Financial Reporting

MASTER IN ACCOUNTING AND MANAGEMENT CONTROL
International Financial Reporting

&
Analysis
2. INTERNATIONAL FINANCIAL REPORTING
Ana Isabel Lopes

Department of Accounting
2023-2024
INTERNATIONAL FINANCIAL REPORTING
By the end of the chapter, you should be able to:
- Discuss the measurement of fixed tangible assets, intangible assets and investment property at initial recognition
- Discuss the major measurement methods subsequent to initial recognition for non-current assets
- Discuss and apply the principles, concepts and major methods of providing for depreciation
- Explain what depreciation does and does not do
- Discuss alternative treatments for investment properties
- Describe, apply and appraise the requirements of impairment of non-current assets
- Describe, apply and appraise the requirements of standards related to biological assets to bearer plants
- Describe, apply and appraise the requirements of standards related to accounting for leases in the lessee
financial statements
- Describe, apply and appraise the requirements of standards related to provisions, contingent liabilities and
contingent assets
International Financial Reporting & Analysis - Ana Isabel Lopes

2.1. Non-current assets
FIXED TANGIBLE ASSETS

Materials from the
book
Part 2,
Chapter 9
Measurement of Tangible Fixed (Non-
current) Assets
• Assets have been defined as follows (Framework Para. 4.3):
• An asset is a present economic resource controlled by the entity as a
result of past events.
• An economic resource is a right that has potential to produce economic
benefits.
• Assets are divided into current assets and non-current assets.
• IAS 16 Property, Plant and Equipment.
• IAS 40 Investment Properties.
• IAS 41 Agricultural Activities.
• IFRS 16 Leases.
For use with International Financial Reporting and Analysis, 9th edition (9781473786820)
by D. Alexander, A. Jorissen, M. Hoogendoorn, C. van Mourik, P. Inwinkl and G. Michelon ©2023 Cengage
Initial Measurement of Property, Plant and
Equipment (PPE)
IAS 16 defines property, plant and equipment (PPE) as:
• Tangible items.
• Held for use in the production or supply of goods or services, for rental
to others, or for administrative purposes.
• Expected to be used during more than one period.
An item of property, plant and equipment should be recognized (Para. 7) as an
asset if, and only if:
• It is probable that future economic benefits associated with the item will
flow to the entity.
• The cost of the item to the entity can be measured reliably.
Initial Measurement of PPE
• An item of property, plant and equipment that qualifies for recognition as an
asset should initially be measured at its cost.
• The cost of an item of property, plant and equipment comprises:
• Its purchase price, including import duties and non-refundable purchase
taxes.
• Any directly attributable costs of bringing the asset to working condition
for its intended use.
• The initial estimate of the costs of dismantling.
Examples of directly attributable costs are:
• Cost of site preparation.
• Initial delivery and handling costs.
• Installation and assembly costs.
• Professional fees such as for architects and engineers.
• The estimated cost of dismantling and removing the asset and restoring
the site.
Elements not be included in the cost of a PPE:
• Costs incurred while an item capable of operating in the manner intended by
management has yet to be brought into use or is operated at less than full
capacity.
• Initial operating losses, such as those incurred while demand for the item’s
output builds up.
• Costs of relocating or reorganizing part or all of an entity’s operations.
• Costs of opening a new facility.
Elements not be included in the cost of a PPE (Continued):
• Costs of introducing a new product or service (including costs of advertising
and promotional activities).
• Costs of conducting business in a new location or with a new class of
customer (including costs of staff training).
• Administration and other general overhead costs.
Subsequent Costs of PPE
Under the recognition principle, an entity recognizes in the carrying amount of
an item of property, plant and equipment the cost of replacing such a part of
an item when that cost is incurred if the recognition criteria are met. The
carrying amount of those parts that are replaced is derecognized in accordance
with the derecognition provisions of the Standard.
Measurement Subsequent to Initial
Recognition of PPE
Two alternative approaches to subsequent measurement are allowed:
• The cost model:
• IAS 16 describes it as, after recognition as an asset, an item of property,
plant and equipment shall be carried at its cost less any accumulated
depreciation and any accumulated impairment losses.
• The Revaluation Model:
• IAS 16 describes it as, after recognition, an item of property, plant and
equipment which fair value can be measured reliably is carried at a
revalued amount.
Principles of Accounting for Depreciation
• Depreciation of fixed assets results from the matching convention which
requires that the corresponding expense needs to be matched with the benefit
in each period.
• The total expense for the asset’s life is spread over the total beneficial life in
proportion to the pattern of benefit.
• To calculate a figure for this depreciation charge, it is necessary to answer four
basic questions:
1. What is the cost of the asset?
2. What is the estimated useful life of the asset to the business?
3. What is the estimated residual selling value of the asset at the end of the
useful life as estimated?
4. What is the pattern of benefit or usefulness derived from the asset likely
to be?
Methods of Calculating Depreciation
• Time-based depreciation methods:
• Straight line method.
• Reducing balance method.
• Sum of the digits method.
• Methods based on activity level:
• Defined as output of the asset.
• Defined as service quantity of the asset (usage).
• The depreciable amount is allocated on a straight line basis, i.e. an equal
amount is allocated to each year of the useful life.
• If an asset is revalued or materially improved then the new depreciable
amount will be allocated equally over the remaining, possibly extended,
useful life.
• Assumes uniform consumption pattern of economic benefits.
• The depreciation expense:
• Depreciable amount estimated useful live = depreciation expense.
Principles of Accounting for Depreciation-
Some Misconceptions Underlined
• The process of depreciation calculation is not designed to produce
meaningful balance sheet numbers.
• The depreciable amount is the annual charge based on actual or implied
assumptions as to the pattern of benefit being derived.
• Therefore:
• The asset figure for an intermediate year has no very obvious or useful
meaning.
• Depreciation has nothing to do with ensuring that the business can
‘afford’ to buy another asset when the first one becomes useless.
• However, depreciation, like any other expense figure, does have the
effect of retaining resources (or total assets) in the business.
Depreciation and IAS 16
• The depreciable amount of an asset shall be allocated on a systematic basis
over its useful life.
• The depreciable amount of an asset is determined after deducting its
residual value.
Useful Life is:
• The period over which an asset is expected to be available for use by an
entity.
• Or the number of production or similar units expected to be obtained from
the asset by an entity.
Depreciation and IAS 16
Definition of Cost:
• The amount of cash or cash equivalents paid or the fair value of the other
consideration given to acquire an asset at the time of its acquisition or
construction, or when applicable, the amount attributed to that asset when
initially recognized in accordance with the requirements of IFRS 2 (Share-
based Payment).
The Residual Value:
• The estimated amount that an entity would obtain from disposal of the
asset, after deducting the estimated costs of disposal, if the asset were
already of the age and in the condition expected at the end of its useful life.
The Revaluation Model
• After recognition as an asset, an item of property, plant and equipment
which fair value can be measured reliably shall be carried at a revalued
amount, being its fair value at the date of revaluation less any subsequent
accumulated depreciation and subsequent accumulated impairment losses.
• Revaluations shall be made with sufficient regularity to ensure that the
carrying amount does not differ materially from that which would be
determined using fair value at the balance sheet date.
• If an item of PPE is revalued, the entire class of PPE to which the asset
belongs shall be revalued.
The Revaluation Model
• If an asset’s carrying amount is increased as a result of a revaluation, their
increase shall be recognized in other comprehensive income and
accumulated in equity under the heading ‘revaluation surplus’.
• If the increase of an asset’s carrying amount is a reversal of a revaluation
decrease of the same asset previously recognized in profit or loss, then the
increase shall be recognized in profit or loss to the extent of the amount of
the prior reversal decrease.
Accounting for Investment Properties
• Investment property is property (land or a building or part of a building or
both) held (by the owner or by the lessee under a finance lease) to earn
rentals or for capital appreciation or both, rather than for:
• Use in the production or supply of goods or services, or for
administrative purposes; or
• Sale in the ordinary course of business.
• Owner-occupied property is property held (by the owner or by the lessee
under a finance lease) for use in the production or supply of goods or
services or for administrative purposes.
Accounting for Agriculture and Biological
Assets
• Agricultural activity is the management by an entity of the biological
transformation and harvest of living animals or plants (biological assets) for
sale or for conversion into agricultural produce or into additional biological
assets (IAS 41, Para. 5).
• Biological transformation comprises the process of growth, degeneration,
production and procreation that cause qualitative or quantitative changes in
a biological asset (IAS 41, Para. 5).
• Harvest is the detachment of produce from a biological asset or the
cessation of a biological asset’s life processes.
Student Activity
5 minutes

For the following 8 assets, which standard has to be
applied for recognition, measurement and disclosure?
•The land used by a farm; dairy cattle is grazing on the land.

•A car used by the postal servicesto deliver packages.
•A car produced by a car manufacturer.
•A fruit tree in an orchard managed by a large farming company.
•A building rented to a third party and held for capital appreciation.
•An aeroplane used by an airline company.
•Land held for rental purposes by a rubber company.
•A breeding cow on a farm.
Materials from the
professor and other
resources

Text and video
from CPD Box
https://www.cpdbox.com/ifr
s/ias-16/

FIXED TANGIBLE ASSETS
SUMMARY of impacts on financial statements
Statement of Financial
Position Income statement
Net tangible
asset
Assets
Initial amount
+ Costs improving condition Depreciation
(year)
+ Revaluation
(-) Accumulated
Revaluation
depreciation
(-) Accumulated
(increase, decrease S. Equity Repairs &
Maintenance
impairment until 0)
(=)Carrying amount Revaluation
Liabilities decrease (if reversal))

REAL LIFE
FIXED TANGIBLE ASSETS examples

REAL LIFE

REAL LIFE

Student Activity
15 minutes
International Financial Reporting & Analysis - Ana

Isabel Lopes
Remember Straight Line Method?
• Data:
• Cost €12,000
• Useful life 4 years
• Scrap value €2,000
• Date of acquisition: 1 January 2022
• Date of payment: 1 Maio 2022
• Date available for the intended used: 1 March 2022
• Date of effective start of use: 1 June 2022
• Annual charge in 2022?

• Annual charge in 2023?
Remember Straight Line Method?
• Solution:
• Annual charge in 2022? = (€12,000 – €2,000)/4 * 10m/12m

= €2,083.33 (33)
• Annual charge in 2023? = (€12,000 – €2,000)/4

= €2,500
Remember revaluation model?
• Data:
• Assume Company X owns land. The carrying value of the land before revaluation
is €40,000.
• The fair value of the land has increased and the current market price is €50,000.
Company X values its PPE with the use of the revaluation model.
• What entries need to be made at the end of the period to bring the carrying
value of the asset in line with the principles of the revaluation model?
• Solution:
Dr PPE - Land 10,000

Cr Revaluation surplus 10,000
• Revalued carrying value on statement of financial position is €50,000 and under

equity there will be a revaluation surplus of €10,000.
• Data:
• Assume that another piece of land owned by Company X with an initial value of
€20,000 recorded a revaluation decrease last year of €3,000.
• Due to a changing economic climate, the industrial activity in the area in which
the land is situated is increasing. The current market price for that land is
estimated at €21,000.
• What entries are needed to bring the carrying value of the asset in line with the
principles of the revaluation model in IAS 16?
• Solution:
• In the current reporting period, the carrying value of the land has increased by €4,000 −
from €17,000 (i.e. €20,000 reduced for the initial revaluation decrease of €3,000) to
€21,000.
• However, €3,000 of this increase is the reversal of a prior revaluation decrease which,
under IAS 16, would have been recorded in profit or loss. Therefore, this prior decrease
needs to be reversed first (i.e. €3,000 will be recognized in profit or loss).
• The remaining amount (€1,000) will be recorded under other comprehensive income and
accumulated in equity under the heading ‘revaluation surplus’.
Student Activity
At home

Isabel Lopes
Test your knowledge
Examples: https://www.accaglobal.com/an/en/student/exam-support-
resources/fundamentals-exams-study-resources/f7/technical-
articles/ppe.html
Solutions: https://www.accaglobal.com/content/dam/acca/global/PDF-
students/2012s/ias16_solutions.pdf

INVESTMENT PROPERTY

Materials from the
professor and other
resources

Isabel Lopes
Text and video
from CPD Box
https://www.cpdbox.com/ifrs/ias-
40/

INVESTMENT PROPERTY: BE CAREFULL…
Apportioning property between investment property and owner-occupied property

• In many cases it will be clear what constitutes investment property as opposed to owner occupied property, but in other
instances making this distinction might be less obvious.
• JUDGEMENT
Hotels? Shopping
centres?

MEASUREMENT
INICIAL RECOGNITION
AFTER INITIAL– RECOGNITION
at cost
FAIR VALUE MODEL

COST MODEL
(to all itens in the same category)
Different from revaluation model in Fixed Tangible

Similar to cost model in Fixed Tangible Assets Assets
But fair value information must be determined and The carrying amount must be adjusted to the then-current
disclosed fair value  impact in income statement

TRANSFERS
INICIAL
TO ORRECOGNITION
FROM INVESTMENT
– at costPROPERTY
• From investment property to owner-occupied property, when owner-occupation starts;
• From investment property to inventories, on commencement of development with a view to

sale;
• From an owner-occupied property to investment property, when owner-occupation ends;
• From inventories to investment property, when an operating lease to a third party starts.

Investment Property
TRANSFERS
INICIAL
TO ORRECOGNITION
FROM INVESTMENT
– at costPROPERTY
Transfers between investment property, owner-occupied property and

inventories do not change the carrying amount of the property transferred
If cost model is used
If fair value model is used Different treatments

Investment Property
TRANSFERS
INICIAL
TO ORRECOGNITION
FROM INVESTMENT
– at costPROPERTY
Fixed Tangible
Investment Fixed Tangible Asset
property Asset
Mantains the
FAIR VALUE COST same amount,
and then apply
standard

Investment Property
TRANSFERS
INICIAL
TO ORRECOGNITION
FROM INVESTMENT
– at costPROPERTY
Investment
property
Revaluate to fair
value at the date of
Investment
Fixed Tangible Asset the change
property
COST
FAIR VALUE
Fair value > carrying amount
2 analysis:
• Reversal of previous impairment;
Fair value < carrying amount or/and
• Recognition of the difference in other
Recognize difference in profit or loss comprehensive income

Investment Property
TRANSFERS
INICIAL
TO ORRECOGNITION
FROM INVESTMENT
– at costPROPERTY
Inventory
Investment
Inventories
property Mantains the
same amount,
COST
FAIR VALUE and then apply
standard

Investment Property
TRANSFERS
INICIAL
TO ORRECOGNITION
FROM INVESTMENT
– at costPROPERTY
Investment Investment
Inventories
property property
COST
FAIR VALUE
Fair value versus carrying amount
Recognize difference in profit or loss

Investment Property
DERECOGNITION – retirements and disposals
• An item of investment Property should be eliminated from the statement of

financial position:
– On disposal; or
– When the asset is permanently withdrawn from use.
• Gain or losses arising from the retirement or disposal should be determined

as:
= Retirement or disposal value – Carrying amount of the asset
Recorded as a gain or a loss in the

Income statement as incurred

Investment Property
Is investment property a material asset

for the WW group?

Investment Property
Which is the accounting policy applied to Investment property?

Investment Property
• In 2022, there was IP acquired?

• In 2022, there was IP sold or disposed of?
• In 2022, how much was the amortization expense?
• In 2022, how much is the impact on net income from changes in IP?
INTANGIBLE ASSETS

Materials from the
book
INTANGIBLE ASSETS
Part 2,
Chapter 10
Learning objectives
1. Define and distinguish intangible assets

2. Discuss the difference between internally generated goodwill and
purchased goodwill
3. Discuss the characteristics of intangible assets under IAS 38
4. Describe, apply and appraise the requirements of IAS 38 relating to
intangible assets
Intangible Assets
• An Intangible Asset is an identifiable non-monetary asset without physical
substance (IAS 38, Para. 8).
• The definition above excludes goodwill, which is by definition non-
identifiable.
• Examples on intangibles include:
• Patents.
• Brands.
• Trademarks.
• R&D.
• Copyrights.
• software licence.
Recognition of Intangible Assets
The recognition of an item as an intangible asset requires an entity to
demonstrate that the item meets:
• The definition of an intangible asset.

• The recognition criteria.
Definition of Intangible Asset
• Identifiability – necessary in order to distinguish an intangible asset from
goodwill and other assets, e.g. via separate legal rights.
• Control – exercised over an asset if the entity has the power to obtain (or
restrict the access to others of) economic benefits.
• Existence of future economic benefits – relates to the benefits deriving from
the use of the asset.
Recognition Criteria for Intangible Assets
Recognition Criteria
• An intangible asset shall be recognized if, and only if:
• It is probable that the expected future economic benefits that are
attributable to the asset will flow to the entity.
• The cost of the asset can be measured reliably.
• An entity shall assess the probability of expected future economic benefits
using reasonable and supportable assumptions that represent
management’s best estimate of the set of economic conditions that will exist
over the useful life of the asset.
Recognition and Measurement at Initial
Recognition
• An intangible asset shall be measured initially at cost.
• Purchased intangible assets: four modes of acquisitions are considered:

Separate acquisition.
Acquisition as part of a business combination.
Acquisition by way of a government grant.
Acquisition by exchange of assets.
• Internally generated intangible assets.
Internally Generated Intangible Assets
In the case of intangible assets that are internally generated, it is worth noting
that internally generated goodwill cannot be an intangible asset within the
terms of IAS 38 and so cannot be capitalized.
Under IAS 38:
• No intangible asset should be recognized resulting from research or from the
research phase of an internal project.
• Expenditure on research should be recognized as an expense when incurred
(IAS 38, Para. 54).
An intangible resource arising from development should be recognized as an
intangible asset if, and only if, an enterprise can demonstrate all the following
six criteria:
1. The technical feasibility of completing the intangible asset so that it
will be available for use or sale.
2. Its intention to complete the intangible asset and use or sell it.
3. Its ability to use or sell it.
4. How the intangible asset will generate probable future economic
benefits. Among other things, the following should be demonstrated:
the existence of a market for the intangible asset or its output or, if it
is to be used internally, its usefulness to the entity.
5. The availability of adequate technical, financial and other resources to
complete the development and to use or sell the intangible asset,
which may be demonstrated by an appropriate business plan.
6. Its ability to measure reliably the expenditure attributable to the
intangible asset during its development, e.g. by means of the entity’s
costing system.
Subsequent Expenditure after Initial
Recognition
Subsequent expenditure should be recognized as an expense, except in the
rare cases where:
• Probable enhancement of the economic benefits that will flow from the
asset can be demonstrated.
• The expenditure can be measured and attributed to the asset reliably
(IAS 38, Paras. 18–20).
Subsequent Expenditure after Initial
Recognition
An entity shall choose either the cost model or the revaluation model.
• Cost model: After initial recognition, an intangible asset shall be carried at its
cost less any accumulated amortization and any accumulated impairment
losses.
• Revaluation model: After initial recognition, an intangible asset shall be
carried at a revalued amount, being its fair value at the date of revaluation
less any subsequent accumulated amortization and any subsequent
accumulated impairment losses.
• Fair value needs to be determined by reference to an active market.
Revaluations shall be made with such regularity that at the balance sheet
date, the carrying amount of the asset does not differ materially from its fair
value.
Recognition of Revaluation Gains and
Losses
• Increases in an intangible asset’s carrying amount (gains) should be credited
directly to equity under the heading of revaluation surplus, except to the
extent that the increase is a reversal of a previous revaluation decrease (loss)
recognized as an expense in respect of the same asset, in which case the
amount of the reversal is recognized as income.
• Revaluation decreases (losses) are recognized as expenses except to the
extent that the decrease is a reversal of a revaluation increase (gain) that
was previously credited to revaluation surplus in respect of the same asset,
in which case the amount of the reversal should be charged against the
revaluation surplus (IAS 38, Paras. 85-6).
Useful Life of an Intangible Asset
• The useful life can be finite or indefinite:
• An intangible asset with a finite useful life is amortized.

• An intangible asset with an indefinite life is not amortized, only
impairment tests are undertaken.
Different in
SNC
Useful Life of an Intangible Asset: Factors
to be Considered
Factors that need to be considered in estimating an intangible asset’s
useful life include the following (IAS 38, Paras. 90 and 94):
• The expected usage of the asset by the entity and whether the asset
could be efficiently managed by another management team.
• Typical product life cycles for the asset and public information on
estimates of useful lives for similar assets that are used in a similar way.
• Technical, technological, commercial or other types of obsolescence.
• The stability of the industry in which the asset operates and changes in
the market demand for the outputs of the asset.
• Expected actions by competitors or potential competitors.
Useful Life of an Intangible Asset: Factors
to be Considered (Continued)
• The level of maintenance expenditure required to obtain the expected future
economic benefits from the asset and the entity’s intent and ability to spend
such amounts.
• The entity’s period of control over the asset and legal and similar limits on
control or use, such as the expiration dates of related leases.
• Whether the asset’s useful life is dependent on that of other assets of the
enterprise.
• If control over the future economic benefits from the asset is achieved though
legal rights that have been granted for a finite period, the useful life of the asset
should not exceed the duration of the legal rights unless they are renewable and
renewal is virtually certain.
Residual Value of Intangible Assets
IAS 38 stipulates that the residual value of an intangible asset is assumed to be
zero, unless either:
• There is a commitment by a third party to purchase at end of useful life.
• There is an active market for the asset, such that the asset’s residual value
can be determined by reference to that market and it is probable that the
market will exist at the end of the asset’s estimated useful life to the entity.
Finite Useful Life of an Intangible Asset
• The depreciable amount of an intangible asset shall be allocated on a
systematic basis over its useful life.
• Amortization shall begin when the asset is available for use, i.e. when it is in
the location and condition necessary for it to be capable of operating in the
manner intended by management.
• Amortization shall cease at the earlier of the date that the asset is classified
as held for sale (or included in a disposal group that is classified as held for
sale – IFRS 5) and the date that the asset is derecognized.
Finite Useful Life of an Intangible Asset
• The amortization method used shall reflect the pattern in which the asset’s
future economic benefits are expected to be consumed by the entity. If the
pattern cannot be reliably determined, the straight line method shall be
used.
• The amortization charge for each period shall be recognized in profit or loss
unless IAS 38 or another Standard permits or requires it to be included in the
carrying amount of another asset.
Indefinite Useful Life of an Intangible Asset
• These assets are not depreciated but IAS 36 is applied.
• An impairment test is carried out annually and whenever there is an
indication that the intangible asset may be impaired. This will lead to
reductions in carrying value to the recoverable amount at the date of the
impairment test.
Derecognition
• An intangible asset shall be derecognized:
• On disposal; or
• When no future economic benefits are expected from its use or disposal.
• The gain or loss arising from the derecognition of an intangible asset shall be
determined as the difference between the net disposal proceeds, if any, and
the carrying amount of the asset.
• It shall be recognized in profit or loss when the asset is derecognized (unless
IFRS 16 Leases requires otherwise on a sale and leaseback).
• Gains shall not be classified as revenue.
Disclosure
• Requirements are long and detailed.
• Disclosures provide additional useful information that the entity may not
have been able to communicate in the statements, such as surrounding the
unique nature of research and development.
INTANGIBLE ASSETS
Materials from the

professor and other
resources

Isabel Lopes
INTANGIBLE ASSETS
Text and video

from CPD Box
https://youtu.be/DzR1HBfRDjg

Isabel Lopes
INTANGIBLE ASSETS
• Definitions
• Assets = Resources
• Controlled by the entity as a result of past events; and
• From which future economic benefits or service potential are expected to flow to the entity.
• Intangible assets - identifiable, non-monetary assets, without physical substance
• Identifiable if:
• Capable of being separated and sold, licensed, transferred, exchanged or rented separately
OR
• Arise from contractual or other legal rights

INTANGIBLE ASSETS
• Broad categories:
• Research and development
• Patents, copyrights, brand names (only acquired), trademarks, franchises, concessions,

operating right or right of use
• Computer software (developed internally or acquired from a third party)
• Goodwill (special case of intangible with specific treatment)

INTANGIBLE ASSETS
Definition of what constitutes an intangible asset
Intangible assets issues Recognition of intangible assets and their valuation

in the balance sheet
Handling of changes in value of the intangible asset

after its initial recognition
Source: Stolowy and Ding (2017)

INTANGIBLE ASSETS
INICIAL RECOGNITION
Defined?
Source: PwC
Intangible
resource?
Recognised

INTANGIBLE ASSETS
INICIAL RECOGNITION – at cost
The measurement of the cost depends of the way as the intangible arise.

INTANGIBLE ASSETS
Source: BDO

INTANGIBLE ASSETS
Source: BDO

INTANGIBLE ASSETS
MEASUREMENT AFTER INITIAL RECOGNITION
SNC IFRS
NCRF 6 IAS 38
Attention!!

INTANGIBLE ASSETS
SNC
COST MODEL
NCRF 6
Similar to Fixed
Tangible Assets,
except useful
life
REVALUATION MODEL
(only if active market exists)
Attention!!

INTANGIBLE ASSETS
SNC
NCRF 6 Useful life: Finite or indefinitive
If indefinitive, amortization period is

maximum 10 years
Attention!!

INTANGIBLE ASSETS
IFRS
IAS 38
Attention!!

INTANGIBLE ASSETS
IFRS
IAS 38
Attention!!

INTANGIBLE ASSETS
Specific Cases of Intangible itens – lists of Customers/clients
Customers lists
• Separately acquired customer lists can be recognized – They are amortized
• Internally generated brands, mastheads, publishing titles, customer lists

and items similar in substance shall not be recognized as intangible

INTANGIBLE ASSETS
Specific Cases of Intangible itens – Software
Standard software Expensed as a part of ‘purchases of

acquired for resale merchandise’ or of ‘cost of goods sold’
Purchased
Acquired for Capitalized as intangible asset if amount

internal use is material
Computer
software
Source: Stolowy and Ding (2017)

For internal use or Costs of design, coding, testing,
for external use documentation, training materials, etc.
(source code) are capitalized as intangible asset
Created in-
house
To meet a specific Expensed (but capitalized as work in
customer’s order progress inventory until billed or
transferred)
INTANGIBLE ASSETS
DERECOGNITION – retirements and disposals
• An item of intangible assets should be eliminated from the statement of

financial position:
– On disposal; or
– When the asset is permanently withdrawn from use.
• Gain or losses arising from the retirement or disposal should be determined

as:
= Retirement or disposal value – Carrying amount of the asset
Recorded as a gain or a loss in the

Income statement as incurred

INTANGIBLE ASSETS
Student Activity
15 minutes

Isabel Lopes
INTANGIBLE ASSETS
Scenario A:
A pharmaceutical company developed over the years a new vaccine against the new strain of Covid 19.
Recently, they received approval to commercialize the drug from the regulatory authorities. They also
obtained patent protection and now have a patent for this new drug for the next 10 years.
The pharmaceutical company incurred the following costs during the research and development
process which led to the marketable vaccine (all is paid):
 labour costs in the research process for bacteria and viruses: €60,000;
 materials and labour used in the research on possible bacteria and viruses that could be further
developed into vaccines: €130,000;
 materials and labour costs in the development of one specific drug into a promising vaccine for the
new strain: €200,000;
 costs incurred during the testing process on humans: €80,000;
 costs incurred to obtain recognition with the regulatory authorities: €20,000.
Isabel Lopes
INTANGIBLE ASSETS
Scenario A:
Questions
1. How will this vaccine and the related costs be accounted for at the initial recognition of the
intangible asset?
2. If the pharmaceutical company uses the cost model subsequently to initial valuation, what will be
recorded after the initial recognition in the books of the pharmaceutical company?
3. What are the impacts to report in financial position, income statement and cash flow statement?

Isabel Lopes
INTANGIBLE ASSETS
Scenario A:
Solution
1. Only the costs in the development phase are capitalized. So the value (capitalized costs) of the
patent-protected vaccine for covid 19 at initial recognition will be a total of €300,000 (€200,000
(development of blood pressure drug) + €80,000 (testing on humans) + €20,000 (regulatory
expenditure)).
2. The pharmaceutical company accounts for the drug using the cost model, so no changes in fair
value will be recorded.
Since the intangible asset has a finite life, the cost of the patent-based vaccine will be amortized over a
period of ten years with a residual value of zero. Over the lifetime of the patent, the pharmaceutical
company will record each year:
Dr Amortization (cost) 30,000
Cr Patents – accumulated amortization 30,000
Isabel Lopes
INTANGIBLE ASSETS
Scenario A:
Solution
Impacts in Statement of financial Impacts in Income Statement Impacts in Cash flow statement
position
Assets: … CF from operating activit: -190.000
Intangible assets +300.000 -30.000 External services or other: +190.000 CF from investing activit: -300.000
Cash -490.000 Depreciation and amortiz: + 30.000 CF from financing activit: -
SE and Liabilities: ….
Net income: -220.000 Net income: 220.000 Cash and cash equiv: -490.000

Isabel Lopes
INTANGIBLE ASSETS
https://www.sage.com/en-gb/-
/media/files/investors/documents/pdf/annual%20report/sage-
annual-report-2022.pdf

IMPAIRMENT OF ASSETS

Materials from the
book
Part 2,
Chapter 11
Impairment of Assets
IAS 36 Impairment of Assets
• First, the carrying amount of an asset is determined in accordance with
accounting principles and other relevant International Standards.
• Second, the ‘recoverable amount’ of the asset is determined as of that date,
being the higher of fair value less costs to sell and the asset’s value in use (to
the existing enterprise).
• If the recoverable amount is lower than the carrying value as recorded,
then an impairment loss must be recognized immediately, that is, the
carrying value is lowered to the recoverable amount. Otherwise, no
impairment loss is required.
Impairment of Assets
• It is important to emphasize that recoverable amount is a very different
concept from fair value and, for non-current assets, will often be
significantly higher than fair value. IAS 36 does not require assets within its
scope to be recorded at the lower of cost and market or fair value.
• The essential objective of IAS 36 is to ensure that assets are not carried at a
figure greater than their recoverable amount. The Standard itself says
nothing about possible or normal methods of arriving at carrying value. The
Standard applies whatever the underlying basis of valuation of the asset is.
- Identifying an Asset that may be Impaired
- Measurement of Recoverable Amount
- Fair Value Less Costs of Disposal
- Value in Use
- Recognition and Measurement of Impairment Losses
- Reversal of an Impairment Loss
Materials from the

professor and other
resources

Isabel Lopes
IAS 36 – Impairment of assets

Objetive:
• Assure Assets are carried no more than their recoverable amount
• How the recoberable amount is determined

Text and video
from CPD Box
https://youtu.be/oQvFwe-7a_k

Not applied to:

IAS 36 – Impairment of assets
• Inventories
• Financial assets
• Deferred taxes
• Employee benefits
• Investment property at fair value
• Biological assets at fair value
• Insurance contratcs
• Non-current assets held for sale

IMPAIRMENT = Carrying amount > Recoverable amount
For 3 situations:
 Individual assets
 Cash-Generating Units (not covered now)
 Goodwill (not covered now)

IMPAIRMENT = Carrying amount > Recoverable amount
RECOVERABLE AMOUNT =
Higher of fair value less costs to sell and value in use
Fair value less cost to sell Value-in-use
(Amount obtainable in an arm’s length The discounted future net pre-tax cash
transaction less costs of disposal) flows from the continuing use and
ultimate disposal of the asset.

Fair value less cost to sell Value-in-use

Amount obtainable in an arm’s length The discounted future net pre-tax cash
transaction less costs of disposal. flows from the continuing use and
ultimate disposal of the asset.
Fair value Costs of disposal Cash flows Discount rate

• Binding sale • Incremental costs • From continuing • Pre-tax
agreement attributable to the use and disposal • Risks relating
• Market price in disposal of an • Based on asset to value in use
an active asset. in its current are reflected
market. form either in
• Exclude future cash
financing flows or in the
activities discount rate
• Pre-tax.

Source: IFRS at a glance, BDO

Source: IFRS at a glance, BDO

IMPAIRMENT
Carrying amount > Recoverable amount
FAIR VALUE
COST MODEL REVALUATION MODEL
MODEL
Asset decrease
Asset decrease
Revaluation Surplus
decrease (if exists)
Impairment loss in income
statement
Impairment loss in income
statement
IMPAIRMENT
Carrying amount > Recoverable amount
In next periods/years:
Adjust depreciation for the new carrying amount, after impairment is

recognized

REVERSAL OF IMPAIRMENT
When impairment loss no longer exist
When carrying amount increased ≤ original carrying amount
Reverse impairment loss in

income statement (gain)
Asset increase
OR / AND
Revaluation Surplus increase

Student Activity
10 minutes

Isabel Lopes
Question:
An entity owns a factory with a book value (carrying amount) of 900.000 euros.
Meanwhile, a new legislation has been issued that restricts the export of certain products, which covers the
production of this entity, which decides, for strategic reasons, to reduce production by 40% indefinitely.
In the meantime, the finance department has made a projection of expected cash flows over the next 5 years
based on the most recent financial budgets approved by the executive board of directors, estimating that
next year's cash flow, before any financing effect taking into account the application of IAS 36, is identified at
EUR 210.000 and will be reduced by 1% in each of the following years.
Assume that cash flows occur at the end of each year and that they are immaterial from the 5th year
onwards. It is also known that the company considers that the appropriate interest rate to discount cash
flows is 10% (before taxes) or 8% (after taxes).
There is also information saying that if the entity decided to sell the factory at this time, it would recover
660.000 euros, net of any costs incurred with the sale.
There are indications of impairment loss. Is this impairment loss worth 240.000 euros?
Answer:
The situation reveals indications of impairment (external factors) and, moreover, the 660,000 euros of "fair
value less selling costs" may be an indication of impairment loss determining use value.
Value in use: = 210000/(1+0.1) + (210000*0.99)/(1+0.1)^2 + (210000*0.99^2/(1+0.1)^3 +

(210000*0.99^3/(1+0.1)^4 + (210000*0.99^4/(1+0.1)^5 = 781,791.8 euros
Recoverable amount for impairment testing = 781,791.8 euros (higher between use value and fair value less
disposal costs).
Impairment loss = 900,000 – 781,791.8 = 118,208.2 euros, not 240,000 euros.

BIOLOGICAL ASSETS

Text and video
from CPD Box
https://youtu.be/33Gw1aoNx5w

BIOLOGICAL ASSETS
IAS 41 -Agriculture
Applies to:
 biological assets (with the exception of bearer plants)

IAS 41
 agricultural produce at the point of harvest
Does not Applies to:
 Bearer plants
 Lands related to agricultural activity

BIOLOGICAL ASSETS
Biological asset?
IAS 41
- A living animal or plant, but….

BIOLOGICAL ASSETS
Biological asset?
IAS 41
Agricultural activity
Is the management by an entity of the

biological transformation and harvest of
living animals or plants (biological assets)
for sale or for conversion into agricultural
produce or into additional biological assets
BIOLOGICAL ASSETS
Biological asset?
IAS 41
biological transformation
processes of growth, degeneration,

production, and procreation that cause
qualitative or quantitative changes in a
biological asset.

BIOLOGICAL ASSETS
Biogical asset Agricultural produce Products that are the resuls
(The harvested product from of processing after harvest
biological assets)
IAS 41
Animals?
IAS 41 IAS 41 IAS 2
Biological asset Agriculture produce Inventories

Biogical asset Agricultural produce Products that are the resuls
(The harvested product from of processing after harvest
biological assets)
IAS 41
Plants?
IAS 41
Not bearer plant? Biological asset
IAS 16
Bearer plant? Fixed Tangible Assets
BIOLOGICAL ASSETS
A bearer plant is a living plant that:
IAS 41 (a) is used in the production or supply of agricultural produce;
(b) is expected to bear produce for more than one period; and
(c) has a remote likelihood of being sold as agricultural produce, except

for incidental scrap sales.
Present, recognize and measure as Property, Plant and Equipment (IAS 16)

BIOLOGICAL ASSETS
The following are not bearer plants:
(a) plants cultivated to be harvested as agricultural produce (for example, trees

IAS 41 grown for use as wood);
(b) plants cultivated to produce agricultural produce when there is more than
a remote likelihood that the entity will also harvest and sell the plant as
agricultural produce, other than as incidental scrap sales (for example,
trees that are cultivated both for their fruit and their lumber);
(c) annual crops (for example, maize and wheat).
Present, recognize and measure as Biological Asset (IAS 41)

BIOLOGICAL ASSETS
RECOGNITION
IAS 41
- Entity controls the asset as a result of a

past event
- Probable that future economic benefit

will flow to the entity; and
- Fair value or cost of the asset can be

measurement reliably.

BIOLOGICAL ASSETS
MEASUREMENT
IAS 41 BIOLOGICAL ASSETS
Initially: - At fair value less estimated point-of-sale costs
(except where fair value cannot be estimated reliably) - If no

reliable measurement of fair value, biological assets are stated at
cost.
Subsequently: - At fair value less estimated point-of-sale costs

(except where fair value cannot be estimated reliably) - If no reliable
measurement of fair value, biological assets are stated at cost less accumulated
depreciation and accumulated impairment losses
BIOLOGICAL ASSETS
MEASUREMENT
IAS 41 AGRICULTURE PRODUCE
Initially: - At fair value less costs to sell at the point of harvest
Such measurement is the cost at the date when applying IAS 2

Inventory or another applicable IFRS.

BIOLOGICAL ASSETS
PRESENTATION
Non-current assets:
•Property, Plant and Equipment (include bearer plants)

IAS 41 •Biological assets (include all agricultural produce to be harvested more
than 12 months from the reporting date, livestock to be held for more than
12 months and trees cultivated for lumber).
Current assets:
•Biological assets (include produce to be harvested within 12 months of

reporting date, livestock to be slaughtered within 12 months and annual
crops, e.g., wheat, maize)
•Inventories (include the inventories produced from agricultural produce,
e.g, the Tea to be sold, produced from the tea leaves)

BIOLOGICAL ASSETS
NCRF 17

BIOLOGICAL ASSETS
NCRF 17
 Do not exist the definition of “bearer plant”
 All the concepts related with “bearer plants” under IAS 41

and IAS 16 are biological assets in NCRF 17, and shall follow
this standard.
 However, they may be classified as current (consumable) and

non-current (related with production)

BIOLOGICAL ASSETS
Student Activity
5 minutes

Isabel Lopes
Question
“Let’s apply IAS 41 and IAS 2 to the situation of a fish.
Assume a fish farm, Fresh Fish, specializes in salmon, and when the
salmon reaches a mature age it is killed.
Now assume a fishing company, Nautilius, sails the seas and the rivers
to catch fish. They catch a lot of salmon and, while it is still alive after
the catch, it is dead when the ship arrives at the harbour.
When Fresh Fish and Nautilius prepare their annual accounts, how do
they account for the living salmon and the dead salmon?”
(Alexander ey al., 2023)
Answer
Fresh Fish  Fish farm  has actively managed the transformation

process of the salmon  engaged in agricultural activity and IAS 41
applies  As long as the salmon is alive it is a biological asset. When
the salmon is killed (= harvested) it changes from being a biological
asset to being agricultural produce. Since the salmon is not yet
processed further, it still falls under the scope of IAS 41, but as
agricultural produce.
Nautilius  Fishing company  did not manage the transformation

process of the salmon at all  the salmon, dead or still alive, will be
accounted for according to IAS 2 Inventories.
(Alexander ey al., 2023)

NON-CURRENT ASSETS HELD FOR SALE

Text and video
from CPD Box
https://youtu.be/4sElFe8WOkw
(Discontinued operations are not include in the syllabus, so, it is not necessary to
study until the end of the video)

NON-CURRENT ASSETS HELD FOR SALE
(NCAHFS)
IFRS 5 NCRF 8
Adaptation with slight

Differences
Exclude:
Deferred tax assets Assets from employee Financial assets Non-current assets that are Non-current assets that are
benefits measured according to the fair measured at fair value minus
value model (Inv. Property) the estimated costs of the point
of sale (Agriculture)

CLASSIFICATION OF NCAHFS
ANCDPV:
IFRS 5
Non-current assets (or a group for disposal) whose book value will be recovered primarily
through a sales transaction and not through continued use.
Conditions:
Assets (or group for disposal) are available for immediate sale in their current condition;
and
The sale is highly probable [see conditions in IFRS 5 or vídeo].

NCAHFS – initial measurement
At the time of classification as held for sale:

IFRS 5
Immediately before the initial classification of the asset as held for sale  apply
the prior IFRS until the moment of the reclassification. Resulting adjustments are
also recognised in accordance with applicable IFRSs
At the time of
before

NCAHFS – initial measurement
After classification as held for sale:

IFRS 5
the lower of carrying amount and fair value less costs to sell
At each reporting date: Update

Recognize impairment losses; or
Recognize reversals of losses (up to the limit of previously recognized losses);
Recognize increases in fair value less costs to sell directly in profit or loss (to the extent that
it is not in excess of the cumulative impairment loss that has been recognised in accordance with IFRS 5 or previously in
accordance with IAS 36)
Do not recognize any depreciation/amortization in the NCAHFS.

Presentation and Disclosure of NCAHFS
Presentation
IFRS 5
Assets classified as held for sale must be presented separately on the face of the
statement of financial position.
Disclosures
• description of the non-current asset or disposal group
• description of facts and circumstances of the sale (disposal) and the expected
timing
• impairment losses and reversals, if any, and where in the statement of
comprehensive income they are recognised
PROVISIONS AND CONTINGENCIES

Materials from the
book
Part 2,
Chapter 16
Provisions, Contingent Liabilities and
Contingent Assets
• Under IAS 37, a provision is a liability of uncertain timing and amount.
• A liability is a present obligation of the entity arising from past events, the
settlement of which is expected to result in an outflow from the entity of
resources embodying economic benefits.
Contingent Assets
• An obligating event is an event that creates a legal or constructive obligation
that results in an entity having no realistic alternative to settling that
obligation.
• A legal obligation is an obligation that derives from:

• a contract (through its explicit or implicit terms)
• legislation
• other operation of law.
Contingent Assets
• A constructive obligation is an obligation that derives from an entity’s actions
where:
• By an established pattern of past practice, published policies are a

sufficiently specific current statement, whereby the entity has indicated
to other parties that it will accept certain responsibilities.
• As a result the entity has created a valid expectation on the part of those
other parties that it will discharge those responsibilities.
Contingent Assets
A contingent liability is:
• A possible obligation that arises from past events and whose existence will
be confirmed only by the occurrence or non-occurrence of one or more
uncertain future events not wholly within the control of the entity; or
• A present obligation that arises from past events but is not recognized
because:
• It is not probable that an outflow of resources embodying economic
benefits will be required to settle the obligation; or
• The amount of the obligation cannot be measured with sufficient
reliability.
Contingent Assets
A contingent asset is:
• A possible asset that arises from past events and whose existence will be
confirmed only by the occurrence or non-occurrence of one or more
uncertain future events not wholly within the control of the entity.
Accounting for Provisions, Contingent
Liabilities and Contingent Assets
• IAS 37 stipulates a provision shall be recognized when:
• An entity has a present obligation (legal or constructive) as a result of a
past event.
• It is probable that an outflow of resources embodying economic benefits
will be required to settle the obligation.
• A reliable estimate can be made of the amount of the obligation.
• If these are met then recognition will be in the statement of profit or loss
and shown as a provision on the statement of financial position.
• If not, a provision will not be recognized.
• A contingent liability is not recognized in the financial statements but it is
disclosed as follows:
• A brief description of the nature of the contingent liability.
• An estimate of its financial effect.
• An indication of the uncertainties relating to the amount or timing of
outflow.
• The possibility of any reimbursement.
• A contingent asset is not recognized in the accounts but it is disclosed if the
inflow of economic benefits is probable.
• The amount recognized as a provision shall be the best estimate of the
expenditure required to settle the present obligation at the reporting date.
• The best estimate is determined by:
• The amount an entity would rationally pay to settle the obligation or to
transfer it to a third party.
• The judgement of the management supplemented by experience and in
some cases by expert reports.
• Uncertainties shall be measured by the weighting of all possible
outcomes (‘expected value’).
Measurement at present value:
• IAS specifies the discount rate as a pre-tax rate that reflects current market
assessments of the time value of money and the risks specific to the liability.
• If future cash flows are adjusted to take account of risk then the discount
rate used must be risk free and vice versa. This is to ensure that the risk
involved in future cash flows is not allowed for twice.
Specific Application of Recognition and
Measurement Rules
Future operating losses:
• Provisions shall not be recognized for future operating losses.
• Future operating losses do not meet the definition of a liability and the
recognition criteria of a provision.
• An expectation of future operating losses might be an indication that
certain assets are impaired.
Measurement Rules
Restructuring:
• A constructive obligation to restructure arises only when an entity:
• Has a detailed formal plan for the restructuring identifying at least:
• The business or part of a business concerned.
• The principal locations affected.
• The location, function and approximate number of employees who
will be compensated for termination of their services.
• The expenditures that will be undertaken.
• When the plan will be implemented.
• Restructures by starting to implement that plan or announcing its main
features to those affected by it (Para. 72).
Measurement Rules
Onerous contracts:
• A contract in which the unavoidable costs of meeting the obligations under
the contract exceed the economic benefits expected to be received under it.
• If a contract is onerous, the present obligation under the contract shall be
recognized and measured as a provision.
Measurement Rules
Disclosure:
• For each class of provisions, the movement in the provision during the year
needs to be explained (no comparative information needs to be disclosed).
• For each class of provision:
• A brief description and the expected timing of any resulting outflows.
• Indication of uncertainty.
• Amount of unexpected reimbursements.
Measurement Rules
Disclosure:
• For each class of contingent liability, unless the possibility of an outflow is
remote:
• An estimate of its financial effect.
• An indication of the uncertainties relating to the amount or timing of any
outflow.
• The possibility of any reimbursement.
PROVISIONS AND
CONTINGENCIES
Materials from the

professor and other
resources

PROVISIONS AND
CONTINGENCIES
Text and video

from CPD Box
https://youtu.be/cM9YQUegKUs

IAS 37
Provisions,
contingent
liabilities and
contingencies

Objetive of the standards:
• Criteria for recognition and measurement of:
• Liabilities
• Contingente Liabilities
• Contingent assets
• Disclosure essencial in the Notes to help users to understand the nature, the opportunity and the
amount in the financial statements.

Provision Contingent Liability
• Liability of uncertain timing or amount

Possible obligation (from past events) whose
existence will be confirmed only by the
occurrence or non-occurrence of one or
more uncertain future events not wholly in
the control of the entity
or
Probabale outflow
of resources
Present obligation A present obligation (from past events) that
+
(from past events) is not recognised because:
Measured with
reliability - not probable outflow of resources; or
- not measured with sufficient reliability.
RECOGNIZED DISCLOSED
Statement of financial position Notes

Decision tree
(IAS 37)

Criteria for Probability
• Judgement
Payment is probable ('more likely than not')  Provision

Accounting policies

Legal or constructive obligation
• The entity has a present legal or constructive obligation as a result of a past event +
other criteria
•  Provision

Other situations:
• Future operating losses: Do not recognize any provision and do not disclose any contingent liability; eventually, test
for impairment
• Onerous contract: Provision
• Reeestructuring: Provision only if: a detailed formal plan for the restructuring identifying: - The business or part of
business concerned; principal locations affected; location, function, approximate number of employees to be
compensated for termination of their services; expenditures that will be undertaken and when the plan will be
implemented. · Has raised a valid expectation in those affected that it will carry out the restructuring by starting to
implement that plan or announcing (e.g. by a public announcement) its main features to those affected before the
end of the reporting period

Contingent liabilities Contingent assets
Possible obligation (from past events) whose

existence will be confirmed only by the occurrence Possible asset (from past events) whose existence
or non-occurrence of one or more uncertain future will be confirmed only by the occurrence or non-
events not wholly in the control of the entity occurrence of one or more uncertain future events
not wholly within the control of the entity.
or
A present obligation (from past events) that is not

recognised because:
- not probable outflow of resources; or
- not measured with sufficient reliability.
DISCLOSED
Notes

DISCLOSURES – For each category of provisions:
• Carrying amount at the beggining and at the end of the period;

• Increases of provisions
• Used provisions
• Reversals
• Changes due to time (presente value)
• Explanations about nature, process,…. (see standards)

DISCLOSURES – For contingent liabilities:
• Description and nature
• If praticable:
• Estimate of the financial effect
• Conditions of uncertaint
• Possibility of any reimbursment

DISCLOSURES – For contingent assets:
• Description and nature
• If praticable:
• Estimate of the financial effect

Increase liabilities +
Creation/reinforce decrease SE (because
of a Provision? loss increase)
Decrease liabilities +
Reversal of a Decrease liabilities +
Use of a provision? increase SE (because
decrease assets
provision? gain increase)

Student Activity
10 minutes

Isabel Lopes
Identify which of the following is a constructive obligation of the entity:
1. A leisure entity causes severe damage to the habitat of wildlife in a country where there is no
legal protection for the wildlife. The company has a high profile in the support of wildlife as it
makes large contributions to the World Wildlife Fund and campaigns vigorously on its behalf.
To rectify the damage to the habitat a charge of €1 million is likely.
2. An entity in the oil industry causes severe pollution when one of its tankers grounds off a
Pacific island. The entity has avoided costs of cleaning up such contamination in the past and
pays little regard to environmental issues.

Identify which of the following is a constructive obligation of the entity:
1. Yes
2. No

An entity is facing a substantial legal claim for €5 million.
The lawyers estimate that there is a 40 per cent chance of successfully defending the claim.
At what value should this provision be shown in the accounts?

The best estimate of the provision required is €5 million.

An entity identifies a provision for €250,000 at year end 31 December 20X1.
The outflow of this amount is expected at year end 20X3.
Specific risk associated with this provision has already been taken account of when calculating the
best estimate for the provision.
A suitable risk free discount rate to use is identified as 5 per cent.
Show the provision charged in the account for the year ends 20X1, 20X2, 20X3.

End of:
20X1: €250.000 / (1+0,05)^2 = €226.757
20X2: €250.000 / (1+0,05)= €238.095
20X3: the provision should have been paid and therefore will not be required at year end.

The management board of company XXX takes a decision on 24 March to close down one of its
divisions.
The board also agrees the detailed plan for closure put forward on 24 March.
No further action is taken on the closure and the year end for company XXX is 31 March.
What should company XXX provide in the accounts in respect of the closure?

Is there a present obligation? No, the board can change their mind.
Is there a constructive obligation? Only when the closure is communicated in detail as per IAS 37.
When should it be recognized? This is subjective and we have to be careful regarding which costs
are included in any provision.

A company acquires an equipment for use for 10 years with a cost of €100.000.
That equipment must be removed from its location, and the company is responsible for doing the
works at the end of the 10th year, expecting to occur in expenses amounting €20.000.
1. For how much should this FTA be recognized at the initial recognition, considering a discount
rate of 2%?
2. How much is the depreciation at the end of the first year?
3. How much is the provisions at the end of the first year?

1. Initial recognition = 100.000 + 20.000/1,02^10 = 116.406 euros.
2. Depreciation at the end of the 1st year = 11.6406,06 euos
3. Provision (liabilities) at the end of the 1st year = 20.000/1,02^9 = 16.735 euros
- provisions (liabilities) increase and interest expense increase

LEASE ACCOUNTING BY LESSEES and RIGHT-OF-
USE ASSETS (RAU)

LEASES
A lease is an agreement that conveys to one party (the lessee) the right
to use property but does not convey legal ownership of that property.

Introduction
LEASES
IFRS 16
Leasings
• If a lease agreement essentially gives the parties rights and obligations similar to
those arising from a legal purchase, then the accountant proceeds as if it were a
legal purchase.
• If, by way of contrast, a lease agreement is essentially a short-term rental, then
the accountant treats it as such, giving rise in the books of the lessee to a simple
expense, normally allocated on a time basis.
• This situation has changed in 2019 under IFRS 16 Leases.

Lease Accounting by the Lessee
IFRS 16
Leasings
• A single model for lease accounting applies for the lessee.

• A contract is, or contains, a lease if the contract conveys the right to control the
use of an identified asset for a period of time for consideration.
• IFRS 16 defines the inception date of the contract as the earlier date of a lease
agreement, and the date of commitment by the parties to the principal terms and
conditions of the lease.

IFRS 16
Leasings
• It is essential that the following elements are present:

(1) an entity has the right to control the use of
(2) an identified asset
(3) for a period of time in exchange for
(4) a consideration.

IFRS 16
Leasings
• The period of time relates to the lease term, which consists of the
non-cancellable period of a lease together with both:
• (a) periods covered by an option to extend the lease if the lessee is
reasonably certain to exercise that option,
• (b) periods covered by an option to terminate the lease if the lessee is
reasonably certain not to exercise that option.
• Leases with a term of 12 months or less are exempted from IFRS 16.
IFRS 16
Leasings
• The lessee will recognize a right-of-use asset and a lease liability in its books at
the commencement date of the lease.
• The right-of-use asset will be recognized at cost and shall comprise of:
• the amount of the initial measurement of the lease liability
• any lease payments made at or before the commencement date, less any lease incentives
received,
• any initial direct cost incurred by the lessee and
• an estimate of costs to be incurred by the lessee in distmantling and removing the underlying
asset.

• Amounts to be included in the present value of the lease payments for determination of the
lease liability:
• fixed payments, less any lease incentives receivable;
• And also (MORE ADVANCED COURSES):

• variable lease payments that depend on an index or a rate, initially measured at commencement date
• amounts expected to be payable by the lessee under residual value guarantees
• exercise price of a purchase option if the lessee is reasonably certain to exercise that option
• payments or penalties for determining the lease if the lease term reflects the lessee exercising an option to
terminate the lease.

Student Activity
10 minutes

Isabel Lopes
A lessee leases an asset on a non-cancellable lease contract with a primary term of five years from 1
January 20X1. The rental is €650 per quarter payable in advance.
The lessee has the right to continue to lease the asset after the end of the primary period for as
long as they wish at a nominal rent.
In addition, the lessee is required to pay all maintenance and insurance costs, as they arise.
The leased asset could have been purchased for cash at the start of the lease for €10. 000 and has a
useful life of eight years.
• Calculate the interest rate implicit in the lease.

Answer:
• €10.000 (fair value) = present value at implicit interest rate of 20 quarterly rentals payable in
advance of €650.
• The present value of the first rental payable is €650 as it is paid now.
• Thus €9,350 = the present value at implicit interest rate of 19 rentals of €650  DEBT
• Therefore using calculations the implicit interest rate of 19 rentals is 2.95% per quarter.

Example:
Company TTTT acquires the control over an asset through a lease contract with a financial
institution which specializes in the leasing of heavy machinery to industry. Thea lease term is a
period of nine years. These nine years represent a non-cancellable lease term.
At the commencement date of the lease contract, Company TTTT pays €1 million to the lessor and
at the end of each of the nine years of the lease period, Company also pays €1 million. There is an
implicit interest rate embedded in the lease contract of 10 per cent.
At what value should Company TTTT recognize the right-of-use (ROU) asset in its statement of
financial position at the commencement of the lease contract?

Answer:
The net present value of the payments to the lessor consist of the €1 million to be payable at the
end of each of the nine years of the lease contract =
= (1.000.000)/(1+0.1) +(1.000.000 /(1+0.1)² +… (1.000.000)/(1+0.1)⁹ = 5.759.024
The amount of 5.759.024 will be the lease liability at the commencement of the contract.
However, Company TTT already paid €1 million on the commencement date of the lease contract.
So the cost of the right-of-use asset at initial recognition of the lease contract of the heavy
equipment will be €1.000.000+€ 5.759.024 =6.759.024.

Subsequent Measurement IFRS 16
• The right-of-use asset shall be measured at cost less Leasings
(a) any accumulated depreciation and any accumulated impairment losses and
(b) adjusted for any re-measurement of the lease liability.
Two exceptions:
(a) when the asset is measured subsequent to initial recognition at fair value under IAS 40
Investment Property,
(b) when the leased asset relates to a class of property, plant and equipment to which the
lessee applies the revaluation model in accordance with IAS 16.

Subsequent Measurement (Continued) IFRS 16
• After the commencement date, a lessee shall measure the lease Leasings
liability by:
• increasing the carrying amount to reflect interest on the lease liability

• reducing the carrying amount to reflect the lease payments made

Did not changed, so, it is not consistent with IFRS 16.
What are the main differences? Discuss.

Thank you!

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MASTER IN ACCOUNTING AND MANAGEMENT CONTROL

International Financial Reporting

2. INTERNATIONAL FINANCIAL REPORTING

Ana Isabel Lopes

International Financial Reporting & Analysis - Ana Isabel Lopes

International Financial Reporting & Analysis - Ana Isabel Lopes

International Financial Reporting & Analysis - Ana Isabel Lopes

•The land used by a farm; dairy cattle is grazing on the land.

International Financial Reporting & Analysis - Ana Isabel Lopes

International Financial Reporting & Analysis - Ana Isabel Lopes

SUMMARY of impacts on financial statements

International Financial Reporting & Analysis - Ana Isabel Lopes

International Financial Reporting & Analysis - Ana Isabel Lopes

International Financial Reporting & Analysis - Ana Isabel Lopes

International Financial Reporting & Analysis - Ana Isabel Lopes

International Financial Reporting & Analysis - Ana

• Annual charge in 2022?

• Annual charge in 2022? = (€12,000 – €2,000)/4 * 10m/12m

• Annual charge in 2023? = (€12,000 – €2,000)/4

Dr PPE - Land 10,000

• Revalued carrying value on statement of financial position is €50,000 and under

International Financial Reporting & Analysis - Ana

International Financial Reporting & Analysis - Ana Isabel Lopes

International Financial Reporting & Analysis - Ana Isabel Lopes

International Financial Reporting & Analysis - Ana

International Financial Reporting & Analysis - Ana Isabel Lopes

Apportioning property between investment property and owner-occupied property

International Financial Reporting & Analysis - Ana Isabel Lopes

FAIR VALUE MODEL

Different from revaluation model in Fixed Tangible

International Financial Reporting & Analysis - Ana Isabel Lopes

• From investment property to owner-occupied property, when owner-occupation starts;

• From investment property to inventories, on commencement of development with a view to

• From an owner-occupied property to investment property, when owner-occupation ends;

International Financial Reporting & Analysis - Ana Isabel Lopes

Transfers between investment property, owner-occupied property and

If fair value model is used Different treatments

International Financial Reporting & Analysis - Ana Isabel Lopes

International Financial Reporting & Analysis - Ana Isabel Lopes

International Financial Reporting & Analysis - Ana Isabel Lopes

International Financial Reporting & Analysis - Ana Isabel Lopes

Fair value versus carrying amount

Recognize difference in profit or loss

International Financial Reporting & Analysis - Ana Isabel Lopes

DERECOGNITION – retirements and disposals

• An item of investment Property should be eliminated from the statement of

• Gain or losses arising from the retirement or disposal should be determined

= Retirement or disposal value – Carrying amount of the asset

Recorded as a gain or a loss in the

International Financial Reporting & Analysis - Ana Isabel Lopes

Is investment property a material asset

International Financial Reporting & Analysis - Ana Isabel Lopes

Which is the accounting policy applied to Investment property?

International Financial Reporting & Analysis - Ana Isabel Lopes

• In 2022, there was IP acquired?

International Financial Reporting & Analysis - Ana Isabel Lopes

1. Define and distinguish intangible assets