Accounting by lessees

The following principles should be applied in the financial statements of lessees:

at commencement of the lease term, finance leases should be recorded as an
asset and a liability at the lower of the fair value of the asset and the present
value of the minimum lease payments (discounted at the interest rate implicit in
the lease, if practicable, or else at the entity's incremental borrowing rate) [IAS
17.20]
finance lease payments should be apportioned between the finance charge and
the reduction of the outstanding liability (the finance charge to be allocated so as
to produce a constant periodic rate of interest on the remaining balance of the
liability) [IAS 17.25]
the depreciation policy for assets held under finance leases should be consistent
with that for owned assets. If there is no reasonable certainty that the lessee will
obtain ownership at the end of the lease the asset should be depreciated over
the shorter of the lease term or the life of the asset [IAS 17.27]
for operating leases, the lease payments should be recognised as an expense in
the income statement over the lease term on a straight-line basis, unless
another systematic basis is more representative of the time pattern of the user's
benefit [IAS 17.33]

Accounting by lessors

The following principles should be applied in the financial statements of lessors:

at commencement of the lease term, the lessor should record a finance lease in
the balance sheet as a receivable, at an amount equal to the net investment in
the lease [IAS 17.36]
the lessor should recognise finance income based on a pattern reflecting a
constant periodic rate of return on the lessor's net investment outstanding in
respect of the finance lease [IAS 17.39]
assets held for operating leases should be presented in the balance sheet of the
lessor according to the nature of the asset. [IAS 17.49] Lease income should be
recognised over the lease term on a straight-line basis, unless another
systematic basis is more representative of the time pattern in which use benefit
is derived from the leased asset is diminished [IAS 17.50]

Contract work

If the outcome of a construction contract can be estimated reliably, revenue and

costs should be recognised in proportion to the stage of completion of contract
activity. This is known as the percentage of completion method of accounting.
[IAS 11.22]

To be able to estimate the outcome of a contract reliably, the entity must be able
to make a reliable estimate of total contract revenue, the stage of completion,
and the costs to complete the contract. [IAS 11.23-24]

If the outcome cannot be estimated reliably, no profit should be recognised.

Instead, contract revenue should be recognised only to the extent that contract
costs incurred are expected to be recoverable and contract costs should be
expensed as incurred. [IAS 11.32]

The stage of completion of a contract can be determined in a variety of ways including the proportion that contract costs incurred for work performed to date
bear to the estimated total contract costs, surveys of work performed, or
completion of a physical proportion of the contract work. [IAS 11.30]

An expected loss on a construction contract should be recognised as an expense

as soon as such loss is probable. [IAS 11.22 and 11.36]

Application to revenue recognition (also see IAS 18)

Revenue from sale of goods is recognised when:

1) significant risks and rewards of ownership transferred
2) no control retained
3) revenue can be measured reliably
4) transaction costs can be measured reliably
5) probable revenue will be received.

Revenue from services is recognised when criteria 3, 4 and 5 above are

met and the stage of completion of the service can be estimated
reliably.

Advantages and limitations of a framework:

Advantages

Constraints

Avoids a haphazard approach

Economic, e.g. volatility

Facilitates consistency of standards

Legal, e.g. rules based

Less open to criticism of

political/external pressure

Political, e.g. influence outcome

Facilitates communication between

prepares, auditors and users of financial
statements

Social, e.g. professional judgment

Application of measurement principles: IAS 17

Leases = mixed measurement model.

Asset and liability measured at lower of fair value and present value of
minimum lease payments.

ED proposes a cost-based measurement model.

Application of measurement principles: IAS 19 Employee benefits

An entity should recognise an expense as it consumes the economic

benefits of employee service in exchange for employee benefits and a
liability where these are to be paid in the future.

Short-term benefits:
Examples: wages, paid annual leave, sick pay, paid maternity leave, nonmonetary benefits (e.g. medical care, car).
Accounting straightforward: recognise and measure in accordance with basic
accounting principles and practice (see previous slide).
Accumulating paid absences: charge as an expense (and accrue) as the
employees render service; measure at the additional amount that the entity
expects to pay.

Long-term service leave:

Recognise an expense and a liability as employees render service.
Measure at present value of the obligation at the reporting date.

Share based payments

Transactions whereby entities purchase goods or services from other

parties (suppliers, employees) by issuing shares or share options (or by
incurring a liability to transfer an amount of cash based on the price of its
shares).

Equity-settled

Cash-settled

Dr Expense (profit or loss)

Cr Equity (if equity-settled) OR
Cr Liability (if cash-settled)
Equity-settled: Measure at fair value of goods received or, if not possible, fair
value of equity instruments granted.
Cash-settled: Measure at fair value of liability; remeasure at each reporting
date until settled; recognise changes in profit or loss.

Application of measurement principles: IAS 40 and IAS 41

Investment property

Property held to earn rentals and/or for capital appreciation (not for use or sale
in the ordinary course of business) (IAS 40, para. 5).
Measured initially at cost, but subsequent measurement may either follow cost
model (per IAS 16) or fair value model (IAS 40, para. 30).
Under fair value model property remeasured to fair value at each year end and
changes in fair value recognised in profit or loss (IAS 40, paras 33 to 35).

Biological assets and agricultural produce

Biological assets measured at fair value less costs to sell (IAS 41, para. 12).
Agricultural produce measured at fair value less costs to sell at point of harvest
(IAS 41, para. 13).

IFRIC 13 Customer loyalty programmes = deferred revenue recognised at

amount loyalty points could have been sold for separately.

MODULE 2

Adjusting
-

evidence of conditions at reporting period end

require adjustments in amounts recognised in the FS

Non-adjusting

indicative of conditions after reporting period end

require disclosure (nature of event and estimate of financial effect) in the

notes to the FS if material