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

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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IFRS 5 Non-current assets Held for Sale and Discontinued Operations

 

IFRS 5 Non-current assets Held for Sale and Discontinued Operations

at a glance – here it is the ultimate summary:

IFRS 5

Source: https://www.bdo.global/en-gb/services/audit-assurance/ifrs/ifrs-at-a-glance

Definitions
Cash-generating unit – The smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. Discontinued operation – A component of an entity that either has been disposed of or is classified as held for sale and either:
  • Represents a separate major line of business or geographical area
  • Is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations
  • Is a subsidiary acquired exclusively with a view to resale.
SCOPE
  • Applies to all
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IAS 36 Other impairment issues

IAS 36 Other impairment issues – When looking at the step-by-step IAS 36 impairment approach it comes down to the following broadly organised steps: IAS 36 How Impairment test

  • What?? – Determining the scope and structure of the impairment review, explained here,
  • If and when? – Determining if and when a quantitative impairment test is necessary, explained here,
  • IAS 36 How Impairment test or understanding the mechanics of the impairment test and how to recognise or reverse any impairment loss, if necessary, which is explained here

IAS 36 Other impairment issues discusses other common application issues encountered when applying IAS 36, including those related to:

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Leveraged buyout IFRS 3 best reporting

Leveraged buyout IFRS 3 best reporting – In corporate finance, a leveraged buyout (LBO) is a transaction where a company is acquired using debt as the main source of consideration. These transactions typically occur when a private equity (PE) firm borrows as much as they can from a variety of lenders (up to 70 or 80 percent of the purchase price) and funds the balance with their own equity. Leveraged buyout IFRS 3 best reporting

1 The process and business reason

The use of leverage (debt) enhances expected returns to the private equity firm. By putting in as little of their own money as possible, PE firms can achieve a large return on equity (ROE) and internal rate of return … Read more

5 Comprehensive cash flow accounting events

Here are 5 Comprehensive cash flow accounting events with special presentation and/or disclosure requirements under IAS 7. They are:

1 IFRS 9 Classification of cash flows arising from a derivative used in an economic hedge

Consequential amendments were not made to IAS 7 as a result of the introduction of, and subsequent changes to, IFRS 9 Financial Instruments.

A related issue which often arises in practice is the classification of cash flows that arise from a derivative that, although used economically to hedge exposures, is not designated in an IFRS 9 qualifying hedge relationship. The same issue arises under IAS 39, for those insurers that meet the criteria for, and have chosen to apply, the temporary exemption from the application … Read more

IFRS 3 Recognising what you acquired in a business combination

IFRS 3 Recognising what you acquired in a business combination or recognizing and measuring the identifiable assets acquired, liabilities assumed, and any non-controlling interest in the acquiree.

IFRS 3 provides the following recognition principle for assets acquired, liabilities assumed, and any non controlling interest in the acquiree:

Excerpt from IFRS 3 10

As of the acquisition date, the acquirer shall recognize, separately from goodwill, the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree. Recognition of identifiable assets acquired and liabilities assumed is subject to the conditions specified in IFRS 3 11 and IFRS 3 12.

An acquirer should recognize the identifiable assets acquired and the liabilities assumed on the acquisition date if they meet … Read more

Non-current assets held for sale

Non-current assets held for sale

Held for sale or held for distribution

It is important for non-current assets held for sale to establish the potential buyer or distribution of ownership:

  1. Non-current assets and some groups of assets and liabilities (‘disposal groups’) are classified as held-for-sale if their carrying amounts will be recovered principally through sale to third parties and specific criteria related to their sale are met, or
  2. Non-current asset and some groups of assets and liabilities (‘disposal groups’) are classified as held-for‑distribution if their carrying amounts will be used to be distributed (as non-cash dividend) to shareholders.

Normally it should not be to difficult to establish what the nature of the transaction is, to third parties or shareholders.… Read more

Investments in Joint Ventures Overview

Investments in Joint Ventures Overview that is what this is……

An entity with joint control of an investee shall account for its investment in a joint venture using the equity method except when that investment qualifies for exemption in IAS 28. Investments in Joint Ventures Overview

The exemptions include:Investments in Joint Ventures Overview

  • if the entity is a parent that is exempt from preparing consolidated financial statements by the scope exception in paragraphs 4(a) of IFRS 10 Consolidated Financial Statements; or Investments in Joint Ventures Overview
  • all of the following apply: Investments in Joint Ventures Overview
    1. the entity is a wholly-owned subsidiary, or is a partially-owned subsidiary of another entity and its other owners, including those not otherwise entitled
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Control Joint control Significant influence

This is a discussion on IFRS 10 – IFRS 12 Control Joint control Significant influence and the accounting applied. It is added with some other logical IFRS topics: and the other investments (no control, no joint control and no significant influence), which is depicted in the following schedule:

Control Joint control Significant influence

It is building up from … Read more