FINANCIAL REPORTING BY
ifrS for SMEs: the Asset Principles robert Kirk
IFRS for SMEs:
The Asset Principles
In Part 2 of the IFRS for SMEs articles Robert Kirk helps you get to grips with the
basics by focusing on The Asset Principles.
Following on from my first article on the new recognition robert Kirk is Professor of
IFRS for SMEs in June, in this issue, I would The following recognition criteria must be financial reporting at the
like to concentrate on some of the sections applied in order to determine whether or not university of ulster.
of the IFRS dealing with assets. an asset can be reported:
• there must be a probability of future
There are several sections covering all types economic benefits flowing to the entity;
of assets from property, plant and equipment, and
to investment properties, intangible assets, • its cost can be reliably measured.
leases and inventories. In this issue I am
excluding deferred tax assets and financial Major spare parts may require replacement
instrument assets as these will be covered at regular intervals and thus the cost of a
in future editions. I am also not covering the replacement may be capitalised provided
impairment of assets as I will deal with that it is expected to provide incremental future
topic whilst covering liabilities. benefits to the entity. There is more emphasis
in the IFRS on componentization than in FRS
Section 17 Property, Plant and Equipment 15 and therefore major components must be
The principles in this section of the IFRS allocated part of the initial cost of the overall
are very similar to both the full IAS 16 asset and be depreciated separately over their
Property, plant and equipment and to the useful lives.
local standard FRS 15 Tangible Fixed Assets.
Property, plant and equipment are defined Land and buildings are treated as separable
as assets that: assets and should be accounted for
separately even if they are acquired together.
• are held for use in the production or supply
of goods and services, for rental or for Measurement at recognition
administrative purposes; and Property etc should be recognised initially at
• are expected to be used during more than cost. However, unlike the full IFRS and FRS
one period. 15 where revaluation is a possible option,
for cost benefit reasons that option is NOT
They also include investment properties permitted in the SME standard.
whose fair value cannot be measured
without undue cost or effort. The elements of cost that should be
incorporated in the cost of an asset include:
Spare parts are usually carried as inventory
but major spare parts are reported as • its purchase price including any legal fees,
property if they are expected to be used over import duties but after deducting any trade
more than one accounting period. Typical discounts.
examples of property assets include: • any costs directly attributable to
bringing the asset to the location and
• Factory buildings used to manufacture a condition necessary of operating in the
company’s products; way intended by management e.g. site
• Motor vehicles used by the sales staff in preparation, initial delivery and handling,
performance of their duties and vehicles installation and assembly and testing of
provided for administration staff including functionality costs can be included.
the CEO and Directors; • the initial estimate of the cost of
• Administration buildings; dismantling and restoring the site.
• Fixtures and fittings; and
• Plant and machinery.
ACCountAnCy PluS. ISSUE 03. SEPTEMBER 2010. 7
ifrS for SMEs: the Asset Principles
However, the following are not permitted to
be included as the costs of a property:
• the costs of opening a new facility;
• the costs of introducing a new product
or service (including any advertising/
• the costs of conducting business in a new
• administration and other general
• borrowing costs.
In some industries it is a requirement
to dismantle the old equipment by the
government and this should also be
capitalised, albeit discounted back to present
value. It is particularly pertinent to mining
and oil and gas extraction.
The standard also forbids any borrowing
costs to be included in the initial costs
capitalised despite the fact that the full
IFRS, IAS 23 Borrowing Costs, insists on on retirement from active use unless it repairs rise over later years to be balanced
compulsory capitalisation of borrowing has been fully depreciated. Depreciation by lower depreciation in those years.
costs in certain situations. Capitalisation also can only cease when the machine is
has been banned on purely cost/benefit derecognised (i.e. sold) and not when a Section 16 investment Property
considerations. decision has been made to sell the asset. Similar to local Irish standards, investment
Also depreciation may not be suspended properties are dealt with separately but the
Measurement after initial recognition temporarily if the machine is idle although rules are different from the local SSAP. The
All property, after initial recognition, must under the unit of production method it is definition is similar in that these properties
be recorded at cost less any accumulated possible to have a depreciation charge of nil are held for rental to third parties, for capital
depreciation and impairment losses. if no production occurs during the period. appreciation or for both purposes. It is
All property should be depreciated with The following factors must be considered in possible that some properties might be
the exception of land which usually has an determining the useful life of an asset: mixed i.e. part is used by the entity for its
unlimited life, except for assets such own purposes and thus accounted for under
as quarries. • the expected usage by reference to the Section 17 above and part under this section.
asset’s capacity or physical output;
The depreciation charge should be recognised • any expected wear and tear; Under Section 16 investment properties are
in arriving at profit and loss unless it has • technical or commercial obsolescence; initially recorded at cost. Subsequently if a
been included in the carrying amount of and fair value can be measured without undue
another asset e.g. equipment used to • legal or similar limits e.g. leases. cost or effort then it must be fair valued with
manufacture inventories. The depreciable any gains and losses being reported within
amount should be allocated on a systematic The depreciation method selected should income. However, if a fair value cannot be
basis over the asset’s useful life. reflect the pattern in which an entity expects measured reliably then it is accounted for
to consume the asset’s future economic as a normal item of property, plant and
The residual values and useful lives of assets benefits but straight line, reducing balance equipment, under Section 17 above.
need not be reviewed but if there is any and units of production methods are only
indication that either have changed then ones specifically mentioned in the standard. This accounting treatment is different from
any changes should be treated as changes the local standard SSAP 19 Accounting
in accounting estimate and reported in If a company has acquired a piece of for Investment Properties in a number of
profit and loss. Under the full IFRSs an equipment which is legally obsolete after a respects. Under SSAP 19 a reporting entity
annual review is required but this was felt certain output and must be decommissioned
to be onerous for companies applying the then the most appropriate method would be i. must adopt a revaluation model and
standard and therefore, on cost/benefit to divide the total cost of the machine by the not charge depreciation; and
grounds, it was dropped. maximum output and depreciate on a unit of ii. must record all revaluation gains
production basis. However, most companies and losses in reserves and in the
Depreciation begins when the asset is should adopt straight line for the majority of Statement of Comprehensive Income
available for use and ceases from the date their assets and perhaps only adopt reducing but not the Income Statement.
it is derecognised. It does not cease merely balance for vehicles where the costs of
8 ACCountAnCy PluS. ISSUE 03. SEPTEMBER 2010.
ifrS for SMEs: the Asset Principles
B. their cost or value can be reliably Similar to SSAP 9 the costs to incorporate
measured; and within inventory include both the costs of
purchasing raw material and cost of goods
C. they do not result from internal held for resale. In addition, the cost to
expenditure. convert raw material into finished products
based on the normal level of capacity and
also essential to bringing the inventory to
Initially, if purchased, intangibles are its present location and condition must be
recorded at cost and if acquired as part included in the valuation of inventory.
of a business combination, at fair value.
Subsequently intangibles must be amortised The methods that are permitted to charge
over their useful lives but that period should inventory to production include both the
not exceed 10 years. This would normally be First In First Out (FIFO) and the weighted
carried out on a straight line basis but both average method but Last in First Out (LIFO)
the amortisation periods and useful lives is specifically banned from use. Techniques
must be reviewed when there are indicators such as process costing, standard costing
suggesting that either has changed since the and the retail gross profit margin method
previous reporting period. are all permitted as long as they bear a close
relationship to the actual costs incurred in
One major difference between local creating the inventory.
accounting and this IFRS is the treatment
of development costs. These are covered Inventories should be reviewed at the end of
Section 18 intangible Assets other locally separately in SSAP 13 Accounting each reporting for impairment and written
than goodwill for research and development expenditure down to their lower selling price less costs
This section applies to all intangible assets and in that standard a reporting entity to complete and sell. However, unlike SSAP9,
other than goodwill. Similar to the local has a choice of capitalisation or immediate that impairment may be reversed under
standard FRS 10 Goodwill and Intangible write off. This IFRS makes it clear that all certain circumstances but that is expected
Assets intangible assets are defined as development costs must be written off to be rare in practice.
identifiable non monetary assets without immediately. Again that decision has been
physical substance that are separable made on cost benefit grounds. Once the inventory is sold it should be
from the entity or else arise from legal or expensed in the income statement in the
contractual rights. Section 13 inventories same period as the revenue to which it
This section of the IFRS covers the first part relates is recognised.
Home-grown intangibles are not permitted of SSAP 9 Stocks and long term work in
to be recorded as assets on the Statement progress and applies to most inventories Section 20 leases
of Financial position as the recognition including raw material, manufacturing work Good news applies to the treatment of
criteria must be passed before they may be in progress, finished goods and goods held leases under the IFRS as this section is
recognised as assets: for resale. The principle is the same as SSAP very similar to SSAP 21 Leasing and Hire
9 in that all inventory must be valued at the Purchase Contracts in that it artificially
A. it is probable that future economic lower of their cost or estimated selling prices distinguishes finance leases from operating
benefits will flow to the entity; less costs to complete and sell. and requires the lessee to capitalise those
leases as assets on the Statement of
Continued on Page 10
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ACCountAnCy PluS. ISSUE 03. SEPTEMBER 2010. 9
FINANCIAL REPORTING BY
ifrS for SMEs: the Asset Principles robert Kirk
Financial Position whilst at the same time cancellable operating lease rentals due right
recording the obligation due to the finance to the end of the contract split between the
company (lessor) as a liability. Operating amounts due within one year, between two
leases are treated as annual rental expenses and five years and over five years. In SSAP
in the income statement of lessees. 21 only the annual commitments expiring
within one year, between two and five years
The decision as to whether a lease is finance etc are required to be disclosed. An example
or operating can only be made at the of the disclosure under this IFRS is provided
inception of the lease. A finance lease can in the set of illustrative financial statements
only be created if it transfers substantially issued by the IASB as shown in image 1.
all the risks and rewards incidental to
ownership to the lessee. Examples include Conclusion
a legal transfer by the end of the contract, When reviewing the asset standards it is
options to purchase the asset at a bargain clear that the local accounting standards
price, a lease term that covers a substantial are fairly similar to the new IFRS for SMEs.
part of an asset’s life and a leased asset that The main differences are the elimination
is specialised and really can only be used by of the revaluation option in property, plant
the lessee. and equipment, the increased emphasis
on componentization of property, the
If a finance lease is created then both the immediate write off of development costs,
asset and liability are recognised at the lower the maximum amortization period of ten
of the present value of the minimum lease years for intangible assets and the increased
payments and the fair value of the asset. disclosure required for operating leases.
Each payment made by the lessee is then These sections of the IFRS should therefore
apportioned between the interest expense not pose too many difficulties in switch over
and the reduction in the liability and thus the to the IFRS.
interest charge must reflect the continual
reduction in the principal owed. That means In the next issue I propose to look at the
that a constant rate of interest on the impairment of assets and how to account for
outstanding liability must be charged each liabilities under the new IFRS.
period – effectively ruling out the use of the
straight line method and ensuring that either
the sum of the digits or the actuarial method
In addition, the finance lease asset must be 21. Commitment under operating leases
depreciated over the shorter of the lease The Group rents several sales offices under operating leases. The leases are for an
term (including both primary and secondary average period of three years, with fixed rentals over the same period.
periods) and the useful life of the leased asset.
Although not covered in this article the Cu Cu
Section also covers the accounting treatment Minimum lease payments under operating leases 26,100 26,100
required by lessors. It effectively mirrors recognised as an expense during the year
the lessee by capitalising the asset and
depreciating it in the normal way for operating At year-end, the Group has outstanding commitments under non-cancellable operating
leases and, in the case of finance leases, it leases that fall due as follows:
recognises a receivable at an amount equal
to the net investment in the lease with the 20x2 20x1
finance income being recognised based on a Cu Cu
pattern reflecting a constant rate of return on Within one year 13,050 26,100
its net investment. Later than one year but within five years – 13,050
Later than five years – –
One major difference between SSAP 21 and 13,050 39,150
the IFRS is in the disclosure requirements.
Under the IFRS, for operating leases, entities
must disclose the total amount of non
10 ACCountAnCy PluS. ISSUE 03. SEPTEMBER 2010.