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2012 in review

The WordPress.com stats helper monkeys prepared a 2012 annual report for this blog.

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600 people reached the top of Mt. Everest in 2012. This blog got about 9,100 views in 2012. If every person who reached the top of Mt. Everest viewed this blog, it would have taken 15 years to get that many views.

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IAS 11 – Construction Contracts

The short version of IAS 11 – Construction Contracts is available for reference.

IAS 11 – CONSTRUCTION CONTRACTS

Thanks

Kaushalram

IAS 18 – Revenue

 Scope / Definitions

Scope

The sources of revenue include Sales of Goods, Rendering of Services and Use of Entity assets yielding

interest, royalties and dividends.

Definitions

Revenue – Gross inflow of economic benefits arising in the course of ordinary activities when those inflows

result in increases in equity, other than increases relating to contributions from equity participants.

Recognition / Measurement

Measurement*

Revenue should be measured at the fair value of the consideration received or receivable (taking into account trade discounts and volume rebates allowed).

When consideration is deferred the difference between the fair value and the nominal amount of considerations is recognized as interest revenue.

When goods or services are swapped revenue is only generated if the exchange is for dissimilar goods or services.

*Revenue is measured at the fair value of goods or services received adjusted by the amount of any cash or cash equivalents transferred. If the fair value cannot be measured reliably the fair value of goods or services given up is used.

Recognition

An income is recognized when there is a probable increase in the future economic benefit which can be measured reliably.

Applicability of Revenue Recognition

• Usually applied separately to each transaction

• Applied to separately identifiable components in a transaction, or

 • Applied to two or more linked transactions.

Revenue Recognition Criteria

 1. Significant Risks and Rewards of ownership are transferred to the buyer.

 2. Neither continuing managerial involvement nor effective control over goods sold are retained.

 3. The amount of revenue can be measured reliably.

 4. It is probable that economic benefits associated with the transaction will flow to the entity.

 5. Costs (to be) incurred in respect of the transaction can be measured reliably.

 

“Critical Event” Approach

 Under this approach revenue is recognized when a “Critical Event” in the process of earning it has taken place. E.g.,

 – Construction Industry: Revenue is recognized before sale based in the % completion because earning is incremental.

 – If the outcome of the project is uncertain, then revenue recognition may be deferred.

 – For installment sales with extended cash collection terms and where the risk of non-collectibiity is high, receipt of amounts due may be the critical event.

 – For retail sales revenue is recognized at the point of sale.

Cost Recognition

 – Revenue and Expenses to be recognized simultaneously

 – Expenses measured reliably

 – Revenue not to be recognized when cost cannot be measured reliably. In such cases, proceeds should be recognized as liability.

 Rendering of Services

 – Revenue has to be recognized based on the stage of completion of the transaction at the end of the reporting period. (known as Percentage Completion Method)

 – Stage of completion should be estimated using the method that measures reliably the services performed. May include:

                 1. Surveys of work completed

                 2. Services performed as a percentage of total services 

                 3. Proportion of costs to date to total estimated costs.

 – If the outcome could not be measured reliably, revenue to be recognized to the extent of expenses recoverable.

 –  Reliable estimate of outcome is subject to the following conditions:

                      1. The amount of revenue can be measured reliably

                      2. It is probable that the economic benefits associated with the transaction will flow to the entity.

                      3. The stage of completion of the transaction can be measured reliably

                      4. Costs to complete can be measured reliably.

 Interest, Royalties and Dividends

 – It is probable that economic benefits will flow to the entity

 – The amount of revenue can be measured reliably.

Basis of Recognition:-

 1. Interest – using the effective interest rate method

 2. Royalties – on accrual basis in accordance with the substance of the agreement

 3. Dividends – when the shareholder’s right to receive payment is established.

Presentation /Disclosures

 1. Accounting Policies adopted for revenue recognition should be disclosed in the Notes.

 2. Amount of each significant category of revenue recognized during the period to be disclosed.

 

Corresponding IND AS 

IND AS 18 – Revenue

 No significant difference observed.

 IAS 18 – REVENUE

Thanks

Kaushalram

 

IAS 21 – The Effects of Changes in Foreign Exchange Rates

The objectives of IAS 21 are:-

• To report results which reflect the impact of exchange rates in cash flows.
• To fairly present the results of management’s actions.

Definitions

The following are some of the key definitions of IAS 21.

“Functional Currency”is the currency of the primary economic environment in which the entity operates.

“Presentation Currency”  is the currency in which the financial statements are presented.

“Closing Rate”is the spot exchange rate at the date of the statement of financial position.

“Foreign Currency”is a currency other than the functional currency of the entity.

“Net investment in a foreign entity”is the amount of the reporting entity’s interest in the net assets of that operation.

“Monetary Items”are money held and assets and liabilites to be received or paid in fixed or determinable number of units of currency

• Monetary items include trade receivables, cahs, trade payables and loans
• Non-monetary items include non-current assets, investments and inventory.

Functional Currency

Primary Factors:

• The currency that mainly influences the selling price of goods or services
• The currency that impacts labour, material and other costs of providing goods and services

Secondary Factors:

• The Currency in which funds from the financing activities are generated,
• The currency in which monies from operating activities are kept.

Other Factors:

• whether activities area carried out as an extension of the reporting entity or with a significant degree of autonomy by the foreign operation,
• whether transactions between the reporting entity and foreign opration are a high percentage of total transactions,
• whether cash flows of the foreign operation impact directly on the cash flows of the reporting entity and whether cash available for remittance to the reporting entity.
• whether the foreign operation is dependent upon the reporting entity to help service current and future debt obligations.

Note : Once a functional currency has been identified by the management, is should only be changed if there is a change to the economic climate in whch it was initially identified.

Presentation Currency

Financial Statements – Translated into the presentation currency of the parent entity

Assets & Liabilities – Translated at the end of each reporting period at the closing exchange rate.

Income & Expenses – translated using exchange rates when the transaction occurred.

IFRS 5 – Non-Current Assets Held For Sale and Discontinued Operations

IFRS 5 has been issued in order to

– establish the principles for classification, measurement and presentation of held for sale non-current assets.

– project entity’s future cash flows, earnings generating capacity and financial position by segregating information about discontinued asset / operations.

Definitions

Following are some of the key definitions in IFRS 5.

Component of an Entity : Operations and cash flows area clearly distinguishable from the remainder of the entity, both operationally and for financial reporting purposes.

“Distinguishable” represents Discontinued Operations must be clearly distinguishable.

– its operating assets and liabilities can be directly attributed to its it.

– income can be directly attributed to it.

– atleast a majority of its operating expenses can be directly attributed to it.

Disposal Group :  A group of assets to be disposed off collectively in a single transaction, and directly associated liabilites that will be transferred in the transaction.

The assets include goodwill acquired in a business combination, if the group is:-

• a cash-generating unit to which goodwill has been allocated, or
• an operation within such a cash-generating unit.

Discontinued Operation:  A component of an entity that either

• has been disposed of, or
• is classified as held for sale,

and

• represents a seperate major line of business or geographical area of operations,
• part of asingle co-ordinated plan to dispose of that line of business are or operations,
• subsidiary acquired exclusively with a view to resale.

Held for Sale:

Current Asset:

– expected realisation,sale or consumption:

• in the normal operating cycle, or
• within twelve months after the reporting period

– held primarily for trading purposes

– cash or a cash equivalent.

Non-Current Asset:

Assets does not meet the definitions of a  “Current Asset”.

A non-current asset (or disposal group) classifed as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use.

“Carrying amount” is the amount at which an asset is recognized after deducting any accumulated depreciation and any accumulated impairment losses.

Recognition Criteria for Held for sale Non-Current Assets

In order to classify a non-current asset as Held for Sale, the following criteria to be considered.

• Asset must be available for immediate sale in its present condition.
• The sale must be highly probable.
• Management must be committed to a plan to sell the asset.
• An active plan to locate a buyer and complete the plan must have been initiated.
• The asset must actively marketed for sale at a price that is reasonable relative to its current fair value.
• The sale should be expected to qualify for recognition as a completed sale within one year from the date of classification.
• The actions required to complete the plan should indicate that significatn changes to the plan or withdrawal from the plan are unlikely.

“Fair Value” is the price that would be received to sell an asset (or paid to transfer a liability) in an orderly transaction between market participants at the measurement (e.g., reporting) date.

Measurement

Held for sale non-current assets are carried at the lower of:

• Carrying amount, and
• Fair Value less costs to sell.

Note: Held for sale non-current assets are not depreciated.

Presentation and Disclosure of Non-Current assets Held for Sale and Discontinued Operations

The purpose of disclosure of Non-Current Assets Held for Sale is to enable users to:

• evaluate the financial effects of discontinued operations, and
• evaluate the financial effects of disposals of non-current assets.

Discontinued operations to be disclosed as a single amount in the Statement of Comprehensive Income comprising:

• post-tax profit or loss of discontinued operations
• post-tax gain or loss recognised on the mearusrement to fairvlue less costs to sell or the disposal of the assets constituting the discontinued operation.

An Analysis of the single amount either in the Statement of Comprehensive Income or in the notes to be disclosed.

Net cash flows to the operating, investing and financing activities of discontinued operations must be presented in a financial statement or in the notes to be disclosed.

Key Concepts of IAS 18

The Key concepts of IAS 18 are :-

• Revenue
• Revenue Measurement
• Recognition of Revenue from  a) Sale of Goods, b) Rendering of Services, and c) Interest, Royalties and Dividends.

Revenue and Revenue Measurement

Revenue refers to the gross inflow of economic benefits during the course of ordinary activities resulting in the increase of equity but not due to the contributions from equity participants. It does not include amounts received from the Sales or Services Tax authorities. Revenue is measured at fair value of the consideration received or receivable taking into consideration the trade discount or volume rebates allowed by the entity.

Five Criteria for Revenue Recognition from Sale of Goods

Revenue from the sale of goods can be recognised only when the below mentioned five criteria are met.

Risks & Rewards – Significant risks and rewards of ownership have been transferred from the seller to the buyer.

Management & Control – The entity neither retains continuing managerial involvement to the degree associated with the ownership nor retains effective control over goods sold.

Revenue Measurement – Revenue amount can be reliably measured.

Probability of Economic Benefits – Inflow of Economic Benefits is probable.

Cost Measurement – Costs can be reliably measured.

Revenue Recognition from Rendering of Services

In case of rendering of services, revenue can either be recognised based on the stage of completion of the transaction as at the end of reporting period, or using the Percentage of Completion Method.

Revenue for rendering services can be done, only when the following four criteria are met.

1. Revenue Measurement – Revenue amount can be reliably measured.
2. Stage of Completion Measurement – Stage of completion at the end of the reporting period can be reliably measured.
3. Probabiliy of Economic Benefits – Inflow of Economic Benefits is probable.
4. Cost Measurement – Costs can be reliabilly measured.

Revenue Recognition from Entity Assets used by Others

Interest, Dividends and Royalties fall under this category.  The criteria for revenue recognition are as below.

Interest – Recognised using effective interest method based on the time lapsed.

Dividends – Recognised when the shareholder’s right to receive the payment is established. Usually done when the dividend is declared.

Royalties – Recognised when accrued and in accordance with the substance of the relevant agreements.

Transactions not dealt with under IAS 18 – Revenue Recognition

The list of transactions not dealt with under IAS 18 are as follows. These are specifically dealt with in other standards.

1. Lease Agreements (IAS 17 Leases)

2. Dividends from Investments which are accounted for under Equity Method (IAS 28 Investment in Associates)

3. Insurance Contracts (IFRS 4 Insurance Contracts)

4. Changes in the Fair Value of the Financial Assets and Financial Liabilities or their disposal (IAS 39 Financial Instruments Recognition and Measurement)

5. Initial recognition of biological assets and from changes in the fair value of bioligical assets related to agricultural activity and initial recognition of agricultural produce (IAS 41 Agriculture)

Objective of IAS 18 – Revenue Recognition

Objective of IAS 18

The objective of IAS 18 is to prescribe the accounting treatment of revenue arising from certain types of transactions and events. Revenue is recognised when future economic benefits will flow to the entity and the benefits can be measured reliably.

This standard prescribes the criteria to be met for the revenue recognition and provides practical guidance on the application of these criteria.

IAS 18 focuses on the principles of:

– the timing of revenue recognition,

– the substance over form

IAS 18 applies to revenue generated from:-

– Sale of Goods

– Rendering of Services, and

– Interest, royalties and dividends, among others

Accounting Policy requirements to be followed by the First-time Adopters of IFRS

The entity shall use the same accounting policies as adopted in the first IFRS Financial Statements with the subsequent IFRS Financial Statements. The entity shall retrospectively apply the current version of IFRS on all periods presented in its below mentioned financial statements.

• Opening IFRS Balance Sheet
• Comparative Periods
• Current Period

Obsolete versions of IFRS that were effective at the earlier dates  shall not be applied.