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Course 3
Financial Accounting
Prof. Adriana Tiron Tudor - course
Lect. Szilveszter Fekete - practice
Agenda course 3
1. Objectives
2. Intangible fixed assets
3. Financial fixed assets
4. Reporting changes in value
5. Measurement after recognition
6. Impairments: a simulation
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That intangible assets
May represent a significant portion of both total and fixed
assets
Raise issues of definition, classification, recognition and
recording
What conditions are for appropriate R&D capitalization
That some accounting principles favor recognition of
intangible assets while others oppose it
1. Objectives
By attending this course, you will understand:
That financial assets
There are several types of financial fixed assets
How financial fixed assets differ from short term investments
Raise issues of definition, classification, recognition, measurement
and recording of financial assets
Definition: An intangible asset is an identifiable non-monetary asset
without psychical substance used in production of goods or
rendering services, or for rental.
IAS 38 Intangible assets
Recognition : - future economic benefits;
- cost can be measured reliably;
Structure RO: A. Set up costs;
B. Development costs;
C. Concessions, patents, licenses, trademarks, and
other similar rights and assets
D. Goodwill;
E. Other intangible assets
Structure and recognition criteria of intangibles
2. Intangible fixed assets
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Acquired separately:Cost includes:
- purchase price,
- duties,
- non-refundable taxes,
- net of discounts and rebates
- direct costs of preparing the asset and bringing it to an
appropriate condition for its intended use.
Examples: franchises, patents, customer lists, trademarks
Not included in cost:
Advertising, promotion, training associated with new products,
locations, customers; administrative and other general
overhead; early stage operating losses
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Two phases of costs to generate an internally generated intangible:
(1) Research phase original and planned investigation to gain new scientific
or technical knowledge: costs are expensed as incurred
(2) Development phase application of knowledge to a plan or design for the
production of new materials, devices, products, processes, systems or
services before commercial production: costs are expensed as incurred,
UNLESS all of the following can be demonstrated. If so, can
capitalize as an intangible asset.
1. Technical feasibility of completing
2. Intention to complete, use or sell
3. Ability to use or sell
4. How it will generate future economic benefits
5. Availability of resources to complete and use or sell, and
6. Expenditures during development can be reliably measured i.e.,
feasibility and economic viability of the asset must be established to
support capitalization
Brand names
Expenditure on internally generated brands is in
most cases indistinguishable from the cost of
developing the business in general
A brand name acquired from another company
will generally meet asset recognition criteria
Brand names can have an indefinite useful life
If indefinite useful life, no systematic amortization
necessary
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Patents
Internally generated patents:
Application of specific recognition criteria for
development costs
Identification of the related costs can be
problematic
Depreciation schedule can be a matter of
debate
Purchased goodwill
Buying customer goodwill
Control over resources - issue
Usually no legal rights to protect client relationships
Exchange transactions for the same or similar customer
relationships may provide evidence that the company is able to
control the expected future benefits
Recognition of internally generated goodwill as an asset
is prohibited by IAS 38
Internally generated goodwill is not recognized as an asset
Because no identifiable resource has been created that is
controlled by the entity and that can be measured reliably at cost
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Organization (or set-up) costs accounting
Definition: Set-up costs are the costs incurred during the process of
establishing or incorporating a business; and also during its
expansion. They include incorporation fees, legal fees (writing of
articles of incorporation, by-laws), underwriting fees, promotional fees.
Amortization: maximum 5 years
Accounts used:
201 Set-up costs
2801 Amortization of set-up costs
6811 Amortization expenses
Reporting in BS: NBV = Entrance value (CBd
201
) Accumulated
amortization (CBc
2801
)
Organization (or set-up) costs accounting
Example:
The sole owner of X SRL deposits in the entitys petty cash an
amount of 1500 RON to cover the payments for incorporation
purposes. The entire amount is used/paid as set-up costs. After
operations are started, the owner receives back his deposit. Set-
up costs are amortized during 5 years and then removed from
evidence.
Solution:
1. cash deposit 5311 = 4551 1.500
2. recording & payment of set-up costs 201 = 5311 1.500
3. cashreimbursement 4551 = 5311 1.500
4. amortization (5 yrs) 6811 = 2801 300
5. removal from evidence (5. year) 2801 = 201 1.500
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Development costs
Definition: Development is the application or research findings or other
knowledge to a plan or design for the production of new or
substantially improved materials, devices, products,
processes, systems or services before the start of commercial
production or use.
Amortization: according to contract or useful life (longer durations than 5
years must be justified)
Accounts used:
203 Development costs
2803 Amortization of development costs
2903 Impairment of development costs
6811 Amortization expenses
6813 Impairment losses on non-current assets
7813 Income from derecognition of impairment of non-current
assets
Reporting in BS: NBV = CBd
203
- CBc
2803
- CBc
2903
Development costs
Example:
The entity receives an invoice of a complex study on product development, the
amount is 50.000 lei, VAT 19%, which is paid later by bank transfer. Useful life is
estimated to 5 years. After development costs are completely amortized, they
are discharged from evidence.
Solution:
1. acquisition (invoice): % = 404 59.500
203 50.000
4426 9.500
2. Payment 404 = 5121 59.500
3. Annual amortization 6811 = 2803 10.000
4. Evidence discharge 2803 = 203 50.000
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Concessions, patents, licenses, trademarks .
Definition: Concessions, patents, licenses, trademarks, represent rights of
authors on their intellectual (or otherwise) property. These rights are
guaranteed whether by law (in this case they may be traded) or by
secrecy (in this case the company keep them as top secrets).
Amortization: according to contract (concessions), use, effect/protection of law
Accounts used:
205 Concessions, patents, licenses, trademarks,
2805 Amortizarea of concessions, patents, licenses, trademarks,
2905 Impairment of concessions, patents, licenses, trademarks,
6811 Amortization expenses
6813 Impairment losses on non-current assets
7813 Income from derecognition of impairment of non-current
assets
Reporting in BS: NBV = CBd205 - CBc2805 - CBc2905
Concessions, patents, licenses, trademarks .
Example:
An entity obtains concession rights over mineral resources for 10 years, the
negotiated value of concession contract is 2.000 RON, the annual royalty 200
RON. Record annual amortization and payment of royalty; after expiration of
contract concessions are removed.
Solution:
1. Acquisition of concession rights: 205 = 167 2.000
2. Annual amortization: 6811 = 2805 200
3. Payment of annual royalty: 167 = 5121 200
4. Evidence discharge: 205 = 2805 2.000
Mechanism of impairment:
Recognition of impairment 6813 = 2905
Derecognition of impairment 2905 = 7813
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Accounting for other intangible assets
Definition: This is the catchall of intangibles; all intangible assets being
recorded as other which cannot be considered in the previous
classes.
According to current Romanian legislation/practice computer
software is recorded as other intagibles.
Amortization: estimated useful life
Accounts used:
208 Other intangible assets
2808 Amortization of other intangible assets
2907 Impairment of other intangible assets
6811 Amortization expenses
6813 Impairment losses on non-current assets
7813 Income from derecognition of impairment of non-current
assets
Reporting in BS: NBV = CBd
208
- CBc
2808
- CBc
2908
Accounting for other intangible assets
Example:
An entity purchases a software for the price of 6.000 lei, VAT 19%.
The useful life is 3 years, the end of which the amortized software is
discharged from evidence.
Solution:
1. purchase of software: % = 404 7.140
208 6.000
4426 1.140
2. annual amortization: 6811 = 2808 2.000
3. evidence discharge: 2808 = 208 6.000
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Where can we find further information on
intangibles in the financial reports of
entities?
Notes on the accounts
Note 1 Fixed assets
Accounting policies
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Definition: amounts invested on long term in securities (shares, bonds) or in
loans granted, that generate benefits to the entity, as financial
income (dividends, interests) or control in other entitys operations
Initial evaluation: entrance value (acquisition cost)
Subsequent evaluation (for reporting):
* in individual BS: NBV
* in consolidated BS: NBV or fair value
Obs. Financial fixed assets are not amortized, but should be tested for
impairment
Control
How can we define it ???
3. Financial fixed assets
Financial fixed assets accounting
Structure:
A. Shares in affiliated entities;
B. Shares in entities with participating interests;
C. Securities accounted with equity method
D. Other long term securities (ex. bonds)
E. Long term receivables (generated by loans granted)
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Banca Transilvania Group -
Structure
Banca Transilvania Group - Structure
Shares in affiliated entities
Definition: shares (participating interests) in other entities capital, that
represent (or by which we hold) the majority of voting rights.
Accounts used:
261 Shares in affiliated entities (related parties)
2691 Amounts payable for shares in affiliated entities
2961 Impairment of shares in related parties
6863 Impairment losses on financial assets
7863 Financial income from derecognition of impairment of financial
assets
Reporting in BS: NBV = CBd 261 CBc 2961
Where do we report 2691 Amounts payable ??
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Shares in affiliated entities
Example
Our company purchases the majority of shares of an entity for 400.000 lei. According to
the contract it pays 75% of the amount the rest being settled later (both by bank).
At the end of the year the market value of the shares is 380.000 lei.
In the next year the rest is settled. At the end of the year the market value of shares is
410.000 lei.
Solution:
In financial year N:
1. Acquisition and partial payment 261 = % 400.000
of shares 5121 300.000
2691 100.000
2. Impairment 6863 = 2961 20.000
In financial year N+1:
3. Settlement of the rest 2691 = 5121 100.000
4. Impairment derecognition 2961 = 7863 20.000
2691 Amounts payable for shares in affiliated entities
2961 Impairment of shares in related parties
Shares in entities with participating interests
Definition: Participating interests are rights in the capital of other entities,
whether or not represented by certificates, which, by creating a durable
link with those entities, are intended to contribute to the company's
activities.
Typology: < 10% => minority interests
10%- 20% => strategic investment
20%- 50% => (possible) significant influence
Accounts used:
263 Participating interests
2692 Amounts payable for participating interests
2962 Impairment of participating interests
Reporting in BS: NBV = CBd 263 CBc 2692
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Other long term securities accounting
Definition: other titles/certificates/securities that do not qualify in previous
classes, eg. bonds, special shares (preference shares)
Accounts used:
265 Other long term securities
2693 Amounts payable for other financial assets
2963 Impairment of other long term securities
Reporting in BS: NBV = CBd 265 CBc 2963
Long term receivables accounting
Definition: amounts granted to other entities on long term, without reception of
certificates as equivalent. They take the form of long term
receivables, e.g. loans granted, guarantees, deposits.
Most of these long term receivables carry interest.
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Long term receivables accounting
Example
An entity grants to its subsidiary a loan of 100.000 lei, for a period of 2 years.
The interest of 5% will be received at maturity, when the loan is reimbursed.
Reflect these operations in the accounting system of both parties.
Solution (parent company):
In financial year N:
1. Accept and payment of loan 2671 = 5121 100.000
2. Recording the interest 2672 = 766 5.000
In financial year N+1:
3. Recording the interest 2672 = 766 5.000
4. Receiving the interest and 5121 = % 20.000
loan at maturity 2671 100.000
2672 10.000
2671 Amounts owed by related parties
2672 Accrued interest on amounts owed by related parties
Long term receivables accounting
Example
An entity grants to its subsidiary a loan of 100.000 lei, for a period of 2 years.
The interest of 5% will be received at maturity, when the loan is reimbursed.
Reflect these operations in the accounting system of both parties.
Solution (subsidiary):
In financial year N:
1. Receiving the loan 5121 = 1661 100.000
2. Recording the interest 666 = 1685 5.000
In financial year N+1:
3. Recording the interest 666 = 1685 5.000
4. Receiving the interest and % = 5121 20.000
loan at maturity 1661 100.000
1685 10.000
1661 Debt towards related parties
1685 Accrued interest on debt towards related parties
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4. Reporting changes in value
Reporting changes in value
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Impairment
- Assess at each balance sheet date indicators of impairment.
- If indication, assess recoverable amount (higher of fair value
less costs to sell and value in use).
- If recoverable amount < carrying amount impairment loss.
- Recognise impairment loss as expense immediately.
Unless carried at revalued amount (revaluation
decrease).
Use new carrying amount to calculate future
depreciation.
- Refer to IAS 36 for impairment loss calculation.
Computing impairment
Imp = NBV* - RV
Imp = impairment
NBV* = net book value before impairment (carrying amount)
RV = recoverable value, resulted from stacktaking
NBV* = EV Depr
EV = entrance value (gross book value)
Depr = cumulated depreciation or amortization
RV = max {net selling price; value in use}
Net selling price is the amount obtainable from the sale of an asset in
an arms length transaction, less the expected disposal costs.
The value in use is calculated by discounting the future cash-flows
expected from the use of the asset during its useful life and from its
disposal at the end of the useful life.
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Revaluation
Depreciate revalued
amount over useful life
Depreciate cost
over useful life
Revaluation Model Cost Model
5. Measurement after recognition
Revaluation model
- Revalue regularly.
- Revalue all assets of the same class.
- Revaluation increases credited to:
Profit or loss to the extent they reverse previous
revaluation decrease of that asset.
Otherwise, equity (revaluation surplus).
- Revaluation decreases debited to:
Equity to the extent of any revaluation surplus in
equity related to that asset.
Otherwise, profit or loss.
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The effective accounting treatment
of revaluation differences:
If revaluation result is an increase of net book value, then it is
treated as
an increase of the revaluation reserve from own capitals, only if
there was not a previous decrease known as an expense related
to that asset or
as another income to compensate the cost of previous known
decrease of that asset.
If revaluation result is a decrease of net book value, then it is
treated as
an expense with all depreciation value, if the revaluation reserve
is not registered as an amount related to that asset (revaluation
surplus) or as
a decrease of revaluation reserve from own capitals,
is treated as an expense with the minimum between the value of
that reserve and the value of decrease, and the possible
difference uncovered is registered as an expense.
Reevaluation
V reeval > V contab.neta
R.initiala rezerva reev.
R.ulterioara (descrestere, ch.) venit, rezerva
V reeval < V contab.neta
R.initiala cheltuiala
R ulterioara (crestere, rezerve) rezerva reev.,
cheltuieli
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Practical Example - 3
- ABC & Co., has an item of plant with an initial cost of 100.000.
- At the date of revaluation accumulated depreciation amounted to
55,000.
- The fair value of asset, by reference to transactions in similar assets,
is assessed to be Rs. 65,000.
- Find out the entries to be passed?
Practical Example Solution
Method I:
Accumulated depreciation = Asset 55,000
Asset = Revaluation reserve 20,000
The net result is that the asset has a carrying
amount of
Rs. 65,000 (100,000 55,000 + 20,000).
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Practical Example Solution
Method II:
Carrying amount (100,000 55,000) = 45,000
Fair value (revalued amount) 65,000
Surplus 20,000
% of surplus (20,000/ 45,000) 44.44%
Entries to be Made:
Asset (100,000 x 44.44%) = % 44,440
Acc. Depreciation (55,000 x 44.44%) 24,442
Surplus on Revaluation 20,000