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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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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IFRS 11 Joint Arrangements quick overview

IFRS 11 Joint Arrangements quick overview provides the fastest overview on financial reporting by entities that have an interest in arrangements that are bound by a contractual arrangement providing two or more parties joint control.

OBJECTIVE

To establish principles for financial reporting by entities that have an interest in arrangements that are controlled jointly (i.e. joint arrangements)

IFRS 11 Joint Arrangements quick overview

IFRS 11 Joint Arrangements quick overview

IFRS 11 Joint Arrangements quick overview

SCOPE

IFRS 11 applies to all entities that are a party to a joint arrangement

DEFINITIONS

Joint arrangement

Joint control

Joint operationJoint operator

Joint ventureJoint venturer

Party to a joint arrangement

Separate vehicle

JOINT ARRANGEMENT

A joint arrangement is an arrangement

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IAS 24 Related parties by definition

IAS 24 Related parties by definition starts with two classes of related parties:Third party services

  • person(s) IAS 24 Related parties by definition
  • entity(ies) IAS 24 Related parties by definition

in relation to the central entity in this standards the REPORTING ENTITY. IAS 24 Related parties by definition

The reporting entity in IAS 24 is referred to (so it strictly is spoken not an IFRS Definition) as the entity that is preparing its financial statements (consolidated and/or unconsolidated).

PERSONS

For persons it includes close members of that person’s family – where family is sometimes broader than a domestic (legal) definition of a married couple, as follows:

Starting point is a person and its relation with the reporting entity, the (related party) person has … Read more

Completely understand 1 consolidated and 2 separate financial statements

Completely understand 1 consolidated and 2 separate financial statements is a summary of the requirements of IFRS 10 Consolidated financial statements, IFRS 11 Joint Arrangements, IFRS 12 Disclosure of Interests in Other Entities and IAS 28 Investments in Associates and Joint ventures and IAS 27 Separate financial statements.

Major topics discussed are:

  • The single control model in IFRS 10 that applies to all entities (including ‘structured entities’ or ‘variable interest entities’ as they are referred to in US GAAP). The changes introduced by IFRS 10 require continuous management to exercise significant judgement to determine which entities are controlled, and therefore are required to be consolidated by a parent. IFRS 10 may periodically change which entities are within a group
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Investments in Associates 1st and best read

Investments in Associates 1st and best read – Just as a starter, two definitions!

Associate: An entity, including an unincorporated entity such as a partnership, over which an investor has significant influence and which is neither a subsidiary nor an interest in a joint venture. Investments in Associates 1st and best read

Significant influence: The power to participate in the financial and operating policy decisions of the investee but it is not control or joint control over those policies. Investments in Associates 1st and best read

What are investments in associates?

A holding of 20% or more of the voting power (directly or through subsidiaries) will indicate significant influence unless it can be clearly demonstrated otherwise. If the … Read more

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

What are related parties?

What are related parties – Related parties are relationships in which one party has the ability to control or significantly influence the economic and operating decisions of another. Transactions with related parties are a common feature of business. Typically related party relationships include the following:

  • Enterprises controlled or controlling one another, such as subsidiaries and joint venturesWhat are related parties
  • Individuals having an interest in the enterprise that gives them significant influence over the enterprise, such as majority owners
  • Key management personnel responsible for planning, directing and controlling the activities of the reporting enterprise, including close members of families of these individuals

Parties are considered related when one of the parties has control over the other or is able to exert considerable influenceRead more

Joint Arrangements

IFRS 11 describes the accounting for joint arrangements. The investor will be required to either apply the equity method of accounting or recognize, on a line-by-line basis, its share of the underlying assets, liabilities, revenues and expenses. The accounting treatment required will depend on the substance of the arrangement and the nature of the investor’s interest in it. The option to apply proportionate consolidation has been removed. IFRS 11 supersedes the requirements relating to joint ventures in IAS 31 and SIC 13.

A joint arrangement is an arrangement of which two or more parties have joint control and the following characteristics are present:

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Dilution

Dilution is a reduction in earnings per share or an increase in loss per share resulting from the assumption that convertible instruments are converted etcetera