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FAC3702 FASSET CLASS CLASS 3 SEPTEMBER/OCTOBER 2018

FAC3702 FASSET CLASS CLASS 3 SEPTEMBER/OCTOBER 2018. Important FASSET Information. Have you signed and to submitted your contract? Sign the attendance register Complete the evaluation/feedback form. Agenda for Today. Class 3 Non-current assets held for sale – IFRS 5

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FAC3702 FASSET CLASS CLASS 3 SEPTEMBER/OCTOBER 2018

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  1. FAC3702 FASSET CLASSCLASS3SEPTEMBER/OCTOBER 2018

  2. Important FASSET Information • Have you signed and to submitted your contract? • Sign the attendance register • Complete the evaluation/feedback form

  3. Agenda for Today • Class 3 • Non-current assets held for sale – IFRS 5 • The effects of changes in foreign exchange rates – • IAS 21, IAS 32, IFRS 7 and IFRS 9

  4. IFRS 5 - NCAHFS OBJECTIVE: Assets that meet the criteria to be classified as held for sale to be measured at the lower of carrying amount and fair values less cost to sell {such assets will no longer be depreciated}. Assets that meet the criteria to be classified as held for sale to be presented separately on the face of the statement of financial position and the results of discontinued operations to be presented separately in the statement of comprehensive income.

  5. IFRS 5 - NCAHFS WHAT IS IT? Classify a non-current asset (or disposal group) as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use. Such assets and liabilities shall be remeasured to the lowerof carrying amount and fair value less costs to sell and carried as current items on the face of the statement of financial position.

  6. IFRS 5 - NCAHFS

  7. IFRS 5 - NCAHFS CRITERIA TO QUALIFY AS HELD FOR SALE: IFRS 5 makes it clear that items should only be classified as held for sale once they have met all the criteria! • Available for immediate sale in its current condition subject only to terms that are usual and customary for sale of such assets AND its sale must be highly probable. • For the sale to be highly probable: o Management must be committed to a plan to sell the asset, AND o An active program to locate a buyer and complete the plan must be initiated. • Asset must be actively marketed for sale at a price that is reasonable. • The sale should be expected to qualify for recognition as completed sale within one year from date of classification. • Actions required to complete the plan should indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.

  8. Extension of the period required to complete a saleIFRS 5 Appendix B (Application supplement) WHAT: An extension of the period required to complete a sale beyond one year. CRITERIA: If the delay is caused by events or circumstances beyond the entity's control AND If there is sufficient evidence that the entity remains committed to its plan to sell the asset (or disposal group). IMPACT: Still classify an asset (or disposal group) as held for sale.

  9. Other matters to consider with regard to classification as held for sale Sale transactions include exchanges of non-current assets for other non-current assets when the exchange has commercial substance in accordance with IAS 16 Property, plant and equipment. When an entity acquires a non-current asset (or disposal group) exclusively with a view to its subsequent disposal, it shall classify the non-current asset (or disposal group) as held for sale at the acquisition date, only if the one-year or a permitted extended period requirement is met AND It is highly probable that any other criteria above that are not met at acquisition date will be met within a short period following the acquisition (usually limited to three months).

  10. The criteria is met after the reporting period If the criteria is met after authorisation of the financial statements for issue: shall not classify a non-current asset (or disposal group) as held for sale in those financial statements when issued. If the criteria is met after year-end but before the authorisation of the financial statements for issue, the entity shall disclose the following information by way of a note: • a description of the non-current asset (or disposal group); (b) a description of the facts and circumstances of the sale, or leading to the expected disposal, and the expected manner and timing of that disposal; (c) if applicable, the reporting segment in which the non-current asset (or disposal group) is presented in accordance with IFRS 8 Operating segments.

  11. IFRS 5 - NCAHFS EXAMPLES: • Disposal group • Discontinued operation INCLUDES: All recognised non-current assets and disposal groups except for: • Assets carried at Fair Value (FV) with changes in FV recognised in P/L for example financial assets (IFRS 9); non-current assets accounted for using Fair Value model in IAS 40 (Investment property) • Assets with difficulty in determining fair value for example deferred tax assets in IAS 12 These assets will be carried at values determined by applying their applicable standard.

  12. IFRS 5 – Initial Measurement The carrying amount of a non-current asset (or all the assets and liabilities in a disposal group) shall, immediately before the initialclassification as held for sale, be measured in accordance with the applicable IFRSs. An entity shall measure a non-current asset (or disposal group) classified as held for sale at the lower of its carrying amount (at the moment of reclassification) and fair value less costs to sell – this adjustment is an impairment loss. (IFRS 5.15) If it falls outside the scope of IFRS 5 the individual item shall instead be carried at the value determined by applying the relevant standard relating to that asset. For example IAS 40

  13. IFRS 5 – Initial Measurement for a Disposal Group STEP 1: Determine the carrying amount of all the individual assets in the disposal group at date of classification by applying the IFRSs applicable to them. STEP 2: Determine the fair value less costs to sell of the disposal group. Note: CGT is excluded specifically per the definition of costs to sell. STEP 3: Determine the lower of carrying amount and fair value less costs to sell. Measure the disposal group held for sale at the lower of the two figures calculated. STEP 4: Calculate the impairment loss (Carrying amount less figure calculated in step 3) STEP 5: Allocate the impairment loss to non-current assets within the scope of the measurement requirements of IFRS 5 If outside the scope carried at their values determined by applying their applicable standards.

  14. IFRS 5 – Subsequent Measurement Assets or disposal groups classified as held for sale will have to be remeasured to its fair value less costs to sell if a year-end occurs between the date of initial classification as held for sale and the final date of disposal.

  15. Example- Disposal group containing both items included and excluded(extract from question 3, tutorial letter 102) Prop-Invest Ltd is a property investment company situated in Johannesburg, with property investments in Gauteng and the Western Cape. The company has a 30 June year-end. A property was purchased on 28 February 20.10 for R2 800 000 (land: R1 000 000; building: R1 800 000) with the intention to earn rental incomefrom it. On 31 March 20.10, Prop-Invest Ltd entered into a five (5) year operating lease contract with Mrs. Ndlovu, who uses the property for residential purposes. However, the return on the investment in properties located in the Western Cape did not meet management’s expectations and subsequently the board of directors decided to sellall properties located in the Western Cape and rather reinvest in Gauteng. Investment property IFRS 5- criteria?

  16. Example- Continued (extract from question 3, tutorial letter 102) On 31 January 20.11 a detailed formal plan of disposal was approved, publicly announced and at a stage of completion where no realistic possibility of withdrawal existed. Management expects that a binding sales agreement for the property will be concluded by 30 September 20.11. The property will be sold for cash. The property is marketed by an estate agent at a price that is reasonable in relation to its current fair value. The commission payable to the estate agent on the sale of the property will amount to R250 000. On 31 January 20.11 the sale of the property located in the Struisbaai geographical area met all the requirements for classification as held for sale in terms of IFRS 5. The fair values of the Struisbaai property, on the respective dates, are as follows: IFRS 5 criteria

  17. Example- Continued (extract from question 3, tutorial letter 102) Accounting policies: Investment property is accounted for using the fair value model. All the net replacement values and fair values of the properties were determined by Mr. Sharp, an independent sworn appraiser. Mr. Sharp has recent experience in the location and category of the property being valued. The net replacement values and the fair values were determined by reference to current market prices on an arm’s length basis of similar properties in the same area. The carrying amount of the investment property will be recovered through sale. REQUIRED: What will the notes to the Financial Statements look like at year-end 30 June 20.11 for • Investment Property AND • Non-current assets held for sale

  18. Example- Continued (extract from question 3, tutorial letter 102) ANSWER: PROP-INVEST LTD NOTES FOR THE YEAR ENDED 30 JUNE 20.11 Investment property- Land calculation FV adjustment at the end of previous financial year CA at beginning of year Special rules for IAS 40! Not sold at y/e  remeasure to FV using IAS 40 principles FV adjustment on date of transfer

  19. Example- Continued (extract from question 3, tutorial letter 102) ANSWER: PROP-INVEST LTD NOTES FOR THE YEAR ENDED 30 JUNE 20.11 Investment property- Building calculation Investment property was transferred to NCAHFS! NCAHFS is therefore debited with the FV adjustment and NOT Investment Property with subsequent changes in FV after transfer date

  20. Example- Continued (extract from question 3, tutorial letter 102) ANSWER: PROP-INVEST LTD NOTES FOR THE YEAR ENDED 30 JUNE 20.11 2.2. Investment property The valuation was performed on 31 January 20.11. The fair values were determined by an independent sworn appraiser. The property will at year-end be disclosed as NCAHFS. Remember to first revalue IP (FV model) in order to transfer to FV of the property to NCAHFS (FV adjustment on reclassification date).

  21. Example- Continued (extract from question 3, tutorial letter 102) ANSWER: PROP-INVEST LTD NOTES FOR THE YEAR ENDED 30 JUNE 20.11 2.3. Non-current asset held for sale The board of directors decided to sell the Struisbaai property since the property investment did not meet expectations. A formal plan of disposal was approved and publicly announced on 31 January 20.11. On 30 June 20.11 the sales plan was at a stage of completion where no realistic possibility of withdrawal existed. Management expects that a binding sales agreement will be concluded by 30 September 20.11. The property will be sold for cash. Non-current asset held for sale consist of the following: R Investment property – Struisbaai 2 979 000 The valuation was performed on 31 January 20.11. The fair values were determined by an independent sworn appraiser. 1. Reason for sale 3. Manner of sale Investment property at fair value falls outside the scope of IFRS 5. Continue to measure the investment property in accordance with IAS 40 even though it has been transferred. (@ FV ) 2. Anticipated date of sale 4. List items included in this classification

  22. IFRS 5 – Initial MeasurementExample- Question 14 extract from TUT102 Machinery Khona Ltd purchased a machine which was immediately available for use, as intended by management, on 1 September 20.10 for R2 400 000. The machine has an estimated useful life of 650 000 units, with a residual value of R250 000. However, due to the fact that the machine did not meet its expected production capacity, the directors decided to dispose of it. A detailed formal disposal plan was publicly announced and on 30 April 20.13 the disposal was at a stage of completion where no realistic possibility of withdrawal existed. A binding sales agreement for the machine was concluded and management expects the sale to be completed on 20 December 20.13. The machine will be sold for cash. From acquisition date until 31 October 20.12, the machine had produced a total of 185 000 units. During the current financial year until 30 April 20.13, the machine had produced 70 000 units. On 30 April 20.13 the machine’s fair value less costs to sell, was determined to be R1 200 000. On 31 October 20.13, the fair value less costs to sell of the machine increased to R1 300 000 due to an unprecedented demand for this type of machinery. IFRS 5 criteria

  23. IFRS 5 – Initial MeasurementExample- Question 14 extract from TUT102 Additional information: It is the accounting policy of Khona Ltd to account for machinery using the cost model. Depreciation on machinery is provided for according to the units of production method. A tax allowance on machinery, according to section 12C of the Income Tax Act, allowing a 40% deduction in the first year of use, with a 20% deduction per year in the following three years.

  24. IFRS 5 – Initial MeasurementExample- Question 14 extract from TUT102 Current financial year Details on a Timeline: 1 Sept 2010 1 Nov 2012 30 April 2013 31 Oct 2013 Purchased Beginning of year Transfer to NCAHFS Year-end Cost = R2 400 000 FV – cost to sell FV – cost to sell Useful life= 650 000 units = R1 200 000 = R1 300 000 Res. Value= R250 000 185 000 units produced 70 000 units produced

  25. ANSWER: Calculations - Machinery On initial classification to NCAHFS Subsequent measurement at Y/E

  26. IFRS 5 – Initial MeasurementExample- Question 14 extract from TUT102 ANSWER: Disclosure – Machinery: Property, plant and equipment note Carrying amount of machinery on date of reclassification

  27. IFRS 5 – Initial MeasurementExample- Question 14 extract from TUT102 Reason for sale, date of sale, manner of sale Item Reversal of impairment loss on subsequent measurement: Amount + Where included Impairment loss on initial classification: Amount & Where included

  28. IFRS 5 – Impairment LossesExample: Question 2 in TUT 102 Vino Ltd is a company which produces and sells wine. The wine is produced in the Western Cape and bottled at their plant in Gauteng. The company has a 31 March year-end. On 31 October 20.10, the directors decided to sell the Gauteng bottling plant and all of its assets. On that date they approved a detailed formal plan of disposal. On 31 December 20.10, the approved formal sales plan was at a stage of completion where no realistic possibility of withdrawal existed and all the requirements to classify the Gauteng bottling plant as held for sale were met. Management expects that a binding sales agreement for all the assets will be concluded by 1 May 20.11, and the assets will be sold for cash. Criteria of IFRS 5 were met = Transfer to NCAHFS

  29. IFRS 5 – Impairment LossesExample: Question 2 in TUT 102 Details of the bottling plant’s assets are as follows: Machinery with an original cost price of R8 000 000 was acquired on 1 July 20.05. The machinery is used specifically in the bottling process. It has a residual value of R80 000 and an expected useful life of 15 years. The machinery was available for use, as intended by management, on acquisition date. The carrying amount of the machinery on 1 April 20.10 amounted to R5 492 000. The carrying amount of inventory on 31 December 20.10 and 31 March 20.11 amounted to R650 000 and R625 000 respectively. The net realisable value of the inventory amounted to R550 000 on 31 December 20.10 and R525 000 on 31 March 20.11. Vino Ltd developed a customised software package to be used in the bottling plant. The software package met all the criteria for the recognition as an intangible asset. The software was used to operate the machinery. The software was developed at a cost price of R860 000. It was estimated that the software will have an expected useful life of 20 years. The software was available for use, as intended by management, on 30 September 20.07 and was brought into use on the same date. The carrying amount on 1 April 20.10 amounted to R752 500.

  30. IFRS 5 – Impairment LossesExample: Question 2 in TUT 102 No provision for depreciation or amortisation has been made for the current financial year. The fair value less costs to sell of the bottling plant, on the respective dates, is as follows: Additional information • A pre-tax discount rate of 15% is considered to be appropriate. 2. It is the accounting policy of Vino Ltd to account for intangible assets using the cost model. 3. Depreciation and amortisation is provided for in accordance with the straight-line method over the expected useful life of the assets. Required: Calculate the impairment loss on the disposal group and disclose it in the NCAHFS note Initial measurement Subsequent measurement

  31. IFRS 5 – Impairment LossesExample: Question 2 in TUT 102 ANSWER (Calculations Disposal Group): Step 1: Determine the carrying amount of all the individual assets in the disposal group at 31 December 20.10. Period from 1 April 20.10 until 31 December 20.10 Total CA of all assets included in disposal group on reclassification date

  32. IFRS 5 – Impairment LossesExample: Question 2 in TUT 102 ANSWER (Calculations Disposal Group): Step 2: Determine the fair value less cost to sell the disposal group at 31 December 20.10. Fair value less cost to sell (given) R6 250 000 Step 3: Determine the lower of carrying amount and fair value less cost to sell at 31 December 20.10. Measure the disposal group at fair value less cost to sell Fair value less cost to sell (given) R6 250 000 Step 4: Calculate impairment loss suffered at 31 December 20.10. Carrying amount less fair value less cost to sell R116 250 (R6 366 250 – R6 250 000) Total impairment loss of disposal group on initial classification = Should now be allocated to all the non-current assets within the group

  33. IFRS 5 – Impairment LossesExample: Question 2 in TUT 102 ANSWER (Calculations Disposal Group): Step 5: Allocate the impairment loss to the assets Total calculated impairment loss Allocate only to non-current assets! Inventory = current 5 096 000 + 720 250 = 5 816 250 Total of FV less cost to sell on initial measurement as given in question

  34. IFRS 5 – Impairment LossesExample: Question 2 in TUT 102 AT YEAR-END!! ANSWER (Disclosure): 3. Non-current assets held for sale A decision to dispose of the assets of the Gauteng bottling plant was taken on 31 October 20.10 after a formal detailed disposal plan for the assets of the bottling plant was approved. The plan regarding the once-off sale of the assets was at a stage of completion on 31 December 20.10, where no realistic possibility of withdrawal existed. It is expected that the plan for the sale of the assets will be completed by 1 May 20.11 for cash. The disposal group under discussion comprises: An impairment loss of R116 250 was recognised upon initial classification of the disposal group as held for sale. The impairment loss was included under loss after tax on remeasurement on the face of the statement of profit or loss and other comprehensive income. Why, When, How? Total of FV less cost to sell on year-end as given in question Final amounts after impairment loss allocated at year-end IAS 2 special rules. Write-down to NRV at Y/E Total impairment loss, where included?

  35. IFRS 5 – Presentation and Disclosure – Continuing and Discontinued operations STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 20.10 CONTINUING OPERATIONS Revenue XXXX Cost of sales (XXX) Gross profit XXXX Other expenses (XXX) Finance costs (XX) Profit before tax XXX Income tax expense (XX) Profit for the year from continuing operations XXX Statement of P/L will be split to show profit from continued operations and loss on discontinued operation separately

  36. IFRS 5 – Presentation and Disclosure Non-current assets held for sale- Disclosure in SOCI STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 20.10 CONTINUING OPERATIONS Profit for the year from continuing operations XXX DISCONTINUED OPERATIONS Revenue XXX Expenses (XXX) Loss before tax (XXX) Income tax benefit XX Loss after tax XXX Loss after tax on measurement of non-current asset held for sale/disposal group (XX) Loss on measurement of non-current asset held for sale to fair value less costs to sell (XX) Income tax benefit X Loss for the year from discontinued operations (XX) PROFIT FOR THE YEAR XXXXXX

  37. IFRS 5 – Non Current Assets to be Abandoned Won’t be classified as held for sale! Carrying amount will be recovered primarily through continuing use. An entity shall not account for a non-current asset that has been temporarily taken out of use as if it had been abandoned. (IFRS 5.14)

  38. IFRS 5 – Changes to a plan of sale Criteria for classification as held for sale are no longer met! Cease to classify the asset (or disposal group) as held for sale. (IFRS 5.26) Measure at the lower of: (a) its carrying amount before the asset (or disposal group) was classified as held for sale, adjusted for any depreciation, amortisation or revaluations that would have been recognised had the asset (or disposal group) not been classified as held for sale, and (b) its recoverable amount at the date of the subsequent decision not to sell. (IFRS 5.27)

  39. IFRS 5 – Changes to a plan of sale Individual assets: The adjustment must be included in the same caption in the statement of comprehensive income used to present a gain or loss. PPE item or intangible asset that has been carried under the revaluation model per IAS 16 or IAS 38, the adjustment shall be treated as a revaluation increase or decrease. The asset no longer classified as held for sale should be reinstated at the lower of what its carrying amount would have been had it never been classified as held for sale and its recoverable amount. Disposal group: The remaining non-current assets of the group that individually still meet the criteria to be classified as held for sale shall be measured individually at the lower of their carrying amounts and fair values less costs to sell at that date. Any non-current assets that no longer meet the criteria shall cease to be classified as held for sale.

  40. Questions?

  41. FAC3702 FASSET CLASSCLASS3SEPTEMBER/OCTOBER 2018LEARNING UNIT 7

  42. The Effects of Changes in Foreign Exchange Rates What is it? • Transactions in foreign currencies and/or foreign operations • Translate transactions into presentation currency (Rand) for incorporation into the financial statements. • The results of the foreign operations (branch) will be accounted for in the functional currency (rand).

  43. Uncovered foreign currency transactions Initial Measurement: Principle: The spot rate on the transaction date is used for translation purposes. The date of the transaction is the date on which the transaction first qualifies for recognition in accordance with IASs. (IAS 21.22) Application: Transaction date is when risks and rewards pass. For example- shipped FOB (Free on Board)

  44. Covered transactions – FEC taken out What is it?  Risk management to cover the entity against foreign currency fluctuations. Hedge accounting involves the following steps: Step 1: Identify the hedged item. Step 2: Identify a potential hedging instrument. Step 3: Determine if the qualifying criteria for hedge accounting have been met. Step 4: Account for the hedge transaction in terms of the appropriate hedge accounting model.

  45. Hedged Item • Liability  Creditor/ Supplier • External to the reporting entity. • Always use SPOT rate at transaction date. • Transaction date = date on which all risk and rewards are transferred When you become the owner  Delivery, Shipped free on board (FOB) • Creditor- revalue outstanding balance (in foreign currency) at year-end and before payment at SPOT rate at date of payment/ year-end. • Must be reliably measured and the transaction highly probable

  46. Hedging Instrument- FEC • What is a FEC? Contract with bank  Buy specified amount of foreign currency from the bank at a specified exchange rate. • Example: $ 10 000 at R7.00 for $1 • For hedge accounting purposes, only contracts with a party external to the reporting entity (i.e. external to the group or individual entity that is being reported on) can be designated as hedging instruments. • Revalue- compare to other FEC forward rates • Expire/ Settle- compare your FEC forward rate to SPOT at the day of payment to revalue your FEC before your payment journal. • FEC Forward rates - increase to more than what yours is = gain - decrease to less than yours = loss • 2 types of hedges – Fair value hedge – Cash flow hedge • Will be specified in question information which one

  47. Hedge Accounting 2 Types of hedges: • Fair value hedge (FV hedge) which hedges the exposure to changes in fair value • Cash flow hedge (CF hedge) which hedges the exposure to variability in cash flows Determine if the FEC is taken out before or on/after transaction date. • Before transaction date = cash flow hedge • On/After transaction date = fair value hedge

  48. Fair value hedge • Revalue = Fair value gain (P/L) = FEC Asset (SFP) OR Fair value loss (P/L) = FEC Liability (SFP) • Compare FEC Forward rates when revalue except when FEC expires, then compare FEC Forward rate to Spot on date of expiry/ payment of creditor. • On expiry: 1. Revalue FEC using FEC rate VS Spot rate 2. Revalue creditor at Spot rate 3. Write payment journal which is - Debit creditor = forex amount you pay @ Spot rate - Credit bank = FEC contract amount @ ORIGINAL FEC rate - Debit FEC liability and/ or Credit FEC asset to clear those accounts.

  49. Fair value hedge Using fair value hedge accounting

  50. Example - Fair value hedge Skhota Ltd is a manufacturing company situated in Rustenburg. The company has a 31 December reporting date. “Flame Hot” Formula On 1 June 2015, Skhota Ltd signed an agreement with an Australian company to acquire a formula at a cost of AUD30 000 (Australian dollar), to manufacture charcoal with an increased heat retention ability. All the risks and rewards associated with the formula were transferred to Skhota Ltd on the date of the agreement and the formula was available for use as intended by management, on this date. The cost price of the formula is payable in full on 31 January 2016. The formula has an estimated useful life of 25 years and a residual value of Rnilwas allocated to the formula. On 1 June 2015, Skhota Ltd took out a foreign exchange contract (FEC) for AUD30 000 in order to hedge the foreign currency risk component of the transaction.

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