MT
ACCOUNTING PROFESSION (GENERAL ACCOUNTING PRINCIPLES FOR SMALLER ENTITIES) REGULATIONS
Table of Provisions (27)
Statutory Text (27 Articles)
ACCOUNTANCY PROFESSION (GENERAL ACCOUNTING
PRINCIPLES FOR SMALLER ENTITIES)
SUBSIDIARY LEGISLATION 281.03
ACCOUNTING PROFESSION
(GENERAL ACCOUNTING PRINCIPLES
FOR SMALLER ENTITIES) REGULATIONS
1st January, 2009
LEGAL NOTICE 51 of 2009, as amended by Legal Notice 58 of 2010.
The title of these regulations is the Accountancy
Profession (General Accounting Principles for Smaller Entities)
Regulations.
(Regulation 4)
General Accounting Principles for Smaller Entities
Section 1: Citation and objective
1.1 The title of this schedule is the General Accounting Principles for Smaller
Entities (GAPSE).
1.2 The objective of GAPSE is to ensure that reporting entities or groups falling
within its scope provide in their financial statements information about the financial
position, financial performance and cash flows of the entity or group that is useful to
users in assessing the stewardship of management and for making economic
decisions, r ecogn ising that the b alan ce between users’ needs in respect o f
stewardship and economic decision-making for entities or groups falling within its
scope is different from that for other reporting entities or groups.
Section 2: Interpretation
2.1 The terms "GAPSE", "these Principles", "this Schedule" and "General
Accounting Principles for Smaller Entities" all refer to the general accounting
principles for smaller entities set out in the Schedule to these regulations and
forming an integral part hereof.
2.2 Most terms used in these Principles are defined in regulation 3 and in
various relevant Sections of this Schedule. Nevertheless terms that are not so defined
shall have the following meaning, unless the context otherwise requires
(a) "Amortisation" means the systematic allocation of the depreciable
amount of an asset over its useful life.
(b) "Carrying amount" refers to the amount at which an asset or liability is
recognised in the balance sheet.
(c) "Cash flows" means inflows and outflows of cash and cash equivalents.
(d) "Class of assets" means a grouping of assets of a similar nature and use
in an entity’s operations.
(e) "Closing rate of exchange" is the spot exchange rate between two
currencies at the balance sheet date.
(f)
"Depreciable amount" is the cost of an asset, or other amount
substituted for cost (in the financial statements), less its residual value.
(g) "Depreciation" means the systematic allocation of the depreciable
amount of an asset over its useful life.
(h) "Derecognition" is the removal of a previously recognised asset or
liability from an entity’s balance sheet.
(i)
"Economic life" is either -
(i)
the period over which an asset is expected to be economically
useable by one or more users; or
(ii) the number of production or similar units expected to be obtained
from the asset by one or more users.
(j)
"Employee benefits" refers to all forms of consideration given by an
entity in exchange for service rendered by employees.
(k) "Fair value" is the amount for which an asset could be exchanged, a
liability settled, or an equity instrument granted could be exchanged,
between knowledgeable, willing parties in an arm’s length transaction.
ACCOUNTANCY PROFESSION (GENERAL ACCOUNTING
PRINCIPLES FOR SMALLER ENTITIES)
(l)
"Fellow subsidiary" is an entity which is under common control with
the reporting entity.
(m) "Finance costs" means interest and other costs incurred by an entity in
connection with the borrowing of funds.
(n) "Goodwill" means future economic benefits arising from assets that are
not capable of being individually identified and separately recognised.
(o) "Impracticable": applying a requirement is impracticable when the
entity cannot apply it after making every reasonable effort to do so.
(p) "Measurement" is the process of determining the monetary amounts at
which the elements of the financial statements are to be recognised and
carried in the balance sheet and income statement.
(q) "Minority interest" refers to that portion of the profit or loss and net
assets of a subsidiary attributable to equity interests that are not owned,
directly or indirectly through subsidiaries, by the parent.
(r) "Present value" is a current estimate of the present discounted value of
the future net cash flows in the normal course of business.
(s) "Probable" means more likely than not.
(t)
"Profit" is the residual amount that remains after expenses have been
deducted from income.
(u) "Reporting date" (sometimes also referred to as "balance sheet date”) is
the end of the latest financial reporting period covered by financial
statements.
(v) "Reporting period" (sometimes also referred to as "financial reporting
period") refers to a period, ending on the entity’s reporting date, for
which financial statements have been prepared.
(w) "Residual value" (of an asset) is the estimated amount that an entity
would currently obtain from disposal of an asset, after deducting the
estimated costs of disposal, if the asset were already of the age and in
the condition expected at the end of its useful life.
(x) "Useful life" (Section 14) means the estimated remaining period, from
the commencement of the lease term, without limitation by the lease
term, over which the economic benefits embodied in the asset are
expected to be consumed by the entity.
(y) "Useful life" (Sections 7, 11, 12 and 22) means either
(i)
the period over which an asset is expected to be available for use
by the entity; or
(ii)
the number of production or similar units expected to be obtained
from the asset by the entity.
Section 3: Concepts and pervasive principles
The scope of this Section is to deal with
(a) the objective of financial statements and the underlying assumptions;
(b) the qualitative characteristics that determine the usefulness of
information in financial statements; and
(c) the definition and recognition of the elements of financial statements.
Objective of financial statements and underlying assumptions
3.2 The objective of financial statements prepared under GAPSE is to provide
information about an entity’s
(a) financial position,
(b) financial performance, and
(c) ability to generate cash and cash equivalents that is useful to a wide
range of users in assessing the stewardship of management and for
economic decision-making.
3.3 In order to meet their objective, financial statements (with the exception of
cash flow information) shall be prepared on the accrual basis of accounting. Under
this basis, the effects of transactions and other events giving rise to assets, liabilities,
equity, income or expenses are recognised when they occur, rather than when cash or
its equivalent is received or paid, and hence they are recorded in the accounting
records and reported in the financial statements of the financial reporting periods to
which they relate.
3.4 The entity shall be presumed to be carrying on business as a going concern.
The financial statements shall be prepared on this basis unless management either
intends to liquidate the entity or to cease trading, or it has no realistic alternative but
to do so. When management is aware, in making its assessment, of material
uncertainties related to events or conditions that may cast significant doubt upon the
entity’s ability to continue as a going concern, those uncertainties shall be disclosed.
When financial statements are not prepared on a going concern basis, that fact shall
be disclosed, together with the basis on which the financial statements are prepared
and the reason why the entity is not regarded as a going concern. Where the period
considered by management in making its assessment of the entity’s ability to
continue as a going concern has been limited to a period of less than twelve months
from the balance sheet date, that fact shall be disclosed. The financial statements
shall not be prepared on a going concern basis if management determines after the
balance sheet date either that it intends to liquidate the entity or to cease trading, or
that it has no realistic alternative but to do so.
Qualitative characteristics of information in financial statements
3.5 Qualitative characteristics are the attributes that make the information
provided in financial statements useful to users.
3.6 Understandability - The information provided in financial statements should
be presented in a way that makes it comprehensible by users who have a reasonable
knowledge of business and economic activities and accounting and a willingness to
s t u d y t h e i n f o r m a t i o n w i t h r e a s o n a b l e d i l i g e n c e . H o w e v e r, t h e n e e d f o r
understandability does not allow relevant information to be omitted on the grounds
that it may be too difficult for some users to understand.
3.7 Relevance - The information provided in financial statements must be
relevant to the decision-making needs of users. Information has the quality of
relevance when it influences the economic decisions of users by helping them
evaluate past, present or future events or confirming, or correcting, their past
evaluations.
3.8 Materiality - Information is material if its omission or misstatement could
influence the economic decisions of users made on the basis of the financial
statements. Materiality depends on the size of the item or error judged in the
p a r ti c u l a r c i r c u m s t an ce s o f i t s o m i s s i o n o r m i s s t a te m en t. H o w ev er, i t i s
inappropriate to make, or leave uncorrected, immaterial departures from GAPSE to
achieve a particular presentation of an entity’s financial position, financial
performance or cash flows.
3.9 Reliability - The information provided in financial statements must be
reliable. Information is reliable when it is free from material error and bias and
represents faithfully that which it either purports to represent or could reasonably be
expected to represent. Financial statements are not free from bias if, by the selection
or presentation of information, they are intended to influence the making of a
decision or judgement in order to achieve a predetermined result or outcome.
3.10 Substance over form - Transactions and other events and conditions should
be accounted for and presented in accordance with their substance and economic
reality and not merely their legal form. This enhances the reliability of financial
statements.
3.11 Prudence - The uncertainties that inevitably surround many events and
circumstances are acknowledged by the disclosure of their nature and extent and by
the exercise of prudence in the preparation of the financial statements. Prudence is
the inclusion of a degree of caution in the exercise of the judgements needed in
making the estimates required under conditions of uncertainty, such that assets or
income are not overstated and liabilities or expenses are not understated. However,
the exercise of prudence does not allow the deliberate understatement of assets or
income, or the deliberate overstatement of liabilities or expenses. In short, prudence
does not permit bias.
3.12 Completeness - To be reliable, the information in financial statements must
be complete within the bounds of materiality and cost. An omission can cause
information to be false or misleading and thus unreliable and deficient in terms of its
relevance.
3.13 Comparability - Users must be able to compare the financial statements of
an entity through time in order to identify trends in its financial position and
performance. Users must also be able to compare the financial statements of
different entities in order to evaluate their relative financial position, performance
and cash flows. Hence, the measurement and display of the financial effect of like
transactions and other events and conditions must be carried out in a consistent way
throughout an entity and over time for that entity and in a consistent way for
different entities. In addition, users must be informed of the accounting policies
employed in the preparation of the financial statements, and of any changes in those
policies and the effects of such changes.
3.14 Timeliness - To be relevant, financial information must be able to influence
the economic decisions of users. Timeliness involves providing the information
within the d ecision time f ram e. I f th er e is un due delay in the repor ting of
information it may lose its relevance. Management may need to balance the relative
merits of timely reporting and the provision of reliable information. In achieving a
balance between relevance and reliability, the overriding consideration is how best
to satisfy the needs of users in making economic decisions.
3.15 Balance between benefit and cost - The benefits derived from information
should exceed the cost of providing it. The evaluation of benefits and costs is
substantially a judgemental process. Furthermore, the costs are not necessarily borne
by those users who enjoy the benefits. In applying a costs and benefits test, an entity
should understand that the benefits of the information may also be enjoyed by a
broad range of external users.
True and fair view
3.16 Preparation of financial statements in accordance with these Principles is
presumed to result in financial statements which give a true and fair view of the
financial position, financial performance and cash flows of an entity.
3.17 The balance sheet shall give a true and fair view of the financial position of
the entity as at the end of the financial reporting period; the income statement shall
give a true and fair view of the financial performance of the entity for the financial
reporting period; and the cash flow statement shall give a true and fair view of the
entity’s cash flows during the financial reporting period. Transactions and other
events and conditions should be accounted for and presented within items in the
income statement and balance sheet in accordance with their substance and
economic reality and not merely their legal form. To determine the substance of a
transaction it is necessary to identify whether the transaction has given rise to new
assets or liabilities for the reporting entity and whether it has changed the entity’s
existing assets or liabilities.
3.18 The application of the qualitative characteristics and appropriate Sections
within these Principles normally results in financial statements that convey a true
and fair view. However, if in extremely rare circumstances an entity’s management
concludes that compliance with any of the requirements of these Principles is
inconsistent with the requirement to give a true and fair view, an entity shall depart
from that requirement to the extent necessary to give a true and fair view. Particulars
of the departure, the reasons for it and its effect must be given in a note to the
financial statements as follows
(a)
a statement that there has been a departure from the requirements of
GAPSE and that the departure is necessary to give a true and fair view;
(b) an explanation of the nature of the departure;
(c) a statement of the treatment that GAPSE would normally require and a
description of the treatment adopted;
(d) a statement of the reasons why the treatment prescribed would not give
a true and fair view; and
(e) a description of how the amounts and disclosures shown in the financial
statements is different as a result of the departure, normally with
quantification, except where
(i)
quantification is already evident in the financial statements
themselves; or
(ii) the effect cannot be reasonably quantified, in which case an entity
shall explain the circumstances.
3.19 Where a departure continues in subsequent financial statements, the
disclosures shall be made in all subsequent financial statements and shall include
comparative amounts for the previous financial reporting period. Where a departure
affects only the comparative amounts, only the disclosures required by sub-
paragr aphs (c) and ( e) of the preceding par agraph shall be giv en for tho se
comparative amounts.
3.20 Where the application of the requirements of these Principles would not be
sufficient to give a true and fair view within the meaning of paragraph 3.17,
additional information must be given.
The elements of financial statements
3.21 Financial statements portray the financial effects of transactions and other
e v e n t s b y g r o u p i n g t h e m i n t o b r o a d c l as s es a c c o r d i n g t o th e ir e co n o m i c
characteristics. These broad classes are termed the elements of financial statements,
which term includes assets, liabilities, equity, income and expenses. Paragraphs 3.22
- 3.30 define these elements.
3.22 The elements directly related to the measurement of financial position are
assets, liabilities and equity.
3.23 An asset is a resource controlled by the entity as a result of past events and
from which future economic benefits are expected to flow to the entity. The future
economic benefit embodied in an asset is the potential to contribute, directly or
indirectly, to the flow of cash and cash equivalents to the entity, for example through
use in the entity’s operating activities, or through convertibility to cash and cash
equivalents, or through its capability to reduce cash outflows.
3.24 A liability is a present obligation of the entity arising from past events, the
settlement of which is expected to result in an outflow from the entity of resources
embodying economic benefits. An essential characteristic of a liability is that the
entity has a present, rather than a future, obligation. A present obligation therefore
arises from past transactions or other past events. Moreover, the settlement of the
present obligation usually involves the entity giving up resources embodying
economic benefits, such as the payment of cash, transfer of other assets, provision of
services, replacement of that obligation with another obligation, or conversion of
that obligation to equity.
3.25 Equity is the residual interest in the assets of the entity after deducting all its
liabilities. However it may be sub-classified in the balance sheet, for example in
funds contributed by shareholders, retained earnings and other reserves.
3.26 Profit is frequently used as a measure of an entity’s performance. The
elements directly related to the measurement of profit are income and expenses.
3.27 Income is increases in economic benefits during the financial reporting
period in the form of inflows or enhancements of assets or decreases of liabilities
that result in increases in equity, other than those relating to contributions from
equity participants.
3.28 The definition of income encompasses both revenue and gains. Revenue
arises in the course of the ordinary activities of an entity and is referred to by a
variety of different names including sales, fees, interest, dividends, royalties and
rent. Gains represent other items that meet the definition of income in paragraph
3.27 and may, or may not, arise in the course of the ordinary activities of an entity.
Gains include, for example, those arising on the disposal of non-current assets or
from increases in their carrying amounts.
3.29 Expenses are decreases in economic benefits during the financial reporting
period in the form of outflows or depletions of assets or incurrences of liabilities that
result in decreases in equity, other than those relating to distributions to equity
participants.
3.30 The definition of expenses encompasses losses as well as those expenses
that arise in the course of the ordinary activities of the entity. The latter include, for
example, cost of sales, wages and depreciation. They usually take the form of an
outflow or depletion of assets such as cash and cash equivalents, inventory, property,
plant and equipment. Losses represent other items that meet the definition of
expenses in paragraph 3.29 and may, or may not, arise in the course of the ordinary
activities of the entity. Losses include, for example, those resulting from disasters
such as fire and flood, those arising on the disposal of non-current assets, and those
unrealised losses arising from the effects of increases in the rate of exchange for a
foreign currency in respect of the borrowing of an entity in that currency.
Recognition of the elements of financial statements
3.31 Recognition is the process of incorporating in the balance sheet or income
statement an item that meets the definition of an element and satisfies the following
criteria
(a) it is probable that any future economic benefit associated with the item
will flow to or from the entity;
(b) the item has a cost or value that can be measured reliably.
3.32 An asset is recognised in the balance sheet when it is probable that the
future economic benefits will flow to the entity and the asset has a cost or value that
can be measured reliably. An asset is not recognised in the balance sheet when
expenditure has been incurred for which it is considered improbable that economic
benefits will flow to the entity beyond the current financial reporting period. Such a
transaction would therefore be recognised as an expense in the income statement.
3.33 A liability is recognised in the balance sheet when it is probable that an
outflow of resources embodying economic benefits will result from the settlement of
a present obligation and the amount at which the settlement will occur can be
measured reliably.
3.34 Income is recognised in the income statement when an increase in future
economic benefits related to an increase in an asset or a decrease of a liability has
arisen that can be measured reliably. This means, in effect, that recognition of
income occurs simultaneously with the recognition of increases in assets or
decreases in liabilities.
3.35 Expenses are recognised in the income statement when a decrease in future
economic benefits related to a decrease in an asset or an increase of a liability has
arisen that can be measured reliably. This means, in effect, that recognition of
expenses occurs simultaneously with the recognition of an increase in liabilities or a
decrease in assets. Expenditure incurred on assets that generate economic benefits
over several financial reporting periods is normally recognised as an expense in the
income statement on the basis of systematic and rational allocation procedures. This
is often necessary in recognising the expenses associated with the using up of assets
such as property, plant and equipment, patents and trademarks; in such cases the
expense is referred to as depreciation or amortisation. An expense is also recognised
immediately in the income statement when an expenditure produces no future
economic benefits or when, and to the extent that, future economic benefits do not
qualify, or cease to qualify, for recognition in the balance sheet as an asset. An
expense is also recognised in the income statement in those cases when a liability is
incurred without the recognition of an asset.
3.36 The requirements for recognising and measuring assets, liabilities, income
and expenses in these Principles are based on pervasive principles that are identified
in paragraphs 3.21 - 3.35 of this Section. In the absence of a requirement in GAPSE
that applies specifically to a transaction or other event or condition, paragraph 5.5
establishes a hierarchy for an entity to follow in deciding on the appropriate
accounting policy in the circumstances. The second level of that hierarchy
(paragraph 5.5(b)) requires an entity to consider the pervasive recognition and
measurement principles set out in paragraphs 3.21 - 3.35 and paragraph 3.38 of this
Section.
Derecognition of the elements of financial statements
3.37 After an asset or liability is recognised on the balance sheet, it shall be
derecognised if, and to the extent that, it is no longer probable that any future
economic benefits associated with the item will flow to or from the entity.
Measurement of the elements of financial statements
3.38 Measurement is the process of determining the monetary amounts at which
assets, liabilities, income and expenses are to be recognised and carried in the
balance sheet and income statement. Measurement involves the selection of a basis
of measurement. These Principles specify which measurement basis an entity shall
use for many types of assets, liabilities, income and expenses. In the absence of a
requirement in GAPSE that applies specifically to a transaction or other event or
condition, an entity shall have regard to measurement bases for similar assets,
liabilities, income and expenses when determining monetary amounts at which such
transactions, other events or conditions are to be initially and subsequently
measured.
Section 4: Presentation of financial statements
4.1
A complete set of financial statements comprises
(a) a balance sheet;
(b) an income statement;
(c) a statement of changes in equity;
(d) a statement of income and retained earnings in lieu of (b) and (c), where
permitted;
(e) a cash flow statement; and
(f)
notes to the financial statements.
4.2 The financial statements shall be identified clearly and distinguished from
other information in the same published document and each component of the
fin an cial s tatements s hall b e id en tified clear ly. In ad dition , th e f ollowing
information shall be displayed prominently, and repeated when it is necessary for a
proper understanding of the information presented
(a) the name of the reporting entity and any change in its name since the
end of the preceding financial reporting period;
(b) whether the financial statements cover the individual entity or a group
of entities;
(c) the date of the end of the financial reporting period or the period
covered by the financial statements, whichever is appropriate to that
component of the financial statements;
(d) the presentation currency, as defined in Section 19 of these Principles;
and
(e) the level of rounding, if any, used in presenting amounts in the financial
statements.
4.3 An entity that is permitted to apply GAPSE in accordance with regulation 5,
and that opts to apply these Principles, shall present a complete set of financial
statements (including comparative information) at least annually. When the end of
an entity’s financial reporting period changes and the annual financial statements
(including comparatives) are presented for a period longer or shorter than one year,
the entity shall disclose
(a) that fact;
(b) the reason for using a longer or shorter period; and
(c) the fact that comparative amounts for the income statement, statement
of changes in equity, statement of income and retained earnings (if
presented), cash flow statement and related notes are not entirely
comparable.
4.4 An entity shall retain the presentation and classification of items in the
financial statements from one financial reporting period to the next unless
(a) it is apparent, following a significant change in the nature of the entity’s
operations or a review of its financial statements, that another
presentation or classification would be more appropriate having regard
to the criteria for the selection and application of accounting policies; or
(b) these Principles require a change in presentation.
4.5 When the presentation or classification of items in the financial statements
is changed, an entity shall reclassify comparative amounts unless the quantification
of that reclassification is impracticable. When comparative amounts are reclassified,
an entity shall disclose
(a) the nature of the reclassification;
(b) the amount of each item or class of items that is reclassified; and
(c) the reason for the reclassification.
4.6 When it is impracticable to quantify the amount of the reclassification, an
entity shall disclose
(a) the reason for not reclassifying the amounts; and
(b) the nature of the adjustments that would be required, were the amounts
able to be determined and reclassified.
4.7 Comparative amounts for the previous financial reporting period shall be
shown for every item presented in the financial statements and notes thereto.
Comparative information shall be included for narrative and descriptive information
when it is relevant to an understanding of the current financial reporting period’s
financial statements. Where there is no amount to be shown for an item for the
current financial reporting period but a comparative amount can be shown for the
previous period, the comparative amount shall be shown. Where a comparative
amount is not comparable with that for the current financial reporting period for the
reason contemplated in paragraphs 5.7 - 5.9 of these Principles, it shall be adjusted
and particulars of the adjustment and the reasons for it shall be disclosed in a note to
the financial statements. Comparative amounts are not required to be disclosed in
relation to any amounts stated in the notes to the financial statements for the items
listed below
(a) a reconciliation of the carrying amount of property, plant and equipment
and investment property at the beginning and end of the financial
reporting period as required by sub-paragraph (f) of paragraph 7.26, and
paragraph 8.14 (by virtue of a reference to the requirements of
paragraph 7.26), respectively of these Principles;
(b) a reconciliation of the carrying amount of intangible assets at the
beginning and end of the financial reporting period as required by sub-
paragraph (d) of paragraph 11.17 of these Principles;
(c) a reconciliation of the carrying amount of goodwill at the beginning and
end of the financial reporting period as required by paragraph 22.20 of
these Principles;
(d) a reconciliation of the carrying amount of each class of investment at
the beginning and end of the financial reporting period as required by
subparagraph (b) of paragraph 9.19 of these Principles; and
(e) a reconciliation of the carrying amount of financial assets at the
beginning and end of the financial reporting period as required by sub-
paragraph (b) of paragraph 18.18 of these Principles.
4.8 An entity shall present separately each material class of similar items. An
entity shall present separately items of a dissimilar nature or function unless they are
immaterial. Omissions or misstatements of items are material if they could,
individually or collectively, influence the economic decisions of users taken on the
basis of the financial statements. Materiality depends on the size and nature of the
omission or misstatement judged in the surrounding circumstances. The size or
nature of the item, or a combination of both, could be the determining factor.
4.9 An entity shall not offset assets and liabilities, or income and expenses,
unless required or permitted by these Principles.
4.10 An entity’s financial statements shall comply with the requirements set out
in this Section as to their form and content.
Balance Sheet
4.11 The balance sheet presents an entity’s assets, liabilities and equity at a point
in time.
4.12 The following items shall be shown separately on the face of the balance
sheet, in the order indicated, and under the headings and sub-headings listed below.
Items preceded by Arabic numerals may be combined under their respective sub-
heading when they are immaterial for the purposes of the financial statements giving
a true and fair view, or such combination makes for greater clarity, in which latter
case the items combined shall be dealt with separately in the notes. The layout,
nomenclature and terminology of items in the balance sheet that are preceded by
Arabic numerals may be amended according to the nature of the entity and its
transactions to provide information that is relevant to an understanding of the
entity’s financial position.
In respect of each item an entity also needs to show the corresponding amount for
the preceding financial reporting period. Unless there is a corresponding item that
needs to be shown, an entity shall not show any item listed below for which there is
no amount for the current period.
ASSETS
Non-current assets
I.
Intangible assets
1. Development costs
2. Concessions, patents, licences, trade marks and similar rights and assets, if
they were acquired for valuable consideration
3. Payments on account
II.
Property, plant and equipment
1. Land and buildings
2. Plant and machinery
3. Other fixtures and fittings, tools and equipment
4. Payments on account and tangible assets in the course of construction
III.
Investment property
IV. Financial assets (Investments accounted for under Section 9 should be
disclosed separately in the notes)
1. Investments in subsidiaries, associates and jointly controlled entities
2. Loans to subsidiaries, associates and jointly controlled entities
3. Other non-current investments (other than loans)
4. Other loans
Trade and other receivables
1. Trade receivables
2. Amounts owed by subsidiaries, associates and jointly controlled entities
3. Other receivables
4. Prepayments and accrued income
Current tax receivable
VII. Subscribed capital called but not paid
VIII. Deferred tax assets
Goodwill
Current assets
Inventories
1. Raw materials and consumables
2. Work in progress
3. Finished goods and goods for resale
4. Payments on account
Trade and other receivables
1. Trade receivables
2. Amounts owed by subsidiaries, associates and jointly controlled entities
3. Other receivables
4. Prepayments and accrued income
Current tax receivable
Subscribed capital called but not paid
Financial assets (Investments accounted for under Section 9 should be
disclosed separately in the notes)
1. Shares in subsidiaries, associates and jointly controlled entities
2. Other current investments
Cash and cash equivalents
EQUITY AND LIABILITIES
Equity
Share capital
Share premium account
Revaluation reserve
Other reserves
1. Capital redemption reserve
2. Other reserves
V.
Retained earnings
VI.
Minority interest
Non-current liabilities
I.
Long-term borrowings
1. Debenture loans, showing convertible loans separately
2. Bank loans
3. Bills of exchange payable
4. Amounts owed to subsidiaries, associates and jointly controlled entities
5. Other long-term borrowings
II.
Trade and other payables
1. Trade payables
2. Payments received on account of orders
3. Other creditors
4. Accruals and deferred income
III.
Deferred tax liabilities
IV.
Provisions
1. Provisions for employee benefits and similar obligations
2. Other provisions
Current liabilities
I.
Short-term borrowings
1. Debenture loans, showing convertible loans separately
2. Bank loans and overdrafts
3. Bills of exchange payable
4. Amounts owed to subsidiaries, associates and jointly controlled entities
5. Other short-term borrowings
II.
Trade and other payables
1. Trade payables
2. Payments received on account of orders
3. Other creditors
4. Accruals and deferred income
III.
Current tax payable
IV.
Provisions
1. Provisions for employee benefits and similar obligations
2. Other provisions
4.13 The face of the balance sheet shall also include line items that present the
following amounts (if applicable)
(a) the total of assets classified as held for sale and assets included in
disposal groups classified as held for sale in accordance with Section 24
of these Principles; and
(b) liabilities included in disposal groups classified as held for sale in
accordance with Section 24.
4.14 An entity shall present additional line items, headings and subtotals on the
face of the balance sheet when such presentation is relevant to an understanding of
the entity’s financial position. Additional line items are also included when the size,
nature or function of an item or aggregation of similar items is such that separate
presentation is relevant to an understanding of the entity’s financial position. The
judgment on whether additional items are presented separately is based on an
assessment of
(a) the nature and liquidity of assets;
(b) the function of assets within the entity; and
(c) the amounts, nature and timing of liabilities.
4.15 An entity shall present current and non-current assets, and current and non-
current liabilities, as separate classifications on the face of its balance sheet in
accordance with paragraphs 4.16 and 4.17, except when a presentation based on
liquidity provides information that is reliable and more relevant. When that
exception applies, all assets and liabilities shall be presented in order of approximate
liquidity.
4.16 An entity shall classify an asset as current when
(a) it expects to realise the asset, or intends to sell or consume it, in the
entity’s normal operating cycle;
(b) it holds the asset primarily for the purpose of trading;
(c) it expects to realise the asset within twelve months after the end of the
reporting period; or
(d) the asset is cash or a cash equivalent, unless it is restricted from being
exchanged or used to settle a liability for at least twelve months after
the end of the reporting period.
An entity shall classify all other assets as non-current. When the entity’s normal
operating cycle is not clearly identifiable, its duration is assumed to be twelve
months.
4.17 An entity shall classify a liability as current when
(a) it expects to settle the liability in the entity’s normal operating cycle;
(b) it holds the liability primarily for the purpose of trading;
(c) the liability is due to be settled within twelve months after the end of
the reporting period; or
(d) the entity does not have an unconditional right to defer settlement of the
liability for at least twelve months after the end of the reporting period.
An entity shall classify all other liabilities as non-current.
Income statement
4.18 All items of income and expense recognised in the financial statements for
the period shall be included in the income statement, unless they are specifically
permitted or required to be taken directly to reserves by these Principles or by
applicable legislation, in which case they shall be included in the statement of
changes in equity. These Principles provide different treatment for the following,
amongst others
(a) the effects of corrections of errors and changes in accounting policies
are presented as adjustments of prior periods in accordance with Section
5 rather than as part of profit or loss in the period in which they arise;
and
(b) revaluation surpluses (see Section 7) and some gains and losses arising
on translating the financial statements of a foreign operation (see
Section 19) are reported directly in equity, rather than as part of profit
or loss, when they arise.
4.19 The items prescribed in paragraph 4.20 shall be shown separately on the face
of the income statement, in the order indicated. Items preceded by Arabic numerals
may be combined when they are immaterial for the purposes of the financial
statements giving a true and fair view, or such combination makes for greater clarity,
in which latter case the items combined are dealt with separately in the notes. The
layout, nomenclature and terminology of items in the income statement that are
preceded by Arabic numerals may be amended according to the nature of the entity
and its transactions to provide information that is relevant to an understanding of the
entity’s financial performance.
In respect of each item an entity also needs to show the corresponding amount for
the preceding financial reporting period. Unless there is a corresponding item that
needs to be shown, an entity shall not show any item listed below for which there is
no amount for the current period.
4.20 An entity shall present an analysis of expenses using a classification based
on either the nature of expenses or their function within the entity, whichever
provides information that is reliable and more relevant. Entities are encouraged, but
not required, to present this analysis on the face of the income statement.
The ‘function of expense’ method classifies expenses according to their function
as part of cost of sales or, for example, the costs of distribution or administrative
activities. An entity that adopts a classification using the ‘function of expense’
method presents the following items (which may be combined or amended as
appropriate in accordance with paragraph 4.19 of these Principles), preferably on the
face of the income statement
1. Revenue
2. Cost of sales (after taking into account any necessary provisions for
depreciation, amortisation and impairment of assets)
3. Gross profit or loss
4. Distribution costs (after taking into account any necessary provisions for
depreciation, amortisation and impairment of assets)
5. Administrative expenses (after taking into account any necessary provisions
for depreciation, amortisation and impairment of assets)
The objective of these regulations is to prescribe the
general accounting principles that may be adhered to by entities
complying with all the criteria set out in regulation 4.
(1)
In these regulations, unless the context otherwise
requires
"the Act" means the Accountancy Profession Act;
"balance sheet date" means the date on which the balance sheet
of an entity is drawn up;
"company" shall have the meaning assigned to it in the
Companies Act;
"entity" or "reporting entity" means a commercial partnership as
defined in the Companies Act and any other body, corporate or
unincorporate, which carries on a trade or business and which is
required to prepare financial statements in terms of the laws of
Malta;
"financial reporting period" means the period ending on the
entity’s balance sheet date for which financial statements are
prepared;
"financial statements" means the statements prepared by an
entity comprising the following documents
(a) a balance sheet;
(b) an income statement and a statement of changes in
equity or in the instances permitted by the Schedule a
statement of income and retained earnings;
(c) a cash flow statement; and
(d) notes to the financial statements;
"public company" shall have the meaning assigned to it in the
Companies Act;
"regulated market" shall have the meaning assigned to it in the
Companies Act;
"security" shall have the meaning assigned to it in the Companies
Act;
ACCOUNTANCY PROFESSION (GENERAL ACCOUNTING
PRINCIPLES FOR SMALLER ENTITIES)
"state owned entity" means
(a) any organ of the Government;
(b) any public authority or corporation established by law;
or
(c) an entity in which the Government holds, directly or
indirectly, not less than fifty per cent of the voting
rights of the entity;
"the Schedule" means the Schedule to these regulations and
forming an integral part hereof.
(2) References to an "entity" or "reporting entity" in these
regulations shall, in the case of an entity or reporting entity
preparing consolidated financial statements in terms of Section 23
of the Schedule, be construed as referring to the group of entities
presenting consolidated financial statements as a single economic
entity.
(3) Unless the context otherwise requires, terms used in these
regulations and which are not defined herein shall have the
meaning assigned to them in the Act.
An entity shall, for financial reporting periods ending on or
after 1st January 2009, prepare financial statements in accordance
with the general accounting principles for smaller entities set out in
the Schedule if
(a) the Board of Directors of a company or, in the case of
an entity other than a company, its governing body, has
resolved to apply the Schedule for that financial
reporting period; and
(b) the entity satisfies the requirements set out in
regulation 5 for the applicability of the Schedule.
(1)
The Schedule shall not apply to an entity -
(a) which exceeds the limits of any one of the following
three criteria
(i)
balance sheet total: seventeen million and five
hundred thousand euro (€17,500,000), or the
equivalent thereof converted at the closing rate
of exchange on the balance sheet date;
(ii) total
revenue
thirty-five
million
euro
(€35,000,000), or the equivalent thereof
converted at the average rate of exchange for the
financial reporting period;
(iii) average number of employees during each of the
two consecutive financial reporting periods
immediately preceding the relevant financial
reporting period: two hundred and fifty;
(b) in which a member holding not less than twenty per
cent of the shares in that entity has, due to the
financial reporting requirements of such member and
not later than six months prior to the end of the
ACCOUNTANCY PROFESSION (GENERAL ACCOUNTING
PRINCIPLES FOR SMALLER ENTITIES)
financial reporting period for which the financial
statements are being prepared, served notice on the
entity requesting the preparation of financial
statements in accordance with generally accepted
accounting principles and practice
Provided that where a member of an entity reaches the
twenty percent holding referred to in this paragraph
during the six month period prior to the end of the
financial reporting period, the notice requesting the
preparation of financial statements in accordance with
generally accepted accounting principles and practice
may be served by the said member not later than the
earlier of
(i)
the expiry of three months from the date on
which the twenty per cent holding is reached; or
(ii) the last day of the financial reporting period
Provided further that in the case of an entity preparing
its financial statements in accordance with the
Schedule for the financial reporting period ending in
2009, the notice requesting the preparation of financial
statements in accordance with generally accepted
accounting principles and practice may be served by
the said member at any time prior to the end of the
relative financial reporting period;
(c) whose securities are listed on a regulated market;
(d) which is a guarantor of the principal or interest on the
securities of an entity referred to in paragraph (c), as
referred to in the Listing Rules issued in terms of the
Financial Markets Act;
(e) which is a public company;
(f)
which is in possession of a licence or other
authorisation issued by the Malta Financial Services
Authority acting as the competent authority in terms of
the relevant legislation; and
(g) which is a state-owned entity and which exceeds any
two of the following three criteria
(i)
balance sheet total: four million and four
hundred thousand euro (€4,400,000), or the
equivalent thereof converted at the average rate
of exchange for the financial reporting period;
(ii) total revenue: eight million and eight hundred
thousand euro (€8,800,000) or the equivalent
thereof converted at the average rate of
exchange for the financial reporting period; and
(iii) average number of employees during each of the
two consecutive financial reporting periods
immediately preceding the relevant financial
reporting period: fifty.
(2)
For the purposes of sub-regulation (1)
ACCOUNTANCY PROFESSION (GENERAL ACCOUNTING
PRINCIPLES FOR SMALLER ENTITIES)
(a) "balance sheet total" shall consist of all the assets held
by an entity, including those that are current and non-
current, as defined in the Schedule; and
(b) "total revenue" shall consist of the amounts derived, in
the ordinary course of business, from
(i) the sale of products;
(ii) the rendering of services; and
(iii) the use by third parties of assets held by the
entity, which yield income, including but not
limited to interest, royalties, rent and dividends;
after deducting any sales rebates, value added
tax and other taxes directly linked to an entity’s
revenue.
(c) the "average number
of
employees"
shall
be
determined as follows
(i)
in relation to whole-time employees, the
aggregate number of full weeks worked by all
the whole-time employees of the entity during
the financial reporting period, divided by the
number of full weeks comprised in that financial
reporting period and rounded off to the nearest
number; and
(ii) in relation to part-time employees, the aggregate
number of hours worked by all the part-time
employees of the entity during the financial
reporting period, divided by the number of full
weeks comprised in that financial reporting
period and the resulting amount divided by forty
and rounded off to the nearest number.
(3) For the purposes of determining whether an entity has
exceeded the criteria in sub-regulation (1)(a)(i) and (ii), or in the
case of state-owned entities subregulation (1)(g)(i) and (ii),
(hereinafter the "relevant criteria") an entity shall
(a) for any financial reporting period ending in the period
between the coming into force of these regulations and
the 31st December 2010 (hereinafter in this paragraph
referred to as "the relevant financial reporting
period"), determine whether the relevant criteria have
been exceeded by adopting one of the following
approaches
(i)
an entity or a state-owned entity may refer to the
financial statements presented in accordance
with generally accepted accounting principles
and practice for the two consecutive financial
reporting periods immediately preceding the
relevant financial reporting period such that
(1) an entity, other than a state-owned entity,
shall be deemed to have exceeded the
relevant criteria if in both financial
reporting periods its balance sheet total or
ACCOUNTANCY PROFESSION (GENERAL ACCOUNTING
PRINCIPLES FOR SMALLER ENTITIES)
total
revenue
exceeded
the
limits
established in sub-regulation (1)(a)(i) and
(ii); and
(2) a state-owned entity shall be deemed to
have exceeded the relevant criteria if in both
financial reporting periods its balance sheet
total, or total revenue, or both as the case
may be, exceeded the limits established in
sub-regulation (1)(g)(i) and (ii); or
(ii) an entity or a state-owned entity may compute
the assets comprising the balance sheet total,
and total revenue in accordance with the
provisions set out in the Schedule such that
(1) an entity, other than a state-owned entity
shall be deemed to have exceeded the
relevant criteria if as at the end of the
relevant financial reporting period its
balance sheet total or total revenue for the
relevant financial reporting period exceeded
the limits established in sub-regulation
(1)(a)(i) and (ii); and
(2) a state-owned entity shall be deemed to
have exceeded the relevant criteria if as at
the end of the relevant financial reporting
period its balance sheet total, or total
revenue for the relevant financial reporting
period, or both as the case may be, exceeded
the limits established in sub-regulation
(1)(g)(i) and (ii);
(b) for financial reporting periods ending on or after 1st
January 2011, determine whether the relevant criteria
have been exceeded by referring to its financial
statements for the two consecutive financial reporting
periods immediately preceding the relevant financial
reporting period, irrespective of whether such
financial statements have been prepared in accordance
with the Schedule or generally accepted accounting
principles and practice such that
(i)
an entity, other than a state-owned entity, shall
be deemed to have exceeded the relevant criteria
if in both financial reporting periods its balance
sheet total or total revenue exceeded the limits
established in sub-regulation (1)(a)(i) and (ii);
and
(ii) a state-owned entity shall be deemed to have
exceeded the relevant criteria if in both financial
reporting periods its balance sheet total, or total
revenue, or both as the case may be, exceeded
the limits established in sub-regulation (1)(g)(i)
and (ii).
(4) In the case of the first financial reporting period of an
entity, the entity shall determine whether the relevant criteria have
ACCOUNTANCY PROFESSION (GENERAL ACCOUNTING
PRINCIPLES FOR SMALLER ENTITIES)
been exceeded by computing the assets comprising the balance
sheet total, and total revenue for the first financial reporting period
in accordance with the Schedule such that
(a)
an entity, other than a state-owned entity, shall be
deemed to have exceeded the relevant criteria if as at
the end of the first financial reporting period its
balance sheet total or total revenue for the relevant
financial reporting period exceeded the limits
established in sub-regulation (1)(a)(i) and (ii); and
(b) a state-owned entity shall be deemed to have exceeded
the relevant criteria if as at the end of the first
financial reporting period its balance sheet total, or
total revenue for the relevant financial reporting
period, or both as the case may be, exceeded the limits
established in sub-regulation (1)(g)(i) and (ii).
(5) For the purposes of this regulation, where a financial
reporting period is shorter or longer than one calendar year, the
total revenue generated during that financial reporting period shall
be deemed to be the amount arrived at by dividing the total revenue
figure generated in that financial reporting period by the number of
months in that financial reporting period, and multiplying that
number by twelve.
(6) Where an entity exceeds the relevant criteria that entity
may opt to present its financial statements in accordance with the
Schedule for a financial reporting period (hereinafter the "new
period") if the entity ceases to exceed the relevant criteria for the
two consecutive financial reporting periods immediately preceding
the new period.
(7) Where an entity has prepared its financial statements in
accordance with the Schedule for a financial reporting period, but
has prepared its latest financial statements in conformity with
generally accepted accounting principles and practice for a reason
other than exceeding the relevant criteria, that entity may opt to
present its financial statements in accordance with the Schedule
provided
(a) it does not exceed the relevant criteria for the
preceding two consecutive financial reporting periods;
and
(b) five financial reporting periods elapse since the
balance sheet date of the financial reporting period in
which the entity last prepared financial statements in
accordance with the Schedule.
Other income
Other expenses
Income from investments (as defined in paragraph 9.1)
Other interest receivable and similar income (with a separate indication of
that derived from subsidiaries, associates and jointly controlled entities)
Interest payable and similar charges (with a separate indication of the
amount payable to subsidiaries, associates and jointly controlled entities)
Income from subsidiaries, associates and jointly controlled entities
accounted for under the cost method and recognised in accordance with paragraph
10.13
Share of profit or loss of subsidiaries, associates and jointly controlled
entities accounted for under the equity method and recognised in accordance with
paragraph 10.15
Profit or loss before tax
Tax on profit or loss
Profit or loss for the period from continuing operations
Profit or loss for the period from discontinued operations
Profit or loss for the period
The ‘nature of expense’ method aggregates expenses in the income statement
according to their nature (for example, depreciation, purchases of materials,
transport costs, employee benefits and advertising costs), and are not reallocated
among various functions within the entity. An entity that adopts a classification
using the ‘nature of expense’ method presents the following items (which may be
combined or amended as appropriate in accordance with paragraph 4.19 of these
Principles), preferably on the face of the income statement
1. Revenue
2. Other income
3. Changes in inventories of finished goods and work in progress
4. Raw materials and consumables used
5. Employee benefits expense (with separate disclosure of the total amount for
Wages and salaries, and the total amount for Social security costs given in the notes
as required by paragraph 4.26(b))
6. Depreciation and amortisation expense
7. Other expenses
8. Income from investments (as defined in paragraph 9.1)
9. Other interest receivable and similar income (with a separate indication of
that derived from subsidiaries, associates and jointly controlled entities)
10. Interest payable and similar charges (with a separate indication of the
amount payable to subsidiaries, associates and jointly controlled entities)
11. Income from subsidiaries, associates and jointly controlled entities
accounted for under the cost method and recognised in accordance with paragraph
10.13
12. Share of profit or loss of subsidiaries, associates and jointly controlled
entities accounted for under the equity method and recognised in accordance with
paragraph 10.15
13. Profit or loss before tax
14. Tax on profit or loss
15. Profit or loss for the period from continuing operations
16. Profit or loss for the period from discontinued operations
17. Profit or loss for the period
4.21 If an entity prepares consolidated financial statements, it shall disclose
separately the following items on the face of the income statement as allocations of
profit or loss for the period
(a) profit or loss attributable to minority interest; and
(b) profit or loss attributable to equity holders of the parent.
4.22 An entity shall present additional line items, headings and subtotals on the
face of the income statement when such presentation is relevant to an understanding
of the entity’s financial performance.
4.23 An entity shall disclose separately, either on the face of the income
statement or in the notes, the nature and amount of material components of income
and expense. Such disclosures shall include
(a) write-downs of inventories to net realisable value, and the reversal of
such write-downs;
(b) write-downs of property, plant and equipment to recoverable amount,
and the reversal of such write-downs;
(c) restructurings of the activities of an entity and reversals of any
provisions for the costs of restructuring;
(d) disposals of items of property, plant and equipment;
(e) disposals of investment property;
(f)
disposals of investments;
(g) litigation settlements; and
(h) the reversal of other provisions.
4.24 Entities classifying expenses by function shall disclose the amounts of
depreciation and amortisation expense, and employee benefits expense, recognised
in the income statement for the period.
4.25 The remuneration of the entity’s auditors, including sums paid in respect of
expenses, shall be disclosed in a note to the financial statements. The nature and
estimated monetary value of any benefits in kind shall also be stated.
4.26 An entity shall disclose
(a)
the average number of persons employed by the entity during the
financial year (as determined in accordance with regulation
5(2)(c)), broken down by categories where applicable; and
(b)
the staff costs relating to the financial year, broken down into
(i) wages and salaries; and
(ii) social security costs, with a separate indication of those relating
to pensions.
Statement of changes in equity
4.27 The statement of changes in equity presents an entity’s profit or loss for a
period, items of income and expense recognised directly in equity for the period, the
effects of changes in accounting policies and corrections of errors recognised in the
period, and the amounts of investments by, and dividends and other distributions to,
equity holders during the period.
4.28 An entity presenting a statement of changes in equity shall show on the face
of the statement
(a) the profit or loss for the period;
(b) each item of income or expense for the period that, as required by these
Principles, is credited or charged directly in equity, and the total of
these items;
(c) total income and expense for the period (calculated as the sum of (a)
and (b)), showing separately the total amounts attributable to equity
holders of the parent and to minority interest;
(d) for each component of equity, the effects of changes in accounting
policies and corrections of errors;
(e) the amounts of investments by, and dividends and other distributions to,
equity holders;
(f)
the balance of retained earnings at the beginning of the period and at the
end of the reporting period, and the changes during the period; and
(g) a reconciliation between the carrying amount of each class of
contributed equity and each reserve at the beginning and the end of the
period.
4.29 If the only changes to the equity of an entity during the periods for which
financial statements are presented arise from profit or loss, payment of dividends,
corrections of prior period errors and changes in accounting policy that do not effect
any part of equity other than retained earnings, the entity may present a statement of
income and retained earnings in place of the income statement and statement of
changes in equity. The statement of income and retained earnings presents an
entity’s profit or loss and changes in retained earnings for a period.
4.30 An entity shall present, on the face of the statement of income and retained
earnings, the following items in addition to the information required by paragraphs
4.18 - 4.26 of these Principles
(a) retained earnings at the beginning of the reporting period;
(b) dividends and other distributions declared and paid or payable during
the period;
(c) restatements of retained earnings for corrections of prior period errors;
(d) restatements of retained earnings for changes in accounting policy; and
(e) retained earnings at the end of the reporting period.
Cash flow statement
4.31 The cash flow statement provides information about the historical changes
in cash and cash equivalents of an entity, showing separately changes during the
period from operating, investing and financing activities. Cash is taken as ‘cash at
bank and in hand’. Cash equivalents are held to meet short-term cash commitments
rather than for investment or other purposes. Therefore, an investment normally
qualifies as a cash equivalent only when it has a short maturity of, say, three months
or less from the date of acquisition. Bank overdrafts are normally considered
financing activities similar to borrowings. However, if they are repayable on demand
and form an integral part of an entity’s cash management, bank overdrafts are a
component of cash and cash equivalents.
4.32 An entity shall present a cash flow statement that reports cash flows for a
period classified by operating activities, investing activities and financing activities.
4.33 Cash flows from operating activities are primarily derived from the
principal revenue-producing activities of the entity. Therefore, they generally result
f r o m t h e t r an sa ct i o n s a n d o t h er ev en t s a n d co n d i t io n s t h at en t er i n t o t h e
determination of profit or loss. An entity shall report cash flows from operating
activities using either
(a) the direct method, whereby major classes of gross cash receipts and
gross cash payments are disclosed; or
(b) the indirect method, whereby profit or loss is adjusted for the effects of
non-cash transactions, any deferrals or accruals of past or future
operating cash receipts or payments, and items of income or expense
associated with investing or financing cash flows.
4.34 Under the direct method, information about major classes of gross cash
receipts and gross cash payments may be obtained either
(a) from the accounting records of the entity; or
(b) by adjusting sales, cost of sales and other items in the income statement
for
(i)
changes during the period in inventories and operating
receivables and payables;
(ii) other non-cash items; and
(iii) other items for which the cash effects are investing or financing
cash flows.
4.35 Under the indirect method, the net cash flow from operating activities is
determined by adjusting profit or loss for the effects of
(a) changes during the period in inventories and operating receivables and
payables;
(b) non-cash items such as depreciation, provisions, deferred taxes,
unrealised foreign currency gains and losses, undistributed profits of
subsidiaries, associates and joint ventures, and minority interests; and
(c) all other items for which the cash effects relate to investing or
financing.
4.36 Cash flows arising from investing activities represent expenditures made for
resources intended to generate future income and cash flows and relate to the
acquisition and disposal of non-current assets and other investments not included in
cash equivalents.
4.37 Financing activities result in changes in the size and composition of the
contributed equity and borrowings of the entity.
4.38 An entity shall report separately major classes of gross cash receipts and
gross cash payments arising from investing and financing activities. The aggregate
cash flows arising from acquisitions and from disposals of subsidiaries or other
business units shall be presented separately and classified as investing activities.
4.39 Cash flows from interest and dividends received and paid shall each be
disclosed separately. Cash flows shall be classified in a consistent manner from
period to period as either operating, investing or financing activities.
4.40 Cash flows arising from taxes on income shall be separately disclosed and
shall be classified as cash flows from operating activities unless they can be
specifically identified with financing and investing activities.
4.41 An entity shall disclose the components of cash and cash equivalents and
shall present a reconciliation of the amounts reported in the cash flow statement to
the equivalent items reported in the balance sheet.
4.42 An entity shall exclude from the cash flow statement investing and financing
transactions that do not require the use of cash or cash equivalents. An entity shall
disclose such transactions elsewhere in the financial statements in a way that
provides all the relevant information about these investing and financing activities.
Notes to the financial statements
4.43 The notes, which form an integral part of the financial statements, shall
(a) present information about the basis of preparation of the financial
statements and the specific accounting policies used;
(b) disclose
(i)
the information required by these Principles that is not presented
on the face of the balance sheet, income statement, statement of
changes in equity or statement of income and retained earnings (if
presented), or cash flow statement; and
(ii) all the disclosures required by the respective Sections of these
Principles; and
(c) provide additional information that is not presented on the face of the
balance sheet, income statement, statement of changes in equity or
statement of income and retained earnings (if presented), or cash flow
statement but is relevant to an understanding of any of them.
4.44 Notes shall, as far as practicable, be presented in a systematic manner. Each
item on the face of the balance sheet, income statement and statement of changes in
equity or statement of income and retained earnings (if presented) shall be cross-
referenced to any related information in the notes.
4.45 Notes are normally presented in the following order
(a) a statement that the financial statements have been prepared in
compliance with these Principles;
(b) a summary of significant accounting policies applied;
(c) supporting information for items presented on the face of the balance
sheet, income statement, statement of changes in equity or statement of
income and retained earnings (if presented), and cash flow statement, in
the order in which each statement and each line item is presented; and
(d) other disclosures, including
(i)
contingent liabilities, contingent assets and unrecognised
contractual commitments;
(ii) non-financial disclosures;
(iii) the amount of dividends proposed or declared before the financial
statements were authorised for issue but not recognised as a
distribution to equity holders during the period, and the related
amount per share; and
(iv) the amount of any cumulative preference dividends not
recognised.
Section 5: Accounting policies, estimates and errors
5.1 Accounting policies are those principles, bases, conventions, rules and
practices applied by an entity that specify how the effects of transactions and other
events are to be reflected in its financial statements through recognising, selecting
measurement bases for, and presenting assets, liabilities, income, expenses and
changes to equity. Accounting policies define the process whereby transactions and
other events are reflected in the financial statements. For example, an accounting
policy for a particular type of expenditure may specify whether an asset or an
expense is to be recognised; the basis on which it is to be measured; and where in the
income statement or balance sheet it is to be presented.
5.2 A change in accounting estimate is an adjustment of the carrying amount of
an asset or a liability, or the amount of the periodic consumption of an asset, that
results from the assessment of the present status of, and expected future benefits and
obligations associated with, assets and liabilities. Changes in accounting estimates
result from new information or new developments and, accordingly, are not
corrections of errors. Examples of estimates include those required of
(a) bad debts;
(b) inventory obsolescence;
(c) the useful lives of, or expected pattern of consumption (depreciation
method) of the future economic benefits embodied in, depreciable
assets.
5.3 Prior period errors are omissions from, and misstatements in, the entity’s
financial statements for one or more prior periods arising from a failure to use, or
misuse of, reliable information that was available when the financial statements for
those periods were authorised for issue, and that information could reasonably be
expected to have been obtained and taken into account in the preparation and
presentation of those financial statements. Such errors include the effects of
mathematical mistakes, mistakes in applying accounting policies, oversights or
misinterpretations of facts, and fraud.
Accounting policies
5.4 When a Section of these Principles specifically applies to a transaction,
event or condition, the accounting policy or policies applied to that item shall be
determined by applying the relevant Section. In the absence of a Section in these
Principles that specifically applies to a transaction, event or condition, management
shall use its judgement in developing and applying an accounting policy that results
in information that is
(a) relevant to the economic decision-making needs of users; and
(b) reliable, in that the financial statements
(i)
represent faithfully the financial position, financial performance
and cash flows of the entity;
(ii) reflect the economic substance of the transactions, other events
and conditions, and not merely their legal form;
(iii) are neutral, i.e. free from bias;
(iv) are prudent; and
(v) are complete in all material respects.
5.5 In making the judgement described in the preceding paragraph, management
shall refer to, and consider the applicability of, the following sources in descending
order
(a) the requirements and guidance in these Principles dealing with similar
and related issues;
(b) the definitions, recognition criteria and measurement concepts for
assets, liabilities, income and expenses in paragraphs 3.21 - 3.35 and
paragraph 3.38 of Section 3 of these Principles; and
(c) the requirements and guidance in generally accepted accounting
principles and practice dealing with similar and related issues.
If additional guidance is needed to make the judgement described in the preceding
paragraph, management may also consider the most recent pronouncements of other
standard-setting bodies that use a conceptual framework to develop accounting
standards that is similar to that used in the development of generally accepted
accounting principles and practice, other accounting literature and accepted industry
practices, to the extent that these do not conflict with the requirements and guidance
in these Principles.
5.6 An entity shall select and apply its accounting policies consistently for
similar transactions, other events and conditions. Where GAPSE permits a choice of
accounting policy for categories of transactions, events and conditions, an entity
shall select the policy that is most appropriate to its particular circumstances for the
purpose of giving a true and fair view, taking account of the objectives of relevance,
reliability, comparability and understandability, and shall apply that policy
consistently to each such category of transactions, events and conditions.
5.7
An entity shall change an accounting policy only if the change
(a) is required by these Principles; or
(b) results in the financial statements providing reliable and more relevant
information about the effects of transactions, events or conditions on the
entity’s financial position, financial performance or cash flows.
5.8 The initial application of a policy to revalue assets in accordance with
Section 7, Section 8 and Section 9, is a change in an accounting policy to be dealt
with in accordance with the requirements of the relevant Section, rather than in
accordance with this Section.
5.9 An entity shall account for all changes in accounting policy retrospectively.
When a change in accounting policy is applied retrospectively, the entity adjusts the
opening balance of each affected component of equity for the earliest prior period
presented, and the other comparative amounts disclosed for each prior period
presented, as if the new accounting policy had always been applied. When it is
impracticable to determine the period-specific effects of changing an accounting
policy on comparative information for one or more prior periods presented, the
entity shall apply the new accounting policy to the carrying amounts of assets and
liabilities as at the beginning of the earliest period for which retrospective
application is practicable, which may be the current period, and shall make a
corresponding adjustment to the opening balance of each affected component of
equity for that period.
Accounting policies - disclosure
5.10 In addition to the disclosures on accounting policies required by Section 4 of
these Principles, an entity shall also disclose the following information
(a) the measurement basis (or bases) used in preparing the financial
statements;
(b) the accounting policy the entity has chosen whenever GAPSE allows an
accounting policy choice for a category of transaction, event or
condition;
(c) the other accounting policies used that are relevant to an understanding
of the financial statements; and
ACCOUNTANCY PROFESSION (GENERAL ACCOUNTING
PRINCIPLES FOR SMALLER ENTITIES)
(d) whenever there has been a change in accounting policy that has an
effect on the current period or any prior period, or might have an effect
on future periods, the entity shall also disclose the following
information
(i)
the nature of the change in accounting policy and, if applicable,
the title of the Section of these Principles that requires the change
in accounting policy;
(ii) unless the change in accounting policy is required by these
Principles, the reasons why applying the new accounting policy
provides reliable and more relevant information;
(iii) for the current period and each prior period presented, to the
extent practicable, the amount of the adjustment for each financial
statement line item affected;
(iv) the amount of the adjustment relating to periods before those
presented, to the extent practicable; and
(v) an explanation if it is impracticable to determine the amounts to
be disclosed in (iii) or (iv) above.
Financial statements of subsequent periods need not repeat these disclosures.
Changes in accounting estimates
5.11 An entity shall recognise the effect of a change in an accounting estimate
prospectively by including it in profit or loss in
(a) the period of the change, if the change affects that period only; or
(b) the period of the change and future periods, if the change affects both.
5.12 To the extent that a change in an accounting estimate gives rise to changes in
assets and liabilities, or relates to an item of equity, it shall be recognised by
adjusting the carrying amount of the related asset, liability or equity item in the
period of the change.
Changes in accounting estimates - disclosure
5.13 An entity shall disclose the nature and amount of a change in an accounting
estimate that has a significant effect in the current period or is expected to have a
significant effect in future periods, except for the disclosure of the effect on future
periods when it is impracticable to estimate that effect.
Correction of prior period errors
5.14 To the extent practicable, an entity shall correct material prior period errors
retrospectively in the first set of financial statements authorised for issue after its
discovery by
(a) restating the comparative amounts for the prior period presented in
which the error occurred; or
(b) if the error occurred before the earliest prior period presented, restating
the opening balances of assets, liabilities and equity for the earliest
prior period presented.
Correction of prior period errors - disclosure
5.15 An entity shall disclose the following about prior period errors
(a) the nature of the prior period error;
(b) for each prior period presented, to the extent practicable, the amount of
the correction for each financial statement line item affected;
(c) in the circumstances described in paragraph 5.14(b), the amount of the
correction at the beginning of the earliest prior period presented; and
(d) if retrospective restatement is impracticable for a particular prior
period, the circumstances that led to the existence of that condition and
a description of how and from when the error has been corrected.
Financial statements of subsequent periods need not repeat these
disclosures.
Section 6: Revenue and construction contracts
6.1 Revenue is the gross inflow of economic benefits during the period arising
in the course of the ordinary activities of an entity when those inflows result in
increases in equity, other than increases relating to contributions from equity
participants.
This Section shall be applied in accounting for revenue arising from the following
transactions and events
(a) the sale of goods;
(b) the rendering of services; and
(c) the use by others of entity assets yielding income such as interest,
royalties, rent and dividends.
6.2 This Section shall also be applied in accounting for construction contracts in
the financial statements of contractors. A construction contract is a contract
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 or their ultimate purpose or use. Because of the nature of the activity
undertaken in construction contracts, the date at which the contract activity is
entered into and the date when the activity is completed usually fall into different
accounting periods. This Section lays down principles for determining when contract
revenue and contract costs should be recognised as revenue and expenses in the
income statement.
Measurement of revenue
6.3 An entity shall measure revenue at the fair value of the consideration
received or receivable. The fair value of the consideration received or receivable
excludes the amount of any trade discounts and volume rebates allowed by the
entity.
6.4 An entity shall include in revenue only the gross inflows of economic
benefits received and receivable by the entity on its own account. An entity shall
therefore exclude from revenue all amounts collected on behalf of third parties such
as sales taxes, goods and services taxes and value added taxes. Similarly, in an
agency relationship, the gross inflows of economic benefits include amounts
collected on behalf of the principal and which do not result in increases in equity for
the entity. The amounts collected on behalf of the principal are not revenue. Instead,
revenue is the amount of commission.
6.5 In most cases, the consideration is in the form of cash or cash equivalents
and the amount of revenue is the amount of cash or cash equivalents received or
receivable. However, when the inflow of cash or cash equivalents is deferred, and
the arrangement constitutes in substance a financing transaction, the fair value of the
consideration is the present value of all future receipts determined using an imputed
rate of interest. An entity shall recognise the difference between the present value of
all future receipts and the nominal amount of the consideration as interest revenue.
ACCOUNTANCY PROFESSION (GENERAL ACCOUNTING
PRINCIPLES FOR SMALLER ENTITIES)
Sale of goods
6.6 An entity shall recognise revenue from the sale of goods when all the
following conditions are satisfied
(a) the entity has transferred to the buyer the significant risks and rewards
of ownership of the goods;
(b) the entity retains neither continuing managerial involvement to the
degree usually associated with ownership nor effective control over the
goods sold;
(c) the amount of revenue can be measured reliably;
(d) it is probable that the economic benefits associated with the transaction
will flow to the entity; and
(e) the costs incurred or to be incurred in respect of the transaction can be
measured reliably.
Rendering of services
6.7 When the outcome of a transaction involving the rendering of services can
be estimated reliably, an entity shall recognise revenue associated with the
transaction by reference to the stage of completion of the transaction at the end of
the reporting period (sometimes referred to as the percentage of completion method).
The outcome of a transaction can be estimated reliably when all the following
conditions are satisfied
(a) the amount of revenue can be measured reliably;
(b) it is probable that the economic benefits associated with the transaction
will flow to the entity;
(c) the stage of completion of the transaction at the end of the reporting
period can be measured reliably; and
(d) the costs incurred for the transaction and the costs to complete the
transaction can be measured reliably.
6.8 When the outcome of the transaction involving the rendering of services
cannot be estimated reliably, an entity shall recognise revenue only to the extent of
the expenses recognised that are recoverable.
Interest, royalties, rent and dividends
6.9 An entity shall recognise revenue arising from the use by others of entity
assets yielding interest, royalties, rent and dividends on the bases set out in
paragraph 6.10 when
(a) it is probable that the economic benefits associated with the transaction
will flow to the entity; and\
(b) the amount of the revenue can be measured reliably.
6.10 An entity shall recognise revenue on the following bases
(a) interest shall be recognised on an accrual or time proportion basis;
(b) royalties and rent shall be recognised on an accrual basis in accordance
with the substance of the relevant agreement; and
(c) dividends shall be recognised when the shareholder’s right to receive
payment is established.
Construction contracts
6.11 When the outcome of a construction contract can be estimated reliably, an
entity shall recognise contract revenue and contract costs associated with the
construction contract as revenue and expenses respectively by reference to the stage
of completion of the contract activity at the end of the reporting period (often
referred to as the percentage of completion method). Reliable estimation of the
outcome requires reliable estimates of the stage of completion, future costs and
collectability of billings.
6.12 An entity shall review and, when necessary, revise the estimates of revenue
and costs as the service transaction or construction contract progresses.
6.13 An entity shall determine the stage of completion of a transaction or contract
using the method that measures most reliably the work performed. Possible methods
include
(a) the proportion that costs incurred for work performed to date bear to the
estimated total costs. Costs incurred for work performed to date do not
include
(i)
costs relating to future activity on the contract, such as costs of
material that have been delivered to a contract site or set aside for
use in a contract but not yet installed, used or applied during
contract performance, unless the materials have been made
specially for the contract; and
(ii) prepayments, such as payments made to subcontractors in
advance of work performed under the subcontract;
(b) surveys of work performed; or
(c) completion of a physical proportion of the service transaction or
contract work. Progress payments and advances received from
customers often do not reflect the work performed.
6.14 An entity shall recognise costs that relate to future activity on the
transaction or contract, such as for materials or prepayments, as an asset if it is
probable that the costs will be recovered. Such costs represent an amount due from
the customer and are classified as work in progress.
6.15 An entity shall recognise as an expense immediately any costs that are not
probable of being recovered.
6.16 When the outcome of a construction contract cannot be estimated reliably
(a) an entity shall recognise revenue only to the extent of contract costs
incurred that it is probable will be recoverable; and
(b) the entity shall recognise contract costs as an expense in the period in
which they are incurred.
6.17 When it is probable that total contract costs will exceed total contract
revenue on a construction contract, the expected loss shall be recognised as an
expense immediately.
6.18 If the collectability of an amount already recognised as contract revenue is
no longer probable, the entity shall recognise the uncollectible amount as an expense
rather than as an adjustment of the amount of contract revenue.
Revenue - disclosure
6.19 An entity shall disclose
(a) the accounting policies adopted for the recognition of revenue,
including the methods adopted to determine the stage of completion of
transactions involving the rendering of services; and
(b) the amount of each category of revenue recognised during the period,
including revenue arising from
(i)
the sale of goods;
(ii)
the rendering of services;
(iii)
interest;
(iv)
royalties;
(v)
rent; and
(vi)
dividends.
Construction contracts - disclosure
6.20 An entity shall disclose
(a) the amount of contract revenue recognised as revenue in the period;
(b) the methods used to determine the contract revenue recognised in the
period; and
(c) the methods used to determine the stage of completion of contracts in
progress.
6.21 An entity shall disclose each of the following for contracts in progress at the
balance sheet date
(a) the aggregate amount of costs incurred and recognised profits (less
recognised losses) to date;
(b) the amount of advances received; and
(c) the amount of retentions.
6.22 Retentions are amounts of progress billings that are not paid until the
satisfaction of conditions specified in the contract for the payment of such amounts
or until defects have been rectified. Progress billings are amounts billed for work
performed on a contract whether or not they have been paid by the customer.
Advances are amounts received by the contractor before the related work is
performed.
6.23 An entity shall present
(a) the gross amount due from customers for contract work as an asset; and
(b) the gross amount due to customers for contract work as a liability.
6.24 The gross amount due from customers for contract work is the net amount of
(i) costs incurred plus recognised profits, less (ii) the sum of recognised losses and
progress billings for all contracts in progress for which costs incurred plus
recognised profits (less recognised losses) exceeds progress billings.
6.25 The gross amount due to customers for contract work is the net amount of (i)
costs incurred plus recognised profits, less (ii) the sum of recognised losses and
progress billings for all contracts in progress for which progress billings exceed
costs incurred plus recognised profits (less recognised losses).
Section 7: Property, plant and equipment
7.1
Property, plant and equipment are tangible assets that
(a) are held for use in the production or supply of goods or services, for
rental to others, or for administrative purposes; and
(b) are expected to be used during more than one period.
Recognition
7.2 The cost of an item of property, plant and equipment shall be recognised as
an asset if, and only if
(a)
it is probable that future economic benefits associated with the item
will flow to the entity; and
(b) the cost of the item can be measured reliably.
Measurement at recognition
7.3 An entity shall measure an item of property, plant and equipment at initial
recognition at its cost.
The cost of an item of property, plant and equipment comprises
(a) its purchase price, including legal and brokerage fees, import duties and
non-refundable purchase taxes, after deducting trade discounts and
rebates;
(b) any costs directly attributable to bringing the asset to the location and
condition necessary for it to be capable of operating in the manner
intended by management. These can include staff costs arising directly
from the construction or acquisition of the item of property, plant and
equipment, the costs of site preparation, initial delivery and handling,
installation and assembly, and testing of functionality; and
(c) the initial estimate of the costs of dismantling and removing the item
and restoring the site on which it is located, the obligation for which an
entity incurs either when the item is acquired or as a consequence of
having used the item during a particular period for purposes other than
to produce inventories during that period.
The cost of a self-constructed asset is determined using the same principles as for
an acquired asset.
7.5 Subsequent expenditure shall be capitalised as part of the cost of property,
plant and equipment only if
(a) it enhances the economic benefits of an asset in excess of the previously
assessed standard of performance (i.e. if it is an ‘improvement’); or
(b) it replaces or restores a component that has been separately depreciated
over its useful life.
Otherwise it shall be recognised in the income statement as it is incurred.
7.6 An entity may adopt an accounting policy of capitalising finance costs (such
as interest). Where such a policy is adopted, only those finance costs that are directly
attributable to the acquisition, construction or production of a qualifying asset shall
be capitalised as part of the cost of that asset. A qualifying asset is an asset that
necessarily takes a substantial period of time to get ready for its intended use. The
total amount of finance costs capitalised during a period shall not exceed the total
amount of finance costs incurred during that period.
7.7 Capitalisation of directly attributable costs, including finance costs, shall be
suspended during extended periods in which active development is interrupted.
Recognition of such costs in the carrying amount of an item of property, plant and
equipment ceases when the item is in the location and condition necessary for it to
be capable of operating in the manner intended by management, even if the asset has
not yet been brought into use.
Measurement after recognition
7.8 An entity shall account for all items in the same class of property, plant and
equipment (i.e. having a similar nature, function or use in the business) after initial
recognition using either
(a) the cost model in paragraph 7.9; or
(b) the revaluation model in paragraphs 7.10 - 7.18.
7.9 Under the cost model, an entity shall measure an item of property, plant and
equ ipm ent at cost less any accumulated d epreciation and any accumu lated
impairment losses.
7.10 Under the revaluation model, an item of property, plant and equipment
whose fair value can be measured reliably shall be carried at a revalued amount,
being its fair value at the date of the revaluation less any subsequent accumulated
depreciation and subsequent accumulated impairment losses. Revaluations shall be
made with sufficient regularity to ensure that the carrying amount does not differ
materially from that which would be determined using fair value at the balance sheet
date.
7.11 Where an item of property, plant and equipment is revalued all items in the
same class shall be revalued, but a policy of revaluation need not be applied to all
classes of property, plant and equipment.
7.12 The fair value of land and buildings is usually determined from market-
based evidence by appraisal that is normally undertaken by professionally qualified
valuers. The fair value of items of plant and equipment is usually their market value
determined by appraisal.
7.13 If there is no market-based evidence of fair value because of the specialised
nature of the item of property, plant and equipment and the item is rarely sold,
except as part of a continuing business, an entity may need to estimate fair value
using an income or a depreciated replacement cost approach.
7.14 The frequency of revaluations depends upon the changes in fair values of the
items of property, plant and equipment being revalued. Nevertheless, revaluations
shall be made at least every five years and in the intervening years where it is likely
that there has been a material change in value. When the fair value of a revalued
asset differs materially from its carrying amount, a further revaluation is required.
Some items of property, plant and equipment experience significant and volatile
changes in fair value, thus necessitating annual revaluation. Such frequent
revaluations are unnecessary for items of property, plant and equipment with only
insignificant changes in fair value. Instead, it may be necessary to revalue the item
only every three or five years.
7.15 Gains and losses arising on the revaluation of assets shall be recognised in
equity under the heading of revaluation surplus, net of any attributable taxation
element.
7.16 If an asset’s carrying amount is increased as a result of a revaluation, the
increase shall be credited directly to equity under the heading of revaluation surplus.
However, the increase shall be recognised in profit or loss to the extent that it
reverses a revaluation decrease of the same asset previously recognised in profit or
loss in accordance with paragraph 7.17.
7.17 If an asset’s carrying amount is decreased as a result of a revaluation, the
decrease shall be recognised in profit or loss. However, the decrease shall be debited
directly to equity under the heading of revaluation surplus to the extent of any credit
balance existing in the revaluation surplus in respect of that asset. Any amounts
recognised in profit or loss in accordance with paragraph 7.16 and this paragraph
shall be shown separately on the face of the income statement.
7.18 The revaluation surplus included in equity in respect of an item of property,
plant and equipment may be transferred directly to retained earnings (not through
profit or loss) when the asset is derecognised. This may involve transferring the
whole of the surplus when the asset is retired or disposed of. However, some of the
surplus may be transferred as the asset is used by an entity. In such a case, the
amount of the surplus transferred would be the difference between depreciation
based on the revalued carrying amount of the asset and depreciation based on the
asset’s original cost.
Depreciation
7.19 The cost (or revalued amount) less estimated residual value of an item of
property, plant and equipment shall be depreciated on a systematic basis over the
asset’s useful life. An entity shall select a depreciation method that reflects the
pattern in which it expects to consume the asset’s future economic benefits. The
possible depreciation methods include the straight-line method.
7.20 Depreciation of an asset begins when it is available for use, i.e. when it is in
the location and condition necessary for it to be capable of operating in the manner
intended by management. Depreciation of an asset ceases at the earlier of the date
that the asset is classified as held for sale (or included in a disposal group that is
classified as held for sale) and the date that the asset is derecognised. Therefore,
depreciation does not cease when the asset becomes idle or is retired from active use
unless the asset is fully depreciated.
7.21 The depreciation charge for each period shall be recognised in profit or loss,
unless it is included in the carrying amount of another asset.
7.22 Where an item of property, plant and equipment comprises two or more
major components with substantially different useful lives, each component shall be
accounted for separately for depreciation purposes and depreciated over its
individual useful life. Each part of an item of property, plant and equipment with a
cost that is significant in relation to the total cost of the item shall be depreciated
separately. With certain exceptions, such as sites used for extractive purposes or
landfill, land has an unlimited life and therefore is not depreciated.
7.23 The useful lives and residual values of property, plant and equipment shall
be reviewed regularly and, when necessary, revised. On revision, the carrying
amount of the item of property, plant and equipment at the date of revision, less the
revised residual value, shall be depreciated over the revised remaining useful life.
Such a change shall be accounted for as a change in an accounting estimate in
accordance with Section 5 of these Principles.
7.24 An entity shall review the depreciation method regularly. If there has been a
significant change in the pattern in which the entity expects to consume the asset’s
future economic benefits, the entity shall change the method to reflect the new
pattern. A change from one method of providing depreciation to another is
permissible only on the grounds that the new method will give a fairer presentation
of the results and of the financial position. Such a change does not, however,
constitute a change of accounting policy; the carrying amount of the item of
property, plant and equipment is depreciated using the revised method over the
remaining useful life, beginning in the period in which the change is made. A change
in the depreciation method shall be accounted for as a change in an accounting
estimate in accordance with Section 5 of these Principles.
Impairment
7.25 To determine whether an item of property, plant and equipment is impaired,
ACCOUNTANCY PROFESSION (GENERAL ACCOUNTING
PRINCIPLES FOR SMALLER ENTITIES)
an entity applies Section 12 of these Principles. That Section explains how an entity
reviews the carrying amount of its assets, how it determines the recoverable amount
of an asset, and when it recognises, or reverses the recognition of, an impairment
Disclosure
7.26 An entity shall disclose, for each class of property, plant and equipment
(a) the measurement bases used for determining the gross carrying amount;
(b) the depreciation methods used;
(c) the useful lives or the depreciation rates used;
(d) where material, the financial effect of a change during the period in
either the estimate of useful lives or the estimate of residual values;
(e) the gross carrying amount and the accumulated depreciation
(aggregated with accumulated impairment losses) at the beginning and
end of the period; and
(f)
having regard to paragraph 4.7(a) of these Principles, a reconciliation of
the carrying amount at the beginning and end of the period showing
(i)
additions;
(ii)
assets classified as held for sale or included in a disposal group
classified as held for sale in accordance with Section 24 of these
Principles;
(iii) additions resulting from business acquisitions;
(iv) disposals;
(v) revaluation gains and losses;
(vi) impairment losses recognised or reversed in profit or loss in
accordance with Section 12 of these Principles;
(vii) depreciation;
(viii) the net exchange differences arising on the translation of the
financial statements from the functional currency into a different
presentation currency (see Section 19 of these Principles); and
(ix) other changes.
7.27 Where there has been a change in the depreciation method used, the effect, if
material, shall be disclosed in the period of change. The reason for the change shall
also be disclosed.
7.28 Where applicable, the notes shall disclose (i) the fact that finance costs are
incurred in determining the cost of the assets, and (ii) the amount of finance costs so
7.29 Where property, plant and equipment have been revalued an entity shall
(a) the comparable amounts determined under the cost model (i.e. the
aggregate historical cost amount that would have been included had the
assets not been revalued, reflecting any write-downs to recoverable
amount that would have been necessary); or
(b) the differences between those amounts and the corresponding amounts
actually shown in the balance sheet.
7.30 Where items of property, plant and equipment were revalued, the year in
which they were revalued shall be disclosed. When an item of property, plant and
equipment was revalued during the financial year to which the financial statements
relate, an entity shall disclose in those financial statements
(a) the effect of any revaluation made during the year;
(b) whether an independent valuer was involved; and
(c) the bases of the valuation.
7.31 The entity shall also disclose
(a) the existence and amounts of restrictions on title, and property, plant
and equipment pledged as security for liabilities; and
(b) the amount of contractual commitments for the acquisition of property,
plant and equipment (however authorised but not contracted
commitments should also be disclosed).
7.32 The treatment for taxation purposes of amounts credited or debited to
revaluation surplus shall be disclosed in the notes.
Section 8: Investment property
8.1 Investment property is property (land or a building, or part of a building, or
both) held by the owner or by the lessee under a finance lease to earn rentals or for
capital appreciation or both, rather than for
(a) use in the production or supply of goods or services or for
administrative purposes (hence covered by the definition of property,
plant and equipment under Section 7 of these Principles and accounted
for in accordance with the provisions of that Section); or
(b) sale in the ordinary course of business (hence covered by the definition
of inventories under Section 15 of these Principles and accounted for in
accordance with the provisions of that Section).
Recognition
8.2
Investment property shall be recognised as an asset when, and only when
(a) it is probable that the future economic benefits that are associated with
the investment property will flow to the entity; and
(b) the cost of the investment property can be measured reliably.
Measurement at recognition
8.3 An entity shall measure investment property at its cost at initial recognition.
The cost of a purchased investment property comprises its purchase price and any
directly attributable expenditure such as legal and professional fees, property
transfer taxes and other transaction costs. The cost of a self-constructed investment
property is its cost at the date when the construction or development is complete.
Until that date an entity shall apply Section 7 of these Principles.
Measurement after recognition
8.4 After initial recognition, an entity shall choose as its accounting policy
either the cost model in paragraph 8.5, or the fair value model in paragraphs 8.6 -
8.10, and shall apply that policy to all of its investment property.
8.5 An entity that chooses the cost model shall measure all of its investment
property after initial recognition at cost less any accumulated depreciation and any
accumulated impairment losses and shall account for all of its investment property
by applying the principles for property, plant and equipment measured under the cost
model in accordance with the requirements of paragraph 7.9 and paragraphs 7.19 -
7.24 of Section 7 of these Principles. To determine whether an investment property
is impaired, an entity applies Section 12 of these Principles. That Section explains
how an entity reviews the carrying amount of its assets, how it determines the
recoverable amount of an asset, and when it recognises, or reverses the recognition
of, an impairment loss.
8.6 An entity that chooses the fair value model shall measure all of its
investment property after initial recognition at fair value less any accumulated
depreciation.
8.7 The best evidence of fair value is given by current prices in an active market
for similar property in the same location and condition and subject to similar lease
and other contracts. In the absence of current prices in an active market, an entity
considers information from a variety of sources, including
(a) current prices in an active market for properties of different nature,
condition or location (or subject to different lease or other contracts),
adjusted to reflect those differences;
(b) recent prices of similar properties on less active markets, with
adjustments to reflect any changes in economic conditions since the
date of the transactions that occurred at those prices; and
(c) discounted cash flow projections based on reliable estimates of future
cash flows and using discount rates that reflect current market
assessments of the uncertainty in the amount and timing of the cash
flows.
8.8 If, in exceptional cases, there is clear evidence when an entity first acquires
an investment property (or when an existing property first becomes investment
property following the completion of construction or development, or after a change
of use) that the fair value of the investment property is not reliably determinable on a
continuing basis, an entity shall measure that investment property using the cost
model in paragraph 8.5 and the residual value of that investment property shall be
assumed to be zero. The fair value of an investment property is not reliably
determinable on a continuing basis when, and only when, comparable market
transactions are infrequent and alternative reliable estimates of fair value are not
available. An entity may nevertheless measure all its other investment property
using the fair value model.
8.9 Paragraphs 7.14 - 7.18 and paragraphs 7.19 - 7.24 of Section 7 of these
Principles shall also apply to investment property measured under the fair value
model. References to revaluation surplus therein shall be taken to refer to fair value
reserve in the case of investment property.
8.10 Upon first-time adoption of GAPSE an entity shall transfer any fair value
gains on an item of investment property, previously recognised in profit or loss and
standing to the credit of retained earnings or another reserve in accordance with
another financial reporting framework, to a separate component of equity under the
heading of fair value reserve.
Transfers
8.11 If an item of property, plant and equipment becomes an investment property,
and the entity will account for the investment property under the fair value model,
any difference between the asset’s carrying amount and its fair value at the date
when it becomes an investment property shall be treated in the same way as a
revaluation in accordance with Section 7 of these Principles.
8.12 If a property held as inventories, or a completed self-constructed property,
becomes an investment property, and the entity will account for the investment
property under the fair value model, any difference between the asset’s previous
carrying amount and its fair value at the date when it becomes an investment
property shall be recognised in a separate component of equity under the heading of
fair value reserve.
8.13 When an investment property carried at fair value is transferred to property,
plant and equipment or inventories, following a change of use, the property’s
deemed cost for subsequent accounting in accordance with Sections 7 and 15
respectively, shall be its fair value at the date of change of use. The cumulative
amount recognised in fair value reserve in respect of that investment property may
be transferred to retained earnings when, and only when, the asset (property, plant
and equipment or inventory) is derecognised.
Disclosure
8.14 An entity shall make the disclosures required by paragraphs 7.26 - 7.32 of
Section 7 of these Principles, insofar as applicable. References to revaluation surplus
therein shall be taken to refer to fair value reserve in the case of investment property.
Section 9: Investments
9.1 An investment is a financial asset (as defined in paragraph 18.2) which is
held by an entity for the accretion of wealth through distribution (such as interest,
dividends and similar income), for capital appreciation or for other similar benefits
to the investing entity. This Section does not apply to
(a) Property, plant and equipment as defined in Section 7;
(b) Investment property as defined in Section 8;
(c) Investments in subsidiaries, associates and joint ventures as defined in
Section 10;
(d) Intangible assets as defined in Section 11;
(e) Finance leases as defined in Section 14;
(f)
Inventories as defined in Section 15;
(g) Goodwill as defined in Section 22; and
(h) Other financial assets that do not meet the above definition, including
trade receivables, demand deposits, cash and other instruments such as
interest-free loans which would fall to be treated under Section 18 of
these Principles.
9.2 A class of investment is a group of investments that are similar in nature and
that have common characteristics. Examples of classes of investments include
(a) quoted or unquoted instruments; and
(b) debt or equity securities.
9.3
A held-for-trading investment is an investment that is
(a) acquired principally for the purpose of selling it in the near term; or
(b) part of a portfolio of identified investments that are managed together
and for which there is evidence of a recent actual pattern of short-term
profit-taking.
Recognition
9.4 An entity shall recognise an investment on its balance sheet when, and only
when, it acquires a contractual right
(a) to receive cash or another financial asset from another entity; or
(b) to exchange financial assets or financial liabilities with another entity
under conditions that are potentially favourable to the entity.
Measurement at recognition
9.5 An entity shall measure all of its investments at cost at initial recognition,
comprising purchase price and transaction costs that are directly attributable to the
acquisition of the investment. Transaction costs that shall be included in the initial
measurement of the investment include fees and commissions paid to agents,
advisers, bro kers and dealers, levies by regulato ry agencies and securities
exchanges, and transfer taxes and duties. Transaction costs do not include debt
premiums or discounts, financing costs or internal administrative or holding costs.
Measurement after recognition
9.6 An entity shall account for all items in the same class of investments, except
for held-for-trading investments (see paragraph 9.7), after initial recognition as
follows
(a) for unquoted instruments using the cost model in paragraph 9.8; and
(b) for quoted instruments using any of the following
(i) the cost model in paragraph 9.8; or
(ii) the fair value through equity model in paragraphs 9.9 - 9.13.
9.7 An entity shall account for all held-for-trading investments after initial
recognition using either
(a) the cost model in paragraph 9.8; or
(b) the fair value through profit or loss model in paragraphs 9.9, 9.10 and
9.14.
9.8 Under the cost model, an entity shall measure all items in the same class of
investment after initial recognition at the lower of cost and fair value less costs to
sell. Any adjustments to the carrying amount in this respect shall be recognised in
profit or loss for the period.
9.9 Under the fair value model, an entity shall measure all items in the same
class of investment at fair value if their fair value can be measured reliably. The fair
value of an investment is the price at which the investment could be exchanged
between a knowledgeable, willing buyer who is not over-eager nor determined to
buy at any price, and a knowledgeable, willing seller who is not over-eager nor
forced to sell, both acting independently. The best evidence of fair value is given by
prices quoted in an active market. If the market for an investment is not active, an
entity estimates fair value by using a valuation technique. The objective of using a
valuation technique is to estimate what the transaction price would have been on the
measurement date in an arm’s length exchange motivated by normal business
considerations. An entity determines fair value without any deduction for transaction
costs it may incur on sale or other disposal.
9.10 If the fair value of an investment in a class of investment measured at fair
value cannot be measured reliably, an entity shall measure that investment using the
cost model in paragraph 9.8. An entity may nevertheless measure all its other
investments in the same class using the fair value model if their fair value can be
measured reliably.
9.11 If the carrying amount of an investment measured under the fair value
through equity model is increased as a result of an increase in the fair value of that
investment, the increase shall be credited directly to a separate component of equity
under the heading of fair value reserve, net of any attributable taxation element.
However, the increase shall be recognised in profit or loss to the extent that it
reverses a fair value decrease of the same investment previously recognised in profit
or loss in accordance with paragraph 9.12.
9.12 If the carrying amount of an investment measured under the fair value
through equity model is decreased as a result of a decrease in the fair value of that
investment, the decrease shall be debited directly to a separate component of equity
under the heading of fair value reserve to the extent of any credit balance existing in
the fair value reserve in respect of that investment. Any decrease in the carrying
amount in excess of any credit balance existing in the fair value reserve in respect of
that investment shall be recognised in profit or loss.
9.13 Upon disposal of an investment measured under the fair value through
equity model, the net amount included in the fair value reserve in respect of an
investment may be transferred directly to retained earnings (not through profit or
loss) when the asset is derecognised.
9.14 If held-for-trading investments are measured at fair value, any gain or loss
arising from a change in the fair value of held-for-trading investments shall be
recognised in profit or loss for the period in which it arises.
Investment income
9.15 Investment income arising from interest, royalties and dividends, and profits
or losses on disposal of investments shall be included in the profit or loss for the
period in which they arise.
Disclosure
9.16 An entity that carries quoted investments under the cost model shall disclose
the market value of those investments if it is materially different from their carrying
amount.
9.17 For investments measured at fair value an entity shall disclose, for each
class of investment
(a) the significant assumptions underlying the valuation techniques used, if
any, in accordance with paragraph 9.9 of these Principles; and
(b) the fair value at the balance sheet date and the changes in fair value
recognised either in equity or in the income statement during the period
in accordance with paragraph 9.18(b)(iv) and (v).
9.18 When the fair value of an investment in a class of investment measured at
fair value cannot be measured reliably, and that investment is hence measured under
the cost model in accordance with paragraph 9.10, an entity shall disclose that fact
together with the reason why the fair value of that investment cannot be measured
reliably.
9.19 An entity shall disclose
(a) its accounting policy for each class of investment; and
(b) having regard to paragraph 4.7(d) of these Principles, a reconciliation of
the carrying amount of each class of investment at the beginning and
end of the period showing
(i) additions;
(ii) disposals;
(iii) write-downs to fair value less costs to sell for classes of
investment measured under the cost model;
(iv)
gains and losses resulting from changes in the fair value of
investments measured under the fair value through equity model,
distinguishing between those recognised in equity and those
recognised in profit or loss, in accordance with paragraphs 9.11
and 9.12;
(v)
gains and losses resulting from changes in the fair value of held-
for-trading investments measured under the fair value through
profit or loss model, recognised in profit or loss in accordance
with paragraph 9.14;
(vi)
the net exchange differences arising on the translation of the
financial statements from the functional currency into a different
presentation currency (see Section 19 of these Principles); and
(vii)
other changes.
9.20 An entity shall disclose the existence of any restrictions on title and the
carrying amount of any investments that it has pledged as collateral for liabilities or
contingent liabilities.
Section 10: Investments in subsidiaries, associates and joint ventures
10.1 This Section shall be applied by an investor in accounting for its equity
investments in subsidiaries, associates and joint ventures in its individual financial
statements. Individual financial statements are the financial statements of the
investor prepared in accordance with these Principles. This Section does not apply to
consolidated financial statements, which are specifically covered in Section 23 of
GAPSE.
10.2 Investments in entities other than subsidiaries, associates and joint ventures
shall be accounted for in accordance with the requirements of Section 9 of these
Principles.
Definitions
10.3 A subsidiary is an entity, including an unincorporated entity such as a
partnership, which is controlled by another entity, known as the parent (also referred
to as the ‘investor’ throughout this Section). Control is the power to govern the
financial and operating policies of an entity so as to obtain benefits from its
activities. Control is presumed to exist when the parent owns, directly or indirectly
through subsidiaries, more than 50% of the voting power of an entity unless, in
exceptional circumstances, it can be clearly demonstrated that such ownership does
not constitute control. Control also exists when the parent owns half or less of the
voting power of an entity but it has
(a) power over more than half of the voting rights by virtue of an agreement
with other investors;
(b) power to govern the financial and operating policies of the entity under
a statute or an agreement;
(c) power to appoint or remove the majority of the members of the board of
directors or equivalent governing body and control of the entity is by
that board or body; or
(d) power to cast the majority of votes at meetings of the board of directors
or equivalent governing body and control of the entity is by that board
or body.
10.4 An associate is an entity, including an unincorporated entity such as a
partnership, over which the investor has significant influence and that is neither a
subsidiary nor an interest in a joint venture. Significant influence is the power to
participate in the financial and operating policy decisions of the associate but is not
control or joint control over those policies. If an investor holds, directly or indirectly
(e.g. through subsidiaries), 20% or more of the voting power of the investee, it is
presumed that the investor has significant influence, unless it can be clearly
demonstrated that this is not the case. Conversely, if the investor holds, directly or
indirectly (e.g. through subsidiaries), less than 20% of the voting power of the
investee, it is presumed that the investor does not have significant influence, unless
such influence can be clearly demonstrated. A substantial or majority ownership by
another investor does not preclude an investor from having significant influence.
The existence of significant influence by an investor is usually evidenced in one or
more of the following ways
(a) representation on the board of directors or equivalent governing body of
the investee;
(b) participation in policy making processes;
(c) material transactions between the investor and the investee;
(d) interchange of managerial personnel; or
(e) provision of essential technical information.
10.5 A joint venture is a contractual arrangement whereby two or more parties
undertake an economic activity that is subject to joint control. The following
characteristics are common to all joint ventures
(a) two or more venturers are bound by a contractual arrangement; and
(b) the contractual arrangement establishes joint control.
Joint control is the contractually agreed sharing of control over an economic
activity, and exists only when the strategic financial and operating decisions relating
to the activity require the unanimous consent of the parties sharing control (the
venturers). A venturer (also referred to as the ‘investor’ throughout this Section) is a
party to a joint venture and has joint control over that joint venture.
10.6 Joint ventures can take the form of jointly controlled operations, jointly
controlled assets, or jointly controlled entities.
10.7 The operation of some joint ventures involves the use of the assets and other
resources of the venturers rather than the establishment of a corporation, partnership
or other entity, or a financial structure that is separate from the venturers themselves.
Each venturer uses its own property, plant and equipment and carries its own
inventories. It also incurs its own expenses and liabilities and raises its own finance,
which represent its own obligations. The joint venture activities may be carried out
by the venturer’s employees alongside the venturer’s similar activities. The joint
venture agreement usually provides a means by which the revenue from the sale of
the joint product and any expenses incurred in common are shared among the
venturers. These are referred to as jointly controlled operations.
10.8 Some joint ventures involve the joint control, and often the joint ownership,
by the venturers of one or more assets contributed to, or acquired for the purpose of,
the joint venture and dedicated to the purposes of the joint venture. These are
referred to as jointly controlled assets.
10.9 A jointly controlled entity is a joint venture that involves the establishment
of a corporation, partnership or other entity in which each venturer has an interest.
The entity operates in the same way as other entities, except that a contractual
arrangement between the venturers establishes joint control over the economic
activity of the entity.
10.10 Investments in subsidiaries, associates and jointly controlled entities are
sometimes collectively referred to as "investee" throughout this Section. Accounting
for investments in subsidiaries, associates and jointly controlled entities.
10.11 An investor shall initially account for all investments in subsidiaries,
associates and jointly controlled entities at cost.
10.12 Subsequent to initial recognition, an investor shall account for all its
investments in subsidiaries, associates and jointly controlled entities, using one of
the following
(a) the cost method in paragraphs 10.13 and 10.14; or
(b) the equity method in paragraphs 10.15 - 10.23.
Cost method
10.13 Under the cost method, an investor shall measure all its investments in
subsidiaries, associates and jointly controlled entities at cost less any accumulated
impairment losses. The investor shall recognise a dividend from a subsidiary,
associate or jointly controlled entity in profit or loss in its individual financial
statements when its right to receive the dividend is established.
10.14 The investor shall recognise impairment in accordance with Section 12 of
these Principles. In assessing whether there is an indication that an investment in a
subsidiary, associate or jointly controlled entity (collectively referred to as investee)
may be impaired an entity shall consider available evidence that indicates that the
dividend from an investee recognised in the current financial reporting period
exceeds that investee’s profit for the financial reporting period in which the dividend
is declared. Where applicable, an entity shall apply the guidance in paragraph 10.22
for the purposes of determining an investment’s recoverable amount.
Equity method
10.15 Investments in subsidiaries, associates or jointly controlled entities are
accounted for under the equity method from the date on which they fall within the
respective definition. Under the equity method, the investment is initially recognised
at cost and the carrying amount is increased or decreased to recognise the investor’s
share of the profit or loss of the investee after the date of acquisition. The investor’s
share of the profit or loss of the investee is recognised in the investor’s profit or loss.
Distr ibutions received from an investee reduce the carryin g amount of the
investment. Adjustments to the carrying amount may also be necessary for changes
in the investor ’s proportionate interest in the subsidiary, associate or jointly
controlled entity arising from changes in the investee’s equity that have not been
recognised in their profit or loss. Such changes include those arising from the
revaluation of property, plant and equipment and from foreign exchange translation
differences. The investor’s share of those changes is recognised directly in equity of
the investor.
10.16 When potential voting rights exist, the investor’s share of profit or loss of
the investee and of changes in the investee’s equity is determined on the basis of
present ownership interests and does not reflect the possible exercise or conversion
of potential voting rights.
10.17 If an investee uses accounting policies other than those of the investor for
like transactions and events in similar circumstances, adjustments shall be made to
conform the investee’s accounting policies to those of the investor when the
investee’s financial statements are used by the investor in applying the equity
method.
10.18 Appropriate adjustments are made to the investor’s share of the profits or
losses after acquisition to account for
(a) impairment losses recognised by the investee; and
(b) profits and losses resulting from transactions between an investor and
an investee. The investor’s share in the investee’s profits and losses
resulting from these transactions is eliminated.
10.19 The most recent available financial statements of the subsidiary, associate
or jointly controlled entity are used by the investor in applying the equity method.
When the reporting dates of the investor and the investee are different, the investee
prepares, for the use of the investor, financial statements as of the same date as the
financial statements of the investor unless it is impracticable to do so.
10.20 If, under the equity method, an investor’s share of losses of a subsidiary,
associate or jointly controlled entity equals or exceeds its interest in the investment,
the investor discontinues recognising its share of further losses. The investment is
reported at nil value. Thereafter, additional losses are provided for, and a liability is
recognised, only to the extent that the investor has incurred legal or constructive
obligations or made payments on behalf of the investee. If the subsidiary, associate
or jointly controlled entity subsequently reports profits, the investor resumes
recognising its share of those profits only after its share of the profits equals the
share of losses not recognised.
10.21 After application of the equity method, including recognising the
associate’s losses in accordance with paragraph 10.20, the investor applies the
requirements of Section 12 to determine whether it is necessary to recognise any
additional impairment loss with respect to the investor’s investment.
10.22 For the purposes of determining whether an investment in a subsidiary,
associate or jointly controlled entity is impaired in accordance with Section 12 of
these Principles, an entity shall compare the investment’s recoverable amount
(higher of net realisable value and value in use) with its carrying amount, whenever
there is an indication that the investment may be impaired. In determining the value
in use of investments in subsidiaries, associates or jointly controlled entities, an
entity estimates
(a) its share of the present value of the estimated future cash flows
expected to be generated by the investee, including the cash flows from
the operations of the subsidiary, associate or jointly controlled entity
and the proceeds on the ultimate disposal of the investment; or
(b) the present value of the estimated future cash flows expected to arise
from dividends to be received from the investment and from its ultimate
disposal.
Under appropriate assumptions, both methods give the same result.
10.23 An investor shall discontinue the use of the equity method from the date it
ceases to have
(a) control over the subsidiary’s financial and operating policies; or
(b) significant influence in participating in the financial and operating
policy decisions of the associate; or
(c) joint control over a jointly controlled entity and shall account for the
investment in accordance with Section 9 of these Principles. The
carrying amount of the investment at that date shall be recognised as its
cost on initial measurement.
ACCOUNTANCY PROFESSION (GENERAL ACCOUNTING
PRINCIPLES FOR SMALLER ENTITIES)
Recognition and Measurement - investments in jointly controlled operations and
jointly controlled assets
10.24 In respect of its interests in jointly controlled operations, a venturer shall
recognise in its financial statements
(a) the assets that it controls and the liabilities that it incurs; and
(b) the expenses that it incurs and its share of the income that it earns from
the sale of goods or the rendering of services by the joint venture and
shall measure assets and liabilities recognised in (a) above in
accordance with the respective requirements of these Principles.
10.25 In respect of its interests in jointly controlled assets, a venturer shall
recognise in its financial statements
(a) its share of the jointly controlled assets, classified according to the
nature of the assets;
(b) any liabilities that it has incurred;
(c) its share of any liabilities incurred jointly with the other venturers in
relation to the joint venture;
(d) any income from the sale or use of its share of the output of the joint
venture, together with its share of any expenses incurred by the joint
venture; and
(e) any expenses that it has incurred in respect of its interest in the joint
venture and shall measure assets and liabilities recognised in (a), (b)
and (c) above in accordance with the respective requirements of these
Principles.
Disclosure
10.26 An investor shall disclose its accounting policy for its investments in
subsidiaries, associates and jointly controlled entities.
10.27 For investments in subsidiaries, associates and jointly controlled entities
accounted for under the cost method an investor shall disclose
(a) income received from distributions out of the investee’s accumulated
profits, recognised in the investor’s profit or loss for the period, unless
shown separately on the face of the income statement; and
(b) the information required by Section 12 of these Principles.
10.28 For investments in subsidiaries, associates and jointly controlled entities
accounted for under the equity method an investor shall disclose separately
(a) its share of the profit or loss of the investees, unless shown separately
on the face of the income statement;
(b) its share of changes recognised directly in the equity of the investee in
accordance with paragraph 10.15, unless shown separately on the
statement of changes in equity;
(c) its share of discontinued operations;
(d) the carrying amount of those investments; and
(e) the information required by Section 12 of these Principles.
10.29 An investor shall give a reconciliation of the carrying amount at the
beginning and end of the period, showing the following separately for investments in
subsidiaries, associates and jointly controlled entities
(a) additions;
(b) disposals;
(c) impairment losses recognised or reversed in profit or loss during the
period;
(d) share of profit or loss on investments in subsidiaries, associates and
jointly controlled entities accounted for under the equity method;
(e) distributions received from subsidiaries, associates and jointly
controlled entities accounted for under the equity method;
(f)
the net exchange differences arising on the translation of the financial
statements from the functional currency into a different presentation
currency (see Section 19 of these Principles); and
(g) other changes.
10.30 For all investments in subsidiaries, associates and jointly controlled entities
an investor shall disclose, in relation to each significant subsidiary, associate and
jointly controlled entity
(a) the name of the entity;
(b) the legal form;
(c) if the entity is incorporated outside Malta, the country in which it is
incorporated;
(d) if it is unincorporated, the address of its principal place of business;
(e) the identity and proportion of the nominal value of each class of shares
held;
(f)
if different from (e) above, the proportion of voting power held; and
(g) the amount of capital and reserves.
10.31 For each significant subsidiary, associate and jointly controlled entity
accounted for under the cost method an investor shall disclose
(a) the profit or loss for the latest financial period for which financial
statements have been prepared;
(b) the financial reporting framework under which those financial
statements have been prepared (for example International Financial
Reporting Standards); and
(c) whether those financial statements have been audited.
10.32 An entity shall also disclose
(a) For subsidiaries and associates, the nature and extent of any significant
restrictions on the ability of the subsidiaries and associates to transfer
funds to the investor in the form of cash dividends, or repayment of
loans or advances.
(b) In respect of associates the investor shall disclose
(i)
its share of the contingent liabilities of an associate incurred
jointly with other investors; and
(ii) those contingent liabilities that arise because the investor is
severally liable for all or part of the liabilities of the associate.
10.33 A venturer shall disclose the aggregate amount of the following contingent
liabilities, unless the probability of loss is remote, separately from the amount of
other contingent liabilities
(a) any contingent liabilities that the venturer has incurred in relation to its
interests in joint ventures and its share in each of the contingent
liabilities that have been incurred jointly with other venturers;
(b) its share of the contingent liabilities of the joint ventures themselves for
which it is contingently liable; and
(c) those contingent liabilities that arise because the venturer is
contingently liable for the liabilities of the other venturers of a joint
venture.
10.34 A venturer shall disclose the aggregate amount of the following
commitments in respect of its interests in joint ventures separately from other
commitments
(a) any capital commitments of the venturer in relation to its interests in
joint ventures and its share in the capital commitments that have been
incurred jointly with other venturers; and
(b) its share of the capital commitments of the joint ventures themselves.
Section 11: Intangible assets other than goodwill
11.1 An intangible asset is an identifiable non-monetary asset without physical
substance. Such an asset is identifiable when
(a)
it is separable, i.e. it is capable of being separated or divided from the
entity and sold, transferred, licensed, rented or exchanged, either
individually or together with a related contract, asset or liability;
or
(b)
it arises from contractual or other legal rights, regardless of whether
those rights are transferable or separable from the entity or from
other rights and obligations.
Acquired intangible assets - Recognition and Measurement at recognition
11.2 An intangible asset shall be recognised if, and only if
(a) it is probable that the expected future economic benefits that are
attributable to the asset will flow to the entity; and
(b) the cost of the asset can be measured reliably.
11.3 An intangible asset purchased with a business shall be recognised separately
from the purchased goodwill if its fair value can be measured reliably as required by
paragraph 22.7(c) of these Principles. The probability recognition criterion is always
considered satisfied for intangible assets that are separately acquired. In a business
combination, an acquirer recognises at the acquisition date separately from goodwill
an intangible asset of the acquiree if the asset’s fair value can be measured reliably,
irrespective of whether the asset had been recognised by the acquiree before the
business combination. Therefore, the probability recognition criterion is always
considered to be satisfied for intangible assets acquired in business combinations
because the effect of probability that the future economic benefits embodied in the
asset will flow to the entity is reflected in the fair value measurement of the
intangible asset.
11.4 An intangible asset shall be measured initially at cost. The cost of a
separately acquired intangible asset comprises
(a) its purchase price, including import duties and non-refundable purchase
taxes, after deducting trade discounts and rebates; and
(b) any directly attributable cost of preparing the asset for its intended use.
If an intangible asset is acquired in a business combination, the cost of that
intangible asset is its fair value at the acquisition date.
11.5 The nature of intangible assets is such that, in many cases, there are no
additions to such an asset or replacements of part of it. Accordingly, m ost
subsequent expenditures are likely to maintain the expected future economic
benefits embodied in an existing intangible asset rather than meet the definition of
an intangible asset and the recognition criteria in these Principles.
Internally-generated intangible assets - Recognition and Measurement at
recognition
11.6 The creation of internally-generated intangible assets involves a research
phase and a development phase. Expenditure on research (or on the research phase
of an internal project) shall be recognised as an expense in the period in which it is
incurred. An intangible asset arising from development (or from the development
phase of an internal project) shall be recognised if, and only if, an entity can
demonstrate all the following
(a) the technical feasibility of completing the intangible asset so that it will
be available for use or sale;
(b) its intention to complete the intangible asset and use or sell it;
(c) its ability to use or sell the intangible asset;
(d) how the intangible asset will generate probable future economic
benefits. Among other things, the entity can demonstrate the existence
of a market for the output of the intangible asset or the intangible asset
itself or, if it is to be used internally, the usefulness of the intangible
asset;
(e) the availability of adequate technical, financial and other resources to
complete the development and to use or sell the intangible asset; and
(f)
its ability to measure reliably the expenditure attributable to the
intangible asset during its development.
11.7 The cost of an internally-generated intangible asset for the purpose of
paragraph 11.4 is the sum of the expenditure incurred from the date when the
intangible asset first meets the recognition criteria in paragraphs 11.2 and 11.6 of
these Principles.
11.8 The cost of an internally generated intangible asset comprises all directly
attributable costs necessary to create, produce, and prepare the asset to be capable of
operating in the manner intended by management. Examples of directly attributable
costs would typically include costs of materials and services used, staff costs arising
from the generation of the intangible asset and fees payable to register a legal right.
Recognition as an expense
11.9 An entity shall recognise expenditure on an intangible item as an expense
when it is incurred unless it forms part of the cost of an intangible asset that meets
the recognition criteria.
11.10 An entity shall recognise expenditure on the following items as an expense
and shall not recognise such expenditure as intangible assets
(a) internally generated brands, mastheads, publishing titles, customer lists
and items similar in substance;
(b) expenditure on start-up activities (i.e. start-up costs), unless this
expenditure is included in the cost of an item of property, plant and
equipment. Start-up costs may consist of establishment costs such as
legal and secretarial costs incurred in establishing a legal entity,
expenditure to open a new facility or business (i.e. pre-opening costs) or
expenditure for starting new operations or launching new products or
processes (i.e. pre-operating costs);
(c) expenditure on training activities;
(d) expenditure on advertising and promotional activities; and
(e) expenditure on relocating or reorganising part or all of an entity.
Intangible assets - Measurement after recognition
11.11 After initial recognition, an intangible asset shall be carried at its cost less
any accumulated amortisation and any accumulated impairment losses. To determine
whether an intangible asset is impaired, an entity applies Section 12. That Section
explains when and how an entity reviews the carrying amount of its assets, how it
determines the recoverable amount of an asset and when it recognises or reverses an
impairment loss.
11.12 The cost less estimated residual value of an intangible asset shall be
amortised and allocated on a systematic basis over the asset’s useful life. The
residual value of an intangible asset shall be assumed to be zero unless there is a
commitment by a third party to purchase the asset at the end of its useful life.
Amortisation shall begin when the asset is available for use, i.e. when it is in the
location and condition necessary for it to be capable of operating in the manner
intended by management, and shall cease at the earlier of the date that the asset is
classified as held for sale (or included in a disposal group that is classified as held
for sale) in accordance with Section 24 and the date that the asset is derecognised.
11.13 The amortisation method used shall reflect the pattern in which the asset’s
future economic benefits are expected to be consumed by the entity. If that pattern
cannot be determined reliably, th e str aight-lin e method shall be used. Th e
amortisation charge for each period shall be recognised in profit or loss unless it is
included in the carrying amount of another asset.
11.14 An intangible asset’s useful life and any residual value shall be reviewed
regularly and, when necessary, revised. On revision, the carrying amount of the
intangible asset at the date of revision, less the revised residual value, shall be
amortised over the revised remaining useful life. Such a change shall be accounted
for as a change in an accounting estimate in accordance with Section 5 of these
Principles.
11.15 An entity shall review the amortisation method regularly. A change from
one amortisation method to another is permissible only on the grounds that the new
method will give a fairer presentation of the results and of the financial position.
Such a change does not, however, constitute a change of accounting policy; the
carrying amount of the intangible asset is amortised using the revised method over
the remaining useful life, beginning in the period in which the change is made. A
change in the amortisation method shall be accounted for as a change in an
accounting estimate in accordance with Section 5 of these Principles.
11.16 Intangible assets shall not be revalued.
Disclosure
11.17 An entity shall disclose the following for each class of intangible assets,
distinguishing between internally-generated intangible assets and other intangible
assets
(a) the useful lives or the amortisation rates used;
(b) the amortisation methods used;
(c) the gross carrying amount and accumulated amortisation (aggregated
with any accumulated impairment losses) at the beginning and end of
the period;
(d) having regard to paragraph 4.7(b) of these Principles, a reconciliation of
the carrying amount at the beginning and end of the period showing
(i)
additions, indicating separately those from internal development,
those acquired separately, and those acquired through business
combinations;
(ii) transfers to assets held for sale;
(iii) impairment losses recognised in profit or loss during the period;
(iv) impairment losses reversed in profit or loss during the period;
(v) amortisation recognised during the period;
(vi) the net exchange differences arising on the translation of the
financial statements from the functional currency into a different
presentation currency (see section 19 of these Principles); and
(vii)
other changes in the carrying amount during the period.
11.18 A class of intangible assets is a grouping of assets of a similar nature and
use in an entity’s operations. Examples of separate classes may include
(a) brand names;
(b) mastheads and publishing titles;
(c) computer software;
(d) licences and franchises;
(e) copyrights, patents and other industrial property rights, service and
operating rights;
(f)
recipes, formulae, models, designs and prototypes; and
(g) intangible assets under development.
The classes mentioned above are disaggregated (aggregated) into smaller (larger)
classes if this results in more relevant information for the users of the financial
statements.
11.19 Section 5 of these Principles requires an entity to disclose the nature and
amount of a change in an accounting estimate that has a material effect in the current
period or is expected to have a material effect in subsequent periods. Such disclosure
may arise from changes in
(a) the assessment of an intangible asset’s useful life;
(b) the amortisation method; or
(c) residual values.
11.20 The entity shall also disclose
(a) the existence and carrying amounts of intangible assets whose title is
restricted and the carrying amounts of intangible assets pledged as
security for liabilities; and
(b) the amount of contractual commitments for the acquisition of intangible
assets.
Section 12: Impairment of assets
12.1 This Section shall be applied in accounting for the impairment of the
following assets
(a) property, plant and equipment;
(b) investment property measured under the cost model in accordance with
paragraph 8.5 of these Principles;
(c) intangible assets;
(d) goodwill; and
(e) investments in subsidiaries, associates and jointly controlled entities.
12.2 This Section does not apply to investments within the scope of Section 9 and
financial assets within the scope of Section 18. Those Sections contain separate
provisions that prescribe when and how an impairment loss on investments or
financial assets is to be determined, recognised and reversed.
Recognising and measuring an impairment loss on individual assets
12.3 An entity shall assess at each reporting date whether there is any indication
that an asset may be impaired. If any such indication exists, the entity shall estimate
the recoverable amount of the asset.
12.4 The recoverable amount of an asset (or a group of assets) is the higher of its
fair value less costs to sell and its value in use. Fair value less costs to sell is the
amount obtainable from the sale of an asset in an arm’s length transaction between
knowledgeable, willing parties, less the costs of disposal. Value in use is the present
value of the future cash flows expected to be derived from an asset. Estimating the
value in use of an asset involves the following steps
(a)
estimating the future cash inflows and outflows to be derived from
continuing use of the asset and from its ultimate disposal; and
(b)
applying the appropriate discount rate to those future cash flows.
12.5 In measuring value in use an entity shall
(a) base cash flow projections on reasonable and supportable assumptions
that represent management’s best estimate of the range of economic
conditions that will exist over the remaining useful life of the asset.
(b) base cash flow projections on the most recent financial budgets/
forecasts approved by management. Such projections shall cover a
maximum period of five years, unless a longer period can be justified.
12.6 To give effect to the principle in paragraph 12.4(a) an entity shall include
the following when estimating future cash flows
(a) projections of cash inflows from the continuing use of the asset;
(b) projections of cash outflows that are necessarily incurred to generate
the cash inflows from continuing use of the asset (including cash
outflows to prepare the asset for use) and can be directly attributed, or
allocated on a reasonable and consistent basis, to the asset; and
(c) net cash flows, if any, to be received (or paid) for the disposal of the
asset at the end of its useful life.
12.7 To give effect to the principle in paragraph 12.4(b) an entity shall apply a
pre-tax discount rate that reflects current market assessments of
(a) the time value of money; and
(b) the risks specific to the asset for which the future cash flow estimates
have not been adjusted.
12.8 If, and only if, the recoverable amount of an asset is less than its carrying
amount, the carrying amount of the asset shall be reduced to its recoverable amount.
That reduction is an impairment loss.
12.9 An impairment loss shall be recognised immediately in profit or loss, unless
the asset is carried at revalued amount in accordance with another Section of these
Principles (for example, in accordance with the revaluation model in Section 7). Any
impairment loss of a revalued asset shall be treated as a revaluation decrease in
accordance with that other Section.
12.10 After the recognition of an impairment loss, the depreciation (amortisation)
charge for the asset shall be adjusted in future periods to allocate the asset’s revised
carrying amount, less its residual value (if any), on a systematic basis over its
remaining useful life.
Recognising and measuring an impairment loss on a group of assets and goodwill
12.11 If an entity cannot estimate the recoverable amount for an individual asset,
the entity shall measure the recoverable amount for the group of assets to which the
asset belongs. For this purpose, recoverable amount shall be estimated for the
smallest identifiable group of assets that
(a) generates cash inflows from continuing use that are largely independent
of the cash flows from other assets or groups of assets;
(b) includes the asset for which impairment is indicated; and
(c) the recoverable amount of which can be estimated reliably.
For the purpose of determining the recoverable amount of a group of assets, the
principles in paragraphs 12.4 - 12.7 shall apply and any reference to ‘an asset’
therein shall be construed as being a reference to ‘a group of assets’.
12.12 Goodwill does not generate cash flows to an entity that are independent of
the cash flows of other assets. As a consequence the recoverable amount of goodwill
must be derived from measurement of the recoverable amount of the larger group of
assets of which the goodwill is a part.
12.13 An impairment loss shall be recognised for a group of assets (to which
goodwill could have been allocated) if, and only if, the recoverable amount of the
group of assets is less than its carrying amount. The impairment loss shall be
allocated to reduce the carrying amount of the assets of the group in the following
order
(a) first, to reduce the carrying amount of any goodwill allocated to the
group; and
(b) then, to the other non-cash assets of the group pro-rata on the basis of
the carrying amount of each asset.
These reductions in carrying amounts shall be treated as impairment losses on
individual assets and recognised accordingly.
Reversing an impairment loss
12.14 An entity shall assess at each reporting date whether there is any indication
that an impairment loss recognised in prior periods for an asset other than goodwill
may no longer exist or may have decreased. If any such indication exists, the entity
shall estimate the recoverable amount of that asset or the group of assets to which
the asset belongs if an entity cannot estimate the recoverable amount for the
individual asset.
12.15 An impairment loss recognised in prior periods for an asset other than
goodwill shall be reversed if, and only if, there has been a change in the estimates
used to determine the asset’s recoverable amount since the last impairment loss was
recognised. If this is the case, the carrying amount of the asset shall, except as
described in paragraph 12.16, be increased to its recoverable amount. That increase
is a reversal of an impairment loss.
12.16 The increased carrying amount of an asset other than goodwill attributable
to a reversal of an impairment loss shall not exceed the carrying amount that would
have been determined (net of amortisation or depreciation) had no impairment loss
been recognised for the asset in prior years.
12.17 A reversal of an impairment loss for an asset other than goodwill shall be
recognised immediately in profit or loss, unless the asset is carried at revalued
amount in accordance with another section of these Principles (for example, in
accordance with the revaluation model in Section 7). Any reversal of an impairment
loss of a revalued asset shall be treated as a revaluation increase in accordance with
that other Section. A reversal of an impairment loss for a group of assets shall be
allocated to the non-cash assets of the group, except for goodwill, pro-rata with the
carrying amounts of those assets. These increases in carrying amounts shall be
treated as reversals of impairment losses for individual assets and recognised
accordingly.
12.18 After a reversal of an impairment loss is recognised, the depreciation
(amortisation) charge for the asset shall be adjusted in future periods to allocate the
asset’s revised carrying amount, less its residual value (if any), on a systematic basis
over its remaining useful life.
12.19 An impairment loss recognised for goodwill shall not be reversed in a
subsequent period.
Disclosure
12.20 An entity shall disclose the following for each class of assets
(a) the amount of impairment losses recognised in profit or loss during the
period and the line item(s) of the income statement in which those
impairment losses are included;
(b) the amount of reversals of impairment losses recognised in profit or loss
during the period and the line item(s) of the income statement in which
those impairment losses are reversed;
(c) the amount of impairment losses on revalued assets recognised directly
in equity during the period; and
(d) the amount of reversals of impairment losses on revalued assets
recognised directly in equity during the period.
12.21 An entity shall disclose the following for each material impairment loss
recognised or reversed during the period for an individual asset, including goodwill
(insofar as applicable), or a group of assets
(a) the events and circumstances that led to the recognition or reversal of
the impairment loss;
(b) the amount of the impairment loss recognised or reversed;
(c) for an individual asset, the nature of the asset;
(d) for a group of assets, a description of the group; and
(e) whether the recoverable amount of the asset (group) is its fair value less
costs to sell or its value in use.
12.22 An entity shall disclose the following information for the aggregate
impairment losses and the aggregate reversals of impairment losses recognised
during the period for which no information is disclosed in accordance with
paragraph 12.21
(a) the main classes of assets affected by impairment losses and the main
classes of assets affected by reversals of impairment losses; and
(b) the main events and circumstances that led to the recognition of these
impairment losses and reversals of impairment losses.
Section 13: Government grants
13.1 Government grants are assistance by government, inter-governmental
agencies and similar bodies whether local, national or international, in the form of
cash or transfers of assets to an entity in return for past or future compliance with
certain conditions relating to the operating activities of the entity. Loans at nil or low
interest rate are a form of government assistance, but the benefit is not quantified by
the imputation of interest, hence this benefit shall not be considered as a government
grant for the scope of this Section.
Recognition
13.2 Government grants shall not be recognised until there is reasonable
assurance that
(a) the entity will comply with the conditions attaching to them; and
(b) the grants will be received.
13.3 Subject to paragraph 13.2, government grants shall be recognised in the
income statement so as to match them with the expenditure towards which they are
intended to contribute. Any grants relating to future periods shall be recognised as
deferred income.
13.4 To the extent that the grant is made as a contribution towards expenditure on
a non-current asset, the entity may choose to deduct the grant from the purchase
in accordance with paragraph 13.3.
13.5 Potential liabilities to repay grants either in whole or in part in specified
circumstances shall be provided for only to the extent that repayment is probable.
The repayment of a government grant related to income and recognised as such
under paragraph 13.3 shall be accounted for by setting off the repayment against any
unamortised deferred income relating to the grant. Any excess shall be charged
immediately to the income statement. The repayment of a grant related to a non-
current asset and recognised as such under paragraph 13.4 shall be recorded by
increasing the carrying amount of the asset. The cumulative additional depreciation
that would have been recognised to date as an expense in the absence of the grant
shall be recognised immediately as an expense.
Disclosure
13.6 An entity shall disclose the following regardless of which choice it has made
under paragraph 13.4
(a) the accounting policy adopted for government grants, including an
explanation of how the grant is presented in the financial statements;
(b) the nature and amounts of government grants recognised in the financial
statements; and
(c) where the results of the period are affected materially by the receipt of
forms of government assistance other than grants, the nature of that
assistance and, to the extent that the effects on the financial statements
can be measured, an estimate of those effects.
Section 14: Leases
14.1 A lease is classified as a finance lease if it transfers substantially all the
risks and rewards incidental to ownership. A lease is classified as an operating lease
if it does not transfer substantially all the risks and rewards incidental to ownership.
14.2 Whether a lease is a finance lease or an operating lease depends on the
substance of the transaction rather than the form of the contract. Examples of
situations that individually or in combination would normally lead to a lease being
classified as a finance lease are
(a) the lease transfers ownership of the asset to the lessee by the end of the
lease term;
(b) the lessee has the option to purchase the asset at a price that is expected
to be sufficiently lower than the fair value at the date the option
becomes exercisable for it to be reasonably certain, at the inception of
the lease, that the option will be exercised;
(c) the lease term is for the major part of the economic life of the asset even
if title is not transferred;
(d) at the inception of the lease the present value of the minimum lease
payments amounts to at least substantially all of the fair value of the
leased asset; and
(e) the leased assets are of such a specialised nature that only the lessee can
use them without major modifications.
14.3 Lease classification is made at the inception of the lease and is not changed
during the term of the lease unless the lessee and the lessor agree to change the
provisions of the lease (other than simply by renewing the lease), in which case the
lease classification shall be re-evaluated.
14.4 The inception of the lease is the earlier of the date of the lease agreement
and the date of commitment by the parties to the principal provisions of the lease.
The commencement of the lease term is the date from which the lessee is entitled to
exercise its right to use the leased asset. It is the date of initial recognition of the
lease (i.e. the recognition of the assets, liabilities, income or expenses resulting from
the lease, as appropriate).
14.5 Minimum lease payments are the payments that the lessee is or can be
required to make, excluding contingent rent, costs for services and taxes to be paid
by and reimbursed to the lessor, together with
(a) for a lessee, any amounts guaranteed by the lessee or by a party related
to the lessee; or
(b) for a lessor, any residual value guaranteed to the lessor by
(i) the lessee;
(ii) a party related to the lessee; or
(iii) a third party unrelated to the lessor that is financially capable of
discharging the obligations under the guarantee.
14.6 The lease term is the non-cancellable period for which the lessee has
contracted to lease the asset together with any further terms for which the lessee has
the option to continue to lease the asset, with or without further payment, when at
the inception of the lease it is reasonably certain that the lessee will exercise the
option.
14.7 A hire purchase contract is a contract for the hire of an asset that contains a
provision giving the hirer an option to acquire legal title to the asset upon the
fulfilment of certain conditions stated in the contract. Those hire purchase contracts
which are of a financing nature shall be accounted for on a basis similar to that set
out below for finance leases. Conversely, other hire purchase contracts shall be
accounted for on a basis similar to that set out below for operating leases.
Accounting by lessees
14.8 At the commencement of the lease term, lessees shall recognise finance
leases as assets and liabilities in their balance sheets at amounts equal to the fair
value of the leased asset or, if lower, the present value of the minimum lease
payments, each determined at the inception of the lease. The discount rate to be used
in calculating the present value of the minimum lease payments is the interest rate
implicit in the lease. The interest rate implicit in the lease is the discount rate that, at
the inception of the lease, causes the aggregate present value of (a) the minimum
lease payments and (b) the unguaranteed residual value to be equal to the fair value
of the leased asset. Leased assets shall be recognised, initially measured and
subsequently accounted for in accordance with the applicable Sections of these
Principles.
14.9 A lessee shall apportion minimum lease payments between the finance
charge and the reduction of the outstanding liability. The lessee shall allocate the
finance charge to each period during the lease term so as to produce a constant
periodic rate of interest on the remaining balance of the liability. In allocating the
finance charge to periods during the lease term, a lessee may use an approximation
to simplify the calculation.
14.10 The rental under an operating lease shall be charged on a straight-line basis
over the lease term even if the payments are not made on such a basis, unless another
systematic and rational basis is more appropriate.
14.11 Incentives to sign a lease, in whatever form they may take, shall be spread
by the lessee on a straight-line basis over the lease term or, if shorter than the full
lease term, over the period to the review date on which the rent is first expected to be
adjusted to the prevailing market rate.
14.12 A lessee shall depreciate an asset leased under a finance lease in accordance
with paragraphs 7.19 - 7.24 of these Principles, which apply to assets held as
property, plant and equipment and investment property, and paragraphs 11.12 - 11.15
which apply to intangible assets. If there is no reasonable certainty that the lessee
will obtain ownership by the end of the lease term, the asset shall be fully
depreciated over the shorter of the lease term and its useful life. However, in the case
of a hire purchase contract that has the characteristics of a finance lease the asset
shall be depreciated over its useful life.
Accounting by lessors
14.13 Lessors shall recognise assets held under a finance lease in their balance
sheets and present them as a receivable at an amount equal to the net investment in
the lease.
14.14 Net investment in the lease is the gross investment in the lease discounted
at the interest rate implicit in the lease. Gross investment in the lease is the
aggregate of
(a) the minimum lease payments receivable by the lessor under a finance
lease, and
(b) any unguaranteed residual value accruing to the lessor.
14.15 The recognition of finance income shall be based on a pattern reflecting a
constant periodic rate of return on the lessor’s net investment in the finance lease, or
a reasonable approximation thereto.
14.16 Unearned finance income is the difference between
(a) the gross investment in the lease, and
(b) the net investment in the lease.
14.17 Rental income from an operating lease shall be recognised on a straight-line
basis over the period of the lease, even if the payments are not made on such a basis,
unless another systematic and rational basis is more appropriate.
14.18 An asset held for use in operating leases by a lessor shall be recorded and
accounted for as property, plant and equipment in accordance with Section 7, or as
investment property in accordance with Section 8, or as an intangible asset in
accordance with Section 11, of these Principles according to the nature of the asset.
14.19 A manufacturer or dealer lessor shall not recognise a selling profit under an
operating lease. The selling profit under a finance lease shall be restricted to the
excess of the fair value of the asset over the manufacturer’s or dealer’s cost less any
grants receivable by the manufacturer or dealer towards the purchase, construction
or use of the asset.
Sale and leaseback transactions - accounting by the seller/lessee
14.20 In a sale and leaseback transaction that results in a finance lease, any
apparent profit or loss (i.e. the difference between the sale price and the previous
carrying value) shall be deferred and amortised in the financial statements of the
seller/lessee over the shorter of the lease term and the useful life of the asset.
14.21 In a sale and leaseback transaction that results in an operating lease
(a) any profit or loss shall be recognised immediately, provided it is clear
that the transaction is established at fair value;
(b) if the sale price is below fair value any profit or loss shall be recognised
immediately, except that if the apparent loss is compensated for by
future rentals at below market price it shall to that extent be deferred
and amortised over the remainder of the lease term (or, if shorter, the
period during which the reduced rentals are chargeable); or
(c) if the sale price is above fair value, the excess over fair value shall be
deferred and amortised over the shorter of the remainder of the lease
term and the period to the next rent review (if any).
Sale and leaseback transactions - accounting by the buyer/lessor
14.22 A buyer/lessor shall account for a sale and leaseback in the same way as
other leases are accounted for, i.e. using the methods set out in paragraphs 14.13 -
14.19.
Disclosure by lessees
14.23 Disclosure shall be made of
(a) either
(i)
for each class of asset, the gross amounts of assets that are held
under finance leases together with the related accumulated
depreciation; or
(ii) alternatively to being shown separately from that in respect of
owned assets, the information in (i) above may be integrated with
it, such that the totals of gross amount, accumulated depreciation,
net carrying amount and depreciation allocated for the period for
each class of asset held under finance leases are included with
similar amounts for owned assets. Where this alternative
treatment is adopted, the net amount of assets held under finance
leases and the amount of depreciation allocated for the period in
respect of assets under finance leases included in the overall total
shall be disclosed separately;
(b) the amounts of obligations related to finance leases (net of finance
charges allocated to future periods). These shall be disclosed separately
from other obligations and liabilities, either on the face of the balance
sheet or in the notes; and
(c) the amount of any commitments existing at the balance sheet date in
respect of finance leases that have been entered into but whose
inception occurs after the year end.
14.24 In respect of operating leases, the lessee shall disclose the total of future
minimum lease payments that it is committed to make, analysed into those in which
the commitment expires within that year, those expiring in the second to fifth years
inclusive, and those expiring over five years from the balance sheet date.
Disclosure by lessor
14.25 Disclosure shall be made of
(a) the gross amounts of assets held for use in operating leases and the
related accumulated depreciation charges;
(b) the cost of assets acquired, whether by purchase or finance lease, for the
purpose of letting under finance leases; and
(c) the net investment in (i) finance leases and (ii) hire purchase contracts
at each balance sheet date.
Section 15: Inventories
15.1 Inventories are assets
(a) held for sale in the ordinary course of business;
(b) in the process of production for such sale; or
(c) in the form of materials or supplies to be consumed in the production
process or in the rendering of services.
Measurement of inventories
15.2 Inventories shall be measured at the lower of cost and net realisable value.
Net realisable value is the estimated selling price in the ordinary course of business
less the estimated costs of completion and the estimated costs necessary to make the
15.3 The cost of inventories shall comprise all costs of purchase, costs of
conversion and other costs incurred in bringing the inventories to their present
location and condition.
15.4 The costs of purchase of inventories comprise the purchase price, import
duties and other taxes (other than those subsequently recoverable by the entity from
the taxing authorities), and transport, handling and other costs directly attributable
to the acquisition of finished goods, materials and services. Trade discounts, rebates
and other similar items are deducted in determining the costs of purchase. The cost
of an item of self-constructed inventory is its cost at the date when the construction
or development is complete. Until that date an entity shall apply Section 7 of these
Principles.
15.5 The costs of conversion of inventories include costs directly related to the
units of production, such as direct labour. They also include a systematic allocation
of fixed and variable production overheads that are incurred in converting materials
into finished goods. An entity shall allocate fixed production overheads to the costs
of conversion based on the normal capacity of the production facilities.
15.6 Examples of costs excluded from the cost of inventories and recognised as
expenses in the period in which they are incurred are
(a) abnormal amounts of wasted materials, labour or other production
costs;
(b) storage costs, unless those costs are necessary in the production process
before a further production stage;
(c) administrative overheads that do not contribute to bringing inventories
to their present location and condition; and
(d) selling costs.
15.7 To the extent that service providers have inventories, they measure them at
the cost of their production. These costs consist primarily of the labour and other
costs of personnel directly engaged in providing the service and attributable
overheads. Labour and other costs relating to sales and general administrative
personnel shall not be included. The cost of inventories of a service provider does
not include profit margins or non-attributable overheads that are often factored into
prices charged by service providers.
15.8 The cost of inventories of items that are not ordinarily interchangeable and
goods or services produced and segregated for specific projects shall be assigned by
using specific identification of their individual costs. The cost of other inventories
shall be assigned by using the first-in, first-out (FIFO) or weighted average cost
formula. An entity shall use the same cost formula for all inventories having a
similar nature and use to the entity.
15.9 Where inventories are constantly being replaced and their value is not
material to assessing the company’s state of affairs and their quantity, value and
composition are not subject to material variation, they may be included at a fixed
quantity and value.
Recognition as an expense
15.10 When inventories are sold, the carrying amount of those inventories shall be
recognised as an expense in the period in which the related revenue is recognised.
The amount of any write-down of inventories to net realisable value and all losses of
inventories shall be recognised as an expense in the period the write-down or loss
occurs. The amount of any reversal of any write-down of inventories, arising from
an increase in net realisable value, shall be recognised as a reduction in the amount
of inventories recognised as an expense in the period in which the reversal occurs.
15.11 Some inventories may be allocated to other asset accounts, for example,
inventory used as a component of self-constructed property, plant or equipment.
Inventories allocated to another asset in this way are recognised as an expense
during the useful life of that asset.
Presentation and Disclosure
15.12 An entity shall disclose
(a) the accounting policy adopted in measuring inventories;
(b) the total carrying amount of inventories and the carrying amount in
classifications appropriate to the entity;
(c) the amount of inventories recognised as an expense during the period
(cost of goods sold) unless shown on the face of the income statement;
(d) the amount of any write-downs to net realisable value recognised as an
expense in the period;
(e) the amount of any reversal of any write-downs to net realisable value
recognised in the period, and a description of the circumstances or
events that led to such reversal; and
(f)
paragraph 15.8 requires that the carrying amount of inventory items that
are ordinarily interchangeable (fungible) is determined by using the
first-in, first-out (FIFO) or weighted average cost formula. Where the
carrying amount of inventories determined by using such formula
differs materially, at the balance sheet date, from the last known market
value obtainable on the procurement market prior to the balance sheet
date, the amount of that difference shall be disclosed in total by
category of inventory in the notes to the financial statements.
Section 16: Income taxes
16.1 Accounting profit is profit or loss for a period before deducting tax expense.
16.2 Taxable profit (tax loss) is the profit (loss) for a period, determined in
accordance with the rules established by the taxation authorities, upon which income
taxes are payable (recoverable).
16.3 Tax expense (tax income) comprises current tax expense (current tax
income) and deferred tax expense (deferred tax income).
16.4 Current tax is the amount of income taxes payable (recoverable) in respect
of the taxable profit (tax loss) for a period. Deferred tax expense (income) is the
amount of tax expense (income) included in the determination of profit or loss for
the period in respect of changes in deferred tax assets and deferred tax liabilities
during the period.
16.5 Deferred tax liabilities are the amounts of income taxes payable in future
periods in respect of taxable temporary differences.
16.6 Deferred tax assets are the amounts of income taxes recoverable in future
periods in respect of
(a) deductible temporary differences;
(b) the carryforward of unused tax losses; and
(c) the carryforward of unused tax credits.
16.7 Temporary differences are differences between the carrying amount of an
asset or liability in the balance sheet and its tax base. Temporary differences may be
(a) taxable temporary differences, which are temporary differences that will
result in taxable amounts in determining taxable profit (tax loss) of
future periods when the carrying amount of the asset or liability is
recovered or settled; or
(b) deductible temporary differences, which are temporary differences that
will result in amounts that are deductible in determining taxable profit
(tax loss) of future periods when the carrying amount of the asset or
liability is recovered or settled.
16.8 The tax base of an asset or liability is the amount attributed to that asset or
liability for tax purposes.
Recognition of deferred tax liabilities, deferred tax assets and deferred tax
16.9 An entity shall recognise a deferred tax liability for all taxable temporary
differences, except to the extent that the deferred tax liability arises from
(a) the initial recognition of goodwill; or
(b) the initial recognition of an asset or liability which
(i)
is not a business combination; and
(ii)
at the time of the transaction, affects neither accounting profit nor
taxable profit (loss).
However, for all taxable temporary differences associated with investments in
subsidiaries and associates, and interests in joint ventures, a deferred tax liability
shall be recognised, except to the extent that both the following conditions are
satisfied
(a) the parent, investor or venturer is able to control the timing of the
reversal of the temporary difference; and
(b) it is probable that the temporary difference will not reverse in the
foreseeable future.
16.10 An entity shall recognise a deferred tax asset for all deductible temporary
differences to the extent that it is probable that taxable profit will be available
against which the deductible temporary differences can be utilised, unless the
deferred tax asset arises from the initial recognition of an asset or liability in a
transaction that
(a) is not a business combination; and
(b) at the time of the transaction, affects neither accounting profit nor
taxable profit (loss).
However, for all deductible temporary differences associated with investments in
subsidiaries and associates, and interest in joint ventures an entity shall recognise a
deferred tax asset to the extent that, and only to the extent that, it is probable that
(a) the temporary difference will reverse in the foreseeable future; and
(b) taxable profit will be available against which the temporary difference
can be utilised.
16.11 An entity shall recognise a deferred tax asset for the carryforward of unused
tax losses and unused tax credits to the extent that it is probable that future taxable
profit will be available against which the unused tax losses and unused tax credits
can be utilised.
16.12 At each balance sheet date an entity shall re-assess any unrecognised
deferred tax assets, and shall recognise a previously unrecognised deferred tax asset
only to the extent that it has become probable that future taxable profit will allow the
deferred tax asset to be recovered.
16.13 An entity shall recognise deferred tax as income or an expense and include
it in profit or loss for the period, except to the extent that the tax arises from
(a) a transaction or event which is recognised, in the same or a different
period, directly in equity, in which case the deferred tax shall be
charged or credited directly to equity; or
(b) a business combination (see paragraph 16.14 - 16.18).
Deferred tax arising from a business combination and the resulting effect on
goodwill
16.14 The cost of a business combination is allocated by recognising the
identifiable assets acquired and liabilities and contingent liabilities assumed at their
fair values at the acquisition date. Temporary differences arise when the tax bases of
the identifiable assets acquired and liabilities and contingent liabilities assumed are
not affected by the business combination or are affected differently. For example,
when the carrying amount of an asset is increased to fair value but the tax base of the
asset remains at cost to the previous owner, a taxable temporary difference arises
which results in a deferred tax liability. The resulting deferred tax liability affects
goodwill (see paragraph 16.15).
16.15 In accordance with Section 22, an entity recognises any deferred tax assets
(to the extent that they meet the recognition criteria in paragraph 16.10) or deferred
tax liabilities resulting from a business combination as identifiable assets and
liabilities at the acquisition date. Consequently, those deferred tax assets and
liabilities affect goodwill or the amount of any excess of the acquirer’s interest in the
net fair value of the acquiree’s identifiable assets, liabilities and contingent
liabilities over the cost of the combination (sometimes referred to as ‘negative
goodwill’). However, in accordance with paragraph 16.9(a), an entity does not
recognise deferred tax liabilities arising from the initial recognition of goodwill.
16.16 Goodwill arising in a business combination is measured as the excess of the
cost of the business combination over the acquirer’s interest in the net fair value of
the acquiree’s identifiable assets, liabilities and contingent liabilities, in accordance
with paragraph 22.10 of these Principles. Very often, upon initial recognition of
goodwill, a taxable temporary difference arises. This Section does not permit the
recognition of the resulting deferred tax liability because goodwill is measured as a
residual and the recognition of the deferred tax liability would increase the carrying
amount of goodwill. Similarly, subsequent reductions in that unrecognised deferred
tax liability are also regarded as arising from the initial recognition of goodwill and
are therefore not recognised as required by paragraph 16.9(a).
16.17 As a result of a business combination, an acquirer may consider it probable
that it will recover its own deferred tax asset that was not recognised before the
business combination. For example, the acquirer may be able to utilise the benefit of
its unused tax losses against the future taxable profit of the acquiree. In such cases,
the acquirer recognises a deferred tax asset, but does not include it as part of the
accounting for the business combination, and therefore does not take it into account
in determining the goodwill or the amount of any excess of the acquirer’s interest in
the net fair value of the acquiree’s identifiable assets, liabilities and contingent
liabilities over the cost of the combination (sometimes referred to as ‘negative
goodwill’).
16.18 If the potential benefit of the acquiree’s income tax loss carry-forwards or
other deferred tax assets did not satisfy the criteria for separate recognition (under
paragraph 22.7 of these Principles) when a business combination is initially
accounted for but is subsequently realised, the acquirer shall recognise the resulting
deferred tax income in profit or loss. In addition, the acquirer shall
(a) reduce the carrying amount of goodwill to the amount that would have
been recognised if the deferred tax asset had been recognised as an
identifiable asset from the acquisition date; and
(b) recognises the reduction in the carrying amount of goodwill as an
expense.
However, this procedure shall not result in the creation of ‘negative goodwill’, nor
shall it increase the amount previously recognised for any ‘negative goodwill’.
Recognition of current tax liabilities, current tax assets and current tax
16.19 An entity shall recognise any unpaid current tax for current and prior
periods as a liability.
16.20 An entity shall recognise as an asset any amount already paid in respect of
current and prior periods that exceeds the amount due for those periods.
16.21 An entity shall recognise current tax as income or an expense and include it
in profit or loss for the period, except to the extent that the tax arises from
(a) a transaction or event which is recognised, in the same or a different
period, directly in equity, in which case the current tax shall be charged
or credited directly to equity; or
(b) a business combination (see paragraph 16.14 - 16.18).
16.22 When an entity pays dividends to its shareholders it may be required to pay
a portion of the dividends to taxation authorities, in the form of withholding tax, on
behalf of shareholders. Such an amount paid or payable to taxation authorities shall
be recognised in equity as part of the dividends.
Measurement
16.23 An entity shall measure current tax liabilities (assets) for the current and
prior periods, and related tax expense (income), at the amount expected to be paid to
(recovered from) the taxation authorities, using the tax rates (and tax laws) that have
been enacted or substantively enacted by the reporting date.
16.24 An entity shall measure deferred tax assets and liabilities, and related tax
expense (income), at the tax rates that are expected to apply to the period when the
asset is realised or the liability is settled, based on tax rates (and tax laws) that have
been enacted or substantively enacted by the reporting date.
16.25 The measurement of deferred tax liabilities and deferred tax assets shall
reflect the tax consequences that would follow from the manner in which the entity
expects, at the reporting date, to recover or settle the carrying amounts of its assets
and liabilities. For example, if the temporary difference arises from an item of
income that is expected to be taxable as a capital gain in a future period, the deferred
tax liability is measured using the capital gain tax rate.
16.26 Deferred tax assets and deferred tax liabilities shall not be discounted.
16.27 An entity shall review the carrying amount of a deferred tax asset at each
reporting date. An entity shall reduce the carrying amount of a deferred tax asset and
increase tax expense to the extent that it is no longer probable that sufficient taxable
profit will be available to allow recovery of the deferred tax asset. The entity shall
reverse that reduction to the extent that it subsequently becomes probable that
sufficient taxable profit will be available.
Presentation
16.28 Deferred tax assets (liabilities) shall not be classified as current assets
(liabilities).
16.29 An entity shall offset current tax assets and current tax liabilities if, and
only if, the entity
(a) has a legally enforceable right to set off the recognised amounts; and
(b) intends either to settle on a net basis, or to realise the asset and settle the
liability simultaneously.
16.30 An entity shall offset deferred tax assets and deferred tax liabilities if, and
only if
(a) the entity has a legally enforceable right to set off current tax assets
against current tax liabilities; and
(b) the deferred tax assets and the deferred tax liabilities relate to income
taxes levied by the same taxation authority on either
(i) the same taxable entity; or
(ii) different taxable entities which intend either to settle current tax
liabilities and assets on a net basis, or to realise the assets and
settle the liabilities simultaneously, in each future period in which
significant amounts of deferred tax liabilities or assets are
expected to be settled or recovered.
16.31 The tax expense (income) related to profit or loss shall be presented on the
face of the income statement.
Disclosure
16.32 An entity shall disclose the major components of tax expense (income)
separately.
16.33 The aggregate current and deferred tax relating to items that are charged or
credited to equity shall be disclosed separately.
16.34 An entity shall disclose a numerical reconciliation between tax expense
(income) and the product of accounting profit multiplied by the applicable tax
rate(s), disclosing also the basis on which the applicable tax rate(s) is (are)
computed.
16.35 An entity shall also disclose, in respect of each type of temporary
difference, and in respect of each type of unused tax losses and unused tax credits
(a) the amount of the deferred tax assets and liabilities recognised in the
balance sheet for each period presented; and
(b) the amount of the deferred tax income or expense recognised in the
income statement, if this is not apparent from the changes in the
amounts recognised in the balance sheet.
16.36 In respect of discontinued operations an entity shall disclose the tax
expense relating to
(a) the gain or loss on discontinuance; and
(b) the profit or loss from the discontinued operation for the period,
together with the corresponding amounts for each prior period
presented.
16.37 The following shall also be disclosed
(a) the amount (and expiry date, if any) of deductible temporary
differences, unused tax losses, and unused tax credits for which no
deferred tax asset is recognised in the balance sheet; and
(b) the amount of a deferred tax asset and the nature of the evidence
supporting its recognition when
(i)
the utilisation of the deferred tax asset is dependent on future
taxable profits in excess of the profits arising from the reversal of
existing taxable temporary differences; and
(ii)
the entity has suffered a loss in either the current or preceding
period in the tax jurisdiction to which the deferred tax asset
relates.
Section 17: Provisions and contingencies
17.1 A provision is a liability of uncertain timing or amount.
17.2 A contingent asset is a possible asset that arises from past events and whose
existence will be confirmed only by the occurrence or non-occurrence of one or
more uncertain future events not wholly within the control of the entity. Contingent
assets occur where the inflow of economic benefits is probable, but not virtually
certain.
17.3 A contingent liability is
(a) a possible obligation that arises from past events and whose existence
will be confirmed only by the occurrence or non-occurrence of one or
more uncertain future events not wholly within the control of the entity;
or
(b) an obligation at the balance sheet date that arises from past events but is
not recognised because
(i)
it is not probable that a transfer of economic benefits will be
required to settle the obligation; or
(ii)
the amount of the obligation cannot be measured with sufficient
reliability.
17.4 This Section does not apply to deferred tax and leases, which are covered by
more specific requirements of GAPSE.
Recognition and measurement of provisions
17.5 An entity shall recognise a provision only when
(a) the entity has a present obligation as a result of a past event;
(b) it is probable (i.e. more likely than not) that the entity will be required
to transfer economic benefits in settlement; and
(c) the amount of the obligation can be estimated reliably.
17.6 The entity shall recognise the provision as a liability in the balance sheet
and shall recognise the amount of the provision as an expense in profit or loss unless
(a) it is part of the cost of producing inventories (see paragraph 15.3) or (b) it is
included in the cost of property, plant and equipment in accordance with paragraph
7.4.
17.7 An entity shall measure a provision at the best estimate of the amount
required to settle the obligation at the reporting date. When the effect of the time
value of money is material, the amount of a provision shall be the present value of
the amount expected to be required to settle the obligation. The discount rate (or
rates) shall be a pre-tax rate (or rates) that reflect(s) current market assessments of
the time value of money. The risks specific to the liability should be reflected either
in the discount rate or in the estimation of the amounts required to settle the
obligation, but not both. Gains from the expected disposal of assets shall be
excluded from the measurement of a provision. When a provision is measured at the
present value of the amount expected to be required to settle the obligation, the
unwinding of the discount shall be recognised as finance cost.
17.8 Where some or all of the expenditure required to settle a provision may be
reimbursed by another party (e.g. through an insurance claim), the reimbursement
shall be recognised, as a separate asset, only when it is virtually certain to be
received if the entity settles the obligation. In the income statement, the expense
relating to the provision may be presented net of the recovery.
17.9 An entity shall review provisions at each reporting date and adjust them to
reflect the current best estimate of the amount that would be required to settle the
obligation at that reporting date. Any adjustments to the amounts previously
recognised shall be recognised in profit or loss unless the provision was originally
recognised as part of the cost of inventories or property, plant and equipment.
17.10 A provision shall be used only for expenditures for which the provision was
originally recognised.
Recognition and measurement of contingencies
17.11 Contingent liabilities and contingent assets shall not be recognised.
Nevertheless, paragraph 22.7(c) of these Principles requires a contingent liability
assumed in a business combination to be recognised if its fair value can be measured
reliably. The requirements of this paragraph shall not prejudice the application of
paragraph 22.7(c).
17.12 Contingent liabilities recognised separately as part of allocating the cost of
a business combination are excluded from the scope of this Section. However, the
acquirer shall disclose for those contingent liabilities the information required to be
disclosed by this Section for each class of provision.
Disclosure
17.13 For each class of provision, an entity shall disclose
(a) a brief description of the nature of the obligation and the expected
timing of any resulting outflows of economic benefits;
(b) an indication of the uncertainties about the amount and timing of those
outflows; and
(c) a reconciliation of the carrying amount at the beginning and the end of
the financial reporting period showing
(i)
additional provisions made in the period, including increases to
existing provisions;
(ii) amounts used (i.e. incurred and charged against the provision)
during the period;
(iii) unused amounts reversed during the period;
(iv) the increase during the period in the discounted amount arising
from the passage of time; and
(v) the effect of any change in the discount rate.
17.14 Unless the possibility of any outflow of resources in settlement is remote,
an entity shall disclose for each class of contingent liability at the balance sheet
date
(a) a brief description of the nature of the contingent liability; and
(b) where practicable
(i)
an estimate of its financial effect (if it is impracticable to estimate
the financial effect, that fact shall be stated); and
(ii)
an indication of the uncertainties relating to the amount or timing
of any outflow.
17.15 In determining which provisions or contingent liabilities may be aggregated
to form a class, it is necessary to consider whether the nature of the items is
sufficiently similar for a single statement about them to fulfil the requirements of
paragraphs 17.13(a), 17.13(b), 17.14(a) and 17.14(b)(ii).
17.16 Details shall be provided where any valuable security has been provided by
the entity in connection with a contingent liability and if so, what.
17.17 Where an inflow of economic benefits is probable, an entity shall disclose a
brief description of the nature of the contingent assets at the balance sheet date, and,
where practicable, an estimate of their financial effect.
17.18 In extremely rare cases, disclosure of some or all of the information
required by paragraphs 17.13 - 17.17 can be expected to prejudice seriously the
position of the entity in a dispute with other parties on the subject matter of the
provision, contingent liability or contingent asset. In such cases, an entity need not
disclose the information, but shall disclose the general nature of the dispute, together
with the fact that, and reason why, the information has not been disclosed.
17.19 Unless disclosed elsewhere as required by other Sections of these
Principles, an entity shall disclose, where practicable, the following information
(a) the existence of any restrictions on title and the carrying amount of any
assets that the entity has pledged as collateral for liabilities or
contingent liabilities;
(b) the aggregate amount, or estimated amount, of capital expenditure
contracted but not provided for;
(c) the aggregate amount, or estimated amount, of capital expenditure
authorised but not contracted; and
(d) the nature and business purpose of any arrangements that are not
included in the balance sheet, provided that the risks and rewards from
such arrangements are material and insofar as the disclosure of such
risks and rewards is necessary for assessing the entity’s financial
position.
17.20 Details of any financial commitments that are relevant to assessing the
entity’s state of affairs shall be disclosed. Any commitments concerning pensions
and investments in subsidiaries, associates and jointly controlled entities shall be
disclosed separately.
17.21 Particulars shall be given of any charge on the assets of the company to
secure the liabilities of any other person including, where practicable, the amount
secured.
Section 18: Financial assets, financial liabilities and equity
1 A financial instrument is any contract that gives rise to a financial asset of
one entity and a financial liability or equity instrument of another entity.
18.2 A financial asset is primarily any asset that is
(a) cash;
(b) an equity instrument of another entity; or
(c) a contractual right
(i) to receive cash or another financial asset from another entity; or
(ii) to exchange financial assets or financial liabilities with another
entity under conditions that are potentially favourable to the
entity.
Financial assets covered by the definition of Investments under Section 9 of these
Principles, such as equity instruments of another entity, and investments in
subsidiaries, associates and joint ventures covered under Section 10 of these
Principles, are accounted for in accordance with the provisions of those Sections and
are therefore exempt from the requirements of this Section.
18.3 A financial liability is primarily any liability that is a contractual obligation
(a) to deliver cash or another financial asset to another entity; or
(b) to exchange financial assets or financial liabilities with another entity
under conditions that are potentially unfavourable to the entity.
18.4 A derivative is a financial instrument with all three of the following
characteristics
(a) its value changes in response to the change in a specified interest rate,
financial instrument price, commodity price, foreign exchange rate,
index of prices or rates, credit rating or credit index, or other variable,
provided in the case of a non-financial variable that the variable is not
specific to a party to the contract;
(b) it requires no initial net investment or an initial net investment that is
smaller than would be required for other types of contracts that would
be expected to have a similar response to changes in market factors; and
(c) it is settled at a future date.
18.5 An equity instrument is any contract that evidences a residual interest in the
assets of an entity after deducting all of its liabilities.
Recognition and Measurement at recognition
18.6 An entity shall recognise a financial asset or a financial liability on its
balance sheet when, and only when, the entity becomes a party to the contractual
provisions of the instrument.
18.7 When a financial asset or financial liability is recognised initially, an entity
shall measure it at cost (except for derivatives - see paragraph 18.8), including
transaction costs that are directly attributable to the acquisition of the financial asset
or the issue of the financial liability.
18.8 An entity may recognise derivatives on its balance sheet. An entity that
chooses to recognise a derivative shall measure it at initial recognition at its fair
value. When the fair value of a derivative at initial recognition materially differs
from the initial net investment, if any, paid or received to enter into a derivative
contract (i.e. the fair value of the consideration paid or received), that difference
shall be recognised in the period in which it arises. Any transaction costs that are
directly attributable to the acquisition or issue of the derivative shall be recognised
as an expense in profit or loss.
Measurement after recognition - Financial assets and Financial liabilities (other
than Derivatives)
18.9 After initial recognition an entity shall re-measure all financial assets (other
than those covered by Section 9 of these Princip les) to take cognisance of
impairment losses.
18.10 An entity is encouraged, but not required, to measure its financial assets
and liabilities which have different initial measurement and maturity amounts (e.g.
attributable to transaction costs) at amortised cost using the effective interest
method. The difference between the initial and maturity amounts would be amortised
over the term of the instrument. The effective interest method is a method of
calculating the amortised cost of a financial asset or a financial liability and of
allocating the interest income or interest expense over the relevant period. The
effective interest rate is the rate that exactly discounts estimated future cash
payments or receipts through the expected life of the financial instrument or, when
appropriate, a shorter period to the net carrying amount of the financial asset or
financial liability.
18.11 An entity may nevertheless measure its financial assets and liabilities at the
initial amounts (subject to impairment considerations in the case of financial assets)
without amortising the difference between the initial and maturity amounts.
18.12 An entity shall assess at each balance sheet date whether there is any
objective evidence that a financial asset is impaired. If any such evidence exists, the
entity shall determine the amount of any impairment loss.
18.13 If there is objective evidence that an impairment loss has been incurred on a
financial asset, an entity shall measure an impairment loss as follows
(a) for a financial asset measured at amortised cost less impairment, the
impairment loss is the difference between the asset’s carrying amount
and the present value of estimated future cash flows discounted at the
financial asset’s original effective interest rate; and
(b) for a financial asset measured at cost less impairment, the impairment
loss is the difference between the asset’s carrying amount and the
asset’s recoverable amount.
The amount of the impairment loss shall be recognised immediately in profit or
loss.
18.14 If, in a subsequent period, the amount of the impairment loss decreases and
the decrease can be related objectively to an event occurring after the impairment
was recognised, the previously recognised impairment loss shall be reversed. The
reversal shall not result in a carrying amount of the financial asset that exceeds what
the carrying amount would have been at the date the impairment is reversed had the
impairment not been recognised,. The amount of the reversal shall be recognised in
profit or loss.
Measurement after recognition - Derivatives
18.15 An entity that chooses to recognise a derivative shall measure it after initial
recognition at its fair value. Any increases or decreases in the fair value of a
derivative shall be recognised in profit or loss in the period in which they arise. An
entity applies the guidance in paragraph 9.9 of these Principles to determine the fair
value of a derivative.
Debt/equity classification
18.16 A financial instrument, or its component parts, shall be classified as a
financial liability, a financial asset or an equity instrument in accordance with the
substance of the contractual arrangement rather than its legal form. Some financial
instruments take the legal form of equity but are liabilities in substance and others
may combine features associated with equity instruments and features associated
with financial liabilities. For example a preference share that provides for mandatory
r edem ption by the iss uer fo r a f ixed o r d eterm inab le am ou nt at a fix ed o r
determinable future date, or gives the holder the right to require the issuer to redeem
the instrument at or after a particular date for a fixed or determinable amount, is a
financial liability.
18.17 Dividends relating to a financial instrument or a component that is a
financial liability shall be recognised as expense in profit or loss. Distributions to
holders of an equity instrument shall be debited by the entity directly to equity, net
of any related income tax benefit. If an entity declares dividends after the balance
sheet date, the dividends shall not be recognised as a liability at the balance sheet
date.
Financial assets disclosures
18.18 An entity shall disclose
(a) the measurement basis or bases used for determining the carrying
amount of financial assets; and
(b) having regard to paragraph 4.7(e) of these Principles, an entity shall
give a reconciliation of the carrying amount at the beginning and end of
the period showing the following, separately for non-current (see
paragraph 4.16 of these Principles) loans to subsidiaries, associates and
jointly controlled entities that fall within the scope of this Section, and
for other non-current loans that fall within the scope of this Section
(i)
additions;
(ii)
disposals;
(iii)
impairment losses recognised in profit or loss during the period;
(iv)
reversals of impairment losses recognised during the period;
(v)
the net exchange differences arising on the translation of the
financial statements from the functional currency into a different
presentation currency (see Section 19 of these Principles); and
(vi)
other changes.
Financial liabilities disclosures
18.19 An entity shall disclose, separately for each class of financial liabilities
(a) amounts owed by the entity becoming due and payable after more than
five years; and
(b) financial liabilities covered by valuable security furnished by the entity,
together with an indication of the nature and form of the security given.
Derivatives disclosures
18.20 When an entity chooses to recognise derivatives, it shall disclose the
amount of gains and losses resulting from changes in the fair value of derivatives
recognised in profit or loss in accordance with paragraph 18.15.
18.21 When an entity chooses not to recognise derivatives, as permitted by
paragraph 18.8, it shall disclose the following
(a)
the fair value of the derivatives, if such a value can be determined by
any of the following methods
(i) a market value, for those derivatives for which a reliable market
can readily be identified. Where a market value is not readily
identifiable for a derivative but can be identified for its
components or for a similar instrument, the market value may be
ACCOUNTANCY PROFESSION (GENERAL ACCOUNTING
PRINCIPLES FOR SMALLER ENTITIES)
derived from that of its components or of the similar instrument;
or
(ii)
a value resulting from generally accepted valuation models and
techniques, for those derivatives for which a reliable market
cannot be readily identified. Such valuation models and
techniques shall ensure a reasonable approximation of the market
value; and
(b) information about the extent and the nature of the derivatives.
Equity disclosures
18.22 An entity with share capital shall disclose the following, either on the face
of the balance sheet or in the notes
(a) for each class of share capital
(i)
the number of shares authorised;
(ii)
the number of shares issued and fully paid, and issued but not
fully paid;
(iii) par value per share, or that the shares have no par value;
(iv) a reconciliation of the number of shares outstanding at the
beginning and at the end of the period showing the number
allotted, their aggregate nominal value, and the consideration
received by the entity for the allotment;
(v) the rights, preferences and restrictions attaching to that class
including restrictions on the distribution of dividends and the
repayment of capital;
(vi) shares in the entity held by the entity itself;
(vii)
shares reserved for issue under options and contracts for the sale
of shares, including the terms and amounts;
(b) a description of each reserve within equity; and
(c) for any part of the allotted share capital that consists of redeemable
shares
(i)
the earliest and latest dates on which the company has the power
to redeem those shares;
(ii) whether those shares must be redeemed in any event or are liable
to be redeemed at the option of the company or of the shareholder;
and
(iii) whether any (and, if so, what) premium is payable on redemption.
18.23 The notes shall state
(a) the aggregate amounts of dividends paid in the financial year (other
than those for which a liability existed at the immediately preceding
balance sheet date);
(b) the aggregate amount of dividends that the company is liable to pay at
the balance sheet date; and
(c) the aggregate amount of dividends that are proposed before the date of
approval of the financial statements, and not otherwise disclosed under
paragraph (a) or (b) above.
18.24 If any fixed cumulative dividends on the company’s shares are in arrears,
the amount of the arrears and the period for which each class of dividends is in
arrears shall be disclosed.
Section 19: Foreign currency translation
1 An entity’s functional currency is the currency of the primary economic
environment in which the entity operates and generates net cash flows. A foreign
currency is any currency that is not the functional currency.
19.2 An entity’s presentation currency is the currency in which its financial
statements are presented, which may be regulated by relevant legislation where
applicable.
19.3 Monetary items are money held and assets and liabilities to be received or
paid in a fixed or determinable amount of money.
Determining the functional currency
19.4 An entity shall identify its functional currency.
19.5 The primary economic environment in which an entity operates is normally
the one in which it primarily generates and expends cash. The following are the most
important factors an entity considers in determining its functional currency
(a) the currency
(i)
that mainly influences sales prices for goods and services (this
will often be the currency in which sales prices for its goods and
services are denominated and settled); and
(ii) of the country whose competitive forces and regulations mainly
determine the sales prices of its goods and services;
(b) the currency that mainly influences labour, material and other costs of
providing goods or services (this will often be the currency in which
such costs are denominated and settled).
19.6 The following factors may also provide evidence of an entity’s functional
currency
(a) the currency in which funds from financing activities (i.e. issuing debt
and equity instruments) are generated;
(b) the currency in which receipts from operating activities are usually
retained.
19.7 The following additional factors are considered in determining the
functional currency of a foreign operation, and whether its functional currency is the
same as that of the reporting entity (the reporting entity, in this context, being the
entity that has the foreign operation as its subsidiary, branch, associate or joint
venture)
(a) whether the activities of the foreign operation are carried out as an
extension of the reporting entity, rather than being carried out with a
significant degree of autonomy. An example of the former is when the
foreign operation only sells goods imported from the reporting entity
and remits the proceeds to it. An example of the latter is when the
operation accumulates cash and other monetary items, incurs expenses,
generates income and arranges borrowings, all substantially in its local
currency;
(b) whether transactions with the reporting entity are a high or a low
proportion of the foreign operation’s activities;
(c) whether cash flows from the activities of the foreign operation directly
affect the cash flows of the reporting entity and are readily available for
remittance to it;
(d) whether cash flows from the activities of the foreign operation are
sufficient to service existing and normally expected debt obligations
without funds being made available by the reporting entity.
19.8 As noted in paragraph 19.1, the functional currency of an entity reflects the
underlying transactions, events and conditions that are relevant to the entity.
Accordingly, once the functional currency is determined, it can be changed only if
there is a change to those underlying transactions, events and conditions, such as a
change in the currency in which those underlying transactions, events and conditions
are denominated.
19.9 When there is a change in an entity’s functional currency, the entity shall
account for the effect of the change in functional currency prospectively from the
date of the change. In other words, an entity translates all items into the new
functional currency using the exchange rate at the date of the change. The resulting
translated amounts for non-monetary items are treated as their historical cost.
Reporting foreign currency transactions in the functional currency
19.10 When a transaction qualifies for recognition in accordance with these
Principles, and such a transaction is denominated in a foreign currency, an entity
shall record it by applying to the foreign currency amount the spot exchange rate,
between the functional currency and the currency in which the transaction is
denominated, at the date on which the transaction first qualifies for recognition. For
practical reasons, unless the relevant exchange rate or rates fluctuate significantly, a
rate that approximates the actual rate at the date of the transaction is often used, for
example, an average rate for a week or a month may be used for all transactions in
each foreign currency occurring during that period.
19.11 At each balance sheet date, an entity shall
(a) translate foreign currency monetary items using the closing rate;
(b) translate non-monetary items that are measured in terms of historical
cost in a foreign currency using the exchange rate at the date of the
transaction; and
(c) translate non-monetary items that are measured at fair value in a foreign
currency using the exchange rate at the date when the fair value was
determined.
19.12 Except as described in paragraph 19.15, an entity shall recognise, in profit
or loss in the period in which they arise, exchange differences arising on the
settlement of monetary items or on translating monetary items at rates different from
those at which they were translated on initial recognition during the period or in
previous financial statements.
19.13 When a gain or loss on a non-monetary item is recognised directly in equity,
an entity shall recognise any exchange component of that gain or loss directly in
equity. Conversely, when a gain or loss on a non-monetary item is recognised in
profit or loss, an entity shall recognise any exchange component of that gain or loss
in profit or loss.
Net investment in a foreign operation
19.14 An entity may have a monetary item that is receivable from or payable to a
foreign operation. An item for which settlement is neither planned nor likely to
occur in the foreseeable future is, in substance, a part of the entity’s net investment
in that foreign operation, and is accounted for in accordance with paragraph 19.15.
Such monetary items may include long-term receivables or loans. They do not
include trade receivables or trade payables.
19.15 Exchange differences arising on a monetary item that forms part of a
reporting entity’s net investment in a foreign operation (see paragraph 19.14) shall
be recognised in profit or loss in the individual financial statements of the reporting
entity or the individual financial statements of the foreign operation, as appropriate.
In the financial statements that include the foreign operation and the reporting entity
(for example, consolidated financial statements when the foreign operation is a
subsidiary), such exchange differences shall be recognised initially in a separate
component of equity and recognised in profit or loss on disposal of the net
investment in accordance with paragraph 19.19.
Use of a presentation currency other than the functional currency
19.16 If an entity’s presentation currency differs from its functional currency, that
entity shall translate its results and financial position into the presentation currency,
using the following procedures
(a) assets and liabilities for each balance sheet presented (i.e. including
comparatives) shall be translated at the closing rate at the date of that
balance sheet;
(b) income and expenses for each income statement (i.e. including
comparatives) shall be translated at exchange rates at the dates of the
transactions. If exchange rates between the functional and presentation
currencies do not fluctuate significantly, an entity may use a rate that
approximates the exchange rates at the dates of the transactions, for
example an average rate for the period; and
(c) all resulting exchange differences shall be recognised as a separate
component of equity.
Translation of a foreign operation into the investor’s presentation currency
19.17 In incorporating the results and financial position of a foreign operation
with those of the reporting entity (for example by consolidation or the equity
method), the entity shall translate the results and financial position of the foreign
operation into the reporting entity’s presentation currency by applying the
requirements of paragraph 19.16 of these Principles. Where the foreign operation is
to b e c on so li da ted , th e rep o r tin g en tity s h all s u bs eq ue nt ly f ol lo w n or m al
consolidation procedures, such as the elimination of intragroup balances and
intragroup transactions of a subsidiary (see Section 23 Consolidated Financial
Statements). However, an intragroup monetary asset (or liability), whether short-
term or long-term, cannot be eliminated against the corresponding intragroup
liability (or asset) without showing the results of currency fluctuations in the
consolidated financial statements. This is because the monetary item represents a
commitment to convert one currency into another and exposes the reporting entity to
a gain or loss through currency fluctuations. Accordingly, in the consolidated
financial statements of the reporting entity, an entity continues to recognise such an
exchange difference in profit or loss or, if it arises from the circumstances described
in paragraph 19.15, the entity shall classify it as equity until the disposal of the
foreign operation.
19.18 Any goodwill arising on the acquisition of a foreign operation and any fair
value adjustments to the carrying amounts of assets and liabilities arising on the
acquisition of that foreign operation shall be treated as assets and liabilities of the
foreign operation. Thus, they shall be expressed in the functional currency of the
foreign operation and shall be translated at the closing rate in accordance with
paragraph 19.16.
19.19 On the disposal of a foreign operation, the cumulative amount of the
exchange differences deferred in the separate component of equity relating to that
foreign operation shall be recognised in profit or loss when the gain or loss on
disposal is recognised.
Disclosure
19.20 For items included in the financial statements which are or were originally
denominated in a foreign currency, an entity shall disclose the bases of conversion
used to express them in the functional currency.
19.21 An entity shall disclose
(a) the amount of exchange differences recognised in profit or loss; and
(b) net exchange differences classified in a separate component of equity,
for instance in accordance with paragraph 19.13, and a reconciliation of
the amount of such exchange differences at the beginning and end of the
period.
19.22 An entity shall disclose the currency in which the financial statements are
presented. When the presentation currency is different from the functional currency,
an entity shall state that fact and shall disclose the functional currency and the
reason for using a different presentation currency.
19.23 When there is a change in the entity’s functional currency the entity shall
disclose that fact and the reason for the change in functional currency.
Section 20: Post balance sheet events
1 Post balance sheet events are those events, favourable and unfavourable,
that occur between the balance sheet date and the date when the financial statements
are authorised for issue. There are two types of events
(a) Adjusting events are those that provide evidence of conditions that
existed at the balance sheet date; and
(b) Non-adjusting events are those that are indicative of conditions that
arose after the balance sheet date.
Recognition and Measurement
20.2 An entity shall adjust the amounts recognised in its financial statements,
including related disclosures, to reflect adjusting events after the balance sheet date.
When adjusting the amounts recognised in the financial statements, an entity shall
have regard to the recognition, measurement and disclosure requirements in the
relevant sections of these Principles. Examples of adjusting events are
(a) the settlement, after the balance sheet date, of a court case that confirms
that the entity had a present obligation at the balance sheet date, in
which case an entity shall recognise a corresponding liability and shall
adjust the amount previously recognised as provisions in accordance
with Section 17 of these Principles; and
(b) the receipt of evidence after the balance sheet date that indicates that an
asset was impaired at the balance sheet date, such as a customer being
declared bankrupt or inventories being sold at an amount that is lower
than their previously recognised net realisable value. In such case an
entity shall recognise an impairment loss, or adjust a previously
recognised impairment loss, in accordance with Sections 12 and 15 of
these Principles.
20.3 An entity shall not adjust the amounts recognised in its financial statements
to reflect non-adjusting events after the balance sheet date. Nevertheless, if non-
adjusting events after the balance sheet date are material, non-disclosure could
influence the economic decisions of users taken on the basis of the financial
statements hence disclosures may need to be given in accordance with this section.
Examples of non-adjusting events are a decline in market value of investments
between the balance sheet date and the date when the financial statements are
authorised for issue, or an entity declaring dividends to holders of equity instruments
after the balance sheet date.
Disclosure
20.4 An entity shall disclose the date on which the financial statements were
authorised for issue and who gave that authorisation.
20.5 An entity shall disclose the following for each material category of non-
adjusting event after the balance sheet date
(a) the nature of the event; and
(b) an estimate of its financial effect, or a statement that such an estimate
cannot be made.
Section 21: Related party disclosures
1 A party is related to an entity if
(a) it is a parent, subsidiary, or fellow subsidiary of the entity, or it controls
(including an individual), or is controlled by, or is under common
control with, the entity;
(b) it is an associate, or has an interest in the entity that gives it (including
an individual) significant influence;
(c) it is a joint venture in which the entity is a venturer, or it (including an
individual) has joint control over the entity;
(d) it is a director of the entity or of its parent;
(e) it is a close family member of any individual referred to in (a) to (d)
above who may influence, or be influenced by, that individual; or
(f)
it is an entity that is controlled, jointly controlled or significantly
influenced by any individual referred to in (d) and (e).
21.2 The following are not necessarily related parties
(a) two entities simply because they have a director in common,
notwithstanding (d) and (f) of paragraph 21.1;
(b) two venturers simply because they share joint control over a joint
venture;
(c) any of the following simply by virtue of their normal dealings with an
entity (even though they may affect the freedom of action of an entity or
participate in its decision making process)
(i)
providers of finance,
(ii)
trade unions,
(iii)
public utilities, and
(iv)
government departments and agencies,
(d) a customer, supplier, franchisor, distributor or general agent with whom
an entity transacts a significant volume of business, merely by virtue of
the resulting economic dependence.
21.3 A related party transaction is a transfer of resources, services or obligations
between related parties, regardless of whether a price is charged.
Disclosure
21.4 Relationships between parents and subsidiaries shall be disclosed
irrespective of whether there have been transactions between those related parties.
Thus an entity shall always disclose, where applicable, the name of its immediate
parent and, if different, the name of the ultimate parent. If neither the entity’s
immediate parent nor its ultimate parent produces consolidated financial statements
available for public use, the entity shall also disclose the name of the next most
senior parent that produces such financial statements. The next most senior parent is
the first parent in the group, above the immediate parent, that produces consolidated
financial statements available for public use.
21.5 An entity shall disclose the following in relation to members of the entity’s
board of directors
(a) the amount of the emoluments granted in respect of the financial
reporting period in the form of employee benefits, post employment
benefits, other long term benefits and termination benefits;
(b) any benefits granted, any commitments or any retirement pension
commitments (where applicable) entered into, with respect to former
members of the board of directors;
(c) the amount of advances and credits granted with indications of the
interest rates, main conditions and any amounts repaid; and
(d) any commitments entered into on their behalf by way of guarantees of
any kind.
21.6 If there have been transactions between related parties, except as provided
for in paragraph 21.7, an entity shall disclose the nature of the related party
relationships as well as information about the transactions and outstanding balances
necessary for an understanding of the potential effect of the relationships on the
financial statements. These disclosure requirements are in addition to those required
by paragraph 21.5. As a minimum, disclosures shall include
(a)
the amount of the transactions in aggregate for each significant
category of transactions, except when separate disclosure is
necessary for an understanding of the effects of related party
transactions on the financial statements of the entity;
(b)
the amount of outstanding balances in aggregate and
(i) their terms and conditions, including whether they are secured,
and the nature of the consideration to be provided in settlement;
and
(ii) details of any guarantees given or received;
(c) provisions for doubtful debts related to the amount of outstanding
balances; and
(d) the expense recognised during the period in respect of bad or doubtful
debts due from related parties.
21.7 An entity which forms part of a larger group is encouraged, but not required,
to disclose the information required in paragraph 21.6 in relation to transactions with
entities that form part of the same group to which the entity belongs, provided that
the entity and all such related entities are consolidated in consolidated financial
statements that are available for public use.
Section 22: Business combinations and goodwill
1 This Section shall be applied by a parent in accounting for its investments in
subsidiaries, associates and joint ventures in the consolidated financial statements, if
any, that present the financial results of the parent and its subsidiaries, associates
and joint ventures as those of a single economic entity in accordance with Section 23
of these Principles. This Section shall not be applied by an investor in accounting for
its investments in subsidiaries, associates and joint ventures in its individual
financial statements (as defined in paragraph 10.1), the accounting for which is
specifically covered in Section 10 of GAPSE.
22.2 A business combination is the bringing together of separate entities or
businesses into one reporting entity. The result of nearly all business combinations is
that one entity, the acquirer, obtains control of one or more other separate
businesses, individually referred to as ‘the acquiree’. The acquisition date is the date
on which the acquirer effectively obtains control of the acquiree. Control is defined
in paragraph 10.3 of these Principles.
22.3 The acquirer is the combining entity that obtains control of the other
combining entities or businesses.
Method of accounting
22.4 All business combinations shall be accounted for by applying the purchase
method. Applying the purchase method involves the following steps
(a) identifying an acquirer;
(b) measuring the cost of the business combination; and
(c) allocating, at the acquisition date, the cost of the business combination
to the assets acquired and liabilities and contingent liabilities assumed.
22.5 The acquirer shall measure the cost of a business combination as the
aggregate of
(a) the fair values, at the date of exchange, of assets given, liabilities
incurred or assumed, and equity instruments issued by the acquirer, in
exchange for control of the acquiree; plus
(b) any costs directly attributable to the business combination.
22.6 The acquirer shall, at the acquisition date, allocate the cost of a business
combination by recognising the acquiree’s identifiable assets and liabilities and
those contingent liabilities that satisfy the recognition criteria at their fair values at
that date, except for non-current assets (or disposal groups) that are classified as
held for sale, which shall be recognised at fair value less costs to sell. Any difference
between the cost of the business combination and the acquirer’s interest in the net
fair value of the identifiable assets, liabilities and contingent liabilities so recognised
shall be accounted for in accordance with paragraphs 22.9 - 22.17.
22.7 The acquirer shall recognise separately the acquiree’s identifiable assets,
liabilities and contingent liabilities at the acquisition date only if they existed at that
date and if they satisfy the following criteria at that date
(a) in the case of an asset other than an intangible asset, it is probable that
any associated future economic benefits will flow to the acquirer, and
its fair value can be measured reliably;
(b) in the case of a liability other than a contingent liability, it is probable
that an outflow of resources will be required to settle the obligation, and
its fair value can be measured reliably; and
(c) in the case of an intangible asset or a contingent liability, its fair value
can be measured reliably.
22.8 The acquirer’s income statement shall incorporate the acquiree’s profits and
losses after the acquisition date by including the acquiree’s income and expenses
based on the cost of the business combination to the acquirer. For example,
depreciation expense included after the acquisition date in the acquirer’s income
statement that relates to the acquiree’s depreciable assets shall be based on the fair
values of those depreciable assets at the acquisition date, i.e. their cost to the
acquirer.
Goodwill - Recognition and Measurement at recognition
22.9 Internally generated goodwill shall not be recognised.
22.10 The acquirer shall, at the date of acquisition of a business
(a) recognise goodwill acquired in a business combination as an asset; and
(b) initially measure that goodwill at its cost, being the excess of the cost of
the business combination over the acquirer’s interest in the net fair
value of the identifiable assets, liabilities and contingent liabilities
recognised in accordance with paragraph 22.7.
22.11 If the acquirer’s interest in the net fair value of the identifiable assets,
liabilities and contingent liabilities recognised in accordance with paragraph 22.7
exceeds the cost of the business combination (sometimes referred to as ‘negative
goodwill’), the acquirer shall
(a) reassess the identification and measurement of the acquiree’s
identifiable assets, liabilities and contingent liabilities and the
measurement of the cost of the combination; and
(b) recognise immediately in profit or loss any excess remaining after that
reassessment.
Goodwill - Measurement after recognition
22.12 After initial recognition, goodwill shall be carried at its cost less any
accumulated amortisation and any accumulated impairment losses. To determine
whether goodwill is impaired, an entity applies Section 12 of these Principles. That
Section explains how an entity reviews the carrying amount of its assets, how it
determines the recoverable amount of an asset, and when it recognises, or reverses
the recognition of, an impairment loss. Because goodwill does not generate cash
flows independently of other assets or groups of assets, it is necessary to allocate
goodwill to the group (groups) of assets that is (are) expected to benefit from the
synergies of the business combination for the purpose of estimating its recoverable
amount. Any resulting impairment losses shall be recognised in accordance with
paragraph 12.11 - 12.13 of these Principles.
22.13 The residual value assigned to goodwill shall be zero.
22.14 An entity shall amortise goodwill on a straight-line basis over its useful life,
which shall not exceed 20 years. The amortisation charge for each period shall be
recognised in profit or loss.
22.15 The useful life of goodwill shall be reviewed regularly and revised if
necessary, subject to the constraint that the revised useful life shall not exceed 20
years from the date of acquisition. The carrying amount at the date of revision shall
be amortised over the revised estimate of remaining useful life. Such a change shall
be accounted for as a change in an accounting estimate in accordance with Section 5
of these Principles.
22.16 Goodwill shall not be revalued.
22.17 An impairment loss recognised for goodwill shall not be reversed in a
subsequent period.
Disclosure
22.18 For each business combination (or group of individually immaterial
business combinations) that was (were) effected during the period, the acquirer shall
disclose the following
(a) the names and descriptions of the combining entities or businesses;
(b) the acquisition date;
(c) the percentage of voting equity instruments acquired;
(d) the cost of the combination and a description of the components of that
cost, including any costs directly attributable to the combination. When
equity instruments are issued or issuable as part of the cost, the
following shall also be disclosed
(i) the number of equity instruments issued or issuable; and
(ii) the fair value of those instruments and the basis for determining
that fair value;
(e) details of any operations the entity has decided to dispose of as a result
of the combination;
(f)
the amounts recognised at the acquisition date for each class of the
acquiree’s assets, liabilities and contingent liabilities, including
goodwill;
(g) the amount of any excess recognised in profit or loss in accordance with
paragraph 22.11, and the line item in the income statement in which the
excess is recognised;
(h) a description of the factors that contributed to a cost that results in the
recognition of goodwill - a description of each intangible asset that was
not recognised separately from goodwill and an explanation of why the
intangible asset’s fair value could not be measured reliably (see
paragraph 11.3 of these Principles) - or a description of the nature of
any excess recognised in profit or loss in accordance with paragraph
22.11; and
(i)
the amount of the acquiree’s profit or loss since the acquisition date
included in the acquirer’s profit or loss for the period, unless disclosure
would be impracticable. If such disclosure would be impracticable, that
fact shall be disclosed, together with an explanation of why this is the
case.
22.19 For each business combination effected after the end of the reporting period
but before the financial statements are authorised for issue, the acquirer shall make
the disclosures required by paragraph 22.18 unless such disclosure would be
impracticable. If disclosure of any of that information would be impracticable, that
fact shall be disclosed, together with an explanation of why this is the case.
22.20 Having regard to paragraph 4.7(c) of these Principles, in respect of all
business combinations, an acquirer shall disclose a reconciliation of the carrying
amount of goodwill at the beginning and end of the reporting period, showing
separately
(a) the gross amount and accumulated amortisation and impairment losses
at the beginning of the period;
ACCOUNTANCY PROFESSION (GENERAL ACCOUNTING
PRINCIPLES FOR SMALLER ENTITIES)
(b) changes arising from new business combinations, impairment losses,
disposals of previously acquired businesses, and other changes; and
(c) the gross amount and accumulated amortisation and impairment losses
at the end of the period.
Section 23: Consolidated financial statements
1 Consolidated financial statements are the financial statements of a group
presented as those of a single economic entity.
23.2 Entities that prepare consolidated financial statements may apply this
Section if, and only if, the group does not exceed any of the following criteria in the
immediately preceding two consecutive financial years
(a) total revenue (as defined in regulation 5(2)(b)): thirty-five million euro
(€35,000,000) computed net, or forty-two million euro (€42,000,000)
computed gross;
(b) balance sheet total (as defined in regulation 5(2)(a)): seventeen million
and five hundred thousand euro (€17,500,000) computed net, or twenty-
one million euro (€21,000,000) computed gross;
(c) employees (as determined in accordance with regulation 5(2)(c)): two
hundred and fifty (250).
For the avoidance of doubt, the determination of thresholds computed gross shall
mean that the group revenue and balance sheet shall be computed without any set-
offs and other adjustments that would be required for the preparation of consolidated
financial statements. Determination of thresholds computed net shall mean that
group revenue and balance sheet shall be computed after such adjustments have been
effected.
23.3 If, in certain circumstances, one or more of the subsidiaries to be
consolidated are prohibited from applying GAPSE in the preparation of their
individual financial statements, the group’s consolidated financial statements may
nevertheless be prepared in accordance with this Section (subject to the overriding
principle in paragraph 23.2) provided that the following information is disclosed in
the consolidated financial statements
(a) the fact that a subsidiary (subsidiaries) has (have) prepared financial
statements in accordance with a financial reporting framework other
than GAPSE;
(b) the name (names) of the relevant subsidiary (subsidiaries); and
(c) the financial reporting framework under which those financial
statements have been prepared.
Consolidation procedures
23.4 The consolidated financial statements present financial information about
the g rou p as a sin gle econom ic entity. In pr ep ar in g co nsolidated f inancial
statements, an entity shall
(a) combine the financial statements of the parent and its subsidiaries line
by line by adding together like items of assets, liabilities, equity,
income and expenses;
(b) eliminate the carrying amount of the parent’s investment in each
subsidiary and the parent’s portion of equity of each subsidiary;
(c) measure minority interests in the profit or loss of consolidated
subsidiaries for the reporting period separately from the parent
shareholders’ interest; and
(d) measure minority interests in the net assets of consolidated subsidiaries
separately from the parent shareholders’ equity in them. Minority
interests in the net assets consist of
(i)
the amount of those minority interests at the date of the original
combination; and
(ii) the minority’s share of changes in equity since the date of the
combination.
23.5 When potential voting rights exist (such as voting rights that would result
from exercise of share options or warrants or from conversion of convertible
securities), the proportions of profit or loss and changes in equity allocated to the
parent and minority interests are determined on the basis of existing ownership
interests and do not reflect the possible exercise or conversion of potential voting
rights.
23.6 Intragroup balances and transactions, including income, expenses and
dividends, are eliminated in full. Profits and losses resulting from intragroup
transactions that are recognised in assets, such as inventory and fixed assets, are
eliminated in full. Intragroup losses may indicate an impairment that requires
recognition in the consolidated financial statements.
23.7 The financial statements of the parent and its subsidiaries used in the
preparation of the consolidated financial statements shall be prepared as of the same
reporting date. When the reporting dates of the parent and a subsidiary are different,
the subsidiary prepares, for consolidation purposes, additional financial statements
as of the same date as the financial statements of the parent unless it is impracticable
to do so.
23.8 Consolidated financial statements shall be prepared using uniform
accounting policies for like transactions and other events and conditions in similar
circumstances. If a member of the group uses accounting policies other than those
adopted in the consolidated financial statements for like transactions and events in
similar circumstances, appropriate adjustments are made to its financial statements
in preparing the consolidated financial statements.
23.9 The income and expenses of a subsidiary are included in the consolidated
financial statements from the acquisition date. The income and expenses of a
subsidiary are included in the consolidated financial statements until the date on
which the parent ceases to control the subsidiary. The difference between the
proceeds from the disposal of the subsidiary and its carrying amount as of the date of
disposal, including the cumulative amount of any exchange differences that relate to
the subsidiary recognised in equity in accordance with Section 19, is recognised in
the consolidated income statement as the gain or loss on the disposal of the
subsidiary.
23.10 If an entity ceases to be a subsidiary but the investor (former parent)
continues to hold some equity shares, those shares shall be accounted for in
accordance with Section 9 of these Principles from the date the entity ceases to be a
subsidiary, provided that it does not become an associate or a jointly controlled
entity. The carrying amount of the investment at the date that the entity ceases to be
a subsidiary shall be regarded as the cost on initial measurement of an investment.
23.11 An entity shall present minority interest in the consolidated balance sheet
within equity, separately from the parent shareholders’ equity.
23.12 An entity shall disclose minority interest in the profit or loss of the group
separately in the income statement, as required by paragraph 4.21.
23.13 Losses applicable to the minority in a consolidated subsidiary may exceed
the minority interest in the subsidiary’s equity. The excess, and any further losses
applicable to the minority, are allocated against the majority interest except to the
extent that the minority has a binding obligation and is able to make an additional
investment to cover the losses. If the subsidiary subsequently reports profits, such
profits are allocated to the majority interest until the minority’s share of losses
previously absorbed by the majority has been recovered.
Accounting for investments in associates and jointly controlled entities in the
consolidated financial statements
23.14 When an entity prepares consolidated financial statements it shall measure
all its investments in associates and jointly controlled entities in its consolidated
financial statements in accordance with the equity method in paragraphs 10.15 -
10.23, and shall give the disclosures required by paragraph 10.28, of these
Principles.
Disclosure
23.15 An entity’s consolidated financial statements shall include all the relevant
disclosures required by the respective Sections of these Principles.
Section 24: Discontinued operations and assets held for sale
1 A discontinued operation is a component of an entity that either has been
disposed of, or is classified as held for sale, and
(a)
represents a separate major line of business or geographical area of
operations;
(b) is part of a single coordinated plan to dispose of a separate major line of
business or geographical area of operations; or
(c) is a subsidiary acquired exclusively with a view to resale.
24.2 A disposal group is a group of assets to be disposed of, by sale or otherwise,
together as a group in a single transaction, and liabilities directly associated with
those assets that will be transferred in the transaction.
Discontinued operations - Presentation and Disclosure
24.3 An entity shall disclose
(a) a single amount on the face of the income statement comprising the
total of
(i)
the post-tax profit or loss of discontinued operations; and
(ii)
the post-tax gain or loss recognised on the measurement to fair
value less costs to sell or on the disposal of the assets or group(s)
of assets and liabilities constituting the discontinued operation;
(b) an analysis of the single amount in (a) into
(i)
the revenue, expenses, pre-tax profit or loss and income tax
expense of discontinued operations;
(ii)
the gain or loss recognised on the measurement to fair value less
costs to sell or on the disposal of the assets or group(s) of assets
constituting the discontinued operation and the related income tax
expense.
The analysis may be presented in the notes or on the face of the income statement.
If it is presented on the face of the income statement it shall be presented in a section
identified as relating to discontinued operations, i.e. separately from continuing
operations.
(c) the net cash flows attributable to the operating, investing and financing
activities of discontinued operations. These disclosures may be
presented either in the notes or on the face of the financial statements.
24.4 Unless impracticable, an entity shall restate the disclosures in the preceding
paragraph for prior periods presented in the financial statements so that the
disclosures relate to all operations that have been discontinued by the end of the
reporting period for the latest period presented.
24.5 If an entity ceases to classify a component of an entity as held for sale, the
entity shall reclassify the results of operations of the component previously
presented in discontinued operations and shall include them in income from
continuing operations for all periods presented. The amounts for prior periods shall
be described as having been restated.
Non-current assets held for sale
24.6 An entity shall classify a non-current asset (including property, plant and
equipment, intangibles, and investments in subsidiaries, associates and joint
ventures) as held for sale if its carrying amount will be recovered principally through
a sale transaction rather than through continuing use. For this to be the case, the
asset (or disposal group) must be available for immediate sale in its present
condition subject only to terms that are usual and customary for sales of such assets,
its sale must be highly probable, and the entity must expect to complete the sale
within one year from the date of classification as held for sale.
24.7 An entity shall measure a non-current asset (or disposal group) classified as
held for sale at the lower of its carrying amount and fair value less costs to sell.
24.8 An entity shall not depreciate (or amortise) a non-current asset while it is
classified as held for sale or while it is part of a disposal group classified as held for
sale. Interest and other expenses attributable to the liabilities of a disposal group
classified as held for sale shall continue to be recognised.
Non-current assets held for sale - Presentation and Disclosure
24.9 An entity shall present a non-current asset classified as held for sale and the
assets of a disposal group classified as held for sale separately from other assets in
the balance sheet. The liabilities of a disposal group classified as held for sale shall
be presented separately from other liabilities in the balance sheet. Those assets and
liabilities shall not be offset and presented as a single amount. The major classes of
assets and liabilities classified as held for sale shall be separately disclosed either on
the face of the balance sheet or in the notes. An entity shall present separately any
cumulative income or expense recognised directly in equity relating to a non-current
asset (or disposal group) classified as held for sale.
24.10 An entity shall not reclassify or re-present amounts presented for non-
current assets (or for the assets and liabilities of disposal groups) classified as held
for sale in the balance sheets for prior periods to reflect the classification in the
balance sheet for the latest period presented.
24.11 An entity shall disclose the following information in the period in which
non-current assets have been either classified as held for sale or sold
(a) a description of the 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;
and
ACCOUNTANCY PROFESSION (GENERAL ACCOUNTING
PRINCIPLES FOR SMALLER ENTITIES)
(c) the gain or loss recognised, if not separately presented on the face of the
income statement.
Section 25: Adoption of GAPSE
1 An entity shall apply this Section upon
(a) First-time adoption of GAPSE, i.e. when it prepares financial
statements that conform to these Principles in which the entity makes an
explicit and unreserved statement in those financial statements of
compliance with the General Accounting Principles for Smaller Entities
(GAPSE), and any of the following circumstances prevail
(i)
the entity did not present financial statements for previous
periods; or
(ii)
the entity presented all its previous financial statements in
conformity with a financial reporting framework other than
GAPSE.
(b) Subsequent adoption of GAPSE, i.e. when the entity applied these
Principles in previous financial reporting periods but presented its most
recent previous financial statements in conformity with a financial
reporting framework other than GAPSE. Typically this would apply
when, subsequent to the occurrence of the circumstances contemplated
in regulation 5(3)(b)(i) or (ii) under which occurrence an entity is
disqualified from applying these Principles, an entity is eligible to re-
apply GAPSE in accordance with sub-regulations (6) or (7), as the case
may be, of regulation 5 and the entity opts to re-apply these Principles
and prepare financial statements that conform to these Principles.
First-time adoption
25.2 Paragraph 4.1 of these Principles defines a complete set of financial
statements.
25.3 Paragraph 4.7 of these Principles requires a complete set of financial
statements to show comparative amounts in respect of the previous comparable
period for every item presented in the financial statements and notes thereto. An
entity may present comparative information in respect of more than one comparable
prior period. Therefore, the date of an entity’s transition to these Principles is the
beginning of the earliest period for which the entity presents full comparative
information in accordance with GAPSE in its first financial statements that conform
to these Principles.
25.4 An entity shall prepare an opening GAPSE balance sheet at the date of the
transition to GAPSE. This is the starting point for its accounting under GAPSE.
25.5 An entity shall use the same accounting policies in its opening GAPSE
balance sheet and throughout all periods presented in the financial statements to
which paragraph 25.1 refers. Those accounting policies shall comply with the
relevant Sections of these Principles.
25.6 An entity shall, in its opening balance sheet
(a) recognise all assets and liabilities whose recognition is required by
these Principles;
(b) not recognise items as assets or liabilities if these Principles do not
permit such recognition;
(c) reclassify items that it recognised under its previous financial reporting
framework as one type of asset, liability or component of equity, but are
a different type of asset, liability or component of equity under these
Principles; and
(d) apply these Principles in measuring all recognised assets and liabilities.
25.7 The accounting policies that an entity uses in its opening balance sheet
under these Principles may differ from those that it used for the same date using its
previous financial reporting framework. The resulting adjustments arise from
transactions, other events or conditions before the date of transition to these
Principles. Therefore, an entity shall recognise those adjustments directly in retained
earnings (or, if appropriate, another category of equity) at the date of transition to
these Principles.
25.8 If it is impracticable for an entity to restate the opening balance sheet at the
date of transition in accordance with these Principles, the entity shall apply
paragraphs 25.4 – 25.7 in the earliest period for which it is practicable to do so, and
shall disclose the date of transition and the fact that data presented for prior periods
are not comparable. If it is impracticable for an entity to provide any disclosures
required by these Principles for any period before the period in which it prepares its
first financial statements that conform to these Principles, the omission shall be
disclosed.
Subsequent adoption
25.9 Upon subsequent adoption an entity shall apply paragraphs 25.4 - 25.7, and
the term opening balance sheet shall be taken to refer to the balance sheet as at the
beginning of the earliest period for which the entity presents full comparative
information in accordance with these Principles in the financial statements that
conform to these Principles.
Presentation and disclosure
25.10 An entity shall disclose the date of the transition to GAPSE, and shall
explain whether it is a case of first-time adoption or subsequent adoption of GAPSE.
In the latter case, an entity shall also disclose the date of the end of the latest
financial reporting period for which the entity had previously prepared its financial
statements in accordance with these Principles.
25.11 An entity shall explain how the transition from its previous financial
reporting framework to these Principles affected its reported financial position and
financial performance. In particular, an entity’s financial statements to which
paragraph 25.1 refers shall include
(a) reconciliations of its equity reported under its previous financial
reporting framework to its equity under these Principles for both of the
following dates
(i) the date of transition to these Principles; and
(ii) the end of the latest period presented in the entity’s most recent
annual financial statements under its previous financial reporting
framework; and
(b) a reconciliation of the profit or loss reported under its previous financial
reporting framework for the latest period in the entity’s most recent
annual financial statements to its profit or loss under these Principles
for the same period.