inventories, agriculture, mineral resources, construction...

Inventories, agriculture, mineral resources, construction contracts,

revenues

Prof.(FH) Dr. Walter Egger

IAS 2 – inventories

•  Definition of inventories (IAS 2.6) •  assets

– Held for sale in the ordinary course of business –  In the process of production for such sale; or –  In form of materials or supplies to be consumed

in the production process or int the rendering of services

IAS 2 - inventories

•  Not applicable for (IAS 2.2) – Construction contracts (IAS 11) – Financial instruments (IAS 32, 39, IFRS 7) – Biological assets (IAS 41) – Mineral resources (IFRS 6)


•  Measurement of inventories (IAS 2.9) – At the lower of cost and net realisable value

•  Cost measurement •  At cost of purchase/cost of conversion or •  Lower net realisable value (to compare cost of

inventory with marketprices of the products) – „lossfree measurement“

IAS 2 - inventories

•  Cost of purchase/conversion (IAS 2.10) – The cost of inventories shall comprise all costs

of purchase, cost of conversion and other costs incurred in bringing the inventories to their present location and condition

IAS 2 - inventories

•  Cost of purchase (IAS 2.11) – Purchase price –  Import duties and other taxes – Transport, handling – Other costs, attributable to finished goods,

materials and services – Trade discounts, rebates and other similar items

to be deducted in determining cost of purchase

IAS 2 - inventories

•  Cost of conversion (IAS 2.12) – Direct cost (directly related to the units of

production) •  E.g. direct labour •  But also direct Material expenses

– Systematic allocation of fixed and variable production overheads

IAS 2 - inventories

•  Fixed production overheads – Remain relatively constant regardless of the

volume of production •  Depreciation and maintenance of factory buildings

and equipment •  Cost of factory management and administration

•  Variable production overheads –  Indirect material –  Indirect labour

IAS 2 - inventories

•  Allocation of production overheads to the costs of conversion is based on the normal capacity of the production facilities (IAS 2.13) –  Normal capacity is the production expected to be

achieved on average over a number of periods or seasons under planned Maintenance

–  Measureing via •  Productionquantities •  productiontimes

IAS 2 - inventories

– Only to be mentioned if material – Low production or idle plants don´t increase

cost of conversion (not used capacity) – Not allocated costs = expenses – Overheads are allocated to each unit of

production on the basis of the acutal use of the production facilities

IAS 2 - inventories

•  By-products (IAS 2.14) – By-products are measured at net realisable

value and this value is deducted from the cost of the main product

•  By-products are usually immaterial. Because of that this „differnce method“ the costs of the mainproduct can be measured reliably

IAS 2 - inventories

•  Other costs – Are included in the cost of inventories only to

the extent that they are incurred in bringing the inventories to their present location and condition

–  Non-production overheads –  Cost of designing products for specific customers –  Cost of transportation between group companies

IAS 2 - inventories

•  Excluded from the cost of inventories – Abnormal amounts of wasted materials, labour

or other production costs – Storage costs, unless they are part of the regular

production process – General administrative costs – Selling costs

IAS 2 - inventories

•  Cost of inventories of a service provider (IAS 2.19) – Cost of production

•  Cost of labour •  Other cost of personnel directly engaged in

providing the service (incl. Supervisory personnel) •  Attributable overheads

–  not: profit margins, non-attributable overheads

IAS 23 - Borrowing Costs

•  Borrowing Costs (IAS 23.5) –  Interst on bank overdrafts and borrowings (longterm

and shortterm) –  Amortisation of discounts or premiums relating to

borrowings –  Amortisation of ancillary costs incurred in connection

with the arrangement of borrowings –  Finance charges in respect of finance leases –  Exchange differences arising from foreign currency

borrowings to the extent as beeing adjustment to interest cost

IAS 23 - Borrowing Costs

•  Qualifying assets (IAS 23.6) •  Assets that necessarily takes a substantial period of

time to get ready for its intended use •  Manufacturing plants •  Power generation facilities •  Investment properties

– Not: inventories that are routinely manufactured or otherwise produced in large quantitites on a repetitive basis over a short period of time

IAS 23 Borrowing Costs

•  Benchmarkmethod (not any more!) – Recognised as an expense

•  Recognition – Borrowing Costs, directly attributable to the

acquisition or construction of a qualifying asset –  capitalisable borrowing costs = Borrowing

Costs that would be avoidable without funding the qualifying asset


•  Borrowing costs – Actual borrowing costs incurred on the

borrwing attributable specifically to the qualifying asset

– Capitalisation rate of the weighted average of the borrowing costs to the borrowings of the entity that are outstanding during the period (without specifically attributed costs)


•  Commencement of capitalisation (IAS 23.20-22) –  Expenditures for the asset are being incurred –  Borrowing costs are being incurred –  Activities that are necesarry to prepare the asset for ist

intended use or sale are in progress

•  Suspension of capitalisation (IAS 23.23-24) –  During extended periods in which active development

is interrupted


•  Cessation of capitalisation (IAS 23.25-28) – With the end of the substantially activities –  If completed in parts – for every part

•  Disclosure – Accounting policy – Amount of borrowing costs capitalised in the

period – Capitalisation rate

IAS 2 - inventories

•  Techniques for the measurement of cost –  Standard cost (IAS 2.21)

•  Normal levels of materials and supplies, labour, efficiency and capacity utilisation

•  Regularly reviewed and if necesarry, revised

–  Retail Method (IAS 2.22) •  For the retail industry with large numbers of rapidly changing

items with similar margins •  Cost of the inventory is determined by reducing the sales value

by the appropiate percentage gross margin

IAS 2 - inventories

•  Cost formulas (IAS 2.23-27) –  Individual costs – Group formulas

•  FIFO •  Average cost formula

– NOT: LIFO


•  Net realisable value (IAS 2.28-33) –  Single items or groups of inventories

Estimated sales price - upcoming production cost (if unfinished) - cost of distribution = Net Realisable Value

–  Not to be used in measuring: •  Cost of general administration and distribution •  Profit margin

IAS 2 - inventories

•  Recognition in Income Statement (IAS 2.34-35) – Expenses, if

•  Sold •  Impaired (net realisable value) •  Reversal - income

IAS 2 - inventories •  Disclosures (IAS 2.36-39)

–  Accounting policies adopted •  Measuring (cost formulas)

–  Classifcation of inventories •  Merchandise, production supplies, materials, work in progress,

finished goods •  Carrying amount of each class

–  Carrying amount of inventories at net realisable value –  Inentories recognised as an expense of this period (not necesarry if

income statements „expenses by nature“) –  Write-down of inventories –  Reversal of write-downs –  Circumstances of the reversal –  Carrying amount of inventories pledged as security for liabilities

IAS 2 - inventories

•  Presentation – Balance sheet (one item or in classes of

inventories) –  Income statement

•  Expenses by nature: expenses for material and consumables, change in inventories

•  Expenses by function: cost of goods sold

IAS 41 agriculture

•  Biological assets –  Sheep, trees in a plantation forest, plants, dairy cattle,…

•  Agricultural produce at the point of harvest –  Wool, logs, cotton, milk, …

•  Not IAS 41 –  Products that are the result of processing after harvest

•  Yarn, lumber, clothing, cheese, …

IAS 41 Agriculture •  Recognition of biological assets or agricultural products

–  Control as a result of past events –  Future economic benefit –  Fair value or cost can be measured

•  Measurement (IAS 41.12-25) –  Biological asset on initial recognition and at each balance sheet

date •  At fair value less estimated point-of-sale costs

–  Agricultural produce harvested from an entity´s biological assets •  At fair value less estimated point-of-sale costs at the point of harvest

IAS 41 Agriculture

•  Point-of-sale costs (IAS 41.14) – Commissions to broakers and dealers

•  Levies by regulatory agencies •  Commodity exchanges •  Transfer taxes and duties

– Not included •  Transport and other costs necessary to get assets to a

market

IAS 41 Agriculture

•  Fair market value – Active market – Without acitve market

•  Most recent market transaction price •  Market prices for similar assets with adjustments •  Sector benchmarks

IAS 41 Agriculture

•  Gains and Losses (IAS 41.26-29) –  In profit and loss – Gain

•  Calf is born •  Result of a harvest

IAS 41 Agriculture

•  Inability to measure fair value reliably (IAS 41.30-33) – Measurement at cost less accumulated

depreciation/impairment – For determining cost/depr/impairment use IAS

2, IAS 16, IAS 36

IAS 41 Agriculture

•  Government grants (IAS 41.34-38) – Unconditional grants related to a biological

asset is to be recognised as income (when receivable)

– Conditional grants – income when conditions are met

•  Disclosures (IAS 41.40-57)

IFRS 6 Mineral Resources

•  Measurement at recognition (IFRS 6.8-11) –  At cost –  Elements of cost (not exhaustive)

•  Acquisition of rights to explore •  Topographical, geological, geochemical and geophysical

studies •  Exploratory drilling •  Trenching •  Sampling and •  Activities in relation to evaluating the technical feasibility and

commercial viability of extracting a mineral resource


•  Measurement after recognition (IFRS 6.12) –  Cost model or –  Revaluation model (IAS 38, IAS 16)

•  Classification – reclassification of exploration and evaluation assets

•  Intangible (like drilling rights) •  Tangible (like vehicles and drilling rigs)

–  Reclassification when the technical feasibility and commercial viability of extracting a mineral resource are demonstrable


•  Impairment (IFRS 6.18) –  Indication for impairment

•  Right to explore has expired or will expire in the near future •  Substantive expenditure on further exploration for and

evaluation of mineral resources in the specific area is neither budgeted nor planned

•  Entity has decided to discontinue exploration and evaluation in a specific area

•  Sufficient data indicate that expl and eval cost will not be covered in full from successful development or by sale

•  Disclosures (IFRS 6.23-25)

IAS 18 - Revenue

•  Applicable for (IAS 18.1) – Revenues arising from

•  Sale of goods •  Rendering of services •  The use by others of entity asssets yielding interest,

royalties and dividends

IAS 18 - Revenue

•  Cash sale – at time of receiving cash •  Deferred payment – fair value of the Revenue is

less than the nominal value –  Present value of the proceedings –  Interst expenses/income – financing activities

•  Exchange or swaps of goods and services –  No revenue if a good is exchanged for a good of a

similar nature –  Revenue if a good is exchanged for a different good

IAS 18 - Revenue

•  Identifacation of the Transaction (IAS 18.13) –  eg selling price of a good includes subsequent

servicing over a certain period •  Revenue for the price component of the selling of

the good •  Amount which is allocated to the servicing

component is deferred and recognised, when service is performed

IAS 18 - Revenue

•  Sale of goods – Recognition when

•  The entity has transferred to the buyer the significant risks and rewards of ownership

•  Control over the goods has been transferred •  Amount of the revenue can be measured reliably •  It is probable that the economic benefits associated

with the transaction will flow to the entity •  The costs incurred or to be incurred in respect of the

transaction can be measured reliably

IAS 18 - Revenue

•  Rendering of Services – When the outcome of a transaction involving

rendering of goods is measureable reliably •  Percentage of completion method

–  Amount of revenue can be measured reliably –  Probability of the inflow of the economic benefit –  Stage of completion can be measured reliably –  Cost can be measured reliably

IAS 18 - Revenue

–  prerequisits •  Effective internal financial budgeting and reporting

system •  Stage of completion shall be measured reliably •  When the outcome of the transaction cannot be

estimated reliably, revenue shall be recognised only to the extent of the expenses recognised (and recoverable)

•  When the outcome cannot be estimated reliably and the costs incurred cannot be measured reliably, no profit is recognised

IAS 18 - Revenue

•  Interest, Royalties and Dividends –  Interest – effective interest method (incl.

discounting, amortising of cost of money etc) – Royalties, on an accrual basis, in accordance

with the substance of the relevant agreement – Dividends when the shareholder´s right to

receive payment is established

IAS 18 - Revenue •  Disclosures

–  Accounting policies for the recognition of revenues, including the methods to determine the stage of completion (rendering of services)

–  Categories of revenue •  Sale of goods •  Rendering of services •  interest •  royalties •  dividends

–  Amount of Revenues arising from exchanges of goods or services

IAS 18 - Revenue

•  Bill & Hold Sales (at the buyer´s request) – Probability that the delivery will be made – The item is on hand at time of recognition – The buyer specifically acknowledges the

deferred delivery instructions – Usual payment terms – NO recognition when there is simply an

intention to acquire or manufacture the goods in time of delivery

IAS 18 - Revenue

•  Goods shipped subject to conditions –  Installation and inspection, before that when

•  Installationprocess is simple in nature (plug and play) •  Inspection is performed only for purposes of final

determination of contracht prices

–  On approval when the buyer has negotiated a limited right of return

•  When the shipment has been formally accepted by the buyer and there is uncertainty about the possiblity of return

IAS 18 - Revenue

–  Consignment sales •  Revenue is recognised by the shipper when the goods are sold

by the recipient to a third party

–  Cash on delivery sales •  When cash is received by the seller or the agent

•  Lay away sales when goods are delivered only when the buyer makes the final payment in a series of instalments –  On delivery or when a significant deposit is received

and the goods are at hand and ready for delivery

IAS 18 - Revenue

•  prepayments – Recognition on delivery

•  Sale and repurchase agreement – Probability of selling by the receipient

•  Sale to intermediate parties (distributors, dealers or others) for resale – When risks and rewards of ownership have

passed

IAS 18 - Revenue

•  Abonnements –  Revenue recognised on a straight line basis

•  Instalment payments –  Interest from discounting is also recognised in revenue

•  Real estate sales –  Normally recognised when legal title passes to buyer –  When the aggragate of the payments received provides

insufficient evidence of the buyer´s commitment to complete payment

•  Revenue recognised only to the extent cash is received

IAS 18 - Revenue

•  Rendering of services –  Installation fees:

•  Stage of completion

–  Servicing fees included in the price of the product •  After sale support (hotline)

–  Sale is to be seperated in selling portion and servicing portion

–  Advertising commissions •  When it appears before the public

IAS 18 - Revenue

–  Insurance agency commissions •  Commencement of the insurance

– Financial service fees •  Depends on contract

– Admission fees •  When performance takes place

– Tuition fees •  Over the period

IAS 18 - Revenue

–  Initiation, entrance and membership fees •  If services have to be paid in special, at the time otherwise

–  At begin of the period, if there is no credit risk

–  Franchise fees •  a) supplies of equipment (on delivery) •  b) supplies of initial and subsequent services (when rendered) •  c) continuing franchise fees (as the serivces are provided) •  d) agency fees (only when are at profit)

–  Development of customised software •  Stage of completion

IAS 18 - Revenue

•  Interest, Royalties and Dividends – Licence fees and royalties

•  Over the period •  Without period: on commencement

IAS 11 – Construction contracts

•  Contract, that specifically negotiated for the construction of an asset or a combination of assets that are closely interrelated or interdependent in terms of their design, technology and function of their ultimate purpose or use –  No standard service

•  Contract can be over a period less than a year


•  If the outcome is to be estimated reliably – Percentage-of-Completion-Method

•  Revenue recognised at stage of completion

– Expected losses •  Have to be recognised as an expense immediately


•  When the outcome cannot be measured reliably – Recognition of revenues to the extent of

contract costs incurred (probable to be recoverable)

•  No construction contract – Completed contract method (IAS 2)

IAS 11 – Construction Contracts

•  Fixed Price Contract –  Total contract revenue can be measured reliably –  It is probable that the economic benefits associated with

the contract will flow to the entity –  Both the contract costs to complete and the stage of

completion at balance sheet date can be measured reliably

–  Contract costs can be clearly identified and measured reliably, contract costs incurred can be compared with prior estimates


•  Cost plus contract – Economic benefit will flow to the entity – Contract costs can be measured reliably and be

clearly identified


•  Contract revenues

–  Initial amount or revenue agreed in the contract +/- variations - /+ claims + incentives = contract revenue


•  Contract costs – Contract costs shall comprise

•  Costs that relate directly to the specific contract •  Costs that are attributable to contract activity in

general and can be allocated to the contract •  Other costs as are specifically chargeable to the

customer under the terms of the contract


–  Direct costs (examples) •  Site labour costs, incl. Supervision •  Costs of materials used in construction •  Depreciation of plant and equipment used on the contract •  Cost of moving plant and equipment and materials to and from

the contract site •  Costs of hiring plant and equipment •  Costs of design and technical assistance that is directly related

to the contract work •  Estimated costs of rectification and guarantee work, incl

expected warranty costs

IAS 11 – Constuction Contracts –  Costs that may be attributable to contract activity in

general and can be allocated to specific contracts inlude:

•  Insurance •  Costs of design and technical assistance that are not directly

related to a specific contract •  Construction overheads

–  No construction costs •  General administration •  Selling costs •  Research and development (if not reimbursed due to contract) •  Depreciation of idle plant and equipment that is not used o a

particular contract


•  Measurement of revenue –  Revenue up to date = stage of completion * total

revenue –  Measurement of „Progress towards completion“

•  Cost to cost method: cost incurred to date total estimated costs

•  Contract milestones: contract value of milestone completed total contract value

•  Units of delivery method: products produced or delivered to date total contracted products


•  presentation – Revenue (unbilled revenue) –  receivable („unbilled sales“) – Prepayments can be offset with the unbilled

receivables

IAS 11 – construction contracts

•  disclosures – Recognised contract revenues – Methods to determine the contract revenue

recognised in the period – Methods used to determine the stage of

completion

IAS 11 - Fertigungsaufträge

•  Disclosures for contracts in progress – Aggregate amount of costs incurred and

recognised profits (less recognised losses) to date

– Advances received – Amount of retentions (progress billings that are

not paid until the satisfaction of conditions specified)

IAS 11 – construction contracts

•  Further dislosures – Gross amount due from customers for contract

work as an asset •  Costs incurred plus recognised profits, less •  The sum of recognised losses and progress billings

– Receivable > process billings


•  Further disclosures – Gross amount dur to customers for contract

work is the net amount of •  Costs incurred plus recognised profits, less •  Teh sum of recognised losses and progress billings

–  receivable < process billings

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