedateofthe revaluationis revaluation is (a)restatedproportionatelywiththechangeinthegross carryingamountoftheassetsothatthecarryingamount carrying amount of the asset so that the carrying amount oftheassetafterrevaluationequalsitsrevalued amount. Afterthisprocess: GA and AD = proportionately re stated GAandAD=proportionatelyrestated CA=revaluedamount Subsequent depn calculations based on new Subsequentdepn calculationsbasedonnew revaluationamount(intheassetaccount)

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ACCOUNTINGFORADECREMENT ACCOUNTING FOR A DECREMENT

If Fair value < Carrying amount IfFairvalue<Carryingamount Decrement=CApriortorevaluationlessFV Para 40: Para40: Ifanassetscarryingamountisdecreasedasaresultofa revaluation,thedecreaseshallberecognised inprofitor revaluation the decrease shall be recognised in profit or loss.(Moretocome) ConsistencywithtreatmentforIncrements? In line with prudence recognise losses as soon as Inlinewithprudence lossesassoonas anticipated,recognise gainswhenrealised (Inventory andLCR)

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LECTUREILLUSTRATION1.2:Decremental revaluation
Detailsofanasseton31December2011: EQUIPMENT ACCUMULATEDDEPRECIATION CARRYINGAMOUNT 625,000 250,000 375,000

Thedirectorshavedeterminedthatthefairvalueofthis equipment,obtainedbyindependentvaluation,isRM330,000. Therehavebeennopriorrevaluations. Decrement = CA FV => 375,000 330,000 = RM45,000 >

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ACCOUNTINGFORANINCREMENTAFTERPRIOR REVALUATIONDOWNWARDS
If FV > CA => Increment IfFV>CA=>Increment Adjustment=FVlessCApriortorevaluation(notapplicable undercostmodel) under cost model) Para39(continued): Ifanassetscarryingamountisincreasedasaresultofa revaluation,theincreaseshallbecrediteddirectlyto equityundertheheadingofrevaluationreserve. it d th h di f l ti However,theincreaseshallberecognised inprofitor losstotheextentthatitreversesarevaluationdecrease loss to the extent that it reverses a revaluation decrease ofthesameassetpreviouslyrecognised inprofitorloss.

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LECTUREILLUSTRATION1.3:Incremental revaluationafterpriorrevaluationdownwards
Detailsofanasseton31December2011: EQUIPMENT ACCUMULATEDDEPRECIATION CARRYINGAMOUNT CARRYING AMOUNT

625,000 625 000 250,000 375,000 375 000

Thedirectorshavedeterminedthatthefairvalueofthis equipment,obtainedbyindependentvaluation,isRM450,000. Thisassetwassubjecttoapriorrevaluationdownwardsof RM20,000. RM20 000 So,firstRM20,000ofrevaluationmustoffsetprior So, first RM20,000 of revaluation must offset prior ExpensebeforeCRtoreserve

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ACCOUNTINGFORADECREMENTAFTERPRIOR REVALUATIONSUPWARDS
If FV < CA => Decrement IfFV<CA=>Decrement Adjustment=CApriortorevaluationlessFV(notapplicable undercostmodel) Para40(continued): If an assets carrying amount is decreased as a result of a Ifanasset scarryingamountisdecreasedasaresultofa revaluation,thedecreaseshallberecognised inprofitor loss.However,thedecreaseshallberecognised inother comprehensiveincometotheextentofanycredit balanceexistingintherevaluationsurplusinrespectof thatasset.Thedecreaserecognised inother that asset. The decrease recognised in other comprehensiveincomereducestheamountaccumulated inequityundertheheadingofrevaluationsurplus.

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LECTUREILLUSTRATION1.4:Decremental revaluationafterpriorrevaluationupwards
Detailsofanasseton31December2011: EQUIPMENT ACCUMULATEDDEPRECIATION CARRYINGAMOUNT

625,000 250,000 375,000

The directors have determined that the fair value of this Thedirectorshavedeterminedthatthefairvalueofthis equipment,obtainedbyindependentvaluation,isRM330,000. Thisassetwassubjecttoapriorrevaluationupwardsof j p p RM15,000. So,firstRM15,000ofrevaluationdownwardsmustoffset So, first RM15,000 of revaluation downwards must offset priorCRtothereservebeforerecognised asanexpense

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SUMMARYOFREVALUATIONS SUMMARY OF REVALUATIONS

MovementsinReserve partofOtherCompIncome

Rev&Exp toP&L

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DERECOGNITIONOFAREVALUEDASSET
Anypartofthebalanceintherevaluationreserveinrespectof y g thatassetistransferreddirectlytoretainedearningsatthe timeofderecognition Example 1: Land with CA of RM400 is sold for RM650 Example1:LandwithCAofRM400issoldforRM650

Example2:LandwaspurchasedforRM400,revaluedby RM100thensoldforRM650 RM100 then sold for RM650

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IMPACTSOFFRS116REVALUATIONSON FINANCIALSTATEMENTRATIOS
Incrementalrevaluation=>NCAandEquityand=> affectsanyratiothatincludeseitherinitselements i OA d O inROAandROE=>deteriorationinprofitability d i i i fi bili inTL/TA(debtratio)andTL/Equity(debttoequity ratio)=>improvedleverage ratio) > improved leverage Reverseappliesforanydecremental revaluation IfpreparersofFShavechoiceovermethods(costvs revaluation), timingofrevaluations(3to5years)andvaluationamounts timing of revaluations (3 to 5 years) and valuation amounts (couldtheyshoparound?)=>scopeforearnings management g

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FRS136:IMPAIRMENTOFASSETS FRS 136 IMPAIRMENT OF ASSETS

Recall from FRS 116 Para 30 [& 31]: RecallfromFRS116Para30[&31]:
PPEshallbecarriedatitscost/revalued amount less y q p y anysubsequent accumulateddepreciationandany subsequent accumulatedimpairmentlosses

FRS136ImpairmentofAssets
Impairment test applies equally to PPE whether ImpairmenttestappliesequallytoPPEwhether carriedunderthecostmodelortherevaluationmodel ( (effectivelyadownwardrevaluationinaccordwithFRS y 116)

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IMPAIRMENTOFASSETS IMPAIRMENT OF ASSETS

para 6:Definitions An impairment loss is the amount by which the carrying Animpairmentlossistheamountbywhichthecarrying amountofanassetoracashgeneratingunitexceeds itsrecoverableamount. para 59 If,andonlyif,therecoverableamountofanassetisless thanitscarryingamount,thecarryingamountofthe assetshallbereducedtoitsrecoverableamount.That reductionisanimpairmentloss. d ti i i i tl So,ifRecoverableAmount(RA)islessthanCarrying Amount(CA)then: Amount (CA) then: identifyimpairmentloss(CA RA) write down asset to its RA writedownassettoitsRA

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CARRYINGAMOUNTOFANASSET
para 6: theamountatwhichanassetisrecognisedafter deductinganyaccumulateddepreciation(amortisation) andaccumulatedimpairmentlossesthereon. d l di i l h CA=Carryingcost,Bookvalue,Writtendownvalue(WDV) Thepointfromwhichanyrevaluation(adjustment)ismade Equipment 500,000 AccumulatedDepreciation andImpairmentLosses (200,000) 300,000

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RECOVERABLEAMOUNT RECOVERABLE AMOUNT

para 6:Recoverableamount

thehigher ofitsfairvaluelesscoststosell anditsvalueinuse.

para 6:Fairvaluelesscoststosell

FVlesscostsofdisposali.e.incrementalcosts directlyattributabletothedisposal excludingfinancecostsandincometax excluding finance costs and income tax expense
para 6:Valueinuse

The present value of the future cash flows Thepresentvalueofthefuturecashflows expectedtobederivedfromanassetorCGU

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VALUEINUSE VALUE IN USE

Yr 1 (RM)
Cash inflows expected to be generated by using the machine Cash inflow expected to be generated b selling th t d by lli the machine Cash outflows expected to be incurred by using machine Net cash flow from using g machine Discounted cash flow (estimated)

Yr 2 (RM) 400

Yr 3 (RM) 500

Yr 4 (RM) 90

Totals (RM) 1,290 1 290

300

110

110

(50) 250
DCF1 +

(70) 330
DCF2 +

(100) 400
DCF3 +

(100) 100
DCF4 =

(320) 1,080 1 080 820

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RECOGNISINGANIMPAIRMENTLOSS
para 60 Animpairmentlossshallberecognised immediately inprofitorloss,unlesstheassetiscarriedata i fit l l th ti i d t revaluedamount...Anyimpairmentlossofa revaluedassetshallbetreatedasarevaluation decrease... Journalentry costmethod: Journal entry cost method: DRImpairmentLoss CR Accum depreciation&impairment p p Journalentry revalution method: DRRevaluationsurplus/RevaluationexpenseCR DR Revaluation surplus / Revaluation expense CR PPE

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SUBSEQUENTDEPRECIATION SUBSEQUENT DEPRECIATION

para 63 Aftertherecognitionofanimpairmentloss,the depreciation(amortisation)chargefortheassetshall depreciation (amortisation) charge for the asset shall beadjustedinfutureperiodstoallocatetheassets revisedcarryingamount,lessitsresidualvalue(if any),onasystematicbasisoveritsremaininguseful life. So,afteranadjustmentforimpairmentallfuture depreciationcalculationsarebasedonthenewCA d i i l l i b d h CA (lessanyRV)allocatedovertheremainingusefullife

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FRS136:ImpairmentofAssets FRS 136: Impairment of Assets

Subsequentmeasurementofgoodwill Goodwillisrecognised atacquisitiondateatits cost(measuredbyconsiderationlessFVNA) ( db id i l VNA) Goodwillisthenallocatedto(i.e.includedinthe carryingamountof)anycashgeneratingunitsthat carrying amount of) any cash generating units that areexpectedtobenefitfromthesynergiesofthe businesscombination(para business combination (para 80)

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FRS136:ImpairmentofAssets FRS 136: Impairment of Assets

Subsequentmeasurementofgoodwill Atsubsequentreportingdates,eachcash generatingunitistestedforimpairment Asimpairmentlossesarerecognised foracash generatingunit,thelossesshallbeallocatedto reducethecarryingamountoftheassetsofthe red ce the carr ing amo nt of the assets of the unitinthefollowingorder: first to reduce the carrying amount of any first,toreducethecarryingamountofany goodwillallocatedtotheunit then, to the other assets of the unit prorata then,totheotherassetsoftheunitpro rata onthebasisofthecarryingamountofeach assetintheunit
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FRS136:ImpairmentofAssets FRS 136: Impairment of Assets

Subsequentmeasurementofgoodwill(1) RAofCGU=RM540 RA f CGU RM540
ExpRM60 Goodwill RM100 Gwill RM40

Other Assets RM500

Other Assets RM500

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FRS136:ImpairmentofAssets FRS 136: Impairment of Assets

Subsequentmeasurementofgoodwill(2) RAofCGU=RM450
Gwill RM40 ImpRM90

Other Assets RM500

CGU RM540

Other Assets RM450

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REVERSALOFIMPAIRMENTLOSSES REVERSAL OF IMPAIRMENT LOSSES

An asset cannot be impaired upwards, but previous Anassetcannotbeimpairedupwards,butprevious impairmentlossescanbereversed paras 110116 p Ifcircumstancesariseinwhichanassetsrecoverable amountexceedsCAareversalofaprevious impairmentlosscanberecognised Exceptions: Goodwillimpairmentcannotbereversed ThenewCAcannotexceedtheCAthatwouldhave beendeterminedhadnoimpairmentlossbeen recognised

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FRS136:ImpairmentofAssets FRS 136: Impairment of Assets

Subsequentmeasurementofgoodwill(3) OriginalCA ofCGU
Goodwill RM100

CurrentCA ofCGU
Goodwill RM100 AssetsRM50

RAofCGU=RM520 Priorgoodwill Prior goodwill impairment CANNOT bereversed

Previous impairments i i t

Other Assets RM500

Other Assets RM450

Priorassetimpairments CANbereversed =>impairmentreversalofRM50 ( a e o & as a ga ) (takentoP&Lasagain) =>newCAofCGU=RM500

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REVERSALOFIMPAIRMENTLOSSES S O OSS S
Example
A AssetwithCAofRM500on30June2011isdeemedto i h CA f RM500 30 J 2011 i d d havebeenimpairedbyRM100. Depreciation will continue to be charged on a straight Depreciationwillcontinuetobechargedonastraight linebasisassumingaremainingestimatedusefullifeof 10years 10 years On30June2014thesameassetisdeemedtohavea recoverableamountofRM360.
30/6/11 CA = RM500

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DISCLOSUREANDREVALUATION
FRS 116 FRS116
paras 73&74 assetdetails(e.g.GA,CA,depn / , ) methods/rates,valuationmethods) para 77 revaluationdetails(e.g.when,bywhom, movementsinreserves)

FRS136
para 126 losses/reversalsbyclassofassets para 130 each material impairment loss 130 eachmaterialimpairmentloss para 131 aggregateofimpairmentlossesand g circumstancesleadingtothese

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FVandRA Revaluationmodel
RM 730 1 FV 2 FV 3 ViU FV FV FV ViU FV CA FV CA FV CA ViU CA FV CA FV CA FV CA ViU FV 4 5 6 7 8 9 10 11 12

720 FV* ViU

710 ViU FV* FV* FV* ViU 700 CA 690 680 670 CA CA CA CA

ViU FV* FV* FV* ViU

ViU FV* FV* FV* ViU FV FV FV

ViU FV* FV* NOTE:FV*=FVlesscoststosell,ViU=Valueinuse

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FVandRA Costmodel
RM 730 720 FV* ViU 710 ViU FV* FV* FV* ViU 700 CA 690 680 670 NOTE:FV*=FVlesscoststosell,ViU=Valueinuse CA CA CA CA CA CA CA 1 2 3 ViU ViU ViU CA CA CA CA ViU 4 5 6 7 8 9 10 11 12

ViU FV* FV* FV* ViU ViU FV* FV* FV* ViU FV FV FV

ViU FV* FV*

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SUMMARY
PostacquisitionPPEcarriedundereithercostor revaluationmodel revaluation model Underrevaluationmodel:
Increments taken to reserves (after offsetting prior decrements Incrementstakentoreserves(afteroffsettingpriordecrements inP&L) DecrementstakentoP&L(afteroffsettingpriorincrements againstreserves) i t )

Impairmentrecognised whenRA(thehigherofvaluein useandfairvaluelesscoststosell)<CA use and fair value less costs to sell) < CA Impairmenttestappliestocostandrevaluationmodels
An expense under cost model Anexpenseundercostmodel Treatedasadecrementunderrevaluationmodel

Canreverseimpairmentloss(exceptforgoodwill) p ( p g )
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