Model Recognition
IAS 16 PPE Revaluation OCI
Cost o Initial recognition at cost.
Investment o Subsequent cost OR fair value.
IAS 40 PL
property Fair Value o Method chosen applied to all properties.
o If choose to hold at cost, disclose the FV in the notes.
o Measured at the fair value of the goods or services received, where
the fair value can be estimated reliably.
Equity-settled share-based
o Measured at the fair value of the equity instruments, where the fair
payment
value of the goods or services acquired cannot be measured
reliably.
Cash-settled share-based o Measured the goods or services acquired and the liability incurred
payment at the fair value of the liability.
o Recognise a right-of-use asset and a lease liability at the commencement date of the lease.
o Lease liability is measured at the PV of the lease payments not paid at the commencement date.
Lessee
o PV is calculated using interest rate implicit in the lease, if cannot determined, then incremental
borrowing rate.
o Classify each lease as operating or finance lease.
Lessor o Finance lease – recognise in BS as receivable for the amount of the net investment in the lease
o Operating lease – recognise in PL as income
Criticised
Fair Value o lack of relevance to decision making — fair value is not relevant in relation to
assets that the entity does not intend to sell, such as financial instruments that the
entity intends to hold to maturity
o problems with reliability — fair value is not very reliable in relation to assets that
are not traded in an active market.
Historical Cost o Limited relevance to decision making
o Undermines the faithful representation of financial reports
o Undermines the comparability of financial reports
o Problems with reliability
,Example 1.6: Accounting for Leases by Lessee Pg.40
Fair Value: $68,000 Unguaranteed residual value:
Annual lease payments: S19,800
$4,000
Estimated Residual value: $10,000 Lease term: 4 years Residual value guarantee: $6,000
Economic life: 6 years Lease is cancellable – but penalty is
Interest rate: 9%
24 months of lease payments
Lease agreement costs: $2,647 Assume leasee doesn not cancel the
No option to purchase at end
lease
Executory costs (included in lease
payment) $1,800 per annum
Solutions: 30 June 20X4
Year 1 Year 2 Year 3 Year 4 Total
18,000 18,000 18,000 6,000 60,000 Right-of-use vehicle 67,814
0.917431 0.84168 0.772183 0.708425 Lease liability 49,814
Prepaid executory costs 1,800
16,514 15,150 13,899 4,251 49,812
Cash 19,800
=1/(1.09) =1/1.09^2 =1/1.09^3 =1/1.9^4
Initial recording of lease asset/liability
“Lease Liability”- Initial Measurement is the PV of future lease payments (para.26)
Future lease payments include:
a) (i) Fixed payments 45,563
(ii) (less any lease incentives receivable) ( )
b) variable lease payments
c) Amounts expected to be payable under residual value guarantees 4,251
d) The exercise price of a purchase option if reasonably certain to exercise
e) Payments of penalties for terminating the lease
Total 49,814
“Right of use” asset – measured at cost
a) The amount of the lease liability 49,814
b) (i) Any lease payments made on or before the commencement date 18,000
(ii) (less any lease incentives received) ( )
c) Any initial direct costs incurred by the lessee
d) An estimate of costs to be incurred by the lessee in dismantling and
removing the underlying asset
Total 67,814
Lease Payments Schedule for B Ltd (Lessee)
Lease Interest Reduction Balance of 30 June 20X5
payments expense in liability liability
Lease liability 13,517
30.06.20X4 49,814 Interest expense 4,483
30.06.20X5 18,000 4,483 13,517 36,297 Prepaid executory costs 1,800
30.06.20X6 18,000 3,267 14,733 21,564 Cash 19,800
30.06.20X7 18,000 1,941 16,059 5,505 Second lease payment
30.06.20X8 6,000 495 5,505 Depreciation expense 15,453
60,000 10,187 49,814 Accumulated deprecition 15,453
(Depreciation charge for the period (67,813 - 6,000)/4)
,The following information is provided in relation to a lease agreement between Lessor Ltd (Lessor) and Lessee Ltd
(Lessee):
Initial lease payment of $10,000 paid upon commencement of the lease
Present value of remaining annual lease payments totals $22,180
Present value of guaranteed residual value is $4,250
Present value of unguaranteed residual value is $1,742
What is the amount of the lease liability recognised by Lessee at the commencement of the lease in accordance
with IFRS 16 Leases?
Future lease payments include:
a) (i) Fixed payments 22,180
(ii) (less any lease incentives receivable) ( )
b) variable lease payments
c) Amounts expected to be payable under residual value guarantees 4,250
d) The exercise price of a purchase option if reasonably certain to exercise
e) Payments of penalties for terminating the lease
Total 26,430
,Cash Flow Statement
Interest Paid Income Tax Paid
Opening balance of interest payable Opening balance of current tax payable
+ Interest expense + Income tax payable
- Closing balance of interest payable - Closing balance of current tax payable
Bad Debts Written Off Cash Received from Customers
Opening balance of allowance for doubtful debts Opening balance of trade receivables
+ Doubtful debts expense + Sales revenue
- Closing balance of allowance for doubtful debts - Bad debts written off
- Closing balance of trade receivables
Inventories Purchased on Credit Cash Paid to Supplier
Closing balance of inventories Opening balance of trade payables
+ Cost of sales + Inventories purchased on credit
- Opening balance of inventories + Other goods and services purchases
- Closing balance of trade payables
Cash Paid to Employee
Opening balance of employee benefits liability
+ Employee benefits expense
- Closing balance of employee benefits liability
,Bay Limited’s Balance Sheet as at 30 June 2013 and 2014 were as follows:
2014 2013
ASSETS
Current Assets
Cash 86,000 124,000
Accounts Receivable 169,000 152,000
Inventory 227,000 248,000
482,000 524,000
Non-Current Assets
Land 50,000 125,000
Buildings 530,000 275,000
Accumulated Depreciation – buildings (200,000) (170,000)
Plant & Equipment 80,000 80,000
Accumulated Depreciation – plant & equipment (20,000) (10,000)
440,000 300,000
TOTAL ASSETS 922,000 824,000
LIABILITIES AND OWNERS’ EQUITY
Current Liabilities
Accounts Payable 134,000 121,000
Interest payable 500 1,500
Salaries payable 6,000 17,500
140,500 140,000
Non-Current Liabilities
Mortgage loan payable 132,500 90,000
TOTAL LIABILITIES 273,000 230,000
Shareholder’s Equity
Share capital 250,000 250,000
Retained Earnings 399,000 344,000
Total Equity 649,000 594,000
TOTAL LIABILITIES AND OWNERS’ EQUITY 922,000 824,000
,An extract from the company’s Income Statement for the year ended 30 June 2014 and general ledger revealed the
following information:
$ $
Net Sales 887,000
Cost of Goods sold 566,000
Gross Profit 321,000
Expenses:
Loss on Sale of land 12,500
Interest expense 10,000
Depreciation expense - buildings 30,000
Depreciation expense – P & E 10,000
Salaries and wages 196,000
Net Profit before tax 62,500
Income tax expense
Net Profit after tax 62,500
Additional Information:
All purchases and sales of inventories were made on credit.
During the year dividends were paid out of retained earnings.
A block of land, costing $75,000, was sold during the year.
No plant was purchased or sold during the year.
Required:
(a) Prepare a Statement of Cash Flows for Bay Ltd for year ended 30 June 2014 using the direct method.
$ $
Cash flows from operating activities:
Receipts from Customers 870,000
Payments to Suppliers and Employees (739,500)
Interest Paid (11,000)
Net cash from operating activities 119,500
Cash flows from investing activities:
Proceeds from sale of land 62,500
Payment for building (255,000)
Net cash used in investing activities (192,500)
Cash flows from financing activities:
Proceeds from long-term borrowings 42,500
Dividends Paid (7,500)
Net cash from financing activities 35,000
Net increase (decrease) in cash and cash equivalents (38,000)
Cash and cash equivalents at beginning of year 124,000
Cash and cash equivalents at end of year 86,000
,Cash Received From Customers
Opening Accounts Receivable 152,000
+ Sales 887,000
- Closing Accounts Receivable (169,000)
Cash Received from Customers $870,000
Cash Paid to Suppliers (Cash Payments for Inventory)
COGS 566,000
+ Ending Inventory 227,000
– Beginning Inventory 248,000
+ Beginning Accounts Payable 121,000
– Ending Accounts Payable 134,000
Payments to Suppliers 532,000
Salaries expense 196,000
+ Beginning Salaries Payable 17,500
- Ending Salaries Payable 6,000
Payment to Employees 207,500
Payments to suppliers 532,000
+ Payments to employees 207,500
Payments to Suppliers & Employees 739,500
Interest Paid
Interest expense 10,000
+ Beginning balance Interest Payable 1,500
- Ending balance Interest Payable (500)
Interest Paid 11,000
Purchase of property, plant and equipment
Cost of land sold 75,000 Ending Balance Buildings 530,000
- Loss on disposal of land (12,500) - Beginning Balance Buildings (275,000)
Cash Proceeds from disposal of land 62,500 Cash Paid 255,000
Mortgage loan payable
Ending Balance Mortgage loan payable 132,500
- Beginning Balance Mortgage loan payable (90,000)
Cash Received from borrowing (mortgage) 42,500
Dividends Paid
Profit for the period 62,500
+ Beginning Retained earnings 344,000
- Ending Retained earnings (399,000)
Dividends Paid 7,500
, (b) Prepare the note of reconciliation of net profit to net cash from operating activities.
Net Profit 62,500
Add Depreciation expense 40,000
Add Loss of sale of land 12,500
Less Increase in Accounts receivable (17,000)
Add Decrease in Inventory 21,000
Add Increase in Accounts payable 13,000
Less Decrease in Interest payable (1,000)
Less Decrease in Salary payable (11,500)
Net Cash provided by Operating Activities 119,500
IAS 16 PPE Revaluation OCI
Cost o Initial recognition at cost.
Investment o Subsequent cost OR fair value.
IAS 40 PL
property Fair Value o Method chosen applied to all properties.
o If choose to hold at cost, disclose the FV in the notes.
o Measured at the fair value of the goods or services received, where
the fair value can be estimated reliably.
Equity-settled share-based
o Measured at the fair value of the equity instruments, where the fair
payment
value of the goods or services acquired cannot be measured
reliably.
Cash-settled share-based o Measured the goods or services acquired and the liability incurred
payment at the fair value of the liability.
o Recognise a right-of-use asset and a lease liability at the commencement date of the lease.
o Lease liability is measured at the PV of the lease payments not paid at the commencement date.
Lessee
o PV is calculated using interest rate implicit in the lease, if cannot determined, then incremental
borrowing rate.
o Classify each lease as operating or finance lease.
Lessor o Finance lease – recognise in BS as receivable for the amount of the net investment in the lease
o Operating lease – recognise in PL as income
Criticised
Fair Value o lack of relevance to decision making — fair value is not relevant in relation to
assets that the entity does not intend to sell, such as financial instruments that the
entity intends to hold to maturity
o problems with reliability — fair value is not very reliable in relation to assets that
are not traded in an active market.
Historical Cost o Limited relevance to decision making
o Undermines the faithful representation of financial reports
o Undermines the comparability of financial reports
o Problems with reliability
,Example 1.6: Accounting for Leases by Lessee Pg.40
Fair Value: $68,000 Unguaranteed residual value:
Annual lease payments: S19,800
$4,000
Estimated Residual value: $10,000 Lease term: 4 years Residual value guarantee: $6,000
Economic life: 6 years Lease is cancellable – but penalty is
Interest rate: 9%
24 months of lease payments
Lease agreement costs: $2,647 Assume leasee doesn not cancel the
No option to purchase at end
lease
Executory costs (included in lease
payment) $1,800 per annum
Solutions: 30 June 20X4
Year 1 Year 2 Year 3 Year 4 Total
18,000 18,000 18,000 6,000 60,000 Right-of-use vehicle 67,814
0.917431 0.84168 0.772183 0.708425 Lease liability 49,814
Prepaid executory costs 1,800
16,514 15,150 13,899 4,251 49,812
Cash 19,800
=1/(1.09) =1/1.09^2 =1/1.09^3 =1/1.9^4
Initial recording of lease asset/liability
“Lease Liability”- Initial Measurement is the PV of future lease payments (para.26)
Future lease payments include:
a) (i) Fixed payments 45,563
(ii) (less any lease incentives receivable) ( )
b) variable lease payments
c) Amounts expected to be payable under residual value guarantees 4,251
d) The exercise price of a purchase option if reasonably certain to exercise
e) Payments of penalties for terminating the lease
Total 49,814
“Right of use” asset – measured at cost
a) The amount of the lease liability 49,814
b) (i) Any lease payments made on or before the commencement date 18,000
(ii) (less any lease incentives received) ( )
c) Any initial direct costs incurred by the lessee
d) An estimate of costs to be incurred by the lessee in dismantling and
removing the underlying asset
Total 67,814
Lease Payments Schedule for B Ltd (Lessee)
Lease Interest Reduction Balance of 30 June 20X5
payments expense in liability liability
Lease liability 13,517
30.06.20X4 49,814 Interest expense 4,483
30.06.20X5 18,000 4,483 13,517 36,297 Prepaid executory costs 1,800
30.06.20X6 18,000 3,267 14,733 21,564 Cash 19,800
30.06.20X7 18,000 1,941 16,059 5,505 Second lease payment
30.06.20X8 6,000 495 5,505 Depreciation expense 15,453
60,000 10,187 49,814 Accumulated deprecition 15,453
(Depreciation charge for the period (67,813 - 6,000)/4)
,The following information is provided in relation to a lease agreement between Lessor Ltd (Lessor) and Lessee Ltd
(Lessee):
Initial lease payment of $10,000 paid upon commencement of the lease
Present value of remaining annual lease payments totals $22,180
Present value of guaranteed residual value is $4,250
Present value of unguaranteed residual value is $1,742
What is the amount of the lease liability recognised by Lessee at the commencement of the lease in accordance
with IFRS 16 Leases?
Future lease payments include:
a) (i) Fixed payments 22,180
(ii) (less any lease incentives receivable) ( )
b) variable lease payments
c) Amounts expected to be payable under residual value guarantees 4,250
d) The exercise price of a purchase option if reasonably certain to exercise
e) Payments of penalties for terminating the lease
Total 26,430
,Cash Flow Statement
Interest Paid Income Tax Paid
Opening balance of interest payable Opening balance of current tax payable
+ Interest expense + Income tax payable
- Closing balance of interest payable - Closing balance of current tax payable
Bad Debts Written Off Cash Received from Customers
Opening balance of allowance for doubtful debts Opening balance of trade receivables
+ Doubtful debts expense + Sales revenue
- Closing balance of allowance for doubtful debts - Bad debts written off
- Closing balance of trade receivables
Inventories Purchased on Credit Cash Paid to Supplier
Closing balance of inventories Opening balance of trade payables
+ Cost of sales + Inventories purchased on credit
- Opening balance of inventories + Other goods and services purchases
- Closing balance of trade payables
Cash Paid to Employee
Opening balance of employee benefits liability
+ Employee benefits expense
- Closing balance of employee benefits liability
,Bay Limited’s Balance Sheet as at 30 June 2013 and 2014 were as follows:
2014 2013
ASSETS
Current Assets
Cash 86,000 124,000
Accounts Receivable 169,000 152,000
Inventory 227,000 248,000
482,000 524,000
Non-Current Assets
Land 50,000 125,000
Buildings 530,000 275,000
Accumulated Depreciation – buildings (200,000) (170,000)
Plant & Equipment 80,000 80,000
Accumulated Depreciation – plant & equipment (20,000) (10,000)
440,000 300,000
TOTAL ASSETS 922,000 824,000
LIABILITIES AND OWNERS’ EQUITY
Current Liabilities
Accounts Payable 134,000 121,000
Interest payable 500 1,500
Salaries payable 6,000 17,500
140,500 140,000
Non-Current Liabilities
Mortgage loan payable 132,500 90,000
TOTAL LIABILITIES 273,000 230,000
Shareholder’s Equity
Share capital 250,000 250,000
Retained Earnings 399,000 344,000
Total Equity 649,000 594,000
TOTAL LIABILITIES AND OWNERS’ EQUITY 922,000 824,000
,An extract from the company’s Income Statement for the year ended 30 June 2014 and general ledger revealed the
following information:
$ $
Net Sales 887,000
Cost of Goods sold 566,000
Gross Profit 321,000
Expenses:
Loss on Sale of land 12,500
Interest expense 10,000
Depreciation expense - buildings 30,000
Depreciation expense – P & E 10,000
Salaries and wages 196,000
Net Profit before tax 62,500
Income tax expense
Net Profit after tax 62,500
Additional Information:
All purchases and sales of inventories were made on credit.
During the year dividends were paid out of retained earnings.
A block of land, costing $75,000, was sold during the year.
No plant was purchased or sold during the year.
Required:
(a) Prepare a Statement of Cash Flows for Bay Ltd for year ended 30 June 2014 using the direct method.
$ $
Cash flows from operating activities:
Receipts from Customers 870,000
Payments to Suppliers and Employees (739,500)
Interest Paid (11,000)
Net cash from operating activities 119,500
Cash flows from investing activities:
Proceeds from sale of land 62,500
Payment for building (255,000)
Net cash used in investing activities (192,500)
Cash flows from financing activities:
Proceeds from long-term borrowings 42,500
Dividends Paid (7,500)
Net cash from financing activities 35,000
Net increase (decrease) in cash and cash equivalents (38,000)
Cash and cash equivalents at beginning of year 124,000
Cash and cash equivalents at end of year 86,000
,Cash Received From Customers
Opening Accounts Receivable 152,000
+ Sales 887,000
- Closing Accounts Receivable (169,000)
Cash Received from Customers $870,000
Cash Paid to Suppliers (Cash Payments for Inventory)
COGS 566,000
+ Ending Inventory 227,000
– Beginning Inventory 248,000
+ Beginning Accounts Payable 121,000
– Ending Accounts Payable 134,000
Payments to Suppliers 532,000
Salaries expense 196,000
+ Beginning Salaries Payable 17,500
- Ending Salaries Payable 6,000
Payment to Employees 207,500
Payments to suppliers 532,000
+ Payments to employees 207,500
Payments to Suppliers & Employees 739,500
Interest Paid
Interest expense 10,000
+ Beginning balance Interest Payable 1,500
- Ending balance Interest Payable (500)
Interest Paid 11,000
Purchase of property, plant and equipment
Cost of land sold 75,000 Ending Balance Buildings 530,000
- Loss on disposal of land (12,500) - Beginning Balance Buildings (275,000)
Cash Proceeds from disposal of land 62,500 Cash Paid 255,000
Mortgage loan payable
Ending Balance Mortgage loan payable 132,500
- Beginning Balance Mortgage loan payable (90,000)
Cash Received from borrowing (mortgage) 42,500
Dividends Paid
Profit for the period 62,500
+ Beginning Retained earnings 344,000
- Ending Retained earnings (399,000)
Dividends Paid 7,500
, (b) Prepare the note of reconciliation of net profit to net cash from operating activities.
Net Profit 62,500
Add Depreciation expense 40,000
Add Loss of sale of land 12,500
Less Increase in Accounts receivable (17,000)
Add Decrease in Inventory 21,000
Add Increase in Accounts payable 13,000
Less Decrease in Interest payable (1,000)
Less Decrease in Salary payable (11,500)
Net Cash provided by Operating Activities 119,500
