IAS 16 Generation assets for Power and Utilities

Generation assets for Power and Utilities

– are often large and complex installations. They are expensive to construct, tend to be exposed to harsh operating conditions and require periodic replacement or repair. This environment leads to specific accounting issues.

1 Fixed assets and components

IFRS has a specific requirement for ‘component’ depreciation, as described in IAS 16 Property, Plant and Equipment. Each significant part of an item of property, plant and equipment is depreciated separately. Significant parts of an asset that have similar useful lives and patterns of consumption can be grouped together. This requirement can create complications for utility entities, because many assets include components with a shorter useful life than the asset as a whole.

Identifying components of an asset

Generation assets might comprise a significant number of components, many of which will have differing useful lives. The significant components of these types of assets must be separately identified. This can be a complex process, particularly on transition to IFRS, because the detailed record-keeping needed for componentisation might not have been required in order to comply with national generally accepted accounting principles (GAAP). This can particularly be an issue for older power plants. However, some regulators require detailed asset records, which can be useful for IFRS component identification purposes.

An entity might look to its operating data if the necessary information for components is not readily identified by the accounting records. Some components can be identified by considering the routine shutdown or overhaul schedules for power stations and the associated replacement and maintenance routines. Consideration should also be given to those components that are prone to technological obsolescence, corrosion or wear and tear that is more severe than that of the other portions of the larger asset.

First-time IFRS adopters can benefit from an exemption under IFRS 1 First-time Adoption of International Financial Reporting Standards. This exemption allows entities to use a value that is not depreciated cost in accordance with IAS 16, and IAS 23 Borrowing Costs as deemed cost on transition to IFRS. It is not necessary to apply the exemption to all assets or to a group of assets.

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Best example Amortised cost and EIR calculations

Amortised cost at subsequent periods: a numerical example Amortised cost and EIR calculations

Example Amortised cost and EIR calculations

The following example illustrates the principles underlying the calculation of the amortised cost and the effective interest rate (EIR) for a fixed-rate financial asset:

  • On 1 January 2019, entity A purchases a non-amortising, non-callable debt instrument with five years remaining to maturity for its fair value of €995 and incurs transaction costs of €5. The instrument has a nominal value of €1,250 and carries a contractual fixed interest of 4.7% payable annually at the end of each year (4.7% * €1,250 = €59). Its redemption amount is equal to its nominal value plus accrued interest.
  • The instrument qualifies for a measurement at amortised cost. As explained in the preceding section, its initial carrying amount is the sum of the initial fair value plus transaction costs, i.e. €1,000.
  • The Effective Interest Rate (EIR) is the rate that exactly discounts the expected cash flows of this financial asset, presented in the table below, to its initial gross carrying amount (i.e. €995 + €5 = €1,000 in this example). In practice, entities will need to establish a timetable of all the expected cash flows of the financial instrument (see the table below) and then use for example an Excel formula to determine this rate. The table below summarises the timing of the expected cash flows of the instrument:

Figure 1

Figure 1

In the present case, using an Excel formula, the EIR amounts to 10%. The following table shows that the sum of the discounted cash flows amounts to zero:

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Value a business in emerging markets

Value a business in emerging markets, is giving rise to some special accounting perks, here are the explanations…

The emerging economies in Asia and South America continue experience strong growth over the coming decades. Over the long term, many analysts see China and India moving into the ranks of the world’s largest economies. This sometimes spectacular economic development will produce many situations requiring sound analysis and valuation. In the rising number of privatizations, joint ventures, Read more

IFRS 17 Fair value approach Insurances

Elect to use the fair value approach if the full retrospective approach is impracticable, and it should if the modified retrospective approach is impracticable.

Faithful representation

Faithful representation - Financial information that faithfully represents the phenomena that it purports to represent, i.e. more than its sheer legal form.