IAS 16 ---- some queries - Printable Version

IAS 16 ---- some queries - Printable Version

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IAS 16 ---- some queries - insaan - 06-19-2006

depreciable amt
A.depreciable amt = cost,amount substituted for cost-residual value..
What is meant by amount substituted for cost.give examples.does this
mean carrying amount

Residual Value
B.Residual Value,definition.does this mean Residual Value=Present value of disposal
amount,( i.e amount en entity would obtain from disposal of asset ,after deducting
estimated disposal cost)of residue asset

Recoverable amount
C.Recoverable amount higher of asset's net selling price &
its value in use..what is net selling price..how is it different from
selling price

- Ali Akbar - 06-19-2006

<blockquote id="quote">quote<hr height="1" noshade id="quote">Originally posted by insaan
 depreciable amt
A.depreciable amt = cost,amount substituted for cost-residual value..
What is meant by amount substituted for cost.give examples.does this
mean carrying amount

Residual Value
B.Residual Value,definition.does this mean Residual Value=Present value of disposal
amount,( i.e amount en entity would obtain from disposal of asset ,after deducting
estimated disposal cost)of residue asset

Recoverable amount
C.Recoverable amount higher of asset's net selling price &
its value in use..what is net selling price..how is it different from
selling price
<hr height="1" noshade id="quote"></blockquote id="quote">

Ok

Substituted cost means if you have applied fair value model then cost has no meanings and fair value shall be treated as the substituted cost for the purpose of the definition of depreciable amount.

Residual value shall not be taken as present value of future cash flows relating to disposal this was a treatment of previous standard. Now, the treatment is simple, look for the asset having been passed through the same useful life as ur's and assess its current market value. Assign this value as residual value to ur's.

Net selling price means, net of transaction and other incremental costs.

I will answer your query of IAS 17 in 1-2 days, as I have not even gone through query yet!

ICAPians, the unparalleled..

- insaan - 06-19-2006

thx
what's the difference between depreciable amount and carrying ammount..
is this..depreciable amount is the amount at initial recognition
(i.e for computation of 1st year's depreciation charge in case of
depreciation at NBV method & computation of every subsequent year's depreciation in case of depreciation at cost method) and
carrying amount is the amount at subsequent recognition

- insaan - 06-19-2006

<blockquote id="quote">quote<hr height="1" noshade id="quote">Residual value shall not be taken as present value of future cash flows relating to disposal this was a treatment of previous standard. Now, the treatment is simple, look for the asset having been passed through the same useful life as ur's and assess its current market value. Assign this value as residual value to ur's.<hr height="1" noshade id="quote"></blockquote id="quote">
let me take an example;
date today is 19 june 2006
today we buy an asset for Rs 1000/- & its useful life is 10 years
today,a similar asset,fully depreciated, which also had a useful life of 10 yrs has current market value RS 100/-
means residual value of our new asset purchased is RS100/-BUT isn't this amount in present value terms.Means say after 10 yrs on 19 june 2016 the asset is sold for RS 250/- infaltion being about 10%.
If this is so then y do we calculate present value of Residual value and subtract it from cash price in computation of lease rentals.We should have directly subtracted residual value from cash price and computed rentals

- insaan - 06-19-2006

another question..
If an asset is acquired in exchange for another (non monetory/monetory&non monetary) asset/assets (whether similar or dissimilar in nature)16.24
The cost will be measured at the fair value (of asset received OR given up?) unless
a. the exchange transaction lacks commercial substance 16.25 or
b. the fair value of neither the asset received nor the asset given up is reliably measurable16.26
If the acquired item is not measured at fair value, its cost is measured at the carrying amount of the asset given up

cost will be measured at the fair value (of asset received OR given up?)and if its measured at F.v
of asset given up like carrying amount then what about gain/loss on disposal as which arises
in case of disposal against monetary assets

- Ali Akbar - 06-20-2006

<blockquote id="quote">quote<hr height="1" noshade id="quote">Originally posted by insaan
 thx
what's the difference between depreciable amount and carrying ammount..
is this..depreciable amount is the amount at initial recognition
(i.e for computation of 1st year's depreciation charge in case of
depreciation at NBV method & computation of every subsequent year's depreciation in case of depreciation at cost method) and
carrying amount is the amount at subsequent recognition

<hr height="1" noshade id="quote"></blockquote id="quote">

Yes, the term depreciable amount is used for the calculations of 1st year and subsequent year's depreciation unless there r some changes in estimates e.g estimates of useful life, residual value etc. In case of revision of estimates then subesequent dep charge shall be based upon CA.

ICAPians, the unparalleled..

- Ali Akbar - 06-20-2006

<blockquote id="quote">quote<hr height="1" noshade id="quote">Originally posted by insaan
let me take an example;
date today is 19 june 2006
today we buy an asset for Rs 1000/- & its useful life is 10 years
today,a similar asset,fully depreciated, which also had a useful life of 10 yrs has current market value RS 100/-
means residual value of our new asset purchased is RS100/-BUT isn't this amount in present value terms.Means say after 10 yrs on 19 june 2016 the asset is sold for RS 250/- infaltion being about 10%.
If this is so then y do we calculate present value of Residual value and subtract it from cash price in computation of lease rentals.We should have directly subtracted residual value from cash price and computed rentals
<hr height="1" noshade id="quote"></blockquote id="quote">

Let me make you clear regarding one thing.

"Specific prevails over general"

Keeping in view the aforesaid statement, tell me why do we classify 'advances received from customers as liability? As this doesn't meet the definition of liability given in Framework to the IFRSs and IAS 1. According to the definition of liability we should have calculated the cost of services to be provided to customers against the advances recevied and should have shown as liability according to the definition of liability. Since its the specific requirement of IAS 18, so we will have to classify the whole amount as liability. However, to eliminate this contradiction within standards it is highly probable that in upcoming revision of standards this contradiction shall be harmonised.

If IAS 17 specifies its own treatment for leases then it has nothing to do with IAS 16. Moreover, when we calculate present value of residual amount in case of IAS 17 we also have to calculate present value of all rentals inorder to calculate MLP (Minimum Lease Payment). And the new treatment given by IAS 16 is just to simplify as the residual is usually not so material and you may have read in IAS 1 the Standards do not apply upon immaterial things.

Further more, if you pick up the real life example you will not find any material difference b/w the residual value calculated according to IAS 16 & 17. As the other calculations of IAS 17 are also in PV so thats why the treatment of both standards r different.

Hope it clarifies

ICAPians, the unparalleled..

- Ali Akbar - 06-20-2006

<blockquote id="quote">quote<hr height="1" noshade id="quote">Originally posted by insaan
 another question..
If an asset is acquired in exchange for another (non monetory/monetory&non monetary) asset/assets (whether similar or dissimilar in nature)16.24
The cost will be measured at the fair value (of asset received OR given up?) unless
a. the exchange transaction lacks commercial substance 16.25 or
b. the fair value of neither the asset received nor the asset given up is reliably measurable16.26
If the acquired item is not measured at fair value, its cost is measured at the carrying amount of the asset given up

cost will be measured at the fair value (of asset received OR given up?)and if its measured at F.v
of asset given up like carrying amount then what about gain/loss on disposal as which arises
in case of disposal against monetary assets

<hr height="1" noshade id="quote"></blockquote id="quote">

The whole scenrio should be explained for the purpose.

Earlier (before revision of IAS 16) the treatment for exchange of assets was different and was categorized as exchange of similar and dissimilar assets. In case of dissimilar exchange of assets, the cost of new asset was its fair value. In case of similar exchange the cost of new asset was the CA of asset given up.

Now after revision of IAS 16 the scenerio is as follows

The cost of incoming asset is its fair value (incase fair value of incoming is not more clearly evident use FV of outgoing asset) if

a) the exchange transaction lacks commercial substance;OR
b) the fair value of neither the asset received nor given up is reliably measurable.

Look at the example

Asset A (CA=1000, FV=1200) is planned to be exchanged with asset B(FV =1400). The entity is required to pay 200 also.

Entry will be

Asset B______1,400
Asset A____________1,000
Cash_______________200
Gain on A__________200

Gain arose bekoz our asset has been valued at 1,200 during exchange transaction (thats y we had to pay 200 diff b/w 1400 n 1200)

In case, none of the conditions are met, then entry will be (assuming the cash figure as same)

Asset B_______1,000
Loss__________200
Asset A_____________1,000
Cash________________200

Loss arose bekoz it seems that our asset is being valued at 800 instead of 1,000 thats y we had to pay 200. It might be indication of impairment too.

If your query is still unanswered, feel free to ask.

ICAPians, the unparalleled..

- insaan - 06-20-2006

So i got it
If an asset is acquired in exchange for another (non monetory/monetory&non monetary) asset/assets (whether similar or dissimilar in nature)16.24
The cost will be measured at the fair value (of the asset received, except if F.V of asset given up is more clearly evident then F.V of asset received F.V of asset given up) if
a. the exchange transaction has commercial substance 16.25 or
b. the fair value of either the asset received or the asset given up(or both) is reliably measurable16.26
The cost will be measured at the carrying amount of the asset given up if
a. the exchange transaction lacks commercial substance or
b. The fair value of neither the asset received nor the asset given up is reliably measurable

Exchange transaction
An exchange transaction has commercial substance if
a. the configuration (risk, timing and amount) of the cash flows of the asset received differs from the configuration of the cash flows of the asset transferred; or
e.g cash inflow from disposal of old asset is RS 1000 & Cash outflow due to acquisition of new asset is Rs500,this exchange transaction has commercial substance
b. the entity-specific value of the portion of the entityâs operations affected by the transaction changes as a result of the exchange; and
e.g present value of expected cash inflows from use and disposal of old asset was RS 800 & now the present value of expected cash inflows from new asset acquired is RS 900
thus entity specific value of entity's operation chnage by RS.100 due to this transaction,thus this exchange transaction has commercial substance
c. The difference in (a) or (b) is significant relative to the fair value of the assets exchanged.
e.g fair value of asset given up is RS800 & asset acquired is RS 900 & the difference in (A)i.e RS500(1000-500) & The difference in (b)i.e Rs 100
is significant relative to the fair value of the assets exchanged,thus this exchange transaction has commercial substance

DO confirm my illustrations,this is what i have concluded..M I right?

However, entity-specific value of the portion of the entityâs operations affected by the transaction shall reflect post-tax cash flows

one more thing all these conditions must be met for an exchange transaction to have commercial substance.isn't it?

The fair value of an asset for which comparable market transactions do not exist is reliably measurable if 16.26
(a) the variability in the range of reasonable fair value estimates is not significant for that asset or
(b) the probabilities of the various estimates within the range can be reasonably assessed and used in estimating fair value.
what is meant by clause b

Fair value
F.V of
a. Land & building----determined from market based evidence by appraisal16.32
b. Property,plant&equipment----is market value determined by appraisal
means for land & buliding we need to have market based evidence BUT not for Property,plant&equipment & what is meant by appraisal

However, where no market based evidence of F.V; entity may need to estimate F.V using
an income or depreciated replacement cost approach16.33
what is income or dereciated replacement cost approach?