IAS 36 AND IFRS 40

1. International
accounting standards
(IAS)
DONE BY
BCMH/8006/16 ANEETA MARIA VINCENT
BCMH/8017/16 VEENA VINOD
BCMH/8025/16 KARAMJIT SINGH
BCMH/8027/16 AFROZ FATHIMA AZIS ALI

2. The international accounting
standards (IAS)
The international accounting standards (IAS) were an older set of
standards stating how particular types of transactions and other events
should be reflected in financial statements. In the past,
international accounting standards were issued by the Board of the
International Accounting Standards Committee (IASC); since 2001, the new
set of standards has been known as the international financial reporting
standards (IFRS) and has been issued by the International Accounting
Standards Board (IASB).
In this presentation;
• IAS 36 Impairment of Assets 2004*
• IAS 40 Investment Property 2003*

3. IAS36 Impairment ofAssets

4. Objective of IAS 36
• To ensure that assets are carried at no more
than their recoverable amount and to define
how recoverable amount is determined.

6. • Impairment loss
Amount by which carrying amount of an asset or cash generating
unit exceeds its recoverable amount.
• Carrying amount
The amount at which as asset is recognized after deducting any
accumulated deprecation and accumulated impairment losses
thereon.
Book value OR value displayed in balance sheet.

7. Recoverable amount
The amount which is expected to be recovered by use or sale of the asset, whichever
is higher.
• The recoverable amount of an asset is the greater of the two calculations shown
below:
• Recoverable Amount = Fair Value - Cost ofDisposal
• Recoverable Amount = Value in Use
Fair value is the price that would be received to sell anasset.
Costs to sell would include legal costs to selling and direct incremental costs e.g. costs
which would necessarily be incurred if the asset issold
Value in use is the present value of the future cash flows expected to be derived from
an asset or cash-generating unit

8. • Example: CompanyA
• Building purchased = $ 2 million ; using straight line deprecation
• Estimated life = 20 years
• Used years by building = 5 years
• Selling cost of building = $ 1 million
• Cost incurred = $ 50,000 or $ 0.05 million
• PV of net cash flows the building = $ 1.2 million ( alternatively)
• The basic rule is to recognize impairment if carrying amount exceedsthe
recoverable amount.
• The building has a cost of $2 million, useful life of 20 years and is used for 5 years. The
accumulated depreciation is $2/20*5 or 0.5 million
• Carrying amount = building purchased – accumulated depreciation
• = 2 M – 0.5 M
• = $ 1.5 M

9. • Recoverable amount is the higher of fair value less costs to sell and value inuse.
• Fair value less costs to sell = $1 million - $0.05 million
= $0.95 million.
OR
• Value in use is the present value of future cash flows = $1.2 million.
• Carrying amount is $1.5 million while recoverable amount is $1.2 million.An
impairment loss of $0.3 million is to be recognized. The journal entry wouldbe:
Accumulated impairment
loss 300,000

10. • At the end of each reporting period, an entity is required to assess whether there
is any indication that an asset may be impaired (i.e. its carrying amount may be
higher than its recoverable amount). IAS 36 has a list of external and internal
indicators of impairment. If there is an indication that an asset may be impaired,
then the asset's recoverable amount must be calculated. [IAS 36.9]
• The recoverable amounts of the following types of intangible assets are measured
annually whether or not there is any indication that it may be impaired. In some
cases, the most recent detailed calculation of recoverable amount made in a
preceding period may be used in the impairment test for that asset in the current
period: [IAS 36.10]
I. an intangible asset with an indefinite useful life
II. an intangible asset not yet available for use
III. goodwill acquired in a business combination
Identifying an asset that may be impaired

11. Impairmen
t loss
Indicators of Impairments
Carrying
amount
Recoverable
amount
Impairment
loss
External
factors
Internal
factors
Impairment
loss

12. • External Factors • Internal Factors
• market value declines
• negative changes in technology,
markets, economy, or laws
• increases in market interest rates
• net assets of the company higher
than market capitalization
• obsolescence or physical
damage
• asset is idle, part of a
restructuring or held for
disposal
• for investments in subsidiaries,
joint ventures or associates, the
carrying amount is higher than
the carrying amount of the
investee's assets, or a dividend
exceeds the total comprehensive
income of the investee

13. Cash Generating Unit ( CGU)
Cash
Generating
Unit
Formedwith
group of
assets
Capable of generating
cashflows
independently of
other CGU’s
Recoverable amount should be determined for the individual asset, if
possible. [IAS 36.66]
If it is not possible to determine the recoverable amount for the individual
asset, then determine recoverable amount for the asset's cash-generating
unit (CGU). [IAS 36.66] The CGU is the smallest identifiable group of assets
that generates cash inflows that are largely independent of the cash
inflows from other assets or groups of assets.

14. INVESTMENT PROPERTY
IAS 40

15. IAS 40 Investment Property applies to the accounting for property (land
and/or buildings) held to earn rentals or for capital appreciation (or
both). Investment properties are initially measured at cost and, with
some exceptions. May be subsequently measured using a cost model or
fair value model, with changes in the fair value under the fair value
model being recognized in profit or loss.
Overview

16. Examples of investment property
Not
investment
property
Investment
Property

17. Other classification issues
Property held under an operating lease.
A property interest that is held by a lessee under an operating lease may be
classified and accounted for as investment property provided that: [IAS 40.6]
the rest of the definition of investment property is met
the operating lease is accounted for as if it were a finance lease in accordance
with IAS 17 Leases
the lessee uses the fair value model set out in this Standard for the asset
recognised
An entity may make the foregoing classification on a property-by-property basis.
Partial own use.
If the owner uses part of the property for its own use, and part to earn rentals or
for capital appreciation, and the portions can be sold or leased out separately,
they are accounted for separately. Therefore the part that is rented out is
investment property. If the portions cannot be sold or leased out separately, the
property is investment property only if the owner-occupied portion is
insignificant. [IAS 40.10]

18. Ancillary services.
If the entity provides ancillary services to the occupants, the appropriateness
of classification as investment property is determined by the significance of
the services provided. If those services are a relatively insignificant component
of the arrangement as a whole, then the entity may treat the property as
investment property. Where the services provided are more significant, the
property should be classified as owner-occupied. [IAS 40.13]
Intracompany rentals.
Property rented to a parent, subsidiary, or fellow subsidiary is not investment
property in consolidated financial statements that include both the lessor and
the lessee, because the property is owner-occupied from the perspective of
the group. However, such property could qualify as investment property in the
separate financial statements of the lessor, if the definition of investment
property is otherwise met

19. Initial measurement
Investment property is initially measured at cost, including transaction costs.
Such cost should not include start-up costs, abnormal waste, or initial
operating losses incurred before the investment property achieves the
planned level of occupancy. [IAS 40.20 and 40.23]
Measure at
cost
including
transaction
costs
Purchase
price
Deferred
cash price
equivalent
(interest
expensed)
Costs when
construction
complete
Legal fees
Property
transfer
taxes
Direct
expenditure

20. Exclude from cost at recognition
Start
up costs
Operating losses
before planned
level of occupancy
Abnormal waste or
development expenditure

21. Measurement subsequent to
initial recognition
IAS 40 permits entities to choose between: [IAS 40.30]
a fair value model, and
a cost model.
One method must be adopted for all of an entity's investment property.
Change is permitted only if this results in a more appropriate presentation.
IAS 40 notes that this is highly unlikely for a change from a fair value model
to a cost model.

22. Measurement after recognition:
Accounting Policy
Choose and apply to all
investment property
Fair Value Model
Recognise gain or loss
in P&L of each period
Change from FV to cost
model not appropriate
Cost Model
Disclose FV
(professional valuation
recommended)
Rebuttable presumption
that FV can be
measured or residual
value must be zero

23. Fair Value Model
Measure all investment properties at fair value
Investment under operating lease may not be measured at costafter
initial recognition; it must be measured at fair value
Recognise gains and losses from changes in fair value in the profit
and loss account until disposal
Once held for sale, measure investment property according to IFRS
5
Fair value must reflect market conditions at the balance sheet date
Current prices in active market for similar property in same location and
condition under similar lease or other contract
Current/recent prices adjusted to reflect differences
If reasonable estimate of fair value not available for a particular
property, use IAS 16 cost model in exceptional cases
Residual value must be zero
Apply IAS 16 cost model until disposal

24. Fair Value
Price between
knowledgeable
willing parties
in arms length
transaction
Exclude
special
financing
terms
Include
disposal costs
Reflect market
conditions at
balance sheet
date
Include rental
income and
similar
outflows

25. Cost model
After initial recognition, investment property is accounted for in
accordance with the cost model as set out in IAS 16 Property, Plant
and Equipment – cost less accumulated depreciation and less
accumulated impairment losses.

26. Transfers to, or from, investment property should only be made when
there is a change in use, evidenced by one or more of the following:
Transfers to or from investment property classification
owner-occupation
(fair value at date
of change in use)
development for
sale
End of
owner
occupation
commencement of
an operating lease
to another party

27. Disposal
An investment property should be derecognised on disposal or when
the investment property is permanently withdrawn from use and no
future economic benefits are expected from its disposal. The gain or
loss on disposal should be calculated as the difference between the net
disposal proceeds and the carrying amount of the asset and should be
recognised as income or expense in the income statement. [IAS 40.66
and 40.69] Compensation from third parties is recognised when it
becomes receivable. [IAS 40.72]

28. Disclosure: Fair Value Model & Cost Model
• Whether fair value or cost model applied
• Reasons for classifying property under operating leaseas
investment property
Model
• Criteria to distinguish owner-occupied from investment
property
• Methods and assumptions to calculate fair value
• Market evidence to support fair value
• Whether or not a professional valuation was obtained
Value
• Restrictions on realisability (existence and amounts)
• Contractual obligations to develop, repair, maintain or
enhance investment property
Obligations

29. Disclosure: Fair Value Model and Cost
Model
• Rental income
• Direct operating expenses relating to rental income
• Direct operating expenses not related to rental income
• Cumulative change in fair value from sale of asset at cost
to fair value pools
Amounts in
profit or loss
• Reconciliation between carrying amounts at beginning and
end of period
• Reconciliation between valuation obtained and valuation
included in financial statements (if adjusted)
Fair value
model
• Description of investment property
• Reason why fair value cannot be determined
• Range of estimates in which fair value is likely to fall
• Disposal of investment property not carried at fair value
(carrying amount and recognised gain or loss)
Cost model

30. Cost model: Additional disclosure
Depreciation methods used
Useful lives
Gross carrying amount
Accumulated depreciation and impairment loss at beginning and end of period
Reconciliation of carrying amount at beginning and end of period
Additions
From subsequent expenditure
From acquisitions
Assets classified as held for sale
Depreciation
Impairment loss recognised and reversed
Net exchange differences on translation
Transfers to and from inventories and owner-occupied property
Fair value of investment property or
Description of property
Reason why fair value cannot be determined
Range of estimates in which fair value is likely tolie

31. Fair value model: Additional disclosure
Reconciliation between carrying amount at beginning
and end of period
Additions
From acquisition
From subsequent expenditure
From acquisitions through business combinations
Assets classified as held for sale
Net gain or loss from fair value adjustments
Net exchange difference on translation
Transfer to and from inventories and owner-occupied
property
Other changes