Classification of Assets

Source: IFRS
Note: This is just a copy from the source. Not my original work.

1. Classification of assets Joint World Bank and IFRS Foundation ‘train the trainers’ workshop hosted by the ECCB, 30 April to 4 May 2012

2. Concepts— classification of asset © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

3. 3 Classification concepts Objective of financial reporting Financial statements portray financial effects of transactions and events by: grouping into broad classes (the elements, eg asset) sub-classify elements ( eg assets sub-classified by their nature or function in the business) IAS 1 application of IFRSs with additional disclosures when necessary results in a fair presentation (faithful representation of transactions, events and conditions) don’t offset assets & liabilities or income & expenses © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

4. 4 Classification concepts—assets and claims Information about the nature and amounts of a reporting entity’s economic resources and claims can help users to identify the reporting entity’s financial strengths and weaknesses. That information can help users to: assess the reporting entity’s liquidity and solvency its needs for additional financing and how successful it is likely to be in obtaining that financing. (CF. OB13) © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

5. 5 Classification concepts—assets Different types of economic resources affect a user’s assessment of the reporting entity's prospects for future cash flows differently. Some future cash flows result directly from existing economic resources ( eg accounts receivable and investment property). Other cash flows result from using several resources in combination to produce and market goods or services to customers ( eg PPE and intangible assets). Although those cash flows cannot be identified with individual economic resources (or claims), users of financial reports need to know the nature and amount of the resources available for use in a reporting entity’s operations. ( CF.OB14) © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

6. Concept—asset An asset is defined as: a resource controlled by the entity as a result of a past event from which future economic benefits are expected to flow to the entity. 6 © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

7. Asset recognition concepts An asset is recognised when: it is probable that any future economic benefit associated with the item will flow to the entity; and the item has a cost or value that can be measured with reliability. 7 For some items that satisfy the definition of an asset, significant judgement is required to evaluate whether such items satisfy the recognition criteria. Individual IFRSs provide principles and application guidance . © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

8. Unit of account The unit of account is the level at which an asset is aggregated or disaggregated for recognition purposes. Most IFRS do not prescribe the unit of account therefore judgement is required in applying recognition criteria to an entity’s specific circumstances. For example: individually insignificant items, such as moulds, tools and dies may be aggregated when applying the recognition criteria in IAS 16. cows would usually be recognised individually whereas bees would usually be recognised as a swarm when applying IAS 41. 8 © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

9. Classifying assets © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

10. 10 Assets overview 10 Assets Intangible Financial Inv Property PP&E Inventory Etc Defined Benefit Deferred Tax Cost CM or RM CM or RM Cost Nil Nil Lower of C or NRV some FVM Cost Cost CM or FVM Fair value AmC or FVM Tax rates & undiscounted Tax rates & undiscounted FV plan assets less PUC plan obligation FV plan assets less PUC plan obligation Various Various Classification, recognition and measurement © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

11. Classification of assets Different assets exhibit different characteristics (nature) and can be held for a variety of uses (use) in order to generate future economic benefits Nature and use determine the classification of assets IFRSs defines a number of assets For some assets significant judgement is required to determine their classification 11 © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

12. 12 ASSET TYPE USE IN BUSINESS ? FORM OF FUTURE ECONOMIC BENEFITS Inventory (IAS 2) Sale or used in production of items for sale or in services Usually cash or other asset received in exchange PP&E (IAS 16) Used in production or supply of goods or services, rental or administration (more than one period) Usually cash through sale of ‘final’ product or service Intangibles (IAS 38) Used in production or supply of goods or services Usually cash through sale of ‘final’ product or service Investment property IAS 40) Earn rentals or capital appreciation, or both Usually c ash inflows independent from other assets Financial assets (IFRS 9) To generate cash returns or as a hedging instrument Cash or other financial assets received in exchange Asset type © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

13. Definition Inventories are assets: held for sale in the ordinary course of business; in the process of production for sale; or materials or supplies to be used in the production for sale. 13 Definition of inventory (IAS 2) © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

14. Definition Property, plant and equipment (PPE) are tangible items that are held for use in the production or supply of goods or services, for rental to others, or for administration purposes; and are expected to be used during more than one period. 14 Definition of property , plant and equipment (IAS 16) © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

15. Intangible assets The use within the business of intangible assets is similar to that of property, plant and equipment. An intangible asset is an identifiable non-monetary asset without physical substance. Such an asset is identifiable when it is separable, or when it arises from contractual or other legal rights. 15 Definition of intangible assets ( IAS 38) © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

16. It is sometimes difficult to assess whether an internally generated intangible asset qualifies for recognition because of problems in: identifying whether and when there is an identifiable asset that will generate expected future economic benefits; and determining the cost of the asset reliably. In some cases, the cost of generating an intangible asset internally cannot be distinguished from the cost of maintaining or enhancing the entity's internally generated goodwill or of running day-to-day operations. Therefore, special requirements in addition to the general requirements for recognition of an internally generated intangible asset apply. 16 Recognition of internally generated intangible assets ( IAS 38) © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

17. Expenditure on particular internally generated intangible assets must be recognised as an expense when incurred ( eg research activities—the original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding. 17 Recognition of research costs ( IAS 38) © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

18. An intangible asset arising from the development phase of an internal project must be recognised if, and only if, an entity can demonstrate all of the following: the technical feasibility of completing the intangible asset so that it will be available for use or sale. its intention to complete the intangible asset and use or sell it. its ability to use or sell the intangible asset. how the intangible asset will generate probable future economic benefits. Among other things, the entity can demonstrate the existence of a market for the output of the intangible asset or the intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset. the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset. its ability to measure reliably the expenditure attributable to the intangible asset during its development. 18 Recognition of development cost ( IAS 38) © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

19. Definition Investment property is land or a building (including part of a building) or both, held to earn rentals or for capital appreciation or both. It is neither owner-occupied (see IAS 16 Property, Plant and Equipment ) nor held for sale in the ordinary course of business (see IAS 2 Inventories ). 19 Definition of investment property (IAS 40) © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

20. Sometimes it is difficult to identify investment property. In such cases an entity develops criteria so that it can exercise that judgement consistently eg , owner of a hotel transfers some responsibilities to third parties under a management contract (PPE or investment property?) 20 Judgements and estimates ( IAS 40 ) © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

21. Introduction IFRS 9 prescribes the classification and measurement of financial assets and completes the first phase of the project to replace IAS 39 Financial Instruments: Recognition and Measurement . 21 Financial instruments (IFRS 9) © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

22. 22 Fair Value (No impairment) Amortised cost (one impairment method) Contractual cash flow characteristics Business model test FVO for accounting mismatch (option) All other instruments: Equities Derivatives Some hybrid contracts … Equities: OCI presentation available (alternative) Reclassification required when business model changes Classification model: financial assets (IFRS 9) © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

23. A hybrid contract (a non-derivative host contract with an embedded derivative) with a host that is a financial asset is not separated. Such contracts are classified in accordance with the classification criteria in their entirety. Other hybrid contracts ( eg host contract is a financial liability or a non-financial item) are separated if particular conditions apply unless the entity designates the entire contract as at fair value through profit or loss. 23 Embedded derivatives (IFRS 9) © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

24. Classification of financial assets into IFRS 9 categories drives the subsequent measurement and requires careful consideration of all available evidence. Classification is made primarily based on an entity’s business model Embedded derivatives may reside in contracts other than financial instruments ( ie leases, sale or purchase contracts). Judgement must be applied to determine whether they are present in contracts. 24 Judgements and estimates (IFRS 9) © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

25. Determining whether the designation at initial recognition at fair value through profit or loss is appropriate. 25 Judgements and estimates ( IFRS 9 ) continued © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

26. A non-current asset is classified as ‘held for sale’ if its carrying amount will be recovered principally through a sale transaction, rather than through continuing use (paragraph 6). To be classified as a non-current asset held for sale: The asset must be available for immediate sale in its present condition (subject only to terms that are usual and customary for sales of such assets). The sale must be highly probable (appropriate management commitment, actively seeking a buyer, reasonable price, 12 month limit). 26 Non-current Assets Held for Sale (IFRS 5) © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

27. IAS 41 specifies the accounting for: biological assets (living plant or animal) in agricultural activity— whose biological transformation (growth, degeneration, production and procreation) and harvest is managed by an entity for sale or for conversion into agricultural produce or into additional biological assets; and agricultural produce up to the point of harvest. It does not address the processing of agricultural produce after harvest ( eg processing grapes into wine, or wool into yarn). 27 Introduction (IAS 41) © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

28. Biological assets that are attached to land ( eg trees in a plantation forest) are classified separately from the land the trees are biological assets in agricultural activity (IAS 41) if owner-occupied, the land is property accounted for in accordance with IAS 16 28 Classification (IAS 41) © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

29. 29 IAS 41 Agriculture © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

30. It can be difficult to determine whether particular biological assets are engaged in agricultural activity and therefore in the scope of IAS 41— eg the animals of some zoos. 30 Judgements and estimates (IAS 41) © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

31. Assets—classification examples Ex 1: A trades in property ( ie it buys property to sell it at a profit near-term) Ex 2: B trades in transferable taxi licences Ex 3: C produces wine from grapes harvested from its vineyards in a 3-year production cycle Ex 4: D holds lubricants that are consumed by its machine in producing goods 31 © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

32. Assets—classification examples continued Ex 5: E maintains its plant using: a bespoke long-life cleaning machine; & a set of low-value common tools acquired from a local hardware store Ex 6: F operate a hotel from a building it owns it rents out hotel rooms for short-stays guest services included in the room rate = breakfast and television services charged for separately = other meals, room bar, gymnasium facilities & guided tours 32 © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

33. Assets—classification examples continued Ex 7: G buys a building to earn rentals under an operating lease from its subsidiary. The sub sells its products from the building Ex 8: H owns a herd of cattle—breeding stock of its agricultural activities a tractor used to transport feed to the herd 33 © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

34. Assets—classification examples continued Ex 9: I owns digital films and audio recordings which it licenses to its customers Ex 10: In accounting for the acquisition of the net assets and operations of a competitor J recognised future economic benefits arising from assets that are not individually identified as an asset (goodwill) 34 © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

35. Examples of classification judgements when unclear what purpose of acquiring property is (inventories, IP or PPE?) when property owner provide ancillary services to the occupants of a property (IP or PPE?) mixed use property (IP or PPE?) when is undue cost or effort necessary to measure the fair value of an IP on an ongoing basis (IP or PPE?) 35 © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

36. 36 Questions or comments? Expressions of individual views by members of the IASB and its staff are encouraged. The views expressed in this presentation are those of the presenter. Official positions of the IASB on accounting matters are determined only after extensive due process and deliberation. © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

37. © 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org 37 The requirements are set out in International Financial Reporting Standards (IFRSs) , as issued by the IASB at 1 January 2012 with an effective date after 1 January 2012 but not the IFRSs they will replace. The IFRS Foundation, the authors, the presenters and the publishers do not accept responsibility for loss caused to any person who acts or refrains from acting in reliance on the material in this PowerPoint presentation, whether such loss is caused by negligence or otherwise. 37 © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org