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I.F.R.S 2009-10 transition

I.F.R.S 2009-10 transition. Paul.boden@cipfa.org.uk Alison.clark@cipfa.org.uk Roman.haluszczak@cipfa.org.uk. Preparing for 2009-10 IFRS. Areas to be covered in this session Intangibles Property Plant and Equipment Revaluation and impairment losses Residual Values

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I.F.R.S 2009-10 transition

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  1. I.F.R.S 2009-10 transition Paul.boden@cipfa.org.uk Alison.clark@cipfa.org.uk Roman.haluszczak@cipfa.org.uk

  2. Preparing for 2009-10 IFRS • Areas to be covered in this session • Intangibles • Property Plant and Equipment • Revaluation and impairment losses • Residual Values • Investment Properties – IAS40 • Depreciation and revaluation • Assets held for sale – IFRS 5 • Sold in 2009-10 • Reclassification of assets

  3. Intangible Assets – IAS 38 • Asset life • The SORP presumed that all intangible assets had a life no longer than 20 years, • IAS 38 allows intangible assets to have indefinite lives • So what if you reclassify to indefinite in 2009-10? • This is a change in accounting estimate rather than policy • Change applied prospectively • Requires assessment of impairment each year

  4. Intangible Assets – IAS 38 • Impairment • Impairments are chargeable to the Revaluation Reserve in the first instance • Then to I&E when no Revaluation Reserve remains. • 2009-10 Summary IFRS Adjustment entries • Reversal of any impairment charged in 2009-10 to I&E where balance exists on Revaluation Reserve

  5. Property, Plant & EquipmentIAS 16

  6. Revaluation / Impairment loss • Revaluation / Impairment Assessment - IFRS Fall in prices? Consumption of economic benefit? Across the board ? Specific to asset? Revaluation loss IAS16 Impairment IAS36

  7. IAS 16 Property, Plant Equipment • Revaluation Gains – golden rule • Revaluation gains shall be used to reverse any previous revaluation loss (formally impairment loss due to general fall in prices) charged to I&E. • Revaluation gains can also reverse an impairment loss that was charged to I&E where there has been a change in estimates • This reversal will go back to the point where the original revaluation/impairment loss took place. • This can be no earlier than 1.4.2007, when the Revaluation reserve was first created.

  8. IAS 16 Property, Plant Equipment • Impairment losses – golden rule • Impairments including clear consumption of economic benefit on specific revalued assets to be recognised against; • the Revaluation Reserve up to the balance in that reserve, • any remaining impairment to be charged to the Comprehensive Income and Expenditure Statement.

  9. IAS 16 Property, Plant and Equipment • Revaluation and impairment losses • BVACOP 2010: to note • Under BVACOP any residual impairments and revaluation losses for PPE where charged to I&E is a cost of service. • Impairment on Investment property will be shown in the Financing and Investment Income and Expenditure line in the I&E. • Impairment losses relating to assets under construction and surplus assets held for disposal, and any revaluation gains that reversed a loss in a prior period in relation to those assets, should be taken to Non Distributed Costs.

  10. Revaluation Gains Investment Property / Held for sale Revaluation gain Apply to I&E Is there a Previous impairment to I&E? Is there a previous revaluation loss to I&E? No PPE Apply to Revaluation Reserve Yes Yes No Cannot Use gain Due to Change in estimates? Apply to I&E (adjust for depreciation) Remaining Balance? Yesuse gain

  11. Revaluation Losses / Impairment Revaluation Loss Impairment Loss PPE PPE Investment Property / Held for sale Investment Property / Held for sale Apply to Revaluation Reserve Apply to Revaluation Reserve Remaining Balance? Remaining Balance? Apply to I&E Apply to I&E

  12. IAS 16 Property, Plant Equipment • Revaluation gain reversing a previous loss • Under SORP revaluation gain would probably gone straight to the Revaluation Reserve ? • Under IFRS the gain must first reverse any previous loss charged to I&E • 2009-10 Summary IFRS Adjustment entries • So where a gain was recognised in 2009-10, and a revaluation loss (previously charged to I&E) is recorded • Reverse SORP entries • Use gain to reverse previous impairment loss; • Any remaining gain put to the revaluation reserve; • Any remaining loss is held on the asset register until further gains takes place. PLUS

  13. IAS 16 Property, Plant Equipment • Revaluation gain reversing a previous loss • 2009-10 Summary IFRS Adjustment entries • Will also need to; • Adjust reversal for depreciation that would have been charged had the original previous loss not taken place (‘catch up’ depreciation) • How? Original loss charged to I&E Remaining asset life at time of loss • Apply the revaluation gain to reverse the calculated adjusted loss.

  14. IAS 16 Property, Plant Equipment • Revaluation gain reversing a previous loss • 2009-10 IFRS Adjustment entries - Example Journals • Step 1 Calculate catch up depreciation • Amount that took the value below the HCNBV divided by the estimated useful asset life remaining at the time of the loss • Say £30,000 / 35 years = £860 • Step 2 Apply catch up depreciation • Cr Revaluation Reserve £860 • Dr Comprehensive Income and Expenditure £860 • Cr General Fund/HRA (via MiRS) £860 • Dr Capital Adjustment Account £860

  15. IAS 16 Property, Plant Equipment • Revaluation gain reversing a previous loss • 2009-10 IFRS Adjustment entries- Example Journals • Step 3 Apply gain to Income and Expenditure • Dr Revaluation Reserve • Cr Comprehensive Income and Expenditure • Dr General Fund/HRA (via MiRS) • Cr Capital Adjustment Account • Note: debit revaluation reserve as this currently has a credit due to the SORP entries

  16. IAS 16 Property, Plant Equipment Impairment losses 2009-10 Summary IFRS Adjustment entries Where Impairment losses due to the clear consumption of economic benefits has been charged to I&E in 2009-10 under the SORP, to comply with IFRS it should be reversed where a Revaluation Reserve balance exists; The charge should then be applied to the balance on the revaluation reserve first i.e. (not I&E as under SORP); Any remaining impairment is then charged to I&E (as it takes the carrying value below historic net book value).

  17. IAS 16 Property, Plant and Equipment • Impairment losses • 2009-10 IFRS Adjustment entries • Step 1 Reverse the impairment charged to I&E • Dr FA (Accumulated impairment) • Cr Comprehensive Income and Expenditure • Dr General Fund/HRA (via MiRS) • Cr Capital Adjustment Account • Step 2 Charge the revaluation reserve with the loss • See rough guide sections 5.3 & 5.5.

  18. IAS 16 Property, Plant Equipment • Impairment losses – Previous year reversals • Conditions – IAS36 para 114 to 116 • Impairments recognised in prior years may only be reversed if there ‘has been a change in the estimates used to determine the assets recoverable amount’; • A change in estimates includes; • Change in the basis in valuation • Change in the estimates of the valuation of components • A revaluation gain does not automatically mean that the impairment is reversed – it may simply indicate that values have increased!;

  19. IAS 16 Property, Plant and Equipment • Residual Values • IFRS requires residual values to based on current values in the balance sheet • May necessitate regular valuation assessments • In 2009-10 changes to residual values would alter the depreciation charged in the 2009-10 accounts

  20. IAS 16 Property, Plant and Equipment • Residual Values • 2009-10 IFRS Adjustment entries • Step 1 Reverse SORP depreciation charge: • Dr Accumulated Depreciation (Non current assets) • Cr C I&E – Service costs • Dr Movement in Reserve Statement • Cr Capital Adjustment Account • Cr Revaluation Reserve (where necessary) • Dr Capital Adjustment Account (where necessary) • Step 2 Apply new residual value to asset • Step 3 Recalculate depreciation charge • Step 4 Apply depreciation charge (opposite step 1)

  21. Investment PropertyIAS 40

  22. IAS 40 Investment Property • Qualification Criteria • The Code adopts IPSAS 16 definition of investment property • Assets need to satisfy the following criteria to remain as Investment Properties • an investment property is one that is used solely to earn rentals or for capital appreciation or both. • Property that is used to facilitate the delivery of services or production of goods as well as to earn rentals or for capital appreciation does not meet the definition of an investment property under IPSAS 16, and is accounted for as Property, Plant and Equipment. • The cost or fair value of the investment property can be measured reliably. • i.e if the asset DOES NOT meet the criteria it needs to be reclassified to PPE.

  23. IAS 40 Investment Property – Criteria met • Investment property held at market value under IFRS • May mean more frequent revaluation • Gains/losses on revaluation are a charge to I&E • Under IFRS Investment property not depreciated • Under SORP depreciated if < 20 years life remaining • 2009-10 Summary IFRS Adjustment entries • Reverse any gain/loss applied in 2009-10, need to restore the asset as though the gain/loss never took place. • Reverse 09-10 depreciation applied to the I&E account under SORP • Recalculate the gain/loss using the opening 1.4.09 value. • Charge the 2009-10 revaluation gain/loss to I&E

  24. Assets Held for saleIFRS 5

  25. IFRS 5 Assets Held for Sale • Qualification Criteria • The asset must be available for immediate sale in its present condition subject to terms that are usual and customary for sales of such assets (or disposal groups); • The sale must be highlyprobable; the appropriate level of management must be committed to a plan to sell the asset and an active programme to locate a buyer and complete the plan must have been initiated; • The asset must be actively marketed for a sale at a price that is reasonable in relation 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 and • Action 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

  26. IFRS 5 Assets Held for Sale - Criteria met • No depreciation is chargeable on held for sale assets – it was under the SORP • 2009-10 IFRS Adjustment entries • Step 1 - Restore the asset to the 1.4.09 value • By reversing the depreciation charge and • any revaluation adjustments made in 2009-10 • Step 2 - Compare the value at 31 March 2010 to the restored 1.4.09 value • Where…….

  27. IFRS 5 Assets Held for Sale - Criteria met Fair Value (Market Value less costs to sell) @ 31 March 2010 Carrying Amount @ 1 April 2009 On comparison where the asset is lower of; Is the lowest Is the lowest Reduce asset value Charge reduction to I&E (even if balance on revaluation reserve) No adjustments to the asset value (unless there has been a previous impairment or revaluation loss if so see section 5 of Rough guide)

  28. Assets Held for Sale – Criteria not met – and not sold by 31 March 2010 • The 2009-10 transactions where held for sale are reversed in respect of any depreciation recognised • 2009-10 IFRS Adjustment entries • Dr Accumulated Depreciation • Cr Comprehensive Income and Expenditure statement • Dr General Fund/HRA (via MiRS) • Cr Capital Adjustment Account • andany revaluations (due to being held at MV) • Cr Revaluation Reserve • Dr Gross Carrying Amount • Dr Accumulated Depreciation

  29. Assets Held for Sale – Criteria not met – and not sold by 31 March 2010 • Asset reclassified e.g. to surplus assets; • Once reclassified; • Requirement to re-value the asset • and depreciate for the year; needs to be applied on revalued amount. • Deprecation entries as normal

  30. Held for sale - Assets SOLD in 2009-10 • Under the SORP, the carrying amount when the asset was sold was likely to have been at market value. • The code requires the asset held for sale to be the lower of market value or carrying value at time of classification. • Where the latter applies the gain/loss on the sale recognised under the SORP in 2009-10 will be different, as it will have been based on the market value. • Will need to recalculate the gain/loss on disposal

  31. Held for sale - Assets SOLD in 2009-10 • 2009-10 Summary IFRS Adjustment entries • Review the asset to determine its correct value on disposal i.e. lower of market value or carrying value. • Need to ensure this is the amount written out of the balance sheet on disposal. • It may be a different figure from that written out under the SORP • Compare (revised) asset value to sale proceeds to determine new gain/loss amount • Recognise new gain or loss in I&E account • Amend statement in movement in reserves • You may want to reverse all of the original SORP disposal, gain/loss entries and start again e.g. restore the asset then dispose of it.

  32. Reclassification of assets

  33. Reclassification of asset in 2009-10 Investment property Property, Plant and Equipment Held for sale • Change of use of an asset/no longer meets criteria Changes to Changes to Changes to 2 1 4 5 3 Property, Plant and Equipment Heldfor sale Investmentproperty

  34. Preparing IFRS financial statements • In Summary • Four basic steps • Select IFRS accounting policies and apply them from the date of transition (1st April 2009) • Recognise and derecognise assets and liabilities as required under IFRS • Remeasure assets and liabilities held at different amounts under IFRS • Reclassify assets and liabilities/income and expenditure presented differently under IFRS

  35. Hints and Tips • Review your 2009-10 SORP period 13 journals • It’s likely these will be the majority of the changes • Produce mock set of primary statements • Maintain good working docs • Setup separate audit file for 2009-10 restatement. • Cross reference journals to appropriate part of the code • Make notes of why you made the decisions you did

  36. Hints and Tips • Adjust • Your reporting hierarchy • Primary Statement layouts • Add • New GL codes • Create • A period 14 restatement month

  37. Thankyou • Off to the bar! • (for a glass of milk!) • Roman or Alison’s round (delete as appropriate!)

  38. Thank you • QUESTIONS/COMMENTS?

  39. Delegate Information

  40. Rough guide ref 5.3 5.5 5.6 5.11 5.23 5.46 5.57 PPE - Restatement Checklist • Reclassify impairment loss due to fall in prices to revaluation loss. • Reclassify impairment charged to I&E due to fall in prices to revaluation loss • Residual value estimates annual review under IFRS may change depreciation charges • Reclassification to IP, revaluation change issues • Reversal of revaluation loss by use of gain – all sorts of journals for this. • Impairments – use of revaluation reserve. • IP’s before 09-10 gains/losses • IP’s acquired in 09-10 revaluations

  41. Rough guide ref 5.60 5.71 5.1 5.87,98 5.112 5.128 5.134 5.147 5.150 5.154, 5.160 PPE - Restatement Checklist • IP’s reversal of depreciation • IP’s reclassified to PPE acquired before 1.4.09 • IP’s reclassified to PPE acquired after 1.4.09 • Held for sale criteria not met • Held for sale criteria met pre 09-10 • Held for sale advanced considerations • Held for sale criteria met in 09-10 • Assets sold in 09-10 but held for sale before 09-10 • Assets sold in 09-10 classified in 09-10 • Investment property held for sale

  42. IAS 16 Property, Plant Equipment • Impairment losses – Previous year reversals • The key principles of a reversal are: • Use the revaluation gain to reverse the impairment loss previously charged to I&E. • Adjust the reversal for depreciation that would have been charged had the loss taken place) i.e. the previous impairment loss is neutralised. • Original impairment loss maybe reversed up to the value of the asset prior to the original value before the impairment loss. Any remaining gain should be treated as a revaluation gain (i.e. CR to Revaluation Reserve). • In other words the reversal cannot increase the historic cost!

  43. IAS 16 Property, Plant Equipment Impairment losses – Previous year reversals The accounting entries for the reversal will mirror the original entries of the impairment loss charged to I&E and the depreciation adjustment will follow the accounting entries for depreciation. Reversal will always be against the historic cost impairment loss first (if applicable). If the revaluation gain is lower than the original impairment loss, i.e. there is a remaining loss this will necessitate a pro-rata of the annual depreciation adjustment and a record of the balance of the impairment loss not reversed should be recorded in lieu of any future revaluation gain.

  44. IAS 16 Property, Plant Equipment • Impairment losses – Previous year reversals • Accounting entries for the reversal of an impairment loss are: • Dr Accumulated Impairment • Cr Comprehensive Income and Expenditure Statement • Dr General Fund/HRA (via MiRS) • Cr Capital Adjustment Account

  45. IAS 40 Investment Property • 2009-10 IFRS Adjustment entries • Step 1 Reverse any gain on revaluation recognised in revaluation reserve. • Dr Revaluation Reserve • Dr Gross carrying amount • Cr Accumulated impairment • Cr Accumulated depreciation (where applicable) • Note There should be no balances held on revaluation reserve as removed on transition.

  46. IAS 40 Investment Property • Step 2 Apply the gain to Income and Expenditure. • Dr Gross carrying amount • Cr Comprehensive Income & Expenditure (Finance and Investments) • Dr General Fund/HRA (via MiRS) • Cr Capital Adjustment Account • Step 3 Where applicable - Reverse any depreciation charged in 2009-10 on the investment property. • Dr Accumulated Depreciation • Cr Comprehensive Income & Expenditure (Finance and Investments) • Dr Movement in Reserve Statement • Cr Capital Adjustment Account • Note There should be no balances held on revaluation reserve as removed on transition

  47. IAS 40 Investment Property • Where acquired during 2009-10 • Changes in value to Investment Property (IP) on revaluation should be recognised in the I&E account not via revaluation reserve (as held at Market Value). • Summary 2009-10 IFRS Adjustment entries • Reverse any gain applied to new IP’s in 2009-10 from the revaluation reserve • Recognise the gain via the I&E account

  48. Reclassification of assets

  49. IAS 40 Reclassification Investment Property to PPE (1) • Will result in change of value from Market Value to Existing Use • The carrying value of the asset is deemed to be the historic cost at the date of reclassification. • Following reclassification to PPE the asset will be re-valued according to the appropriate valuation method for the asset. • This adjustment for accounting purposes should be effectively classified as a revaluation and subsequent accounting entries reflect this i.e. accumulated balances on the asset register will need to be written out. • You will also need to charge depreciation as it is now PPE

  50. IAS 40 Reclassification Investment Property to PPE (1) • Summary 2009-10 IFRS Adjustment entries • Reverse any 2009-10 SORP based I.P transactions e.g. revaluation gains or losses, depreciation; • Revalue the asset and account for revaluation under PPE; • Loss on revaluation is chargeable to the I&E (as no revaluation reserve balance exists); • Gain on revaluation is credited to the Revaluation Reserve; • Apply depreciation to the revalued asset figure; • Amend the asset register

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