An enterprise may receive monetary or non-monetary compensation from third parties for the
STUDYTEXT impairment or loss of items of property, plant and equipment. The compensation may be used to
restore the asset. Examples include:
- Reimbursement by insurance companies after an impairment of items of plant and equipment.
- Physical replacement of an impaired or lost asset The accounting treatment is as follows:
(a) Impairment of items of property, plant and equipment should be recognised under IAS 36; disposals should be recognised under IAS 16
(b) Monetary or non-monetary compensation from third parties for items of property etc that were impaired, lost or given up, should be included in the income statement (c) The cost of assets restored, purchased, constructed as a replacement or received as
compensation should be determined and presented under IAS 16.
2.3 EXPLORATION FOR AND EVALUATION OF MINERAL RESOURCES (IFRS 6)
The main objective of IFRS 6 is to recommends the accounting treatment of assets that are used in exploring mineral resources as they have slight different purpose as compared with other property, plant and equipment and intangible assets. However an entity can still apply the requirements of IAS 16 or 38.
IFRS 6 permits an entity to develop an accounting policy for exploration and evaluation assets without specifically considering the requirements of paragraphs 11 and 12 of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. Thus, an entity adopting IFRS 6 may continue to use the accounting policies applied immediately before adopting the IFRS. This includes continuing to use recognition and measurement practices that are part of those accounting policies.
IFRS 6 requires entities recognising exploration and evaluation assets to perform an impairment test on those assets when facts and circumstances suggest that the carrying amount of the assets may exceed their recoverable amount.
IFRS 6 varies the recognition of impairment from that in IAS 36 Impairment of Assets but measures the impairment in accordance with that Standard once the impairment is identified.
IFRS 6 requires disclosure of information that identifies and explains the amounts recognised in its financial statements arising from the exploration for and evaluation of mineral resources, including
i. Its accounting policies for exploration and evaluation expenditures including the recognition of exploration and evaluation assets.
STUDYTEXT
ii. The amounts of assets, liabilities, income and expense and operating and investing cash flows arising from the exploration for and evaluation of mineral resources.
2.4 FINANCIAL INSTRUMENTS
Financial Instruments has become a very important area in accounting especially because of the developments in financial markets as far new derivatives and other financial instruments. Many companies had ignored the recording and accounting for such instruments and this has been disastrous as big companies like Enron collapsed. There has been an issue with IAS 32 which deals with Presentation, IAS 39 which deals with recognition and measurement and IFRS 7 which deals with Disclosure. IFRS 7 applies to periods commencing from 2007 and supersedes the presentation part of IAS 32.
The main objectives of the three standards are to ensure that financial instruments are properly accounted for and adequate disclosure is made by the companies. The three standards are very comprehensive especially IAS 39 which includes detailed illustration on how to teat the financial instruments in the accounts.
IAS 32 Financial Instruments: Presentation and Disclosure
Please note that the disclosure part of the standards has been superseded by IFRS 7 whose summary we shall look at later.
The stated objective of IAS 32 is to enhance financial statement users’ understanding of the significance of financial instruments to an entity’s financial position, performance, and cash flows.
IAS 32 addresses this in a number of ways:
- Clarifying the classification of a financial instrument issued by an enterprise as a liability or as equity.
- Prescribing the accounting for treasury shares (a company’s own repurchased shares).
- Prescribing strict conditions under which assets and liabilities may be offset in the balance sheet.
- Requiring a broad range of disclosures about financial instruments, including information as to their fair values.
STUDYTEXT
Scope
IAS 32 applies in presenting and disclosing information about all types of financial instruments with the following exceptions:
- Interests in subsidiaries, associates, and joint ventures that are accounted for under IAS 27 Consolidated and Separate Financial Statements, IAS 28 Investments in Associates, or IAS 31 Interests in Joint Ventures. However, IAS 32 applies to all derivatives on interests in subsidiaries, associates, or joint ventures.
- Employers’ rights and obligations under employee benefit plans [see IAS 19].
- Rights and obligations arising under insurance contracts (this is the subject of a current IASB project). However, IAS 32 applies to a financial instrument that takes the form of an insurance (or reinsurance) contract but that principally involves the transfer of financial risks. Also, IAS 32 applies to derivatives that are embedded in insurance contracts.
- Contracts for contingent consideration in a business combination [see IFRS 3].
- Contracts that require a payment based on climatic, geological or other physical variables (weather derivatives) [see IAS 39].
IAS 32 applies to those contracts for buying or selling a non-financial item that can be settled net in cash or another financial instrument, except for contracts that were entered into and continue to be held for the purpose of the receipt or delivery of a non-financial item in accordance with the entity’s expected purchase, sale, or usage requirements.