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Once upon a time, there were two companies ...Cinderella has assets worth 2 000 000 € (machinery only),with total amount of liabilities (to be repayed in twoweeks) equal to 1 800 000 €Snowwhite has both cash and liabilities equal to1 900 000 €As a columnist in Fairy Business News, you have toreccomend one company (over the other)Which one would you recommend and why?2

Current ratio: Liquidity ratio that measures a company's abilityto pay short-term obligations.Current Ratio formula is:Provided that you are a bank, there are three almost identicalapplicants for the loan, and you can approve only 1 application,which one would you approve?Alpha, CR = 0.2; Bravo, CR = 0.68; Charlie, CR = 0.15Rule of the thumb: The higher, the betterHow can you increase your current ratio?3

There are many terms used for non-current assets (e.g.buildings, cars, machinery, software): Capital assets Fixed assets Long-term assets4

IAS 1:At the end of a year, your company has following assets:buildings; merchandise; material, cash; computersWhich of them are current?Why? 5

Let´s imagine, that in 2007 you´ve provided a loan of80 000 € to your customer.At the end of each year your customer will pay you 2 000 €Interest rate is 4.2 % p. a.The loan should be paid back in full at the end of 2010At the end of 2008, what will be the impact of the loan onyour non-current assets? 6

Loan(BoP)InterestrateInterest RepaymentLoan(EoP)2007 80 000 4,20% 3 360 -2 000 81 3602008 81 360 4,20% 3 417 -2 000 82 7772009 82 777 4,20% 3 477 -2 000 84 2542010 84 254 4,20% 3 539 -87 792 07

At the end of 2008, the overall amount of loan is worth82 777, measured at amortized costs2 00o is a current portion of the loan80 777 is a non-current portion of the loan8

purchase (individually or as a part of businesscombination)transfer in exchange for assumption of liabilitiesself-manufacturinggiftgovernmental grant9

Should the company expense or capitalize relatedexpenditures?If the expenditures are expensed, they immediately decreasenet income and total assetsIf the expenditures are capitalized (recognized as a cost of anasset), there is no direct impact on total assets or net incomeNet income is affected in the period of realization (e.g. sale) ofthe underlying assetThus , it is necessary to establish the rule for recognition of anasset (capitalization) and measurement of its cost10

Should the company expense or capitalize related expenditures?Balance SheetNon-current assetsRetained earnings300 000 (previous and current net 40 000 Expenses 0 Income 0income)Current assets 50 000 Other equity 200 000Netincome0Non-current liabilities 50 000 Current ratio0,83Current liabilities 60 000Total 350 000 Total 350 000 Return on assets (net income / assets)0,00%Current assetsBB 50 000 BB 300 000Income StatementNon current assetsTotal 50 000 Total 300 000ExpensesIncomeTotal 0 Total 0Current liabilitiesNon-current liabilitiesBB 60 000 BB 50 000Total 60 000 Total 50 00011

Why there is need (if any) for recognition of differentclasses of non-current assets?1. They have a different level liquidity (ability to beexchanged for cash2. There is a different pattern of economic benefits to bederived from such assets (sale vs. lease, lease vs.continuous use in production)3. Some of the a exposed to an impairment while othersare subject of possible appreciaton (e. g. land, piecesof art)13

Why there is need (if any) for recognition of differentclasses of non-current assets?1. As a result, there are different risks and benefitsassociated with such assets and ...2. ... they have to be measured differently ...3. ... recognized as different classes of non-currentassets14

Covered by IAS 16Only tangible assets (e. g. buildings, cars, computers,fixtures, airplanes, machinery)Definition in IAS 16.6: ... tangible items held for use duringmore than one period in the production or supply of goodsor services, for rental to others, or for administrativepurposesRecognition criteria in IAS 16.7 (it will result in increase ofcash or decrease of expenditures, the cost shall bemeasured reliably)15

Initial measurement is made upon acquisition ofa non-current asset (in fact, all assets)– this is the amount at which the asset should beregistered in accounting books (general ledger andjournal)Subsequent measurement is made at each reportingdate (i. e. end of an accounting period)16

Elements of costsWhich of these could be included in the cost (i. e. initial bookvale) of a computera) purchase priceb) refundable value added taxc) nonrefundable value added taxd) transportatione) training of a stafff) installationg) administration and general overheadSee IAS 16.16 - 2217

Elements of costsWhich of these could be included in the cost (i. e. initial bookvale) of a computera) purchase priceb) refundable value added taxc) nonrefundable value added taxd) transportatione) training of a stafff) installationg) administration and general overheadSee IAS 16.16 - 2218

You have purchased a computer from Jones Co.Cash price is 1 000 €Purchase contract will be settled in 2 years; at thattime you will pay 1 210 €What will be amount of initial cost at which thecomputer should be initially recognized?19

The computer should be recognized at 1 000 €Difference of 210 € (= 1 210 – 1 000) is deferred andrecognized in future periods as financial costEach year, financial cost would be computed based oneffective interest rate: , %20

There is issue of :-impairment of assets- appreciation of assets (e. g. land, buildings)- subsequent cost incurred in relation with the PP&EIAS 16 assume two models for subsequentmeasurement Cost Model Revaluation Model21

1. An asset has been acquired for 1 000 €, its fair value is1 200 €As a result, the amount of asset is increased by 200,revaluation surplus (equity) is increased by 2002. An asset has been acquired for 1 000 €, so farimpairment allowance s are equal 300, fair value is 1 200As a result, impairment allowances are derecognized(decreased by 300), amount of the asset is increased by 500and revaluation surplus is increased by 200Creation and discharging of impairment allowances ismade through net income22

3. Carrying amount of an asset is 1 200, revaluationsurplus (created in former periods) is 200, fair value incurrent period is 700As a result, revaluation surplus would be depleted tozero (by 200), impairment allowance is increased by 300,asset should be increased by 500Creation and discharging of revaluation surplus ismade through the equity rather than through netincome23

Capitalized only if they enhance economic benefits ofalready recognized assetsAs a result, expenditures for repairs and maintenanceare never capitalized under IAS 16Each major component, which have different patternsof related economic benefits is depreciatedindependently (e. g. lift and rest of the building)24