Government grants

Example accounting policies

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Example accounting policies

Get the requirements for properly disclosing the accounting policies to provide the users of your financial statements with useful financial data, in the common language prescribed in the world’s most widely used standards for financial reporting, the IFRS Standards. First there is a section providing guidance on what the requirements are, followed by a comprehensive example, easy to tailor to the specific needs of your company.Example accounting policies

Example accounting policies guidance

Whether to disclose an accounting policy

1. In deciding whether a particular accounting policy should be disclosed, management considers whether disclosure would assist users in understanding how transactions, other events and conditions are reflected in the reported financial performance and financial position. Disclosure of particular accounting policies is especially useful to users where those policies are selected from alternatives allowed in IFRS. [IAS 1.119]

2. Some IFRSs specifically require disclosure of particular accounting policies, including choices made by management between different policies they allow. For example, IAS 16 Property, Plant and Equipment requires disclosure of the measurement bases used for classes of property, plant and equipment and IFRS 3 Business Combinations requires disclosure of the measurement basis used for non-controlling interest acquired during the period.

3. In this guidance, policies are disclosed that are specific to the entity and relevant for an understanding of individual line items in the financial statements, together with the notes for those line items. Other, more general policies are disclosed in the note 25 in the example below. Where permitted by local requirements, entities could consider moving these non-entity-specific policies into an Appendix.

Change in accounting policy – new and revised accounting standards

4. Where an entity has changed any of its accounting policies, either as a result of a new or revised accounting standard or voluntarily, it must explain the change in its notes. Additional disclosures are required where a policy is changed retrospectively, see note 26 for further information. [IAS 8.28]

5. New or revised accounting standards and interpretations only need to be disclosed if they resulted in a change in accounting policy which had an impact in the current year or could impact on future periods. There is no need to disclose pronouncements that did not have any impact on the entity’s accounting policies and amounts recognised in the financial statements. [IAS 8.28]

6. For the purpose of this edition, it is assumed that RePort Co. PLC did not have to make any changes to its accounting policies, as it is not affected by the interest rate benchmark reforms, and the other amendments summarised in Appendix D are only clarifications that did not require any changes. However, this assumption will not necessarily apply to all entities. Where there has been a change in policy, this will need to be explained, see note 26 for further information.

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Better Communication in Financial Reporting

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Better Communication in Financial Reporting

Better Communication in Financial Reporting is an IFRS.org initiative to focus financial reporting on users. There is a general view that financial reports have become too complex and difficult to read and that financial reporting tends to focus more on compliance than communication. See also narrative reporting as a discussion on alternative ways of reporting.

At the same time, users’ tolerance for sifting through information to find what they need continues to decline.

This has implications for the reputation of companies who fail to keep pace. A global study confirmed this trend, with the majority of analysts stating that the quality of reporting directly influenced their opinion of the quality of management.

To demonstrate what companies could do to make their financial report more relevant, there are several suggestions to ‘streamline’ the financial statements to reflect some of the best practices that have been emerging globally over the past few years. In particular:

  • Information is organized to clearly tell the story of financial performance and make critical information more prominent and easier to find.
  • Additional information is included where it is important for an understanding of the performance of the company. For example, we have included a summary of significant transactions and events as the first note to the financial statements even though this is not a required disclosure.

Improving disclosure effectiveness

Terms such as ’disclosure overload’ and ‘cutting the clutter’, and more precisely ‘disclosure effectiveness’, describe a problem in financial reporting that has become a priority issue for the International Accounting Standards Board (IASB or Board), local standard setters, and regulatory bodies. The growth and complexity of financial statement disclosure is also drawing significant attention from financial statement preparers, and more importantly, the users of financial statements.

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IAS 16 Generation assets for Power and Utilities

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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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IFRS vs US GAAP Investment property – Broken in 10 great excellent reads

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IFRS vs US GAAP Investment property

The following discussion captures a number of the more significant GAAP differences under both the impairment standards. It is important to note that the discussion is not inclusive of all GAAP differences in this area.

The significant differences and similarities between U.S. GAAP and IFRS related to accounting for investment property are summarized in the following tables.

Standards Reference

US GAAP1

IFRS2

360 Property, Plant and equipment

IAS 40 Investment property

Introduction

The guidance under US GAAP and IFRS as it relates to investment property contains some significant differences with potentially far-reaching implications.

Links to detailed observations by subject

Definition and classification Initial measurement Subsequent measurement
Fair value model Cost model Subsequent expenditure
Timing of transfers Measurement of transfers Redevelopment
Disposals

Overview

US GAAP

IFRS

Unlike IFRS Standards, there is no specific definition of ‘investment property’; such property is accounted for as property, plant and equipment unless it meets the criteria to be classified as held-for-sale.

‘Investment property’ is property (land or building) held by the owner or lessee to earn rentals or for capital appreciation, or both.

Unlike IFRS Standards, there is no guidance on how to classify dual-use property. Instead, the entire property is accounted for as property, plant and equipment.

A portion of a dual-use property is classified as investment property only if the portion could be sold or leased out under a finance lease. Otherwise, the entire property is classified as investment property only if the portion of the property held for own use is insignificant.

Unlike IFRS Standards, ancillary services provided by a lessor do not affect the treatment of a property as property, plant and equipment.

If a lessor provides ancillary services, and such services are a relatively insignificant component of the arrangement as a whole, then the property is classified as investment property.

Like IFRS Standards, investment property is initially measured at cost as property, plant and equipment.

Investment property is initially measured at cost.

Unlike IFRS Standards, subsequent to initial recognition all investment property is measured using the cost model as property, plant and equipment.

Subsequent to initial recognition, all investment property is measured under either the fair value model (subject to limited exceptions) or the cost model.

If the fair value model is chosen, then changes in fair value are recognised in profit or loss.

Unlike IFRS Standards, there is no requirement to disclose the fair value of investment property.

Disclosure of the fair value of all investment property is required, regardless of the measurement model used.

Similar to IFRS Standards, subsequent expenditure is generally capitalised if it is probable that it will give rise to future economic benefits.

Subsequent expenditure is capitalised only if it is probable that it will give rise to future economic benefits.

Unlike IFRS Standards, investment property is accounted for as property, plant and equipment, and there are no transfers to or from an ‘investment property’ category.

Transfers to or from investment property can be made only when there has been a change in the use of the property.

IFRS vs US GAAP Investment property IFRS vs US GAAP Investment property IFRS vs US GAAP Investment property

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Property plant and equipment

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Property plant and equipment are tangible items that are held for use in many different ways and are expected to be used during more than one period.

IAS 41 Agricultural activity

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IAS 41 Definition of agricultural activity –  The management by an entity of the biological transformation and harvest of biological assets

Notes to the financial statements

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Notes to the financial statements that contain information in addition to the statement of financial position, of financial performance, of changes in equity

16 Best Questions to Ask about the Statement of Performance

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Questions to Ask about the Statement of Performance The Statement of Performance (consisting of the Statement of Income ifrs and the Statement of Other Comprehensive Income ifrs) has to be questioned, first Revenue then Expenditures. Questions to Ask about the Statement of Performance The questions that apply to revenues raised to support operations tend to be identical for the many potential sources. They are: Who provides each category of revenue to the organization and why? Are there restrictions on how these revenues are used? What are the costs associated with raising this kind of revenue? Is the effort of raising these funds worthwhile? Are there opportunities to increase revenues from this source? In particular, what are our fundraising expenditures as … Read more

Purchase price of PPE

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Purchase price of PPE – Here is one complete case of the purchase price and other cost that may be capitalised when acquiring a non-current asset in the day-to-day business. THE CASE Purchase price of property Entity K purchased a plant for a gross price of CU 200 million. The seller granted a 0.5% rebate. The gross price includes excise duty CU 18 million for which the buyer entity will get a tax refund and non-refundable VAT of CU 10 million. The company has also incurred CU 15 million for transportation costs, handling charges and insurance, CU 5 million for installation and CU 3 million for testing and technical engineering fees. It has earned CU 0.2 million from selling goods … Read more

Government grants and assistance

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The receipt of government grants and assistance by an entity may be significant for the preparation of the financial statements for two reasons. Firstly, if resources have been transferred, an appropriate method of accounting for the transfer must be found. Secondly, it is desirable to give an indication of the extent to which the entity has benefited from such assistance during the reporting period. This facilitates comparison of an entity’s financial statements with those of prior periods and with those of other entities. Scope/Objective IAS 20 is applied in accounting for, and in the disclosure of, government grants and in the disclosure of other forms of government assistance. Government grants are sometimes called by other names such as subsidies, subventions … Read more