To understand the accounting treatment of fixed assets under IFRS let us first understand what fixed assets are. What are Fixed Assets? Fixed assets are the assets that are purchased for long-term use by a business and not for resale. Some examples of fixed assets are land, buildings, machinery, furRead more
To understand the accounting treatment of fixed assets under IFRS let us first understand what fixed assets are.
What are Fixed Assets?
Fixed assets are the assets that are purchased for long-term use by a business and not for resale. Some examples of fixed assets are land, buildings, machinery, furniture and fixtures, etc.
Fixed assets are essential for the smooth operations of the business. It often shows the value of the business. The value of fixed assets usually decreases with time, obsolescence, damage, etc.
As per IAS-16 Property, Plant and Equipment, an asset is identified as a fixed asset if it satisfies the following conditions:
- the future economic benefits associated with the asset will probably flow to the entity, and
- the cost of the asset can be measured reliably.
What is IFRS?
IFRS stands for International Financial Reporting Standards. It provides a set of standards to be followed globally by all companies to ensure transparency, comparability, and consistency.
What is the accounting treatment of fixed assets under IFRS?
Under IFRS, the first step is to measure the value of the fixed assets on cost. The cost of the fixed assets includes the following:
- purchase price
- any direct cost related to the asset (such as transportation, installation, etc.)
- duties/taxes
After this step, the entity may choose any one of the following two primary methods:
- Cost Model: According to this model the value is first recognized on a cost basis. This includes the purchase price and direct costs attributable to the asset. Subsequently, depreciation is calculated on the cost of the asset. Depreciation spreads the cost of an asset over its useful life. Impairment checks are conducted to ensure the asset’s value on the books doesn’t exceed what it’s worth.
For example, a company bought a piece of machinery for 60,000. 5,000 were spent on its installation. It has a useful life of 10 years. The machinery would be depreciated over its useful life of 10 years based on its cost which is 65,000.
2. Revaluation model: As per this model, the fixed assets are valued on their fair value, as on the revaluation date. The amount of depreciation and impairment losses is subtracted from the fair value.
If the value of an asset increases, the gain goes to equity (revaluation surplus) unless it can be set off with a past loss recorded in profit or loss.
On the other hand, if the value decreases, the loss goes to profit or loss unless it offsets a past surplus in equity.
For example, a building was purchased for 100,000. On the revaluation date, the fair value of this building was 150,000. Hence, there is a revaluation surplus of 50,000 which shall be credited to the revaluation surplus account.
Impact on Financial Statements
Fixed assets are shown on the Assets side of the Balance Sheet.
Conclusion
From the above discussion, it may be concluded that:
- Fixed assets are the assets that are purchased for long-term use by a business and not for resale.
- Some examples of fixed assets are land, buildings, machinery, furniture and fixtures, etc.
- IFRS provides a set of standards to be followed globally by all companies to ensure transparency, comparability, and consistency.
- Under IFRS, the first step is to measure the value of the fixed assets on cost.
- After this step, the entity may choose any one of the two primary methods which are cost model and the revaluation model.
- Fixed assets are shown on the Assets side of the Balance Sheet.
See less
Introduction First, we should know what Earnings per share is. Earnings per share or EPS is the earnings available to each equity share of a company. The general formula of Earning per share is as follows: Earnings per share indicate the profit-generating capability of an enterprise and potential inRead more
Introduction
First, we should know what Earnings per share is.
Earnings per share or EPS is the earnings available to each equity share of a company. The general formula of Earning per share is as follows:
It is shown at the bottom of the Statement of profit and loss of a company.
Basic Earnings per share
As per AS-20, there are two types of EPS.
Basic Earnings per share has the same meaning as given above. But the formula of basic earnings per share as per AS-20 is as follows:
The formula of basic earnings per share is slightly different from the general formula of EPS. Here the numerator is the same as discussed above. But the denominator is different.
Here it is ‘Weight average number of equity shares outstanding’ instead of ‘Total number of equity shares outstanding.
The two components of the formula are discussed below:
Meaning of earnings available to equity shareholders
The earnings or net profit which remains after deduction of interest payable, preference dividend, if any, and tax is known as earnings available to equity shareholders. It is calculated as shown below:
Weighted average number of equity shares outstanding
The weighted average will be calculated by applying the weight of the time period for which the numbers of shares were outstanding. Let’s see a simple case to understand the calculation of the weighted average number of equity shares outstanding:
Solution:
Alternative way:
The calculation of the weighted average number of equity shares is different in special cases like:
Partly paid-up shares
Partly paid-up shares are not considered in the above calculation unless they are eligible to take part in dividends. In that case, such partly paid-up shares are included in the calculation as fractional shares.
For example, 300 equity shares of Rs. 10 each and Rs. 5 paid up will be considered as 150 shares. (300 x 5/10)
Bonus shares
We know bonus shares are issued at no cost to the shareholders. Issue of bonus shares leads to an increase in the number of equity shares without an increase in the resources.
AS-20 tells us to make adjustments to the number of shares outstanding before the issue of bonus shares as if the bonus shares were issued at the beginning of the earliest reported period. The effect will be retrospective.
Take the following example:
Here, number of bonus shares = 30,000 x 2 = 60,000
Therefore, EPS for 2012 = 60,00,000 /(30,000 + 60,000)= Rs. 6.67
As the earliest report period is 2011, its EPS will also have to be adjusted. Bonus issue will be treated as if it had occurred at the beginning of the earliest reported period.
Adjusted EPS for 2011= 18,00,000 / (30,000 + 60,000) = Rs. 20
Right issue
The right issue generally has an exercise price that is less than the fair value of the shares. Hence, we can say that the right issue has an element of bonus in them.
So, just like in the case of a bonus issue, we will have to adjust the number of shares outstanding before the right issue up to the earliest reported period by an adjustment factor.
The number of shares outstanding before the right issue is to be multiplied by the adjustment factor given below:
Theoretical ex-right value per share is calculated in the following way:
Let’s see an example:
Net profit for 2011Â Â Â Â Rs. 11,00,000
Net profit for 2012Â Â Â Â Rs. 15,00,000
No. of shares outstanding prior to rights issue  5,00,000 shares
Rights issue price                                                      Rs. 15
Last date to exercise rights                                   1st March 2012
The right issue is one new share for every 5 shares outstanding (i.e. 1,00,000 new shares)
The fair value of shares immediately prior to 1st March 2012 = Rs. 21
Solution: