24 Oct

Corporate reporting standard improving, though quality not as high as it should be

Whilst corporate reporting by large listed companies is generally good, detailed explanations and clarity could still be better, according to the FRC Annual Review of Corporate Reporting.

The quality of narrative reporting has improved following the introduction of the strategic report in 2013. There have been further improvements in the strategic report this year, but it remains an area subject to frequent challenge by the FRC’s Corporate Reporting Review team, particularly where there is insufficient balance or where disclosures are not sufficiently specific or descriptions too vague. The FRC expects companies to provide company specific data rather than resort to generic information.

The FRC’s review of 203 annual and interim report and accounts included pre-informing 60 companies that a certain aspect of their next report and accounts would be subject to review. We are pleased that many took the opportunity of reviewing the relevant disclosures and publishing reports and accounts that included an improvement in the quality of information provided.

The report notes that expectations of corporate reporting are changing. There are increasing calls for more information about how a company has thought about its long-term success, how directors have discharged their Section 172 duties to stakeholders, along with a better explanation of how a company creates value and the extent to which that value is dependent on relationships with stakeholders.

Requirements are also changing with the implementation of new standards for Financial Instruments, Revenue from Contracts with Customers and Leases (IFRS 9, 15 and 16) and the Non-Financial Reporting Directive.

Paul George, FRC’s Executive Director for Corporate Governance and Reporting, said:

Whilst reporting is generally good, there is no room for complacency. Most companies seek to meet members’ needs through fair, balanced and understandable reporting. Our report provides important information to those involved in the preparation of Annual Report and Accounts. It highlights aspects of good practice, common areas for improvement and changing expectations of stakeholders. High quality and transparent reporting are fundamental to building trust and to the long-term success of UK companies and the wider economy

With Brexit on the horizon but a lack of clarity over the outcome, the majority of companies reviewed report continuing uncertainties with more detail than last year. They believe it is still too early to tell about the long-term effects and business impact of leaving the EU. The FRC encourages companies to provide as much detail as possible in their next annual report.

Read the full report here

The Technical Findings can be found here

06 Jul

Valuation of Financial Instruments

The AICPA is seeking comments from financial professionals and organisations on the valuation of financial instruments and their underlying components. The Framework is said to bring further clarity, consistency and transparency to the valuation of these instruments.

Historically, financial instruments, such as mortgage-backed securities, credit default swaps, complex bonds and other derivatives, have been difficult to value, which has the potential to adversely impact markets and the global economy.

The new Framework defines the level of documentation necessary for a professional working with securities and financial instruments to effectively demonstrate the valuation performed. The guidance provided by the Framework relies upon three major principals: independence, objectivity and consistency. This guidance will inform the basis for a new credential from the American Institute of CPAs, Certified in Valuation of Financial Instruments (CVFI), expected to launch later this year.

The Disclosure Framework for the Valuation of Financial Instruments and the Certified in Valuation of Financial Instruments (“CVFI”) Credential, provides guidance on how to explain the characteristics of financial instruments and disclose how these securities have been valued in a way that is understandable, consistent and transparent. The Framework establishes parameters of documentation requirements, sets definitions of terms that may be unique to the Framework, and includes a list of accounting, audit and valuation standards and references to technical literature directly applicable to the guidance in the Framework.

The comment period for this Framework is open through September 27, 2017. Comments within this time period will be reviewed and applied to the disclosure framework by the AICPA Disclosure Framework Work stream and the AICPA Financial Instruments Task Force, both of which are comprised of financial professionals, academics, and financial policy experts.

Jeannette Koger, CPA, CGMA vice president of advisory services and credentialing, AICPA:

Financial instruments have become increasingly complex and determining their value has been a challenge that has adversely affected the market in the past. With this Framework, the AICPA is responding to marketplace needs by creating a standardised and replicable process for financial professionals who perform valuations on financial instruments,”
This Framework will ensure that professionals working with financial instruments perform their engagements with independence, objectivity and consistency. We encourage all stakeholders to review and comment on the draft

The Application of the Disclosure Framework for the Valuation of Financial Instruments demonstrates how the Framework would be applied for areas of valuation that are often either misapplied or insufficiently supported or documented in valuations for financial reporting. It also identifies the most common components in which the valuation professional provides a conclusion of value, and addresses matters where there is need for greater consistency in the application of the approaches and methodology. It provides support for matters that require the application of professional judgment, as well as documentation of inputs and results.

The Application of the Financial Instruments Framework will continue to evolve and expand to cover a broader spectrum of subject matter topics and professional practice trends in the valuation profession.

Once finalized, CVFI credential holders will be required to comply with the Framework, ensuring confidence in the consistency in their work, to ensure integrity and transparency in the fulfillment of their duties, in the interest of the financial markets and ultimately to the public.

CPAs and valuation professionals are encouraged to sign up for information and updates on the Certified in Valuation of Financial Instruments (CVFI) credential from the AICPA.

14 Jun

ICAEW: Do digital experts hold the key to solving the corporate reporting conundrum?

Corporate reporting needs to take advantage of new technologies, according to ICAEW. In its report What next for corporate reporting: time to decide?, released today, the accountancy and finance body says that it’s time for policy makers to take a decision on how best to use IT to satisfy increasing demands for information.

Traditional paper-based reporting is still perceived by many as the principal form of communication.  However, there are increasing demands for a range of information to be provided in corporate reports but at the same time, fears those reports are becoming too long and therefore less useful.  ICAEW suggests that inclusion of digital and technology specialists in reporting discussions could highlight opportunities for companies to use technology in reporting as part of the solution to this problem.

Dr Nigel Sleigh-Johnson, Head of ICAEW’s Financial Reporting Faculty, said:

Dr Nigel Sleigh-Johnson, Head of Financial Reporting Faculty ICAEW

Stakeholders  are demanding more information from companies, and companies seem willing to provide it. But there seems to be  little progress in using technology as a reporting tool, which could solve this communication challenge. Demand for more access to information is likely to continue to grow, so it is important to address these problems as soon as possible
There is a real risk that the annual report becomes further overloaded with information in order to meet wider stakeholder demands, while making the report less useful for investors for economic decision making purposes. Presenting additional information outside of the annual report, in a digital format that is user-friendly and easy to access, may provide the answer to this. However, there needs to be further research into the implications of digitalisation. IT expertise would improve understanding of, for example, the potential in this context of two emerging technologies: data analytics and blockchain technology

In its new report, What’s next for corporate reporting: time to decide?, ICAEW captures the main features of vibrant discussions on the future of corporate reporting at a number of ICAEW roundtables and meetings. The importance of including technology specialists in meetings in order to discuss opportunities to meet the demands of the reporting process,  as well as better collaboration between accounting and IT communities for the best results, was a common view heard during these discussions.

However, ICAEW warns that key policy decisions on issues such as this need to be taken if real progress is to be made in advancing the quality of corporate reporting. Either stakeholders make a concerted effort to accelerate and coordinate progress, with collaboration between technology specialists and those with an interest in better corporate reporting, or we accept that the pace of progress in the use of technology as a corporate reporting tool is likely to remain very slow.

It’s time to decide, in this and other areas highlighted in the report.

The full report can be found here: http://www.icaew.com/en/technical/financial-reporting/information-for-better-markets/what-next-for-corporate-reporting
06 Oct

New small company accounting rules may mean filings are rejected, warns ICAEW

blind businessNew accounting rules for small companies has led to Companies House rejecting accounts filed with them, due to uncertainty over filing options ICAEW has warned. The accountancy and finance body has published updated guidance to help small companies and others understand the filing options under the new regime.

Recent changes to UK company law mean small companies no longer have the option to submit so-called abbreviated accounts for periods beginning on or after 1 January 2016. Small companies are still able to take advantage of some filing options under the new regime, but the change has led to some misunderstandings, and in some cases to rejection of company accounts filed with the Registrar of Companies.

After liaising with Companies House and member firms, ICAEW has produced a set of Frequently Asked Questions, together with background information to help small companies and other interested parties navigate the new rules.

Dr Nigel Sleigh-Johnson, head of ICAEW’s Financial Reporting Faculty, said:

The new regime reflects UK implementation of a new EU accounting directive and means that small companies can no longer file an abbreviated version of their full accounts at Companies House – they have to file the version they prepare for members. But they can, for example, prepare abridged accounts for members and file those, provided shareholders all agree. There are other options too, such as choosing to remove the profit and loss account from the accounts filed on the public record

There are a number of different scenarios identified in the guidance, which explains the requirements in each case

The new ICAEW guidance is available at:

http://www.icaew.com/-/media/corporate/files/technical/financial-reporting/factsheets/uk-gaap/small-company-filing-options-faqs-final.ashx and will also be available through the Companies House website.
27 Sep

New Guide on Compilation Engagements Helps Accountants Meet Changing Market Demand

IAASB IFAC Compilation Guide Global AccountantIFAC has released the Guide to Compilation Engagements. The Guide aims to help professional accountants in practice, especially those operating in SMPs, in conducting compilation engagements in compliance with ISRSTM 4410 (Revised), an International Standard on Related Services developed exclusively by the IAASB.

Giancarlo Attolini, IFAC SMP Committee Chair said:

The regulatory environment is changing. As a result, increasingly small- and medium-sized entities (SMEs) may now be able to choose from an array of assurance and related services to meet their needs

Accounting practices, especially SMPs that typically serve SMEs, need to be prepared to help their clients navigate this choice, while being prepared to meet clients’ changing demands. The Guide can help practitioners increase their knowledge and understanding of compilation engagements, thus broadening their service offerings and strengthening their practices in this important area

Practitioners can use the Guide as an introduction to compilation engagements, to deepen their prior understanding and knowledge, as a day-to-day reference guide, or as the basis for training modules. The Guide includes practical guidance on the application of the requirements in the standard and “Consider Points,” which offer suggestions to facilitate efficiency and address areas where practitioners often encounter difficulties.

Featuring illustrative examples alongside relevant extracts from the standard, the Guide also includes appendices with key checklists and forms that practitioners can use as is or modify to meet the requirements of their particular jurisdiction.

Visit SMP Publications & Resources for access to the Guide, which forms part of IFAC’s suite of implementation support and includes comprehensive Guides covering the implementation of the IAASB’s audit, quality control, and review standards: ISATM, ISQCTM, and ISRETM 2400 (Revised), respectively. For access to additional implementation resources from IFAC and notable organisations from around the world, see the Global Knowledge Gateway, in particular, the areas of audit & assurance and ethics.

17 May

IASB and FASB Propose Changes to Lease Accounting

IASB and FASB of the US have published for public comment a revised Exposure Draft outlining proposed change to the accounting for leases. The proposal aims to improve the quality and comparability of financial reporting by providing greater transparency about leverage, the assets an organisation uses in its operations and the risks to which it is exposed from entering into leasing transactions.

Leases Global AccountantUnder existing accounting standards, a majority of leases are not reported on a lessee’s balance sheet. Additionally, the existing accounting models for leases require lessees and lessors to classify their leases as either finance leases (for example, a lease of equipment for nearly all of its economic life) or operating leases (for example, a lease of office space for 10 years) and to account for those leases differently.

For finance leases, a lessee recognises lease assets and liabilities on the balance sheet. For operating leases, a lessee does not recognise lease assets or liabilities on the balance sheet. The existing standards have been criticised for failing to meet the needs of users of financial statements because they do not always provide a faithful representation of leasing transactions.

Hans Hoogervorst, Chairman of the IASB commented

“The development of an improved standard for leasing is vital. At present, investors must take an educated guess to determine the hidden advantage from leasing by using basic disclosures in financial statements and applying arbitrary multiples. It is clearly not in the best interests of investors to expect analysts and others to guess the liabilities associated with leases. The proposals outlined in this revised Exposure Draft will go a great distance towards improving the quality and comparability of financial reporting in this area.”

Leslie Seidman, Chairman of the FASB commented

“The FASB and the IASB have worked together to develop a revised, converged proposal to address the inadequacies of current lease accounting and disclosures.  The proposal is responsive to the widespread view of investors that leases are liabilities that belong on the balance sheet.  The Boards revised the original proposal to distinguish between different types of leases for income statement and cash flow purposes, in response to feedback received from stakeholders.”

The Changes

Lease accounting that would require a lessee to recognise assets and liabilities for the rights and obligations created by leases.  A lessee would recognize assets and liabilities for leases of more than 12 months.

Stakeholders have informed the Boards that there are a wide variety of lease transactions with different economics. To better reflect those differing economics, the revised Exposure Draft proposes a dual approach to the recognition, measurement and presentation of expenses and cash flows arising from a lease. For most real estate leases, a lessee would report a straight-line lease expense in its income statement. For most other leases, such as equipment or vehicles, a lessee would report amortisation of the asset separately from interest on the lease liability.  The Boards are also proposing disclosures that should enable investors and other users of financial statements to understand the amount, timing, and uncertainty of cash flows arising from leases.

The Boards are also proposing changes to how equipment and vehicle lessors would account for leases that are off-balance-sheet. Those changes would provide greater transparency about such lessors’ exposure to credit risk and asset risk.

Stakeholders are encouraged to review and provide feedback on the revised Exposure Draft by September 13, 2013.

09 May

IAS 40 Investment Properties

There are many scenarios that students, and professional accountants, will come across that examine the concept of investment property and it is important that accountants at all levels understand the fundamental concepts as to why investment properties are subjected to a completely separate standard other than that of IAS 16 Property, Plant and Equipment.

This article will take a look at the broad concepts behind IAS 40 Investment Property and the accounting requirements that the standard itself provides.

The main reason that investment property is outside the scope of IAS 16 is because the characteristics of investment properties differ significantly from the characteristics of owner-occupied property, as well as the fact that the International Accounting Standards Board (IASB) recognise that the values attributed to such properties, and the changes in those values (particularly in today’s turbulent economic times) are relevant to the users’ of financial statements, hence there is a need to have a completely separate standard on the area of investment property.

Scope

IAS 40 is fairly wide in its overall scope and includes property that is held for capital appreciation purposes, or property from which rentals are earned.  The scope of IAS 40 also includes property that is leased out by the entity under an operating lease, but be careful here! IAS 40 does not deal with other aspects of leased property which are dealt with under IAS 17 Leases.

Paragraph 5 to IAS 40 defines investment property as:

  • 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.
When a property interest is held by a lessee under an operating lease, such a property may be treated as an investment property if, and only if:
  •  It can meet the rest of the definition of investment property.
  • The lessee uses the fair value model in IAS 40.
  • The initial cost of a property interest held under an operating lease and classified as an investment property should be treated as for a finance lease – in other words the asset should be recognised at the lower of the fair value of the property and the present value of the minimum lease payments. [IAS 40 para 6; IAS 17 para 19]

 Illustration

The Gabriella Group owns a portfolio of properties one of which is a converted mill that it leases out (as lessor) to a manufacturer of curtains and soft furnishings under an operating lease.  The mill itself is built on land that is leased by the government to the Gabriella Group (as lessee) for a period of 999 years.  Title to the land on which the mill is built does not pass to the Gabriella Group at the end of the lease and the mill’s useful life is expected to be 50 years.  The terms of the lease do not require the land to be returned with the building intact at the end of the 999 year lease term.

In this scenario, the land element should be accounted for an as operating lease under the provisions in IAS 17 and can be recognised as investment property only if it meets the definition of such and the Gabriella Group has chosen the fair value model for the investment property.  The converted mill does meet the definition of an investment property and should be accounted for under the provisions in IAS 40.  A building is recognised as an investment property if the lease of the land extends beyond the building’s expected useful life and there are no provisions in the lease to return the land with the building intact.

Examples of investment property

IAS 40 cites several examples of what is and what is not investment property.  Examples of investment property as per paragraph 8 to IAS 40 include:

  • Land held for long-term appreciation in value, rather than for short-term sale in the ordinary course of business.
  • Land whose future use has not yet been determined.  If the future use has not yet been determined, land is assumed to be held for capital appreciation.
  • A building owned or held under a finance lease and leased out under an operating lease.
  • A building that is vacant, but held to be leased out under an operating lease.
  • Investment property being redeveloped for continued use as investment property.

Paragraph 9 to IAS 40 then goes on to say what investment property does not include:

  • Property intended for sale in the ordinary course of business or for development and resale.
  • Property under construction for third parties.
  • Owner-occupied property, including property held for such use or for redevelopment prior to such use.
  • Property occupied by employees.
  • Owner-occupied property awaiting disposal.
  • Property that is leased to another entity under a finance lease.

It is imperative, therefore, to ensure that in the real world, or in exam situations, you are familiar with what is and what is not investment property, because the accounting requirements differ significantly.  Getting the classification incorrect can be both costly and misleading to the users’ of the financial statements.

Initial recognition

Investment property should be recognised as an asset within the financial statements when it is probable that future economic benefits that are associated with the property will flow to the entity, and the cost of the property can be reliably measured.

Once management is satisfied that a property meets the definition and recognition criteria of investment property, the initial recognition in the financial statements is exactly the same as the initial recognition for other property, plant and equipment – at cost.  Cost includes:
  • The purchase price.
  • Directly attributable costs (see below).

IAS 40 recognises that start-up costs, abnormal waste, or initial operating losses incurred before the investment property achieves the planned level of occupancy should not be recognised.

IAS 16 at paragraph 17 outlines examples of directly attributable costs as follows:
  • The cost of employee benefits as defined in IAS 19 Employee Benefits, that arise directly from the construction or acquisition of the item.
  • The costs of site preparation.
  • Initial delivery and handling costs.
  • Installation and assembly costs.
  • Professional fees.
  • Costs of testing whether the asset is working properly (commissioning costs), after deducting the net proceeds of sale of any items produced while bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management.

Subsequent measurement

IAS 40 permits the reporting entity to adopt either the fair value model or the cost model as its accounting policy for investment property.

Under the fair value model the investment property is revalued to fair value.  ‘Fair value’ is defined as the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm’s length transaction.  ‘Knowledgeable parties’ in the context of IAS 40 means that both the buyer and the seller are reasonably informed about the nature and characteristics of the property, its actual and potential uses and the state of the market at the reporting date.  A ‘willing buyer’ is one who is motivated, but not forced to buy, nor is such a buyer over-eager or determined to buy at any price.  Such a buyer will not pay a higher price than a market made up of knowledgeable willing buyers and sellers would require.

Under the cost model an entity will carry an investment property at cost less accumulated depreciation and any accumulated impairment losses.  This treatment is consistent with the requirements in IAS 16.  However, when an entity adopts the use of the cost model, they must still obtain fair values as IAS 40 requires the disclosure of such fair values within the financial statements, so the benefits of using the cost model are not evident when fair values still have to be obtained.

An important point to flag up is the situation that may occur when management wish to switch from measuring investment property at fair value to measuring investment property under the cost model.  The following example illustrates a problem in switching from the fair value model to the cost model:

Illustration

Lucas Property Company (Lucas) has two properties, both of which meet the definition of investment property under IAS 40.  Management previously declared that Lucas will carry the investment property using the fair value model, but have now expressed a desire to carry the properties under the cost model.

Where the entity has adopted the fair value model, the IASB considers that it should not then subsequently change to the cost model.  This is because the provisions in IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors allows a change of accounting policy only if the revised policy will provide reliable and more relevant information about the effects of transactions, other events or conditions.  The IASB have concluded that it is highly unlikely that a switch from the fair value model to the cost model will result in such a switch providing more reliable and more relevant information.

Changes in fair values

Changes in the fair values of investment property are recognised within profit or loss for the period in which they arise.  The standard itself requires disclosure of net gains or losses arising from fair value adjustments, but it does not specify where such gains and losses on revaluation should be shown within the statement of comprehensive income (income statement).  They should, however, be shown separately from rental income and direct operating expenses, which IAS 40 requires to be disclosed separately.

As part of their ‘Improvements Project’ in 2003, the IASB revised IAS 1 Presentation of Financial Statements and following this project IAS 1 no longer requires the disclosure of a line item for the results of operating activities.  In the ‘Basis for Conclusions’ section of IAS 1 (specifically IAS 1 para BC13) the IASB have said that if an entity voluntarily discloses a line item for the results of operating activities, it should ensure that the amount disclosed is representative of activities that would normally be considered to be ‘operating’.  Revaluation gains and losses would form part of the operating results and should, therefore, be disclosed in arriving at operating profit, if such a line item is disclosed.  When an entity does not disclose such a line item, it is generally considered that gains and losses on revaluation should be shown in the line item before ‘finance costs’.  The general consensus here is that finance costs are generally not part of operating profit, unless the entity carries on a finance related business.

Disclosures

Under IAS 40, an entity is required to make extensive disclosures within the financial statements relating to all investment property, whether carried at fair value or at cost less depreciation.  The disclosure requirements are as follows:

  • Whether the entity uses the cost model or the fair value model.
  • If the entity applies the fair value model, whether and in what circumstances it classifies, and accounts for, property interests held under an operating lease as investment property.
  • Basis of distinguishing investment property from owner-occupied property and property held for sale in the ordinary course of business, where classification is difficult.
  • Methods and significant assumptions for determining fair value, including a statement as to whether fair value was supported by market evidence or was more heavily based on other factors (which the entity should disclose) because of the nature of the property and lack of comparable market data.
  • Extent of involvement of independent professional valuers with recent experience in the location and category of investment property being valued (in determining fair value for measurement or disclosure purposes) or, if there has been no independent valuation, disclosure of that fact.
  • Amounts included in profit or loss for rental income and direct operating expenses relating to investment property (such as repairs and maintenance) giving amounts separately in the latter case for property that generated rental income and property that did not.
  • The cumulative change in fair value recognised in profit or loss on a sale of investment property from a pool of assets in which the cost model is used into a pool in which the fair value model is used.
  • Details of the existence and amount of restrictions on the realisability of investment property or on remittance of income and proceeds of disposal.
  • Contractual obligations to purchase, construct or develop investment property or for repairs, maintenance of enhancements.
When the entity adopts the use of the fair value model, it needs to disclose a reconciliation of the carrying amount at the beginning and end of the period showing:
  • Additions from acquisitions.
  • Additions from subsequent expenditure recognised in the carrying amount of an asset.
  • Additions from business combinations.
  • Assets classified as held for sale or included in a disposal group classified as held for sale in accordance with IFRS 5 Non-Current Assets Held for Sale and Discontinued Operations, and other disposals.
  • Net gains or losses from fair value adjustments.
  • Net exchange differences arising from retranslation of the reporting entity’s financial statements into a different presentation currency (where applicable) and from retranslation of a foreign operation (for example, an overseas subsidiary undertaking) into the reporting entity’s presentation currency.
  • Transfer to and from inventory and owner-occupied property.
  • Other changes.

Comparative amounts are also required for the above disclosures.

When an entity carries investment property under the cost model, it should make the following additional disclosures (including disclosure of the fair value of the investment property):

  • The depreciation methods used.
  • The useful lives or depreciation rates used.
  • The gross carrying amount and the accumulated depreciation (combined with accumulated impairment losses) at the beginning and end of the period.
  • A reconciliation of the carrying amount of investment property at the beginning and end of the period showing:
    • Additions from acquisitions.
    • Additions from subsequent expenditure recognised as an asset.
    • Additions from business combinations.
    • Assets classified as held for sale or included in a disposal group classified as held for sale in accordance with IFRS 5.
    • Depreciation.
    • Amount of impairment losses recognised and the amount of impairment losses reversed during the period under IAS 36 Impairment of Assets.
    • Net exchange difference arising from retranslation of the reporting entity’s financial statements into a different presentation currency (where applicable) and from retranslation of a foreign operation (for example, an overseas subsidiary) into the reporting entity’s presentation currency.
    • Transfers to or from inventory and owner-occupied property.
    • Other changes.
    • Fair value of investment property.  Where, in exceptional circumstances, the entity cannot reliably determine the fair value of an investment property it should disclose:
      • A description of the property.
      • An explanation as to why fair value cannot be reliably determined.
      • If possible, the range of estimates of fair value within which the fair value of the property is highly likely to lie.

Conclusion

The accounting rules contained in IAS 40 are very extensive and cover a wide scope of issues relating to investment properties.  Students should ensure that they study their respective syllabuses carefully so as to gain a broad understanding of the issues that may crop up in an exam situation.  Professional accountants should ensure they are also familiar with the content in IAS 40 to ensure correct accounting treatment.  It is important that students fully understand the initial recognition and subsequent measurement issues relating to investment properties and how to account for such changes.  Gaining a sound understanding of theoretical knowledge is also important, particularly where there is scope for a discursive style questions to be examined in a financial reporting examination.

Steve Collings is the audit and technical partner at Leavitt Walmsley Associates Ltd and the author of Interpretation and Application of International Standards on Auditing (March 2011) and IFRS For Dummies (April 2012).  He was also named Accounting Technician of the Year at the 2011 British Accountancy Awards.

15 Apr

IAS 11 Construction Contracts

Accounting for construction con- tracts is dealt with in IAS 11 Construction Contracts. This article will look at the core principles involved in IAS 11 and at the end of the article will look at a worked example. The first thing to understand is what a construction contract actually is. According to IAS 11, a construction contract is: a contract specifically entered into for the construction of an asset or a combination of assets that are closely interrelated or interdependent in terms of their design and function or their end use or purpose.’

The principal concern of accounting for long-term construction contracts involves the timing of revenue (and thus profit) recognition. Contracts can last for several years and a standard was therefore required to deal with revenue recognition in relation to long-term construction contracts.

To avoid distortions in the presentation of periodic financial statements, the percentage of completion method was developed which reports the revenues proportionally to the degree to which the projects are being completed.

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Global Accountant IAS 11

15 Apr

IAS 38 Intangible Assets

This article will look at the principles contained in IAS 38 ‘Intangible Assets’ and take a look at the different sorts of intangible assets that can be recognised on the statement of financial position as well as those which are prohibited.

Many organisations will have intangible assets on their statement of financial position. Intangible assets can comprise assets such as:

  • Licences and quotas
  • Patents and copyrights
  • Computer software.
  • Trademarks
  • Franchises
  • Marketing rights.

To be eligible for (potential) recognition on the statement of financial position, the intangible asset must be identifiable. The term ‘identifiable’ essentially means that the asset has the capability of being separated from the rest of the organisation; in addition, an intangible asset can also meet the recognition criteria when it arises from legal rights.

To quickly recap, the Conceptual Framework defines an asset as: ‘a resource controlled by the entity as a result of past events from which future economic benefits are expected to flow’.

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Global Accountant IAS 38