provincial financial management & mscoa ......property being constructed or developed for future...

PROVINCIAL FINANCIAL MANAGEMENT

& mSCOA FORUM

Overview of asset related accounting standards

and requirements

Presented by: Ms Kashnee Sewnarain

Financial Reporting, Office of the Provincial Accountant General

Date: 29th June 2015

1

AGENDA

• Asset GRAP framework 2014/15FY

• Property, Plant and Equipment

• Investment Property

• Intangible assets

• Impairment of assets

• Inventories

• Heritage assets

• Leases

• Biological assets (Agriculture)

• Borrowing costs

• Construction contracts

• Discontinued operations

• Changes in Accounting Policy, Accounting Estimates and Errors

2

ASSET GRAP REPORTING FRAMEWORK

FOR 2014/15 FINANCIAL YEAR

3

GRAP REPORTING FRAMEWORK

• The Accounting Standards Board (ASB) has a legislative mandate to prescribe

the Standards of Generally Recognised Accounting Practice (GRAP)

• Applicable to Municipalities and Municipalities, among other entities

• Board (ASB) further prescribes Directives and Interpretations to the GRAP

standards which form part of the Reporting Framework

• Directives: used to set the transitional provisions and transitional arrangements

for compliance with GRAP – same authority as the GRAP standards

• Directive 5 indicates the applicable standards for the 2014/15 financial

year.

4


• Effective GRAP Standards applicable to accounting for assets are:

• GRAP 3 – Accounting Policies, Changes in Accounting Estimates and Errors

• GRAP 5 – Borrowing costs

• GRAP 11 – Construction Contracts

• GRAP 12 – Inventories

• GRAP 13 – Leases

• GRAP 16 – Investment Property

• GRAP 17 – Property, Plant and Equipment

• GRAP 21 – Impairment of Non-cash Generating Assets

• GRAP 26 – Impairment of Cash Generating Assets

• GRAP 27 – Agriculture

• GRAP 31 – Intangible assets

• GRAP 100 – Discontinued operations

• GRAP 103 – Heritage assets

5


• Effective Directives applicable to Assets are:

• Directive 3 – Transitional Provisions for High Capacity Municipalities

• Directive 4 – Transitional Provisions for Medium and Low Capacity Municipalities

• Directive 5 – Determining the GRAP Reporting Framework

• Directive 7 – Application of Deemed Cost

• Directive 11 – Changes in measurement base

• Interpretations applicable to Assets are:

• IGRAP 2 – Changes in existing decommissioning, restoration and similar liabilities

• IGRAP 3 – Determining whether an arrangement constitutes a lease

• IGRAP 8 – Arrangements for the construction of assets from exchange

transactions

• IGRAP 9 – Distributions of noncash assets to owners

• IGRAP 10 – Assets received from customers

• IGRAP 14 – Evaluating substance of transactions involving the legal form of leases

• IGRAP 16 – Intangible assets – website costs

6

GRAP 17 – PROPERTY, PLANT AND

EQUIPMENT

7

GRAP 17 – PROPERTY, PLANT AND EQUIPMENT

• Property, plant and equipment are tangible items that:

(a) are held for use in the production of supply of goods or services, for rental

to others, or for administrative purposes; and

(b) are expected to be used during more than one reporting period

• Property, plant and equipment shall be recognised as an asset if it meets the

definition of an asset, and only if:

(a) it is probable that future economic benefits or service potential associated

with the item will flow to the entity, and

(b) the cost or fair value of the item can be measured reliably

• Judgement must be applied to recognition principle – can be recognised

individually or in aggregate to insignificant items

8


• An asset is recorded at cost on date of acquisition

• Cost includes the purchase price of the asset, and any other costs attributable

to bringing the asset to the location and condition necessary for it to be

operating in the manner intended by management.

• Cost of an asset includes:

• Purchase price, import duties and non-refundable purchase tax (VAT)

• initial estimates of cost of dismantling/removing an item and restoring the site

(eg. landfill site)

• employee costs capitalised

• capitalised borrowing costs

• costs of installation and delivery

• costs of testing the asset (less any income associated with such testing)

• Storage costs (before the asset is brought into use)

• LESS rebates and trade discounts.

9


• Where an asset has been obtained at no cost or nominal cost – measure cost of

the asset at fair value on date of acquisition (deemed cost)

• Fair value: the amount for which an asset could be exchanged, or a liability

settled, between knowledgeable, willing parties in an arm’s length transaction.

• Examples of Property, Plant and Equipment:

• Property that is owner occupied (administration buildings or to render a service

or supply of goods)

• Property rented to employees, regardless of whether it is market related or not

(intention is to provide housing to employees)

• Infrastructure (roads, water networks, electricity networks etc)

• Property held to provide a social service and rental income is incidental (e.g.

Community halls)

• Improvements on leasehold land (building on Ingonyama Trust land)

10


• Example: Provision for rehabilitation of landfill site

• Municipality X has an obligation to rehabilitate a landfill site at end of its usage

period of 20 years at an expected cost of R 5 million at the end of year 20.

Assume that the landfill site is used from 1 July 2014 and reporting date is 30

June 2015. Discount rate is determined at 8% per annum.

• Use MS Excel or Financial Calculator

• FV = -R 5 000 000 i = 8% N = 20 COMP PV = R 1 072 741

• Recognise capitalisation of rehabilitation cost: 1 July 2014

Dr Landfill site (asset) 1 072 741

Cr Provision for rehabilitation of landfill site 1 072 741

• Recognise increase in provision unwinding of discount (30 June 2015)

Dr Finance Costs 85 819

Cr Provision: rehabilitation of landfill site (1 072 741 x 8%) 85 819

11


• Recognise depreciation (30 June 2015)

Dr Depreciation (1 072 741/ 20 years) 53 637

Cr Accumulated Depreciation 53 637

• Recognise increase in provision unwinding of discount (30 June 2016)

Dr Finance Costs (1072 741 +85 819) x 8% 92 685

Cr Provision: rehabilitation of landfill site 92 685

• Journal entry to recognise depreciation (30 June 2016)

Dr Depreciation (1 072 741/ 20 years) 53 637


12


Subsequent Measurement

• Subsequent to the recognition of an asset, the entity can choose to adopt the

cost model or revaluation model

• Cost model – Continue to recognise asset at original cost or deemed cost less

accumulated depreciation and impairment losses= Carrying amount

• Revaluation model – Determine the revalued amount of the asset, which is

usually the market value determined through the use of an appraisal, less

accumulated depreciation and impairment losses = carrying amount

• Useful lives, residual values and the depreciation method shall be reviewed, at

least at the reporting date for each year.

13


Depreciation

• Depreciation must be calculated from the date the asset is available for use

(location and condition necessary for it to be capable of being operated at

management intended)

• Depreciation must be calculated even though an asset may be idle.

• Depreciation ceases only when the asset is awaiting disposal and fully

depreciated.

• Municipalities generally adopt a straight line method of depreciation which is

illustrated below:

• Motor vehicle purchased at a cost of 1 January 2015 at R 136 800 (incl VAT),

and is expected to be used for 5 years, with a residual value of R 15 000.

• Cost of asset = ( 136 800/114 * 100) = R120 000

• Depreciable amount = (120 000 – 15 000) = R105 000

• Annual depreciation amount = ( 105 000 / 5 ) x 6 /12 = R 10 500

14


Separation of assets into significant parts

• Parts of an asset must be separately identified and depreciated if:

The part identifiable has a cost that is significant in relation to the total cost

of the item; and

The part has a different useful life than that of the item, or other parts.

• Facilitates accurate depreciation and derecognition of components when

replaced.

• The level of identification of parts or components should be documented in

municipal asset management policy and applied consistently for all assets.

• Example: A municipality has acquired a building for R 6 million which includes 5

air conditioners and an elevator.

• Break down in separate parts: Airconditioners, elevator, building itself, parking,

fencing etc.

• Need to determine the value of each of the components/parts by reviewing

actual cost documentation or fair value (which is then applied as deemed cost)

• Determine useful life for each part, as well as residual value.

15

GRAP 16 – INVESTMENT PROPERTY

16


Identification and Classification

• Investment property is land or buildings held by the municipality to earn rentals,

or for capital appreciation, or both, rather than for:

use in the production or supply of goods or services or for administrative

purposes (owner-occupied property) or

Sale in the ordinary course of operations.

• Distinguished from property, plant and equipment in that the asset generates

income that are independent from other assets held by the municipality

• Municipalities may have property where a portion of the property is used to earn

rentals, whilst the remaining portion is used for administrative purposes.

• In that instance, municipalities must determine if the portions can be sold

separately – if so, then record the rental portion as investment property, and the

other as property, plant and equipment.

• If the portions cannot be sold separately, the fair value of each portion cannot be

determined reliably, therefore determine the most significant part

17



• If the most significant part (based on square meters) of the property is being

used as rental, then recognise as investment property. If the most significant

part is administrative, recognise as property, plant and equipment.

• Examples of investment property:

Land or buildings held for long term capital appreciation rather than short

term profit making;

A building or vacant land owned by the municipality and leased out to third

parties under one or more operating leases;

Land held for a current undetermined future use, eg. municipality has still to

decide if it will be sold in the future or occupied by the municipality at a later

stage;

Property being constructed or developed for future use as investment

property (rental income). Note rent earned does not have to be market

related for a property to be classified as investment property.

18



• Examples of property that are NOT investment property:

Property constructed on behalf of third parties = construction contracts

Property leased to another municipality under a finance lease = leases

Property held for sale in ordinary course of operations = inventories

Property being constructed or developed for future sale in the ordinary

course of operations = inventories

Owner-occupied property = property, plant and equipment

Property held to provide goods and services, and generates cash inflows.

Example: a municipality may hold large quantities of housing stock to

provide housing to low income families = inventories

Land and building used to provide employee housing = property, plant and

equipment

19


Initial and Subsequent Measurement

• Investment property must be recognised initially at cost.

• Where an asset is obtained at no cost or nominal cost, its cost should be

measured at fair value on the date of acquisition.

• Cost = purchase price + any direct expenditure necessary to bring the property

to the condition necessary for operating (professional fees, legal services, or

property transfer taxes)

• Subsequent measurement – municipality can choose to adopt fair value model

or cost model.

• Cost model – entity must depreciate the asset and assess whether or not there

is an indication of impairment. If so, the recoverable amount must be calculated.

• Fair value model – No depreciation recognised. Fair value must be determined

annually. Fair value should reflect market conditions at the reporting date.

20



• The best evidence of fair value is given by current market prices in an active

market. Consider similar properties that are in same location and condition and

which have similar lease agreements and other contracts.

• In instances where an entity cannot find current market prices in an active

market, consider applying the discount rate to future cash flow projections based

on reliable estimates of future cash inflows and outflows.

• Municipalities may use valuation rolls to determine fair value – consider if

methodology for determining values in the roll is reflective of current market

conditions at reporting date. Determine the date the valuation was conducted.

• Remember not to double count assets in fair value:

• Equipment such as airconditioning and lifts is generally included in the fair value

value of investment property. Thus, do not recognise such assets separately.

• However, if lifts and airconditioning are recognised separately as property, plant

and equipment, then these assets must be excluded from the fair value

21


Changes in fair value

• The Gain or Loss arising from a change in fair value is recognised in

surplus or deficit for the period (not an impairment loss)

• Example: An entity acquires an investment property for R 305 000. At the

reporting date an independent appraiser establishes the fair value of the

property at R 302 000.

• Journal entry on acquisition:

• Dr Investment Property 305 000

• Cr Bank 305 000

• Journal entry to recognise fair value adjustment – 30 June

• Dr Fair value adjustment (I/E) 3 000

• Cr Investment Property ( 305 000 – 302 000) 3 000

22

GRAP 31 – INTANGIBLE ASSETS

23



• An intangible asset is an identifiable non-monetary asset without physical

substance.

• “identifiable” – is separable i.e. capable of being separated/divided from the

entity and then sold, transferred or used on its own or together with other assets

OR arises from contractual or other legal rights, regardless of whether those

rights are transferable/separable from the entity or from other rights and

obligations.

• “ physical substance” – cannot physically touch the asset.

• Examples of intangible assets:

Software licences

Application software

Patents

24



• Recognise at cost OR if received at no cost or nominal value, fair value

• Cost = purchase price + any direct costs to bring the asset to its intended use

(employee costs resulting from direct involvement, testing, and professional

fees)

• Subsequent measurement – cost or revaluation model

• Useful life of an intangible asset could be finite OR indefinite

• When an entity assessed all factors and determine that there is no foreseeable

limit to the period over which an asset is expected to generate net cash inflows

or service potential for the entity – asset’s useful life is indefinite

• If indefinite, do not calculate amortisation; if finite, calculate amortisation

• Intangible asset arising from contract/legal right – useful life cannot exceed

contract/legal right.

25



• Residual value of an intangible asset with a finite useful life shall generally be

zero, except:

• A third party has committed to purchase the asset at the end of its useful life;

• An active market for the asset exists, and residual value can be determined by

reference to the market and it is probable that the market exists at end of useful

life.

• Impairment – intangible assets with indefinite useful life are not amortised but

assessed for impairment annually.

• Finite intangible assets – calculate amortisation and assess for impairment

annually

• Amortisation, Reassessment of useful life and residual values, fully amortised

assets still in use - Same accounting treatment for intangible assets as property,

plant and equipment except that depreciation is referred to amoritisation

26


Initial Recognition

• Example: Municipality uses accounting system will annual licence fee from 1 January

2014 to 31 December 2014 for an amount of R 200 000. The entity paid this fee on 1

January 2014. The financial year end is 30 June.

Dr Intangible Assets 200 000

Cr Bank 200 000

Dr Amortisation ( 200 000 x 6/12) 100 000

Cr Accumulated Amortisation 100 000

• If the entity has paid licence fee on 30 June 2015, with licence fee being effective

from 1 July 2015 to 30 June 2016: record as prepaid expenses as at 30 June 2015:

Dr prepaid expenses 200 000

Cr Bank 200 000

1 July 2015:

Dr intangible assets 200 000

Cr prepaid expenses 200 000

27

GRAP 12 - INVENTORY

28

GRAP 12 – INVENTORY

Identification

• Inventories are assets:

Materials and supplies to be consumed in the production process;

Materials and supplies to be consumed or distributed in rendering of

services;

Held for sale or distribution in ordinary course of operations; or

In the process if production for sale or distribution

• Examples of Inventory:

• Land or property held for future sale or transfer to third parties eg. RDP houses

for future sale, as primary purpose is low cost housing to the public

• Consumable stores

• Unused spare parts for property, plant and equipment that qualifies for inventory

• Water held by a municipality

• Inventory is recognised as an asset when it is controlled by the entity, as a

result of past event, from which it is probable that future benefits/service

potential associated with the item will flow to the entity, and the cost or fair value

can be measured reliably.

29


Initial measurement

• Inventory recognised at cost + any costs directly related to the inventory to

its usable condition less rebates less settlement discounts.

• Inventory should be measured based on one of the cost formulas:

– Specific identification – specific costs are attributed to identified items of

inventory (not suitable for large numbers of inventory that are ordinary

interchangeable)

– First in first out method – inventories purchased first, will be sold first

– Weighted average cost formula – cost of an item is determined from the

weighted average cost at beginning of period and cost of items

purchased during the period.

• Note if municipality moves from one cost formula to another – change in

accounting policy (retrospective application)

30


Subsequent measurement

• Inventory must be measured at lower of cost or net realisable value except

for:

– Inventory shall be measured at lower of cost and current replacement

cost where inventory are held for distribution at no charge or for a

nominal charge; or consumption in the production process of goods to be

distributed at no cost/nominal cost.

• Cost verses net realisable value

• Net realisable value (NRV) = estimated selling price in ordinary course of

operations less the estimated cost of completion and the estimated cost

necessary to make the sale, exchange or distribution.

• Inventory can be written down to NRV on an item by item basis or where

appropriate, similar items may be grouped.

• Journal to recognise write down

• Dr Write down of inventory (inventory CA less NRV) xxx

• Cr Inventory xxx

31


Subsequent measurement

• Cost verses current replacement cost

• Where market rates are not applicable for distribution of inventories, they are

measured at lower of cost and current replacement cost.

• Current replacement cost = cost that would be incurred to acquire the asset

on the reporting date.

• Journal to recognise write down

• Dr Write down of inventory (inventory CA less NRV) xxx

• Cr Inventory xxx

• Reversal if inventory write-down

• Review is made at end of each subsequent period

• Write down may be reversed to reflect new carrying amount at lower of cost

or NRV

• Limited to original amount of write down

• Dr Inventory

Cr reversal of write down: inventory (limited to previous write down amount)

32

GRAP 103 – HERITAGE ASSETS

33


Identification

• Heritage assets are assets that have cultural, environmental, historical,

natural, scientific, technological or artistic significance and are held

indefinitely for the benefit of present or future generations.

• Characteristics of heritage assets:

– Their value in cultural, environmental, educational and historical terms

are unlikely to be reflected in monetary terms;

– The value of these assets then to increase over time even if their

physical condition deteriorates;

– They are often irreplaceable;

– They have indefinite useful lives and their value appreciates over time

due to cultural, environmental, historical, natural, scientific, technological

or artistic significance;

– Ethical, legal and/or statutory obligations may impose prohibitions or

severe stipulations in disposal by sale;

– They are protected, kept unencumbered, cared for and preserved.

34


Identification

• Examples of heritage assets:

– Sites declared national heritage sites by government;

– Collection of insects, butterflies and fossils;

– Historical monuments, including graves and burial grounds;

– Archaeological and paleontological sites;

– Conservation areas such as national parks;

– Objects of scientific or technological interest such as rare species;

– Historical buildings that have significant historical associations e.g.

churches, museums, courthouses, prisons, hospitals;

– Movable objects such as medals, coins, stamps, objects of decorative or

fine art;

– Works of art, antiquities and exhibits, such as biological an mineral

specimens or technological artefacts;

– Collection of rare books, manuscripts, records, photos, and other

materials held by libraries to be preserved for historical and cultural value

35


Identification

• In summary, some key features that could indicate a heritage asset:

– Asset is held indefinitely;

– Government has declared the asset as of historical significance;

– Asset is protected, cared for and preserved for present and future

generations;

– Asset’s value increases over time; and

– No monetary value can sometimes be placed on the asset.

• May have instances where heritage asset serves a dual purpose eg. Historical

building that meets the definition of heritage asset but it is also used for offices

• Can only be classified as heritage when a significant portion of the asset

meets the definition of heritage asset.

• Management should apply judgment – document judgment criteria in asset

management policy.

36


FAQ: statues, sculptures, monuments

• Municipalities have often asked whether statutes, sculptures, monuments and

other structures are always classified as heritage assets.

• Such structures are often erected to commemorate particular events or

people.

• While the person or event may have significance, the statue, structure,

sculpture or monument may not.

• Assess whether the structure itself is being held for significance and for the

benefit of current and future generations.

• If the structure itself does not qualify for heritage asset recognition, consider

the recognition criteria of other standards e.g. property, plant and equipment

37


Application to 2014/15 financial year

• Directive 3 (high capacity municipalities) and Directive 4 (medium and low

capacity municipalities) provides for a transitional provision related to this

standard.

• Municipalities are not required to measure heritage assets for reporting

periods beginning on or after a date within three years following the initial

adoption of GRAP 103 – heritage assets.

• The effective date of the heritage asset standard is 1 April 2012, which is

effective for financial years commencing on or after that date.

• Therefore municipalities can apply the transitional provision until 30 June

2015.

38


Application to 2014/15 financial year

• If the initial accounting for heritage assets is incomplete by the end of the

reporting period in which the Standard becomes effective (1 April 2012), the

municipality shall report in its financial statements provisional amounts for

those heritage assets for which the accounting is incomplete.

• During the measurement period, the municipality shall retrospectively adjust

the provisional amounts recognised to reflect information obtained about

facts and circumstances that existed on the effective date of the Standard.

• During the measurement period, the municipality shall also recognise

additional heritage assets if information is obtained about the existence of

those heritage assets at the effective date of the Standard and going forward

• Presentation and disclosure requirements need not be complied with for

heritage assets during the measurement period.

39



• Initially measured at cost

• Where acquired at no cost/nominal cost – cost is measured at fair value

(deemed cost)

• If cost cannot be measured reliably therefore cannot be recognised as a

heritage asset– disclose relevant and useful information about the heritage

asset in notes to the financial statements.

• Subsequent measurement – revaluation model or cost model

• Heritage assets are held for indefinite period – hence, not depreciated.

• However, assess for impairment losses annually

40

GRAP 13 - LEASES

41

GRAP 13 – LEASES


• A lease is an agreement whereby the lessor conveys to the lessee, in return

for a payment or series of payments, the right to use an asset for an agreed

period of time.

• A lease can be classified as an operating lease or a finance lease.

• The leased asset under a finance lease is capitalised; whereas under an

operating lease, the costs are expensed and not asset is recognised.

• A finance lease is a lease that transfers substantially all risks and rewards

incidental to ownership of an asset. Title may or may not eventually be

transferred.

• Classification of the lease is made at inception of the lease.

• Inception date is the earlier of the date of the lease agreement and the date of

commitment by the parties to the principle provisions of the lease (date on

which the lease agreement is signed by both parties)

42

GRAP 13 – LEASES


• Primary indicators of a finance lease:

• Ownership of the asset is transferred to the lessee when the lease term ends;

• The lessee has the option to purchase the asset at a price that is expected to be

sufficiently lower than the fair value of the asset at the date the option becomes

exercisable, and at the time of entering the lease, it is expected that the lessee

will exercise this option;

• The lease term is or a major part of the economic life of the asset even though

title is not transferred;

– Lease agreement with cancellation clause with no penalty to lessee = lease

term from commencement date to earliest point at which the cancellation

clause is exercisable;

– Lease agreement with cancellation clause with amount equal to lease if not

cancelled = ignore cancellation clause in determining lease term as 100% of

lease payments will still be made;

– Major part of economic life is generally 75%, however entity must establish

acceptable threshold and documented in policy

43

GRAP 13 – LEASES


• At inception of the lease, the present value of minimum lease payments amount

to at least substantially all of the fair value of the leased asset;

– Remember to exclude maintenance/service cost from minimum lease

calculations;

– Generally 90% is considered reasonable as an acceptable threshold;

however the entity should determine the acceptable threshold and document

in policy.

• The leased asset is of such a specialised nature that only the lessee can

use it without major modifications;

• The leased asset is not easily replaceable by another asset.

44

GRAP 13 – LEASES


• Secondary indicators to consider in classification of finance lease:

• If lessee cancels the lease, the lessee will carry any loss that will be incurred by

the lessor as a result of cancellation;

• Gains or losses due to changes in fair value of the residual value are credited to

the lessee; and

• At the end of the initial lease, the lessee has an option to extend the lease at a

rental that is substantially lower than the market rental

• Please note: All indicators need not be present for classification of finance

lease as any one of them can result in a finance lease.

• However, even if one or more of these indicators are present, if is clear from other

factors that the risks and rewards of ownership are not transferred to the

lessee, the lease may be classified as an operating lease.

• The deciding factor is the extent to which risks and rewards incidental to

ownership of an asset lie with either the lessor or lessee.

45

GRAP 13 – LEASES


• Secondary indicators to consider in classification of finance lease:

• If lessee cancels the lease, the lessee will carry any loss that will be incurred by

the lessor as a result of cancellation;

• Gains or losses due to changes in fair value of the residual value are credited to

the lessee; and

• At the end of the initial lease, the lessee has an option to extend the lease at a

rental that is substantially lower than the market rental

• Please note: All indicators need not be present for classification of finance

lease as any one of them can result in a finance lease.

• However, even if one or more of these indicators are present, if is clear from other

factors that the risks and rewards of ownership are not transferred to the

lessee, the lease may be classified as an operating lease.

• The deciding factor is the extent to which risks and rewards incidental to

ownership of an asset lie with either the lessor or lessee.

46

GRAP 13 – LEASES

Recognition and Measurement

• At the beginning of the lease term, i.e. commencement date, the lessee should

recognise the finance lease

• Leased asset to be recognised at lower of fair value of leased property and

present value of future minimum lease payments (discount at interest rate implicit

in the lease)

• Example: Municipality entered into a lease agreement on 1 July 2014 to lease a

machine for a period of three years. The annual lease payment is R 60 000 and

the rate implicit in lease agreement is 5%. The fair value of the machine is

R 180 000. The present value of minimum lease payments is calculated as:

• PMT = R 60 000; i = 5% ; n = 3 ; COMP PV = R 163 395

• Dr leased asset 163 395

Cr finance lease liability 163 395

47

GRAP 13 – LEASES


• Subsequent measurement:

• 30 June 2015:

• Dr Finance lease liability 51 830

Dr Interest expense ( 163 395 x 5%) 8 170

Cr Bank 60 000

Payment of first installment

• Dr Depreciation ( 163 395/3) 54 465


Recognition of depreciation on leased asset

48

GRAP 27- AGRICULTURE

49

GRAP 27 – AGRICULTURE


• A biological asset is a living animal or plant

• Agricultural produce is the harvested product of the entity’s biological assets

e.g. wool, logs, cotton

• Biological transformation is the process of growth, degeneration, production or

procreation that causes qualitative and quantitative changes in a biological

asset.

• Entity must manage biological transformation in order to be recognised as a

biological asset (not for recreational purposes)

• If not managed for biological transformation – consider recognition in terms of

other GRAP standards

50

GRAP 27 – AGRICULTURE


• Biological asset or agricultural produce can only be recognised if the following

are met:

– Past event has occurred and resulted in the entity having control over the

asset;

– It is probable that the related economic benefit or service potential of the

asset will flow to the entity; and

– Cost or fair value can be measured reliably.

• Upon initial recognition and at each reporting period, biological assets and

agricultural produce should be measured at fair value less estimated point of

sale costs (includes commissions to brokers and dealers, levies by regulatory

agencies and commodity exchanges, transfer taxes and duties, but exclude

transport and other costs necessary to get the assets to a market.

51

GRAP 5 – BORROWING COSTS

52


Identification

• Borrowing costs are interest and other costs that an entity incurs in connection

with the borrowing of funds.

• Benchmark treatment:

• An entity shall recognise all borrowing costs as an expense in the period that

such costs are incurred.

• Alternative treatment:

• Borrowing costs that are incurred in relation to the construction, production or

acquisition of a qualifying asset may form part of the cost of an asset, hence

may be capitalised to the asset.

• Municipalities and entities therefore have a choice as to whether to

capitalise the borrowing costs for qualifying assets, or expense such

costs.

53


Identification

• A qualifying asset is an asset that necessarily takes a substantial period of time to

get ready for its intended use or sale.

• Examples include property, plant and equipment that are manufactured or

constructed, which can include buildings, infrastructure assets such as roads,

bridges, power generation facilities and inventories that take a substantial period

to complete.

• Assets that do not meet the qualifying criteria are inventories produced in large

quantities, inventories produced over a short period of time, investment property

measured at fair value, biological assets, and assets that is ready for their

intended use or sale on acquisition date.

• Prospective application.

• Qualifying assets where construction has commenced before the effective

date (1 April 2014) of this standard: Borrowing costs still being incurred

must be accounted for in accordance with entity’s previous accounting

policy

54



• Borrowing costs capitalised from the date when the entity incurs the expenditure

on the asset, incurs borrowing costs and commences activities that are

necessary to get the asset ready for its intended use. Ceases when asset is

complete. Suspended when abnormal circumstances interrupt construction.

• Two types of borrowings i.e. specific borrowings and general borrowings

• Specific borrowings:

• Funds borrowed specifically to obtain a qualifying asset

• Direct link between the asset and the borrowing costs that will be incurred

• Amount to be capitalised is the actual borrowing costs incurred during the

period, less any investment income on the temporary investment of those funds

• General borrowings (multiple borrowings):

• Capitalisation rate applied to the expenditure on the asset

• Capitalisation rate should be a weighted average rate applied to those general

borrowings of the entity that are outstanding during the period.

• If calculated borrowing costs exceed the actual borrowing costs incurred, the

amount that is capitalised should be limited to the actual amount of borrowing

costs incurred during the period.

55



• Specific borrowing example:

• Municipality borrowed R 1 million on 1 July 2014 from DBSA to construct a

road. An amount of R 400 000 was spent on 1 July 2014 and another

R 250 000 was spent on the asset on 30 September 2014 . Interest on loan is

20% per annum. Surplus funds are invested at an interest rate of 15% per

annum.

• Total borrowing costs incurred = R 1 million x 20% = R 200 000.

• Calculation of interest earned on surplus funds:

Balance on 1 July 2014 (1 000 000 – 400 000) 600 000

• Interest received at 30 Sept 2014 (600 000 x 15% x 3/12) 22 500

• Balance on 30 Sept 2014 (600 000 – 250 000) 350 000

• Interest received on 30 June 2015 (350 000 x 15% x 9/12) 39 375

• Total borrowing costs capitalised = 200 000–22 500–39 375 = 138 125

56



• Specific borrowing example:

• Municipality borrowed R 1 million on 1 July 2014 from DBSA to construct a

road. An amount of R 400 000 was spent on 1 July 2014 and another

R 250 000 was spent on the asset on 30 September 2014 . Interest on loan is

20% per annum. Surplus funds are invested at an interest rate of 15% per

annum.

• Total borrowing costs incurred = R 1 million x 20% = R 200 000.

• Calculation of interest earned on surplus funds:

Balance on 1 July 2014 (1 000 000 – 400 000) 600 000

• Interest received at 30 Sept 2014 (600 000 x 15% x 3/12) 22 500

• Balance on 30 Sept 2014 (600 000 – 250 000) 350 000

• Interest received on 30 June 2015 (350 000 x 15% x 9/12) 39 375

• Total borrowing costs capitalised = 200 000–22 500–39 375 = 138 125

57



• General borrowing example: Municipality is constructing a qualifying asset.

• Expenditure incurred during the period:

31 July 2014 200 000

31 January 2015 300 000

500 000

• Borrowings raised on 1 July 2014:

bank overdraft at 15% 1 500 000

bank loan at 18% 1 200 000

2 700 000

• Total annual interest for the period:

15% x 1 500 000 225 000

18 % x 1 200 000 216 000

442 000

• Weighted average interest calculated as: 442 000 / 2 700 000 = 16.37%

• Borrowing cost capitalised: (200 000 x 16.37% x 11/12) + (300 000 x 16.37% x

5/12) = R 50 474

58

GRAP 11 – CONSTRUCTION CONTRACTS

59


Identification and Recognition

• Assets constructed by an entity for itself (i.e. owned by the entity) do not

constitute contracting activities and are not accounted for in this standard,

but in accordance with GRAP 17 (PPE), GRAP16 (Investment Property) or

GRAP 12 (inventories)

• Construction contract is a contract or binding agreement specifically

negotiated for the construction of an asset/assets that are closely interrelated

or interdependent in terms of design, technology and function or their ultimate

purpose or use.

• A contractor is an entity that enters into a contract to build structures,

construct facilities, produce goods, render services to the specifications of

another entity.

60



• Example:

• The Provincial Department of Public Works has appointed Private Company

to construct the road.

• A municipality enters into an agreement with the Provincial Department to

provide certain professional services to construct a road. The municipality will

manage the flow of funds from the Provincial Department to Private Company.

• Private Company is the contractor

• Department of Public Works is the Client

• Municipality is an agent and does not provide services directly related to the

construction of the road.

61



• Money collected as an agent or on behalf of a principal does not constitute

revenue to the entity and does not result in increases in assets or decreases

in liabilities.

• Construction contracts managed on behalf of a constructing entity do not

constitute construction contracts of the managing entity.

• Managing entity will recognise a management fee received in terms of GRAP

9 (revenue from exchange transactions)

• A principal has primary responsibility for the construction contract, carries the

risk of inventory before and during construction, and carries the risk of any

overspending on the budget of the construction project.

• Important to distinguish between agency, contractor, principal – impact on

accounting treatment of assets, expenditure and income

62

GRAP 100 – DISCONTINUED

OPERATIONS

63

GRAP 100 – DISCONTINUED OPERATIONS

• Standard has been revised –classification for individual assets no longer

available for non current assets held for sale.

• Discontinued operations – component of an entity (operations and cash flows

can be separately identifiable) that has been disposed of and represents a

distinguishable activity, group of activities, or geographical area operations, or

is a controlled entity acquired exclusively for resale.

• Disposal must order within a single coordinated plan. Group of assets to be

disposed need not be sold/transferred, but a mere cessation from use is

sufficient, as a result that such assets have reached its economic useful life

• Disclosure in the notes to the annual financial statements only:

– A description of the component

– A description of facts and circumstances of the disposal

– If applicable, the segment in which the component is presented in

accordance with the Standard ofGRAP on Segment Reporting

64

GRAP 3 – CHANGES IN ACCOUNTING

POLICY, CHANGES IN ACCOUNTING

ESTIMATES AND ERRORS

65

GRAP 3 – CHANGES IN ACCOUNTING POLICY,


Accounting Policies

• Accounting Policies are specific principles, bases, conventions, rules and

practices applied by an entity in preparing and presenting its financial

statements.

• Accounting policies describe the manner in which an entity has elected to

account for similar types of transactions in its financial statements e.g.

Accounting for land or buildings on cost model or revaluation model.

• A change in accounting policy will be necessary and justified only if:

– A change is required by a Standard of GRAP; or

– A change in the current accounting policy will result in more reliable and

relevant information about the impact of transactions and events on the

entity’s financial statements.

• Example of a change in accounting policy is where an entity accounts for

property, plant and equipment on a revaluation method, and the entity decides to

now account for property, plant and equipment on the cost model.

66



Accounting Policies

• First time application of an accounting policy to a new type of transaction is not a

change in accounting policy.

• Change in accounting policy is retrospectively applied – adjust the financial

statements as if the entity had always been applying the accounting policy –

prior year comparatives restated.

67



Accounting Policies

• A municipality has a machine which it previously accounted for under the

revaluation model. During the current period, the municipality decided to adopt

the cost model.

• The machine was purchased on 01 July 2013 for R 1 000 000, and it depreciated

over 5 years. The carrying amount of machine on 30 June 2014 is R 800 000.

• The revalued amount as at 30 June 2014 is R 900 000. A revaluation surplus of

R 100 000 would have been recognised.

• Reverse the revaluation surplus (carrying amount restated to R 800 000)

Dr Revaluation surplus 100 000

Cr Property, plant and equipment 100 000

• Recognise depreciation based on cost amount

• Dr Depreciation (1000 000/5) 200 000

• Cr Accumulated Depreciation 200 000

68



Accounting Estimates

• Due to uncertainties inherent in delivering service and conducting other business

activities, many items in financial statements cannot be measured with precision

but require one to make an estimate e.g. Useful lives, residual values

• An estimate may need revision if changes occur in the circumstances on which

the estimate was based, or as a result of new information or more experience.

• A change in an accounting estimate is recognised prospectively – accounted for

in current period and future periods.

69




• A municipality decided that the useful lives of its assets which had previously

been assessed as 10 years was no longer appropriate, due to new information

received. The municipality has therefore decided to change the remaining useful

life of its assets to 4 years, at 30 June 2015. Assets are depreciated on a

straight-line basis with no residual values.

• The following information regarding the depreciable assets is available:

• Original cost price (30/6/2012): R500,000

• Accumulated depreciation of assets (30/6/2014): R100,000

• Account for change at beginning of current period being 1 July 2014:

Remaining useful life = 4+ 1 = 5 years

Depreciation = ( 500 000 – 100 000) = 400 000 / 5 = R 80 000

• Dr Depreciation 80 000

• Cr accumulated depreciation 80 000

70




• Difference/impact of change in accounting estimate:

Revised useful life – depreciation 80 000

Old useful life – Depreciation ( 500 000/10) (50 000)

Increase in depreciation (change in estimate) 30 000

71



Errors

• Prior period errors are omissions from, and misstatements in, the entity’s

financial statements for one or more prior periods as a result of incorrect

application/use of information that was available at the time the particular

transaction or event occurred, but not used at all, or used incorrectly.

• Examples: failure to account for assets that are under the control of the

municipality, incorrect application of accounting policy or calculation errors.

• Retrospective application must be applied to account for all errors discovered -

prior periods corrected as if the error has never occurred.

• Restate comparative amounts for the prior period/s OR if the error occurred

before the earliest period presented, restate the opening balances of the earliest

period’s assets, liabilities and net assets.

72



Errors

• The municipality discovered that roads to the value of R 3 000 000 was not

accounted for in the fixed asset register and hence, not included in the financial

statements as at 30 June 2014. it has been established that the roads were

constructed prior to 2012 and has a useful life of 30 years. Municipality cannot

determine construction date.

• Recognition of road in 2012 financial year:

• Dr Property, plant and equipment 3 000 000

• Cr Accumulated surplus 3 000 000

• Recognition of depreciation 2013 financial year:

• Dr Depreciation (accumulated Surplus) (3 000 000/30) 100 000

• Cr Accumulated Depreciation 100 000

• Repeat depreciation journal for 2014financial year

73



Retrospective application

• Before an entity can declare that retrospective application of an accounting

policy is not practicable, the entity must prove that reasonable effort has been

exercised to identify the following:

Circumstances that existed on the date the specific transaction or event

occurred

Information that would have been available when the financial statements for

that prior period were authorised for issue

• Hindsight must not be used to determine these past circumstances and

information available.

• The impracticability will seldom be proven, as management cannot argue in

favour of cost saving when a retrospective application is considered.

• Although it is required to make significant estimates about circumstances, the

standard does not prevent the performing of a reliable adjustment or correction

to comparative information.

• .

74

THANK YOU!

Contact Details:

Financial Reporting: Kashnee Sewnarain, Tel: 033-897 4518

email [email protected]

75

mailto:[email protected]

provincial financial management & mscoa ......property being constructed or developed for future...

Documents