CURRENT ASSETS

The standard IAS 1 Presentation of Financial Statements specifies when to present

certain asset or liability as current.

Many people believe that “12 months” is the magic formula or the rule of thumb that
precisely determines what is current or non-current. But, it is not always true.

More specifically, an asset is presented as current when:

• It is expected to be realized (sold, consumed) in its normal operating cycle.

Here, the standard does not specify what the normal operating cycle is, as it
varies from business to business. Sometimes it’s not so clear – in these cases,
it is assumed to be 12 months.
• An asset is held for trading.
It does not matter that the company will probably not sell an asset within 12
months; as soon as its purpose is trading, then it’s current.
• It is expected to be realized within 12 months after the reporting period, or
• It is a cash or cash equivalent (not restricted in any way).

The same applies for liabilities, too, but the standard IAS 1 adds that when there is no
unconditional right to defer settlement of the liability for at least 12 months after the
reporting period, then it is current. Thus, Everything else is non-current.

Typical examples of current items are inventories, trade receivables, prepayments,

cash, bank accounts, etc.
Typical examples of non-current items are long-term loans or provisions, property,
plant and equipment, intangibles, investments in subsidiaries, etc.

These are just examples, but there are a few items that are not that outright and need
to be assessed carefully.

IAS 16 Property, Plant and Equipment

Standard IAS 16 prescribes the accounting treatment for property, plant and equipment and
therefore it is one of the most important and commonly applied standards.

The main issues dealt in IAS 16 are recognition of property, plant and equipment,
measurement at and after recognition, impairment of property, plant and equipment
(although IAS 36 deals with impairment in more detail) and derecognition.

Recognition of Property, Plant and Equipment

Property, plant and equipment are tangible items that are held for use in the
production or supply of goods or services, for rental to others, or for administrative
purposes; and are expected to be used during more than one period.

IAS 16 states that the cost of an item of property, plant and equipment shall be
recognized as an asset if, and only if:

• it is probable that future economic benefits associated with the item will flow to the
entity; and
• the cost of the item can be measured reliably.

This recognition principle shall be applied to all costs at the time they are incurred,
both incurred initially to acquire or construct an item of property, plant and
equipment and incurred subsequently after recognition to add to, replace part of or
service it.

Initial costs

Some items of property, plant and equipment might be necessary to acquire for safety
or environmental reasons.

Although they do not directly increase the future economic benefits, they might be
inevitable to obtain future economic benefits from other assets and therefore, should
be recognized as an asset.

For example, water cleaning station might be necessary in order to proceed with some
chemical processes within chemical manufacturer.

Subsequent costs
Day-to-day servicing of the item shall be recognized in profit or loss as incurred,
because they just maintain (not enhance) item’s capacity to bring future
economic benefits.

However, some parts of the item of property, plant and equipment may require
replacement at regular intervals, for example, aircraft interiors.

In such a case, an entity derecognizes carrying amount of older part and recognizes
the cost of new part into the carrying amount of the item. The same applies to major
inspections for faults, overhauling and similar items.

Measurement

Initial Measurement

An item of property, plant and equipment that qualifies for recognition as an asset
shall be measured at its cost.

The cost of an item of property, plant and equipment comprises:

1. its purchase price including import duties, non-refundable purchase taxes, after
deducting trade discounts and rebates
2. any costs directly attributable to bringing the asset to the location and condition
necessary for it to be capable of operating in the manner intended by management.
Examples of these costs are: costs of site preparation, professional fees, initial
delivery and handling, installation and assembly, etc.,
3. the initial estimate of the costs of dismantling and removing the item and restoring
the site on which it is located.

The cost of an item of property, plant and equipment is the cash price equivalent at
the recognition date.

If payment is deferred beyond normal credit terms, the difference between the cash
price equivalent and the total payment is recognized as interest over the period of
credit (unless such interest is capitalized in accordance with IAS 23).

If an asset is acquired in exchange for another non-monetary asset, the cost will be
measured at the fair value unless:

• the exchange transaction lacks commercial substance or

• the fair value of neither the asset received nor the asset given up is reliably
measurable.

If the acquired item is not measured at fair value, its cost is measured at the carrying
amount of the asset given up.

Subsequent Measurement

An entity may choose 2 accounting models for its property plant and equipment:

1. Cost model: An entity shall carry an asset at its cost less any accumulated
depreciation and any accumulated impairment losses.
 2. Revaluation model:An entity shall carry an asset at a revalued amount. Revalued
amount is its fair value at the date of the revaluation less any subsequent accumulated
depreciation and subsequent accumulated impairment losses.

An entity shall revalue its assets with sufficient regularity so that the carrying amount
does not differ materially from its fair value at the end of the reporting period. If an
item of property, plant and equipment is revalued, the entire class of property, plant
and equipment to which that asset belongs shall be revalued.

The change of asset’s carrying amount as a result of revaluation shall be treated in the
following way:

Change in Carrying
Where
Amount
Other
comprehensive
Profit or loss if reverses previous revaluation
Increase income (heading
decrease of the same value
“Revolution
surplus”)

Other comprehensive income if reduces

Decrease Profit or loss previously recognized revaluation surplus
(heading “Revaluation surplus”)

Depreciation (both models)

Depreciation is defined as the systematic allocation of the depreciable amount of an
asset over its useful life.

The items of property, plant and equipment are usually depreciated in order to
maintain matching principle – as they are in operation for more than 1 year, they
assist in producing the revenues in more than 1 year and therefore, their cost shall be
spread among those years in order to match the revenue they help to produce.

When dealing with the depreciation please do have 3 basic things in mind:

• Depreciable amount: Depreciable amount is simply HOW MUCH you are going to
depreciate. It is the cost of an asset, or other amount substituted for cost, less its
residual value.
• Depreciation period: Depreciation period is simply HOW LONG you are going to
depreciate and it is basically asset’s useful life.

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.

IFRS16 lists several factors that shall be considered when establishing item’s
useful life:
 o expected usage of the item,
o expected physical wear and tear,
o technical or commercial obsolescence of the item, and
o legal or other limits on the use of the asset.

Useful life and asset’s residual value (input to depreciable amount) shall be
reviewed at least at the end of each financial year.

If there is a change in the expectations comparing to previous estimates, then

change shall be accounted for as a change in an accounting estimate in line
with IAS 8 (no restatement of previous periods).

• Depreciation method: Depreciation method is

simply HOW, IN WHAT MANNER you are going to depreciate.

The depreciation method used shall reflect the pattern in which the asset’s
future economic benefits are expected to be consumed by the entity.

An entity may select from variety of depreciation methods, such as straight-

line method, diminishing balance method and the units of production methods.

Selected method shall be reviewed at least at the end of each financial year. If
there is a change in the expected pattern of asset’s usage, then the depreciation
method shall be changed and be accounted for as a change in an accounting
estimate in line with IAS8 (no restatement of previous periods).

Depreciation shall be recognized in profit or loss unless it is capitalized into

the carrying amount of another asset (for example, inventories, or another item
of property, plant and equipment).

Each part of an item of property, plant and equipment with a cost that is
significant in relation to the total cost of the item shall be depreciated
separately. For example, aircraft interior cost might be depreciated separately
from the remaining airplane cost.

Impairment

Here, IAS 16 refers to another standard, IAS 36 Impairment of Assets that prescribes
rules for reviewing the carrying amount of assets, determining their recoverable
amount and impairment loss, recognizing and reversing impairment loss and more.
IAS 16 states that compensation from third parties for items of property, plant and
equipment that were impaired, lost or given up shall be included in profit or loss when
the compensation becomes receivable.

For example, claim for compensation of damage on insured property from insurance
company is recognized to profit or loss when insurance company accepts claim,
closes the case and agrees to compensate (or after whatever procedure is agreed in the
insurance contract).

Derecognition

IAS 16 prescribes that the carrying amount of an item of property, plant and
equipment shall be derecognized on disposal; or when no future economic
benefits are expected from its use or disposal.

The gain (not classified as revenue!) or loss arising from the derecognition of an item
of property, plant and equipment shall be included in profit or loss when the item is
derecognized. The gain or loss from the derecognition is calculated as the net disposal
proceeds (usually income from sale of item) less the carrying amount of the item.

IAS 40 Investment Property

Investment property is land or a building (including part of a building) or both
that is:

• held to earn rentals or for capital appreciation or both;

• not owner-occupied;
 • not used in production or supply of goods and services, or for
administration; and
• not held for sale in the ordinary course of business.
Investment property may include investment property that is being
redeveloped.

An investment property is measured initially at cost. The cost of an investment

property interest held under a lease is measured in accordance with IAS 17 at
the lower of the fair value of the property interest and the present value of the
minimum lease payments.

For subsequent measurement an entity must adopt either the fair value model
or the cost model as its accounting policy for all investment properties. All
entities must determine fair value for measurement (if the entity uses the fair
value model) or disclosure (if it uses the cost model). Fair value reflects
market conditions at the end of the reporting period.
Under the fair value model, investment property is remeasured at the end of
each reporting period. Changes in fair value are recognised in profit or loss as
they occur. Fair value is the price at which the property could be exchanged
between knowledgeable, willing parties in an arm’s length transaction, without
deducting transaction costs (see IFRS 13).

Under the cost model, investment property is measured at cost less

accumulated depreciation and any accumulated impairment losses. Fair value
is disclosed.

Gains and losses on disposal are recognised in profit or loss.

INTANGIBLE ASSETS
IAS 38 sets out the criteria for recognising and measuring intangible assets
and requires disclosures about them. An intangible asset is an identifiable
non-monetary asset without physical substance. Such an asset is identifiable
when it is separable, or when it arises from contractual or other legal rights.
Separable assets can be sold, transferred, licensed, etc. Examples of
intangible assets include computer software, licences, trademarks, patents,
films, copyrights and import quotas. Goodwill acquired in a business
combination is accounted for in accordance with IFRS 3 and is outside the
scope of IAS 38. Internally generated goodwill is within the scope of IAS 38
but is not recognised as an asset because it is not an identifiable resource.

Expenditure for an intangible item is recognised as an expense, unless the

item meets the definition of an intangible asset, and:

• it is probable that there will be future economic benefits from the asset;
and
 • the cost of the asset can be reliably measured.
The cost of generating an intangible asset internally is often difficult to
distinguish from the cost of maintaining or enhancing the entity’s operations or
goodwill. For this reason, internally generated brands, mastheads, publishing
titles, customer lists and similar items are not recognised as intangible assets.
The costs of generating other internally generated intangible assets are
classified into whether they arise in a research phase or a development
phase. Research expenditure is recognised as an expense. Development
expenditure that meets specified criteria is recognised as the cost of an
intangible asset.

Intangible assets are measured initially at cost. After initial recognition, an

entity usually measures an intangible asset at cost less accumulated
amortisation. It may choose to measure the asset at fair value in rare cases
when fair value can be determined by reference to an active market.

An intangible asset with a finite useful life is amortised and is subject to

impairment testing. An intangible asset with an indefinite useful life is not
amortised, but is tested annually for impairment. When an intangible asset is
disposed of, the gain or loss on disposal is included in profit or loss.

IAS 41 — Agriculture
Overview
IAS 41 Agriculture sets out the accounting for agricultural activity – the transformation
of biological assets (living plants and animals) into agricultural produce (harvested
product of the entity's biological assets). The standard generally requires biological
assets to be measured at fair value less costs to sell.
IAS 41 was originally issued in December 2000 and first applied to annual periods
beginning on or after 1 January 2003.

History of IAS 41

Date Development Comments

December 1999 Exposure Draft E65 Agriculture Comment deadline 31 January

2000

December 2000 IAS 41 Agriculture issued Operative for annual financial

statements covering periods
beginning on or after 1 January
2003

22 May 2008 Amended by Improvements to Effective for annual periods

IFRSs (discount rates) beginning on or after 1 January
2009

30 June 2014 Amended by Agriculture: Effective for annual periods

 Bearer Plants (Amendments to beginning on or after 1 January
IAS 16 and IAS 41) 2016

Objective
The objective of IAS 41 is to establish standards of accounting for agricultural activity
– the management of the biological transformation of biological assets (living plants
and animals) into agricultural produce (harvested product of the entity's biological
assets).

Scope
IAS 41 applies to biological assets with the exception of bearer plants, agricultural
produce at the point of harvest, and government grants related to these biological
assets. It does not apply to land related to agricultural activity, intangible assets
related to agricultural activity, government grants related to bearer plants, and bearer
plants. However, it does apply to produce growing on bearer plants.
Note: Bearer plants were excluded from the scope of IAS 41 by Agriculture: Bearer Plants (Amendments to
IAS 16 and IAS 41), which applies to annual periods beginning on or after 1 January 2016.

Key definitions
[IAS 41.5]
Biological asset A living animal or plant

Bearer plant* A living plant that:

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.

Agricultural The harvested product from biological assets

produce

Costs to sell The incremental costs directly attributable to the disposal of an asset,
excluding finance costs and income taxes

* Definition included by Agriculture: Bearer Plants (Amendments to IAS 16 and IAS 41), which applies to
annual periods beginning on or after 1 January 2016.

Initial recognition
An entity recognises a biological asset or agriculture produce only when the entity
controls the asset as a result of past events, it is probable that future economic
benefits will flow to the entity, and the fair value or cost of the asset can be measured
reliably. [IAS 41.10]

Measurement
Biological assets within the scope of IAS 41 are measured on initial recognition and
at subsequent reporting dates at fair value less estimated costs to sell, unless fair
value cannot be reliably measured. [IAS 41.12]
Agricultural produce is measured at fair value less estimated costs to sell at the point
of harvest. [IAS 41.13] Because harvested produce is a marketable commodity, there
is no 'measurement reliability' exception for produce.
 The gain on initial recognition of biological assets at fair value less costs to sell, and
changes in fair value less costs to sell of biological assets during a period, are
included in profit or loss. [IAS 41.26]

A gain on initial recognition (e.g. as a result of harvesting) of agricultural produce at

fair value less costs to sell are included in profit or loss for the period in which it
arises. [IAS 41.28]

All costs related to biological assets that are measured at fair value are recognised
as expenses when incurred, other than costs to purchase biological assets.
IAS 41 presumes that fair value can be reliably measured for most biological assets.
However, that presumption can be rebutted for a biological asset that, at the time it is
initially recognised, does not have a quoted market price in an active market and for
which alternative fair value measurements are determined to be clearly unreliable. In
such a case, the asset is measured at cost less accumulated depreciation and im-
pairment losses. But the entity must still measure all of its other biological assets at
fair value less costs to sell. If circumstances change and fair value becomes reliably
measurable, a switch to fair value less costs to sell is required. [IAS 41.30]
Guidance on the determination of fair value is available in IFRS 13 Fair Value Mea-
surement. IFRS 13 also requires disclosures about fair value measurements.

Other issues
The change in fair value of biological assets is part physical change (growth, etc) and
part unit price change. Separate disclosure of the two components is encouraged,
not required. [IAS 41.51]

Agricultural produce is measured at fair value less costs to sell at harvest, and this
measurement is considered the cost of the produce at that time (for the purposes
of IAS 2 Inventories or any other applicable standard). [IAS 41.13]

Agricultural land is accounted for under IAS 16 Property, Plant and Equipment.
However, biological assets (other than bearer plants) that are physically attached to
land are measured as biological assets separate from the land. In some cases, the
determination of the fair value less costs to sell of the biological asset can be based
on the fair value of the combined asset (land, improvements and biological assets).
[IAS 41.25]
Intangible assets relating to agricultural activity (for example, milk quotas) are
accounted for under IAS 38 Intangible Assets.

Government grants
Unconditional government grants received in respect of biological assets measured
at fair value less costs to sell are recognised in profit or loss when the grant becomes
receivable. [IAS 41.34]
If such a grant is conditional (including where the grant requires an entity not to
engage in certain agricultural activity), the entity recognises the grant in profit or loss
only when the conditions have been met. [IAS 41.35]

Disclosure
Disclosure requirements in IAS 41 include:
o aggregate gain or loss from the initial recognition of biological assets and agricul-
tural produce and the change in fair value less costs to sell during the period*
[IAS 41.40]
o description of an entity's biological assets, by broad group [IAS 41.41]
o description of the nature of an entity's activities with each group of biological
assets and non-financial measures or estimates of physical quantities of output
during the period and assets on hand at the end of the period [IAS 41.46]
o information about biological assets whose title is restricted or that are pledged as
security [IAS 41.49]
o commitments for development or acquisition of biological assets [IAS 41.49]
o financial risk management strategies [IAS 41.49]
o reconciliation of changes in the carrying amount of biological assets, showing
separately changes in value, purchases, sales, harvesting, business combina-
tions, and foreign exchange differences* [IAS 41.50]
* Separate and/or additional disclosures are required where biological assets are measured at cost less accu-
mulated depreciation [IAS 41.55]
Disclosure of a quantified description of each group of biological assets, distinguish-
ing between consumable and bearer assets or between mature and immature
assets, is encouraged but not required. [IAS 41.43]
If fair value cannot be measured reliably, additional required disclosures include: [IAS
41.54]
o description of the assets
o an explanation of why fair value cannot be reliably measured
o if possible, a range within which fair value is highly likely to lie
o depreciation method
o useful lives or depreciation rates
o gross carrying amount and the accumulated depreciation, beginning and ending.

If the fair value of biological assets previously measured at cost subsequently

becomes available, certain additional disclosures are required. [IAS 41.56]
Disclosures relating to government grants include the nature and extent of grants,
unfulfilled conditions, and significant decreases expected in the level of grants. [IAS
41.57]