IFRS for Hospitality and Gaming Industry (Part 1) 25 May 2010 Nelson Lam 林智遠 MBA MSc BBA ACA ACIS CFA CPA(Aust.) CPA(US) FCCA FCPA FHKIoD MSCA 2006-10 Nelson Consulting Limited 1 Workshop Agenda Property, Plant and Equipment (IAS 16) Leases (IAS 17) Part 1 This Evening Updated Practices Cases & Examples from Hospitality & Gaming Industry Revenue (IAS 18) Intangible Assets (IAS 38) Investment Property (IAS 40) Part 2 Tomorrow 2006-10 Nelson Consulting Limited 2 1
Presentation of Financial Statements (IAS 1 Revised in 2007) 2006-10 Nelson Consulting Limited 3 Complete Set of Fin. Statements A complete set of financial statements comprises: a) a statement of financial position as at the end of the period; b) a statement of comprehensive income for the period; c) a statement of changes in equity for the period; d) a statement of cash flows for the period; e) notes, comprising a summary of significant accounting policies and other explanatory information; and f) a statement of financial position as at the beginning of the earliest comparative period when an entity applies an accounting policy retrospectively or makes a retrospective restatement of items in its financial statements, or when it reclassifies items in its financial statements. An entity may use titles for the statements other than those used in HKAS 1. Previously, we call it Balance Sheet Previously, we call it Income Statement 3 years balance sheets 2006-10 Nelson Consulting Limited 4 2
Structures & Content of Fin. Statements Complete Set of Financial Statements Statement of Financial Position as at the end of the period Previous title or changes Previous title: Balance Sheet To use a single statement to present all items of income and expense Statement of Comprehensive Income for the period To use two statements to present all items of income and expense Income Statement for the period Statement of Comprehensive Income for the period No title change New statement Statement of Changes in Equity for the period Statement of Cash Flows for the period Notes A statement of financial position as at the beginning of the earliest comparative period, if required No title change (but restructured) Previous title: Cash Flow Statement No title change New requirement 2006-10 Nelson Consulting Limited Sourced from Intermediate Financial Reporting (2009) by Nelson Lam and Peter Lau 5 Statement of Comprehensive Income Changes in equity in a period Two-Statement Approach Single Statement Approach Non-owner changes Components of profit or loss Components of other comprehensive income Presented in separate income statement Presented in statement of comprehensive income Presented in statement of comprehensive income Owner changes Components of owner changes in equity Presented in statement of changes in equity Presented in statement of changes in equity 2006-10 Nelson Consulting Limited Sourced from Intermediate Financial Reporting (2009) by Nelson Lam and Peter Lau 6 3
Statement of Comprehensive Income Case Consolidated statement of comprehensive income 2006-10 Nelson Consulting Limited 7 Statement of Comprehensive Income Case......... 2006-10 Nelson Consulting Limited 8 4
Property, Plant and Equipment (IAS 16) 2006-10 Nelson Consulting Limited 9 1. Objective and Scope The principal issues in accounting for property, plant and equipment (PPE) are: a) the recognition of the assets, b) the determination of their carrying amounts and c) the depreciation charges and impairment losses to be recognised in relation to them. Definitions Recognition Measurement 2006-10 Nelson Consulting Limited 10 5
1. Objective and Scope Example What are PPE? Are the following PPE? Building acquired under an operating lease Building acquired under finance leases Freehold property used for rental purpose Investment property under re-development Property held for a currently undetermined future use Leasehold land separated from the leasehold building IAS 17 IAS 40 IAS 40 IAS 40 IAS 17 2006-10 Nelson Consulting Limited 11 2. Definitions Property, plant and equipment (PPE) are tangible items that: a) are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and b) are expected to be used during more than one period. 2006-10 Nelson Consulting Limited 12 6
2. Definitions Cost Residual value is the amount of cash or cash equivalents paid or the fair value of other consideration given to acquire an asset at the time of its acquisition or construction, or where applicable, the amount attributed to that asset when initially recognised in accordance with the specific requirements of other IFRSs e.g. IAS 39, IFRS 2 Revised but discussed later 2006-10 Nelson Consulting Limited 13 3. Recognition The cost of an item of PPE shall be recognised as an asset if, and only if: a) it is probable that future economic benefits associated with the item will flow to the entity; and b) the cost of the item can be measured reliably. Recognition Criteria Major spare parts, servicing equipment, replacement and inspection can also be qualified as PPE. If the recognition criteria is met, such cost is recognised; the carrying amount of the replaced parts or previous inspection is derecognised. 2006-10 Nelson Consulting Limited 14 7
3. Recognition Case Wynn Macau, Limited (Notes to Financial i Statements t t 2009) Expenditures incurred after items of property and equipment have been brought into use, such as repairs and maintenance, are normally charged to the statement of comprehensive income in the period in which they are incurred. In situations where it can be clearly demonstrated an expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of an item of property and equipment, and where the cost of the item can be measured reliably, the expenditure is capitalized as an additional cost of that asset or as a replacement. 2006-10 Nelson Consulting Limited 15 3. Recognition Case Galaxy Entertainment Group Limited (2009 Annual Report) Subsequent costs are included in the carrying amount of the asset or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance costs are expensed in the income statement during the financial period in which they are incurred. 2006-10 Nelson Consulting Limited 16 8
4. Measurement at Recognition An item of PPE that qualifies for recognition as an asset shall be measured at its cost. Cost the amount of cash or cash equivalents paid or the fair value of other consideration given to acquire an asset at the time of its acquisition or construction, or where applicable, the amount attributed to that asset when initially recognised in accordance with the specific requirements of other IFRSs e.g. IAS 39, IFRS 2 2006-10 Nelson Consulting Limited 17 4. Measurement at Recognition The cost of an item of PPE comprises: a) its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates; b) any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. c) the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located, the obligation for which an entity incurs either when the item is acquired or as a consequence of having used the item during a particular period for purposes other than to produce inventories during that period. Purchase Price Directly Attributable Cost Dismantling Cost 2006-10 Nelson Consulting Limited 18 9
4. Measurement at Recognition Example Entity A leased an office for a lease term of 5 years in 2010 and incurred $500,000 in decorating the office. The lease requires Entity A to restore the office to its original status when the lease expires. Entity A estimates that the cost of restoration will be around $60,000 at that time. Determine the cost of the decoration. The cost of the decoration: Cost of decoration: $500,000 Initial estimate of restoring the site: Present value of $60,000 000 Assuming discount rate is 6%, PV of $60,000 is $ 44,835 Total initial cost is $ 544,835 2006-10 Nelson Consulting Limited 19 4. Measurement at Recognition Case Amax Holdings Limited (Notes to the financial statements 2008) The cost of self-constructed items of property, plant and equipment includes the cost of materials, direct labour, the initial estimate, where relevant, of the costs of dismantling and removing the items and restoring the site on which they are located, and an appropriate proportion of production overheads and borrowing costs 2006-10 Nelson Consulting Limited 20 10
5. Measurement after Recognition An entity shall choose either: Cost Model Revaluation Model as its accounting policy and the entity shall apply that policy to an entire class of PPE. 2006-10 Nelson Consulting Limited 21 5. Measurement after Recognition Cost Model Revaluation Model After recognition as an asset, an item of PPE shall be carried at Its cost less any accumulated depreciation and any accumulated impairment losses After recognition as an asset, an item of PPE shall be carried at a revalued amount, being its fair value at the date of the revaluation, Less any subsequent accumulated depreciation and subsequent accumulated impairment losses. 2006-10 Nelson Consulting Limited 22 11
5. Measurement after Recognition Revaluation Model What is fair value? Fair value is the amount for which h an asset could be exchanged between knowledgeable, willing parties in an arm s length transaction. All IFRS/IAS have same definition on fair value now. The fair value of land and buildings is usually determined from market-based evidence by appraisal that is normally undertaken by professionally qualified valuers. items of PPE is usually their market value determined by appraisal. If there is no market-based evidence of fair value because of the specialised nature of the item of PPE and the item is rarely sold, an entity may need to estimate fair value using an income or a depreciated replacement cost approach. 2006-10 Nelson Consulting Limited 23 5. Measurement after Recognition Revaluation Model Revaluations shall be made with sufficient regularity to ensure that the carrying amount does not differ materially from the fair value at the balance sheet date. The frequency of revaluations depends upon the changes in fair values of the items of PPE being revalued. a) When the fair value of a revalued asset differs materially from its carrying amount, a further revaluation is required. b) Some items of PPE experience significant and volatile changes in fair value, thus necessitating annual revaluation. c) Such frequent revaluations are unnecessary for items of PPE with only insignificant changes in fair value. Instead, it may be necessary to revalue the item only every 3 or 5 years. 2006-10 Nelson Consulting Limited 24 12
5. Measurement after Recognition Revaluation Model If an item of property, p plant and equipment is revalued, the entire class of PPE to which that asset belongs shall Class be revalued If an asset s carrying amount is increased as a result of a revaluation, the increase shall be recognised in other comprehensive income (OCI) and accumulated in equity under the heading of revaluation surplus. However, the increase shall be recognised in profit or loss to the extent that it reverses a revaluation decrease of the same asset previously recognised in profit or loss. Entire class To OCI directly 2006-10 Nelson Consulting Limited 25 5. Measurement after Recognition Revaluation Model If an asset s carrying amount is decreased as a result of a revaluation, the decrease shall be recognised in profit or loss. However, the decrease shall be recognised in other comprehensive income (OCI) to the extent of any credit balance existing in the revaluation surplus in respect of that asset. The decrease recognised in other comprehensive income reduces the amount accumulated in equity under the heading of revaluation surplus. Negative to P/L 2006-10 Nelson Consulting Limited 26 13
5. Measurement after Recognition Revaluation Model Example In 2010, an entity buys a PPE at $1,000 and adopts revaluation model. At year end of 2010, PPE s fair value rises to $1,500. At year end of 2011, PPE s fair value falls to $800. Ignore the depreciation, prepare journal for each situation above. Dr PPE 1,000 Cr Cash 1,000 Dr PPE (1,500 1,000) 500 Cr OCI 500 Dr OCI 500 Profit and loss 200 Cr PPE (1,500 800) 700 2006-10 Nelson Consulting Limited 27 5. Measurement after Recognition Cost Model Depreciation Revaluation Model Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. Depreciable amount is the cost of an asset, or other amount substituted for cost, less its residual value. Useful life is: a) the period over which an asset is expected to be available for use by an entity; or b) the number of production or similar units expected to be obtained from the asset by an entity. The residual value of an asset is the estimated amount that an entity would currently obtain from disposal of the asset, after deducting the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life. 2006-10 Nelson Consulting Limited 28 14
5. Measurement after Recognition Case Wynn Macau, Limited (Annual Report 2009) Depreciation Depreciation is calculated on a straight-line basis to write off the cost of each item of property and equipment to its residual value over the shorter of the remaining term of the gaming concession (for designated gaming assets and space) or land concession (for all other assets), as applicable, or their estimated useful lives. 2006-10 Nelson Consulting Limited 29 5. Measurement after Recognition Depreciation Each part of an item of PPE with a cost that is significant in relation to the total cost of the item shall be depreciated separately. e.g. it may be appropriate to depreciate separately the airframe and engines of an aircraft The depreciation charge for each period shall be recognised in profit or loss unless it is included in the carrying amount of another asset. Each significant component shall be depreciated separately (not clearly required in the past) Clearer approach on so-called Component Accounting 2006-10 Nelson Consulting Limited 30 15
5. Measurement after Recognition The depreciable amount of an asset shall be allocated on a systematic basis over its useful life. The residual value and the useful life of an asset shall be reviewed at least at each financial year-end if expectations differ from previous estimates, the change shall be accounted for as a change in an accounting estimate in accordance with IAS 8 Depreciation Depreciable amount 2006-10 Nelson Consulting Limited 31 5. Measurement after Recognition Case Depreciation Depreciable amount Amax Holdings Limited (Notes to the financial statements 2008) Where parts of an item of property, plant equipment have different useful lives, the cost of the item is allocated on a reasonable basis between the parts and each part is depreciated separately. Both the useful life of an asset and its residual value, if any, are reviewed annually. 2006-10 Nelson Consulting Limited 32 16
5. Measurement after Recognition Depreciation Residual Value Depreciable amount Residual Value is updated as the estimated amount that an entity would currently obtain from disposal of the asset, after deducting the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life Inflation may be incorporated in residual value 2006-10 Nelson Consulting Limited 33 5. Measurement after Recognition Depreciation Depreciation of an asset begins when it is available for use i.e. when it is in the location and condition necessary for it to be capable of operating in the manner intended by management. Depreciation of an asset ceases at the earlier of the date that the asset is classified as held for sale (or included in a disposal group that is classified as held for sale) in accordance with IFRS 5 and the date that the asset is derecognised Land and buildings are separable assets and are accounted for separately, even when they are acquired together. Depreciable amount Implied that depreciation still required even PPE becomes idle or is retired from active use 2006-10 Nelson Consulting Limited 34 17
5. Measurement after Recognition The depreciation method used shall reflect the pattern in which the asset s s future economic benefits are expected to be consumed by the entity shall be reviewed at least at each financial year-end and such a change shall be accounted for as a change in an accounting estimate in accordance with IAS 8 Other than the above, that method is applied consistently from period to period unless there is a change in the expected pattern of consumption of those future economic benefits. Depreciation Depreciable amount Depreciation method 2006-10 Nelson Consulting Limited 35 5. Measurement after Recognition To determine whether an item of PPE is impaired, an entity applies IAS 36 Compensation from third parties for items of property, plant and equipment that were impaired, lost or given up shall be included in profit or loss when the compensation becomes receivable Depreciation Depreciable amount Depreciation method Impairment 2006-10 Nelson Consulting Limited 36 18
5. Measurement Impairment Triggering events Recoverable Amount Impairment Loss At each reporting date, an entity shall assess whether there is any indication that an asset may be impaired. If any such indication exists, the entity shall estimate the recoverable amount of the asset. It is the higher of an asset s Fair value less and Value in Use costs to sell If, and only if, the recoverable amount of an asset is less than its carrying amount The carrying amount of the asset shall be reduced to its recoverable amount. That reduction is an impairment loss. 2006-10 Nelson Consulting Limited 37 5. Measurement Impairment Triggering events An entity shall assess at each reporting date whether there is any indication that an asset may be impaired. If any such indication exists, the entity shall estimate the recoverable amount of the asset. 2006-10 Nelson Consulting Limited 38 19
6. Derecognition The carrying amount of an item of PPE shall be derecognised: a) on disposal; or b) when no future economic benefits are expected from its use or disposal. The gain or loss arising from the derecognition of an item of PPE shall be included in profit or loss when the item is derecognised (unless IAS 17 requires otherwise on a sale and leaseback). Gains shall not be classified as revenue. Amended by Annual Improvement Project 2008 2006-10 Nelson Consulting Limited 39 6. Derecognition IAS 16 Property, Plant and Equipment Gain (on derecognition of PPE) shall not be classified as revenue. (IAS 16.68) 68) Amendment introduces IAS 16.68A that: However, an entity that, in the course of its ordinary activities, routinely sells items of PPE that it has held for rental to others shall transfer such assets to inventories at their carrying amount when they cease to be rented and become held for sale. The proceeds from the sale of such assets shall be recognised as revenue in accordance with IAS 18 Revenue. IFRS 5 does not apply when assets that are held for sale in the ordinary course of business are transferred to inventories. In some industries, entities are in the business of renting and subsequently selling the same assets, for example, car rental company 2006-10 Nelson Consulting Limited 40 20
6. Derecognition Derecognition on disposal The disposal of an item of PPE may occur in a variety of ways (e.g. by sale, by entering into a finance lease or by donation). In determining the date of disposal of an item, an entity applies the criteria in IAS 18 Revenue for recognising revenue from the sale of goods. IAS 17 Leases applies to disposal by a sale and leaseback. 2006-10 Nelson Consulting Limited 41 6. Derecognition Case Melco Development Limited ( 新濠國際發展有限公司 ) Accounting policies for year ended 31.12.2009 An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in profit or loss in the period in which the asset is derecognised. 2006-10 Nelson Consulting Limited 42 21
6. Derecognition Derecognition on replacement If, under the initial recognition principle, an entity recognises in the carrying amount of an item of PPE the cost of a replacement for part of the item, then it derecognises the carrying amount of the replaced part regardless of whether the replaced part had been depreciated separately. The gain or loss arising from the derecognition of an item of PPE shall be determined as the difference between the net disposal proceeds, if any, and the carrying amount of the item. 2006-10 Nelson Consulting Limited 43 Leases (IAS 17) 2006-10 Nelson Consulting Limited 44 22
1. Objective and Scope The objective of IAS 17 Leases is to prescribe, for lessees and lessors, the appropriate accounting policies and disclosure to apply in relation to 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. 2006-10 Nelson Consulting Limited 45 1. Objective and Scope IAS 17 shall be applied in accounting for all leases other than: a) leases to explore for or use minerals, oil, natural gas and similar non-regenerative resources; and b) licensing agreements for such items as motion picture films, video recordings, plays, manuscripts, patents and copyrights. IAS 17 shall not be applied as the basis of measurement for: a) property held by lessees that is accounted for as investment property (see IAS 40), b) investment property provided by lessors under operating leases (see IAS 40), c) biological assets held by lessees under finance leases (see IAS 41), or d) biological assets provided by lessors under operating leases (see IAS 41). 2006-10 Nelson Consulting Limited 46 23
2. Classification of Leases The classification of leases adopted in IAS 17 Is based on the extent to which risks and rewards incidental to ownership of a leased asset lie the the lessor or the leseee. Risks and Rewards Finance Lease Operating Lease A finance lease is a lease that transfers substantially all the risks and rewards incidental to ownership of an asset. Title may or may not eventually be transferred. An operating lease is a lease other than a finance lease 2006-10 Nelson Consulting Limited 47 2. Classification of Leases Case Galaxy Entertainment Group Limited (2009 Annual Report) Leases that substantially transfer to the Group all the risks and rewards of ownership of assets are accounted for as finance leases... Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. 2006-10 Nelson Consulting Limited 48 24
2. Classification of Leases Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract. Indicators of a finance lease include: Finance Lease Operating Lease a) the lease transfers ownership of the asset to the lessee by the end of the lease term; b) the lessee has the option to purchase the asset at a price that is expected to be sufficiently lower than the fair value at the date the option becomes exercisable for it to be reasonably certain, at the inception of the lease, that the option will be exercised; c) the lease term is for the major part of the economic life of the asset even if title is not transferred; d) at the inception of the lease the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset; and e) the leased assets are of such a specialised nature that only the lessee can use them without major modifications. 2006-10 Nelson Consulting Limited 49 2. Classification of Leases Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract. Indicators of a finance lease include: What is Lease term? Economic life? Inception of a lease? Minimum lease payment Finance Lease Operating Lease Major part? c) the lease term is for the major part of the economic life of the asset even if title is not transferred; d) at the inception of the lease the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset; and Substantially all? 2006-10 Nelson Consulting Limited 50 25
2. Classification of Leases Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract. Finance Lease Operating Lease Indicators of situations that individually or in combination could also lead to a lease being classified as a finance lease are: a) if the lessee can cancel the lease, the lessor s losses associated with the cancellation are borne by the lessee; b) gains or losses from the fluctuation in the fair value of the residual accrue to the lessee (for example, in the form of a rent rebate equalling most of the sales proceeds at the end of the lease); and c) the lessee has the ability to continue the lease for a secondary period at a rent that is substantially lower than market rent. 2006-10 Nelson Consulting Limited 51 2. Classification of Leases Lease classification is made at the inception of the lease. What is inception of the lease? Finance Lease Operating Lease The inception of the lease is the earlier of the date of the lease agreement and the date of commitment by the parties to the principal provisions of the lease. As at this date: a) a lease is classified as either or a finance or an operating lease; and b) in the case of a finance lease, the amounts to be recognised at the commencement of the lease term are determined. 2006-10 Nelson Consulting Limited 52 26
2. Classification of Leases GV Limited has financed its business expansion by acquiring new production plant and equipment through utilising certain leasing arrangements during the year. The leases include options enabling GV Limited to purchase the assets at their fair values at the end of the lease term. will last for five years, which is also the expected useful life of the assets. Give GV Limited the right to cancel the leases, and the lessor s losses associated with the cancellation will be borne by GV Limited. For simplicity, GV Limited would like to record these acquisitions off the balance sheet and charge all leasing charges to income. Discuss the appropriate accounting treatment. Example Indicator of finance lease? Indicator of finance lease? Indicator of finance lease? 2006-10 Nelson Consulting Limited 53 2. Classification Lease of L&B Amendment to IAS 17 Leases Do you remember these 2 paragraphs in IAS 17? Leases of land and of buildings are classified as operating or finance leases in the same way as leases of other assets. However, a characteristic of land is that it normally has an indefinite economic life and, if title is not expected to pass to the lessee by the end of the lease term, the lessee normally does not receive substantially all of the risks and rewards incidental to ownership, in which case the lease of land will be an operating lease. A payment made on entering into or acquiring a leasehold that is accounted for as an operating lease represents prepaid lease payments... The land and buildings elements of a lease of land and buildings are considered separately for the purposes p of lease classification. If title to both elements is expected to pass to the lessee by the end of the lease term, both elements are classified as a finance lease. When the land has an indefinite economic life, the land element is normally classified as an operating lease unless title is expected to pass to the lessee by the end of the lease term, in accordance with para. 14. The buildings element is classified as a finance or operating lease in accordance with para. 7 13. 2006-10 Nelson Consulting Limited 54 27
2. Classification Lease of L&B Amendment to IAS 17 Leases Do you remember these 2 paragraphs in IAS 17? Leases of land and of buildings are classified as operating or finance leases in the same way as leases of other assets. However, a characteristic of land is that it normally has an indefinite economic life and, if title is not expected to pass to the As lessee part of by its the annual end improvements of the lease term, project the lessee in 2007, normally the does not receive substantially IASB reconsidered all of the the risks decisions and rewards it made incidental 2003, to ownership, in which case the specifically lease of land the perceived will be an inconsistency operating lease. between A payment made on entering into or acquiring the general a leasehold lease that classification is accounted guidance for as an in operating IAS lease represents prepaid 17.7 13 lease payments and... The land the and specific buildings lease elements classification of a guidance lease of land in IAS and buildings are considered separately 17.1414 for and the 15 purposes related p to of long-term lease classification. leases of land If title and to both elements is expected buildings. to pass to the lessee by the end of the lease term, both elements are classified as a finance lease. When the land has an indefinite economic The IASB concluded that the guidance in IAS 17.14 and life, the land element is normally classified as an operating lease unless title is 15 might lead to a conclusion on the classification of land expected to pass to the lessee by the end of the lease term, in accordance with leases that does not reflect the substance of the para. 14. The buildings element is classified as a finance or operating lease in transaction. accordance with para. 7 13. 2006-10 Nelson Consulting Limited 55 2. Classification Lease of L&B Amendment to IAS 17 Leases IAS 17.14 and 15 are deleted and IAS 17.15A is added as follows: When a lease includes both land and buildings elements, an entity assesses the classification of each element as a finance or an operating lease separately in accordance with IAS 17.7 13. In determining whether the land element is an operating or a finance lease, an important consideration is that land normally has an indefinite economic life. 2006-10 Nelson Consulting Limited 56 28
2. Classification Lease of L&B Example IASB describes in IAS 17.BC8B and BC8C that: For example, consider a 999-year lease of land and buildings. In this situation, significant risks and rewards associated with the land during the lease term would have been transferred to the lessee despite there being no transfer of title. The Board noted that the lessee in leases of this type will typically be in a position economically similar to an entity that purchased the land and buildings. The present value of the residual value of the property in a lease with a term of several decades would be negligible. The Board concluded that the accounting for the land element as a finance lease in such circumstances would be consistent with the economic position of the lessee. Unclear how long the lease term must be for the IASB to conclude that a lessee and a purchaser are in the same economic position 2006-10 Nelson Consulting Limited 57 2. Classification Lease of L&B Case Galaxy Entertainment Group Limited (2009 Annual Report) The Group has early adopted HKAS 17 (Amendment) Leases, which is mandatory for accounting periods beginning on and after 1 January 2010... HKAS 17 (Amendment) requires the Group to reassess the classification of leasehold land as finance or operating lease. Upon adoption, the opening balances have been assessed and classified accordingly. Current year addition to leasehold land has been classified based on the underlying criteria of HKAS 17. 2006-10 Nelson Consulting Limited 58 29
2. Classification Lease of L&B Case Financial Statements 2009 Note 2 states (for early adoption of Amendment to HKAS 17 in 2009): The early adoption of the amendment to HKAS 17 has resulted in a change in accounting policy for the classification of leasehold land of the Group. Previously, leasehold land was classified as an operating lease and stated at cost less accumulated amortisation. In accordance with the amendment, leasehold land is classified as a finance lease and stated at cost less accumulated depreciation if substantially all risks and rewards of the leasehold land have been transferred to the Group. As the present value of the minimum lease payments (ie, the transaction price) of the land held by the Group amounted to substantially all of the fair value of the land as if it were freehold, the leasehold land of the Group has been classified as a finance lease. The amendment has been applied retrospectively to unexpired leases at the date of adoption of the amendment on the basis of information existing at the inception of the leases. The amendment does not apply to the leasehold land disposed of by the Group in prior years. 2006-10 Nelson Consulting Limited 59 3. Lessees Financial Statements Initial Recognition and Measurement Finance Lease At lease commencement, lessees shall recognise finance leases as assets and liabilities in their statements of financial position at amounts equal to a) the fair value of the leased property, or b) if lower, the present value of the minimum lease payments, each determined at the inception of the lease. The discount rate to be used in calculating the present value of the minimum lease payments is the interest rate implicit in the lease, if this is practicable to determine; if not, the lessee's incremental borrowing rate shall be used. Any initial direct costs of the lessee are added to the amount recognised as an asset. 2006-10 Nelson Consulting Limited 60 30
3. Lessees Financial Statements Subsequent Measurement Finance Lease Minimum lease payments shall be apportioned between a) the finance charge and b) the reduction of the outstanding liability. Finance charge allocated to each period during the lease so as to produce a constant periodic rate of interest on the remaining balance of the liability. Contingent rents charged as expenses in the periods in which they are incurred. Contingent rent is that portion of the lease payments that is not fixed in amount but is based on the future amount of a factor that changes other than with the passage of time e.g. percentage of future sales, amount of future use, future price indices, future market rates of interest 2006-10 Nelson Consulting Limited 61 3. Lessees Financial Statements Subsequent Measurement Finance Lease A finance lease gives rise to depreciation expense for depreciable assets as well as finance expense for each accounting period The depreciation policy for depreciable leased assets consistent with that for depreciable assets that are owned, and the depreciation recognised shall be calculated in accordance with IAS 16 and IAS 38 If there is no reasonable certainty that the lessee will obtain ownership by the end of the lease term the asset shall be fully depreciated over the shorter of the lease term and its useful life 2006-10 Nelson Consulting Limited 62 31
3. Lessees Financial Statements Case Wynn Macau, Limited (Prospectus Accountants Report 2009) Finance leases, which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item, are capitalized at the inception of the lease Dr Assets at the fair value of the leased property or, Cr Liabilities if lower, at the present value of the minimum lease payments. Lease payments are apportioned between Dr Liabilities the finance charges and P/L Finance charge reduction of the lease liability Cr Cash so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are reflected in profit or loss. 2006-10 Nelson Consulting Limited 63 3. Lessees Financial Statements Disclosures Finance Lease In addition to meeting the requirements of IAS 32, the following disclosures for finance leases: a) for each class of asset, the net carrying amount at the end of the reporting period. b) a reconciliation between the total of future minimum lease payments at the end of the reporting period, and their present value. In addition, an entity shall disclose the total of future minimum lease payments at the end of the reporting period, and their present value, for each of the following periods: i) not later than one year; ii) later than one year and not later than five years; iii) later than five years. c) contingent rents recognised as an expense in the period. d) the total of future minimum sublease payments expected to be received under non-cancellable subleases at the end of the reporting period. e) a general description of the lessee s material leasing arrangements. 2006-10 Nelson Consulting Limited 64 32
3. Lessees Financial Statements Case Sands China Limited (Annual Report 2009) 2006-10 Nelson Consulting Limited 65 3. Lessees Financial Statements Recognition (Initial and Subsequent) Lease payments under an operating lease shall be recognised as an expense on a straight-line basis over the lease term unless another systematic basis is more representative of the time pattern of the user s benefit Operating Lease 2006-10 Nelson Consulting Limited 66 33
3. Lessees Financial Statements Disclosures Operating Lease Lessees shall, in addition to meeting the requirements of IAS 32, make the following disclosures for operating leases: a) the total of future minimum lease payments under noncancellable operating leases for each of the following periods: i) not later than one year; ii) later than one year and not later than five years; iii) later than five years. b) the total of future minimum sublease payments expected to be received under non-cancellable subleases at the end of the reporting period. c) lease and sublease payments recognised as an expense in the period, with separate amounts for minimum lease payments, contingent rents, and sublease payments. d) a general description of the lessee s significant leasing arrangements. 2006-10 Nelson Consulting Limited 67 3. Lessees Financial Statements Case Sands China Limited (Annual Report 2009) 2006-10 Nelson Consulting Limited 68 34
3. Lessees Financial Statements SIC Interpretation 15 Operating Leases Incentives also clarifies that: All incentives for the agreement of a new or renewed operating lease shall be recognised as an integral part of the net consideration agreed for the use of the leased asset, irrespective of the incentive's nature or form or the timing of payments The lessee shall recognise the aggregate benefit of incentives as a reduction of rental expense over the lease term, on a straightline basis unless another systematic basis is representative of the time pattern of the lessee's benefit from the use of the leased asset. 2006-10 Nelson Consulting Limited 69 4. Lessors Financial Statements Initial Recognition and Measurement Finance Lease Lessors shall a) recognise assets held under a finance lease in their statements t t of financial i position and b) present them as a receivable at an amount equal to the net investment in the lease. Net investment in the lease is the gross investment in the lease discounted at the interest rate implicit in the lease. Gross investment in the lease is the aggregate of: a) the minimum lease payments receivable by the lessor under a finance lease, and b) any unguaranteed residual value accruing to the lessor. 2006-10 Nelson Consulting Limited 70 35
4. Lessors Financial Statements Subsequent Measurement The recognition of finance income shall be based on a pattern reflecting a constant periodic rate of return on the lessor's net investment in the finance lease Finance Lease 2006-10 Nelson Consulting Limited 71 4. Lessors Financial Statements Leases for Manufacturer or Dealer Lessors Finance Lease Manufacturer or dealer lessors shall recognise selling profit or loss in the period, in accordance with the policy followed by the entity for outright sales. If artificially low rates of interest are quoted selling profit shall be restricted to that which would apply if a market rate of interest were charged. Costs incurred by manufacturer or dealer lessors in connection with negotiating and arranging a lease shall be recognised as an expense when the selling profit is recognised. 2006-10 Nelson Consulting Limited 72 36
4. Lessors Financial Statements Example C&P Inc. was used to sell its self-manufactured motor car at $500,000 at cash price and the cost of the car was about $280,000. In order to boom its sale, C&P Inc. offers 2 plans of instalment sale to its customers: 1. Customers can buy the car at $550,000 and repay the consideration in 12 equal instalment over a year at zero interest. 2. Customers can buy the car at $500,000 and then arrange a 48-month instalment plan with the subsidiary of C&P Inc. and the interest rate is 10% per annum on the outstanding balance. Discuss the implication on the selling profit to C&P Inc. The outright profit on the sale is still $220,000 ($500,000 - $280,000). Even for plan 1, the selling profit should still be restricted to $220,000. Since no interest (i.e. an artificially low rate of interest) is quoted, selling profit shall be restricted to that which would apply if a market rate of interest were charged. The excess of selling profit is an compensation on the loss of interest. 2006-10 Nelson Consulting Limited 73 4. Lessors Financial Statements Disclosures Finance Lease Lessors shall, in addition to meeting the requirements in IAS 32, disclose the following for finance leases: a) a reconciliation between the gross investment in the lease at the end of the reporting period, and the present value of minimum lease payments receivable at the end of the reporting period. In addition, an entity shall disclose the gross investment in the lease and the present value of minimum lease payments receivable at the end of the reporting period, for each of the following periods: i) not later than one year; ii) later than one year and not later than five years; iii) later than five years. b) unearned finance income. c) the unguaranteed residual values accruing to the benefit of the lessor. d) the accumulated allowance for uncollectible minimum lease payments receivable. e) contingent rents recognised as income in the period. f) a general description of material leasing arrangements 2006-10 Nelson Consulting Limited 74 37
4. Lessors Financial Statements Recognition (Initial and Subsequent) Lessors shall present assets subject to operating leases in their statements of financial position according to the nature of the asset. Lease income from operating leases shall be recognised in income on a straight-line basis over the lease term unless another systematic basis is more representative of the time pattern in which use benefit derived from the leased asset is diminished Operating Lease 2006-10 Nelson Consulting Limited 75 4. Lessors Financial Statements Recognition (Initial and Subsequent) Initial direct costs incurred by lessors shall be added to the carrying amount of the leased asset and recognised as an expense over the lease term on the same basis as the lease income Depreciation policy for depreciable leased assets shall be consistent with the lessor s normal depreciation policy depreciation shall be calculated in accordance with IAS 16 and 38 Operating Lease 2006-10 Nelson Consulting Limited 76 38
4. Lessors Financial Statements Disclosures Operating Lease Lessors shall, in addition to meeting the requirements of IAS 32, disclose the following for operating leases: a) the future minimum lease payments under noncancellable operating leases in the aggregate and for each of the following periods: i) not later than one year; ii) later than one year and not later than five years; iii) later than five years. b) total contingent rents recognised as income in the period. c) a general description of the lessor s leasing arrangements. 2006-10 Nelson Consulting Limited 77 4. Lessors Financial Statements Case Sands China Limited (Annual Report 2009) 2006-10 Nelson Consulting Limited 78 39
Revenue (IAS 18) 2006-10 Nelson Consulting Limited 79 1. Objective of IAS 18 Income is defined in the Framework for the Preparation and Presentation of Financial Statements as: increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants. Income encompasses both revenue and gains. Revenue is income that arises in the course of ordinary activities of an entity and is referred to by a variety of different names including sales, fees, interest, dividends and royalties. 2006-10 Nelson Consulting Limited 80 40
1. Objective of IAS 18 The primary issue in accounting for revenue is determining when to recognise revenue. Revenue is recognised when it is probable that future economic benefits will flow to the entity and these benefits can be measured reliably. IAS 18 identifies the circumstances in which these criteria will be met and, therefore, revenue will be recognised. 2006-10 Nelson Consulting Limited 81 2. Scope of IAS 18 Sale of goods Rendering of services Interest, royalties and dividend IAS 18 shall be applied in accounting for revenue arising from the following transactions and events: a) the sale of goods; b) the rendering of services; and c) the use by others of entity assets yielding interest, royalties and dividends. 2006-10 Nelson Consulting Limited 82 41
2. Scope of IAS 18 IAS 18 does not deal with revenue arising from: a) lease agreements (see IAS 17 Leases); b) dividends arising from investments which are accounted for under the equity method (see IAS 28 Investments in Associates); c) insurance contracts within the scope of IFRS 4 Insurance Contracts; d) changes in the fair value of financial assets and financial liabilities or their disposal (see IAS 39 Financial Instruments: Recognition and Measurement); e) changes in the value of other current assets; f) initial recognition and from changes in the fair value of biological assets related to agricultural activity (see IAS 41 Agriculture); g) initial recognition of agricultural produce (see IAS 41); and h) the extraction of mineral ores. 2006-10 Nelson Consulting Limited 83 3. What is Revenue? Revenue is the gross inflow of economic benefits during the period arising in the course of the ordinary activities of an entity when those inflows result in increases in equity, other than increases relating to contributions from equity participants. 2006-10 Nelson Consulting Limited 84 42
3. What is Revenue? Revenue includes only the gross inflows of economic benefits received and receivable by the entity on its own account. Amounts collected on behalf of third parties such as sales taxes, goods and services taxes and value added taxes are not economic benefits which flow to the entity and do not result in increases in equity. Therefore, they are excluded from revenue. Similarly, in an agency relationship, the gross inflows of economic benefits include amounts collected on behalf of the principal i and which h do not result in increases in equity for the entity. The amounts collected on behalf of the principal are not revenue. Instead, revenue is the amount of commission. 2006-10 Nelson Consulting Limited 85 4. Measurement of Revenue Revenue shall be measured at the fair value of the consideration received or receivable. Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length transaction. The amount of revenue arising on a transaction is usually determined by agreement between the entity and the buyer or user of the asset. It is measured at the fair value of the consideration received or receivable taking into account the amount of any trade discounts and volume rebates allowed by the entity. In most cases, the consideration is in the form of cash or cash equivalents and the amount of revenue is the amount of cash or cash equivalents received or receivable. 2006-10 Nelson Consulting Limited 86 43
4. Measurement of Revenue Case Wynn Macau, Limited (Prospectus Accountants Report 2009) Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. Revenue is measured at the fair value of the consideration received, excluding discounts, rebates, and other sales taxes or duties. 2006-10 Nelson Consulting Limited 87 5. Identification of the Transaction The recognition criteria in IAS 18 is usually applied separately to each transaction. However, there are situations that the recognition criteria is: 1. Applied to separately identifiable components of a single transaction 2. Applied to two or more transactions together Separately identifiable component of a single transaction Two or more transactions together 2006-10 Nelson Consulting Limited 88 44
5. Identification of the Transaction Example In certain circumstances, it is necessary to apply the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction. Separately identifiable component of a single transaction For example when the selling price of a product includes an identifiable amount for subsequent servicing, that amount is deferred and recognised as revenue over the period during which the service is performed. 2006-10 Nelson Consulting Limited 89 5. Identification of the Transaction Example Conversely, the recognition criteria are applied to two or more transactions together when they are linked in such a way that the commercial effect cannot be understood without reference to the series of transactions as a whole. For example an entity may sell goods and, at the same time, enter into a separate agreement to repurchase the goods at a later date, thus negating the substantive effect of the transaction; in such a case, the two transactions are dealt with together. Two or more transactions together 2006-10 Nelson Consulting Limited 90 45
5. Identification of the Transaction Case Wynn Macau, Limited (Prospectus Accountants Report 2009) Casino revenues are measured by the aggregate net difference between gaming wins and losses, with liabilities recognized for funds deposited by customers before gaming play occurs and for chips in customers possession. Revenues are recognized net of certain sales incentives. Accordingly, the Group s casino revenues are reduced by discounts, commissions and points earned in customer loyalty programs. 2006-10 Nelson Consulting Limited 91 Customer Loyalty Programmes (IFRIC Interpretation 13) 2006-10 Nelson Consulting Limited 92 46
Background Customer loyalty programmes are used by entities to provide customers with incentives to buy their goods or services. If a customer buys goods or services, the entity grants the customer award credits (often described as "points"). The customer can redeem the award credits for awards such as free or discounted goods or services. The programmes operate in a variety of ways. Customers may be required to accumulate a specified minimum number or value of award credits before they are able to redeem them. Award credits may be linked to individual purchases or groups of purchases, or to continued custom over a specified period. The entity may operate the customer loyalty programme itself or participate in a programme operated by a third party. The awards offered may include goods or services supplied by the entity itself and/or rights to claim goods or services from a third party. 2006-10 Nelson Consulting Limited 93 Scope IFRIC Interpretation 13 applies to customer loyalty award credits that: a) an entity grants to its customers as part of a sales transaction, i.e. a sale of goods, rendering of services or use by a customer of entity assets; and b) subject to meeting any further qualifying conditions, the customers can redeem in the future for free or discounted goods or services. The Interpretation addresses accounting by the entity that grants award credits to its customers. 2006-10 Nelson Consulting Limited 94 47
Issues Whether the entity s obligation to provide free or discounted goods or services ("awards") in the future should be recognised and measured by: i) allocating some of the consideration received or receivable from the sales transaction to the award credits and deferring the recognition of revenue (applying IAS 18.13); or ii) providing for the estimated future costs of supplying the awards (applying IAS 18.19); and If consideration is allocated to the award credits: i) how much should be allocated to them; ii) when revenue should be recognised; and iii) if a third party supplies the awards, how revenue should be measured. 2006-10 Nelson Consulting Limited 95 Conclusions Separation An entity shall apply IAS 18.13 and account for award credits as a separately identifiable component of the sales transaction(s) in which they are granted (the "initial sale"). The fair value of the consideration received or receivable in respect of the initial sale shall be allocated between the award credits and the other components of the sale. Separately Identifiable Component Fair Value Award Credit Other Components Supplied by the Entity Itself Supplied by the Third Party 2006-10 Nelson Consulting Limited 96 48