Exercise 1.

11

DEFINITIONS OF ELEMENTS AND RECOGNITION

CRITERIA

Explain how you would account for the following items, justifying your answer by
reference to the Conceptual Frameworks definitions and recognition criteria:
(a) A trinket of sentimental value only.
(b) You are guarantor for your friends bank loan:
(i) You have no reason to believe your friend will default on the loan.
(ii) As your friend is in serious financial difficulties, you think it likely that he will
default on the loan.
(c) You receive 1000 shares in X Ltd, trading at $4 each, as a gift from a grateful client.
(d) The panoramic view of the coast from your cafs windows, which you are convinced
attracts customers to your caf.
(e) The court has ordered your firm to repair the environmental damage it caused to the
local river system. You have no idea how much this repair work will cost.
(a)

Trinket of sentimental value

Fails the para 49(a) asset definition as it does not constitute future economic benefits,
defined in para 53 as the potential to contribute, directly or indirectly, to the flow of
cash and cash equivalents to the entity.
Recognition criteria are irrelevant, as there is no asset to recognise.

(b)

Guarantor for friends loan

(i)

Friend unlikely to default on his loan

Meets the para 49(b) liability definition: (1) present obligation legal
obligation via the guarantor contract; (2) past event signing the guarantor
contract; (3) settlement involving outflow of economic benefits payment of
the guarantee.
Fails probability recognition criterion, as it is not likely that you will be
required to pay on the guarantee. Hence, no liability can be recognised.
However, note disclosure of the guarantee may be warranted (para 88).

(ii)

Friend likely to default on his loan

Again, meets the liability definition as per (i) above.
Meets both recognition criteria probable that outflow of economic benefits
will be required, and settlement amount can be reliably measured (amount
owing). Hence, a liability should be recognised.
Also meets the expense definition and recognition criteria. Definition: (1)
decrease in economic benefits in the form of a liability increase you now owe
the amount of your friends loan; (2) during period the liability increase
arose during period; (3) results in equity decrease if liabilities increase and
assets do not change, equity decreases. Recognition criteria: The decrease in
future economic benefits has arisen, as you now owe the amount of your

friends loan. The bank can advise exactly how much your friend owes and so
it can be reliably measured.
(c)

Receipt of 1000 shares in X Ltd, trading at $4 each, as a gift from a grateful client.
The receipt of the shares meets the asset definition: (1) represent FEBs (via future
sales or dividend stream); (2) controlled by you (only you can benefit from either
selling them or receiving dividends); (3) past event (their receipt).
They also meet the asset recognition criteria: probable that FEBs will eventuate (via
sale or dividend stream); and the shares have a value (they are trading at $4 each)
that can be reliably measured (this value can be verified via stock exchange etc.).
The shares also meet the income definition and recognition criteria. Definition: (1)
increase in EBs in the form of an asset increase you now own the shares; (2)
during period the shares were received during period; (3) results in equity increase
if assets increase and liabilities do not change, equity increases. Recognition
criteria: The increase in FEBs has arisen, as you now own the shares (asset). The
shares value is known and so can be reliably measured.

(d)

Cafs panoramic view

The view fails the definition as the entity does not control the FEBs that are expected
to flow from the view the entity cannot deny or regulate access by others to the
view.
Recognition criteria are irrelevant, as there is no asset to recognise.

(e)

Court order to repair environmental damage caused to the local river system. You have
no idea how much this repair work will cost.
The court order meets the liability definition: (1) present obligation legal
obligation; (2) past event order has been made; (3) settlement will involve outflow
of EBs future payment for repair of damage.
Fails reliable measurement recognition criterion, as you have no idea as yet how
much the repair work will cost. Hence, no liability can be recognised. However,
note disclosure of the court order may be warranted (para 88).
However, if you know a minimum amount that you will have to pay, then the reliable
measurement criterion is met for this amount. The probability criterion is met as it is
certain (given that you have been ordered by the court) that you will have to pay the
repair cost. Again, note disclosure may still be warranted advising that the cost may
be well in excess of this amount.

Exercise 3.1

VALUATION PREMISE FOR MEASUREMENT OF FAIR VALUE

Discuss how you would measure these fair values.

1. Determine the asset or liability that is the subject of measurement:
In this case, there are 2 assets that could be measured at fair value, namely land and factory.
An alternative would be to consider the land and the factory as a single asset.

2. Determine the valuation premise consistent with the highest and best use
The land could be sold for residential purposes for an estimated $1m. Given the cost to
demolish the existing factory of $100 000, the land could be sold for residential purposes for
$900 000. Measuring fair value in this fashion assumes a specific use and is based on an inexchange valuation premise as the land is considered on a stand-alone basis.
The land and factory could also be sold as a package for use by market participants in
conjunction with other assets. The factory has been depreciated by the reporting entity to half
its original cost. Given the cost to build a new factory is $780 000, a depreciated replacement
cost of the existing factory could be said to be $390 000. However as the factory could
presumably be viably built on a cheaper block of land i.e. one not usable for residential
purposes, it is unlikely that there is a market for the land and the factory on an in-use basis. A
market participant would be forced to pay the $900 000 for the factory and the land given the
alternative use of the land for residential purposes.
3. Determine the most advantageous market for the assets
The most advantageous market would appear to be the selling of the property for residential
purposes.
4. Determine the valuation technique
The market approach would be the appropriate valuation technique given that there are
observable market inputs in relation to the selling prices of similar properties.
The land has a fair value based on market prices for similar properties of $900 000. The factory
has a zero fair value as a separate asset.
Example 3.2 of the Illustrative Examples considers a similar situation to this case.
The highest and best use of the land is determined by comparing:
(i) the value of the land as a vacant block for residential purposes which would include the
factory at a zero fair value, and
(ii) the value of the land as currently developed for industrial use which would include the
factory as an ongoing asset.
The highest and best use is the higher of these two values.
If (i) is chosen, then the factory has a zero fair value and no subsequent depreciation would be
determined.
If (ii) is chosen, then it would be necessary to determine the fair value of the land separate from
the fair value of the factory in order to depreciate the factory. It could be argued that that the fair
value of the factory equals the difference between the fair value of the land for residential
purposes and the fair value of the combined assets.
Exercise 3.4

CHARACTERISTIC OF AN ASSET

Outline any provisions in IFRS 13 that relate to consideration of restrictions on the

measurement of fair value of assets, and how the situation described above the restrictions
would affect the measurement of the fair value of the property by MedSea.
The relevant paragraphs of IFRS 13 are: 11, 20, 28(b) as well as BC46 and BC100
A definition of these paragraphs is given in the relevant sections for IFRS 13
Note that the adjustment for a restriction is not a level 1 input, and if the adjustment is
significant, the fair value measure would be categorised at a lower level of the fair value
hierarchy.
The asset considered in this case is the house and the land. There are no restrictions on the house
but there are restrictions on the land. There are 2 restrictions on the land:
- the trees cannot be cut down until Mr Merman dies; and
- there is a gas pipeline across one corner of the land.
The restriction on the cutting down of the trees is enforceable on MedSea but not on any
subsequent buyers of the property. Because the restriction is specific to MedSea and not to other
market participants the restriction is not considered in measuring the fair value of the property
fair value measurement is not entity-specific. Therefore the fair value of the land is based on the
higher of its fair value as the grounds of the current property, ie on an in-use valuation premise
and its fair value in exchange to market participants ie on an in-exchange valuation premise,
considering the use of the property as a residential building site. The restriction on the property
in relation to the felling of the trees is not a consideration in this measurement process.
The restriction in relation to the gas pipeline is a condition specific to the asset itself in the same
way as the condition or location of an asset is specific to an asset. This restriction is transferred
to subsequent buyers of the property, the market participants. Measurement of the fair value of
the property must then take into consideration the existence of the restriction and the effect on
the valuation of the property. For example, if a building cannot be built over the pipeline as the
gas authorities may need access to the pipeline, then this restricts the size of any building that
could be built on the property. This affects the value of the land regardless of whether an in-use
or an in-exchange valuation premise is applied.
Exercise 9.11

APPLYING THE LOWER OF COST AND NRV RULE

Calculate the value of inventory on hand at 30 June 2013 in accordance with the
requirements of IAS 2.
(NRV = estimated selling price less cost of completion and disposal)
Item
A1458
A1965

Qty

Cost
Total
NRV
per unit
Cost
per unit
$
$
$
600
2.30 1 380.00
3.26
815
3.40 2 771.00
2.95

Total
NRV
$
1 956.00
2 404.25

Lowe
r

Adjust
$

Cost
NRV

366.75

B6730
749
DO943
98
G8123
156
W2167 1 492

7.34 5 498.66
1.23
120.54
3.56
555.36
6.12 9 131.04

9.05
0.88
5.03
7.30

6 778.45
86.24
784.68
10 891.60

Cost
NRV
Cost
Cost

34.30
-

Therefore, inventory on hand would be:

Inventory (at cost)
Inventory (at NRV)
Total inventory
Exercise 11.5

$16 565.06
2 490.49
$19 055.55
REVALUATION OF ASSETS

1. Prepare the journal entries during the period 1 July 2014 to 30 June 2015 in relation to
the equipment
2. According to accounting standards, on what basis may management change the method
of asset measurement, for example from cost to fair value
1.
Sonner Ltd
31 December 2014
Depreciation expense Machine A
Accumulated depreciation
(1/2 x 10% x $300 000)

Dr
Cr

15 000

Depreciation expense Machine B

Accumulated depreciation
(1/2 x 10% x $200 000)

Dr
Cr

10 000

Machine A

Machine B

Cost
Accum depn
Fair value
Increment

300 000
135 000
165 000
180 000
15 000

15 000

10 000

Cost
Accum depn

200 000
40 000
160 000
155 000
5 000

Fair value
Decrement

Accumulated depreciation Machine A

Machine A
(Writing the asset down to carrying amount)

Dr
Cr

135 000

Machine A
Gain on revaluation of machinery (OCI)

Dr
Cr

15 000

135000

15 000

(Revaluation of asset)
Income tax expense gain on
revaluation of asset (OCI)
Deferred tax liability
(Tax-effect of revaluation)

Dr
Cr

4 500

Gain on revaluation of machinery (OCI)

Income tax expense (OCI)
Asset revaluation surplus Machine A
(Accumulation of net revaluation gain in equity)

Dr
Cr
Cr

15 000

Accumulated depreciation Machine B

Machine B
(Writing the asset down to carrying amount)

Dr
Cr

40 000

Loss revaluation decrement (P/L)

Machine B
(Revaluation of machine from $200 000
to $155 000)

Dr
Cr

5 000

Depreciation expense Machine A

Accumulated depreciation
(1/6 x x $180 000)

Dr
Cr

15 000

Depreciation expense Machine B

Accumulated depreciation
(1/5 x x $155 000)

Dr
Cr

15 500

4 500

4 500
10 500

40 000

5 000

30 June 2015

Machine A
Carrying amount
Fair value
Decrement

$
165 000
163 000
2 000

Machine B
Carrying amount
Fair value
Decrement

15 000

15 500
$
139 500
136 500
3 000

Accumulated depreciation Machine A

Machine A
(Writing down to carrying amount)

Dr
Cr

15 000

Loss on revaluation of machinery (OCI)

Machine A
(Revaluation downwards)

Dr
Cr

2 000

15 000

2 000

Deferred tax liability

Income tax expense (OCI)
(Tax-effect of revaluation decrement on asset
previously revalued upwards)

Dr
Cr

600

Asset revaluation surplus Machine A

Income tax expense (OCI)
Loss on revaluation of machinery (OCI)
(Reduction in accumulated equity due
to revaluation decrement)

Dr
Dr
Cr

1 400
600

Accumulated depreciation Machine B

Machine B
(Writing down to carrying amount)

Dr
Cr

15 500

Loss revaluation decrement

Machine B
(Writing down to fair value)

Dr
Cr

3 000

600

2 000

15 500

3 000

2: Basis for change in accounting policy

Refer to IAS 8 paragraph 9.(?? IAS 116 paragraph 31)
Discuss the cost basis method and the fair value method in relation to the relevance and
reliability of information.
Current information is generally more relevant than past information. Determination of cost is
generally more reliable than determination of fair value.
Discuss the trade-off between relevance and reliability, that is, as information becomes less
reliable it also loses its relevance. A fair value measure may, because of its timeliness, be more
relevant but if the measure becomes more unreliable, the relevance of the information decreases.
Exercise 11.14

DEPRECIATION CALCULATION

1. Discuss how the costs relating to the aircraft should be accounted for
2. Determine the expenses recognised for the 2014-2015 financial year.
1. Discuss:
- the advantages of a components approach versus a simple depreciation of the $10 million
dollars over the 10-year period.
- the treatment of the upgrades of cockpit equipment
- accounting for inspections

2.
Aircraft body:
Annual expense of $5000 for inspection for cracks
Depreciation expense = 1/10 (3 000 000 3/7 x $2 100 000) = $210 000
Engines:
Depreciation expense = 4 000 000/4 = $1 000 000
Maintenance expense = $300 000
Fittings
Seats: Depreciation = 1/3 x $1 000 000 = $333 333
Annual expense = $100 000
Carpets: Depreciation = 1/5 x 50 000 = $10 000
Cleaning = $10 000
Electrical: Passenger
Annual expense = $15 000
Depreciation = 1/6 x $200 000 = $33 333
Electrical: Cockpit
Annual expense = $250 000
Depreciation = 1/10 x $1 500 000 = $150 000
Food preparation equipment:
Annual expense = $20 000
Depreciation = 250 000/6 = $41 667
For the 2014-15 year:
Total other expenses = $700 000
Annual depreciation = $778 333
Exercise 11.17

ACQUISITIONS, DISPOSALS, DEPRECIATION

(show all workings and round amounts to the nearest dollar)

Prepare journal entries to record the transactions and events for the period 1 July 2013 to
30 September 2016 (Narrations are not required.)
Meerbeck Ltd
General journal entries

DATE

2013
1 July

DETAILS

Equipment
Cash

Dr

Cr

39 800
39 800

5 July
2014
30 June

2015
30 June

30 June

Equipment
Cash

4 200

Depreciation Equipment
Accumulated depreciation - Equipment
($44 000 $1 800)/10 = $4220

4 220
4 220

Depreciation Equipment
Accumulated depreciation - Equipment
{($44 000 $1200)/4 = $8560 + prospective
adjustment for change in estimates [$8560 4220] =
$4340}

12 900

Accumulated depreciation Equipment

Equipment
(Write down to carrying amount)

17 120

Equipment
Gain on revaluation of equipment (OCI)
(Fair value $30 000; Carrying amount $26 880;
Revaluation increase $3120)
Income tax expense (OCI)
Deferred tax liability
(Tax-effect of revaluation increment)

2016
30 June

4 200

12 900

17 120
3 120
3 120

936
936

Gain on revaluation of equipment (OCI)

Income tax expense (OCI)
Asset revaluation surplus
(Transfer to accumulated equity subsequent to
revaluation of asset)

3 120

Depreciation Equipment
Accumulated depreciation Equipment
($30 000 $1200)/3 = $9600

9 600

Accumulated depreciation Equipment

Equipment

9 600

936
2184

9 600

2016
30 June

9 600

(Write down to carrying amount)

Loss on revaluation of plant (OCI)
Loss on revaluation of plant (P&L)
Plant
(Fair value $16 000; Carrying amount $20 400;
Revaluation decrease $4400)
Deferred tax liability
Income tax expense (OCI)
(Tax effect on decrement relating to prior increment)

2016
30 Sept

3120
1280
4 400

936
936

Asset revaluation surplus

Income tax expense (OCI)
Loss on revaluation of plant (OCI)
(Reduction in accumulated equity due to devaluation of
plant)

2 184
936

Depreciation expense Equipment

Accumulated depreciation - Equipment
3/12 x [$16 000 $1200]/2

1 850

Accumulated depreciation Equipment

Carrying amount of Equipment
Equipment
Cash
Proceeds on sale Equipment

3 120

1 850
1 850
14 150
16 000
8 400
8 400