PROXIMITY & REMOTENESS: IAS 23 Vs IFRS for SMEs (Section 25) Vs IPSAS 5

PROXIMITY & REMOTENESS: IAS 23 Vs IFRS for SMEs (Section 25) Vs IPSAS 5 BORROWING COSTS INTRODUCTION         Borrowing cost- simply say, the cost an entity incurs for borrowing funds. IAS 23, IFRS for SMEs (Sec 25) and IPSAS 5 under different financial reporting frameworks all given the same title “Borrowing costs” deals with how an entity should account for the cost incurred in connection with the borrowing of funds. Borrowing costs are interest and other costs that an entity incurs in connection with the borrowing of funds. Borrowing costs include: (a)       interest expense calculated using the effective interest method (b)       finance charges in respect of finance leases (c)       exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs. RECOGNITION DIFFERENCES The three frameworks are somewhat or extensively different in their accounting treatment for borrowing costs. IAS 23  & IFRS for SMEs allows a single accounting policy choice for the entities that have adopted it, while IPSAS 5 allows an entity to choose between two available accounting policies for borrowing costs. IFRS – IAS 20 Capitalisation model IFRS for SMEs (SEC 25) Expense model only IPSAS 5 Choice: Expense or Capitalisation Model IFRS – IAS 20 Any borrowing cost incurred by an entity in connection with the borrowing of funds should be capitalised if and only if i.                     It is incurred on the acquisition, construction or production of  a Qualifying asset and ii.                    Pertain to the capitalisation period                Borrowing costs that do not meet the above should be recognised as expenses in the period in which they are incurred. CLARIFICATION OF TERMS Qualifying Assets – These are assets that necessarily take a substantial period to get ready for its intended use or sale. The time frame of the word “substantial” is not given by the standard; professional judgement needs to be applied. The following are not qualifying assets (borrowing costs incurred on them should be expensed in the periods in which they arose): i.                     Financial assets, and inventories that are manufactured, or otherwise produced, over a short period of time ii.                    Assets that are ready for their intended use or sale when acquired. Capitalisation Period – is the period from the commencement date to the cessation date after excluding any suspension period. Commencement date – This refers to the date in which the entity meets all of the following conditions: (a) it incurs expenditures for the asset (qualifying); (b) it incurs borrowing costs; and (c) it undertakes activities that are necessary to prepare the asset for its intended use or sale. Suspension period – refers to extended periods in which an entity suspends active development of a qualifying asset. Cessation date – this is the date when the entity has substantially completed all the activities necessary to prepare the qualifying asset for its intended use or sale. In Summary Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset form part of the cost of that asset.  Other borrowing costs are recognised as an expense. See the article on IAS 23 - Borrowing costs for more on the treatment of borrowing costs. IFRS for SMEs (SEC 25) Section 25 of the IFRS for SMEs deals with the accounting for borrowing costs. As part of its intention to simplify the treatment of transactions by SMEs, this framework requires entities to use only the expense model. This means all borrowing costs incurred by an entity shall be recognised as an expensed in the period in which it was incurred.  Borrowing cost should not be capitalised. IPSAS 5       IPSAS 5 allows an entity to make an accounting policy choice for the treatment of borrowing costs by choosing between i.                     The Benchmark treatment (Expense model) ii.                    Allowed Alternative Treatment (Capitalisation model)     Expense model: For entities that opt to adopt the expense model, the accounting treatment is to charge all borrowing costs as an expenses in the period when they are incurred;     Capitalisation model: The treatment under this model is similar to the treatment under IAS 20. The entity shall capitalise borrowing costs which are directly attributable to the acquisition or construction of a qualifying asset. All other borrowing costs that do not satisfy the conditions for capitalisation are to be expensed when incurred.                Thank you for taking your time and hope this little piece was useful?

PROXIMITY AND REMOTENESS: IAS 20 Vs IFRS for SMEs (Sec 24) Vs IPSAS 23

PROXIMITY AND REMOTENESS: IAS 20 Vs IFRS for SMEs (Sec 24) Vs IPSAS 23 INTRODUCTION IFRS (IAS 20), IFRS for SMEs (Sec 24) and IPSAS 23 are standards having separate scope but needs looking into because of their nearness or remoteness in the treatment of transactions. IAS 20 falls under IFRS (full), IFRS for SMEs (Section 24) is specific to small and medium sized entities that comply with IFRS for SMEs, while IPSAS 23 is directed to public sector entities that have opted or required to comply with the accrual basis IPSAS. The IPSAS 23 here focuses on “transfers”. DEFINITIONS IAS 20/IFRS for SMEs ·         Government: refers to government, government agencies and similar bodies whether local, national or international. ·         Government grants are assistance by government in the form of transfers of resources to an entity in return for past or future compliance with certain conditions relating to the operating activities of the entity. ·         Grants related to assets are government grants whose primary condition is that an entity qualifying for them should purchase, construct or otherwise acquire long-term assets.  Subsidiary conditions may also be attached restricting the type or location of the assets or the periods during which they are to be acquired or held.  ·         Grants related to income are government grants other than those related to assets. IPSAS [Transfers] ·         Transfers are inflows of future economic benefits or service potential from non-exchange transactions, other than taxes. ·         Stipulations on transferred assets are terms in laws or regulation, or a binding arrangement, imposed upon the use of a transferred asset by entities external to the reporting entity. ·         Restrictions on transferred assets are stipulations that limit or direct the purposes for which a transferred asset may be used, but do not specify that future economic benefits or service potential is required to be returned to the transferor if not deployed as specified. ·         Conditions on transferred assets are stipulations that specify that the future economic benefits or service potential embodied in the asset is required to be consumed by the recipient as specified or future economic benefits or service potential must be returned to the transferor. RECOGNITION   The recognition of income from the grant into the income statement/statement of financial performance varies significantly among these three standards . The following are how each standard recognises income from grants/transfers. A.       IFRS (IAS 20) An entity should only recognise government grants when i.                     There is reasonable assurance that the entity will comply with the condition(s) attached with the grant(s) and ii.                    The grant will be received If these two criteria are met, the entity therefore recognises the government grant as an asset and     If the grant is government grant related to income, this will be recognised immediately in the income statement as income.     For grant related to asset, the grant is recognised over the period necessary to match them with related costs that they intend to compensate    on a systematic basis.  What this means is that the basis for recognising the grant as an income is dependent on the basis of recognising the related cost in which the grant is meant to cater for. If the related cost had already been recognised before the grant becomes receivable, the entity immediately recognised the grant when it becomes receivable. B.        IFRS For SMEs (Section 24) The criteria for recognising grant as an income in the income statement is quite different under IFRS for SMEs. Grant is recognised as an income in the income statement depends on the existence of performance condition or not. i.                     IF NO PERFORMANCE CONDITION(S) ATTACHED TO THE GRANT             A grant that does not impose specified future performance condition(s) is recognised as income when the grant proceeds are receivable. ii.                    IF FUTURE PERFORMANCE CONDITIONS ARE ATTACHED TO THE GRANT       When a grant imposes specified future performance condition, revenue is recognised as income only when the performance conditions are met. Grant received before recognition criteria are met are recognised as liability (Deferred income/ Advance receipt of grant) C.        IPSAS 23 {TRANSFERS}       IPSAS 23 applies to revenue from non-exchange transaction by public sector entities. IPSAS 23 treatment of transfers (grant) is closely related to the requirement of IFRS for SMEs (Sec 24), but added some complexities. Revenue from transfers (e.g grant) is recognised in the statement of financial performance subject to the type of stipulation attached to grant (transfers). i.                     IF THE STIPULATION IS RESTRICTIVE IN SUBSTANCE (RESTRICTION) Restrictive stipulation only imposes a performance obligation on the recipient & does not include return obligation. If this is the case, the entity recognises revenue immediately in the statement of financial performance when it becomes receivable & can be measured reliably. ii.                    IF THE STIPULATION IS CONDITIONAL IN SUBSTANCE (CONDITION) Conditional stipulation imposes both a performance obligation as well as a return obligation on the entity. This means the recipient entity is to use the grant in a specified way & would be required to return the grant (transfers) if not used in the specified manner. If this is the case, the entity recognises inflow recognised as an asset as revenue, except to the extent that a liability is also recognised in respect of the same inflow.   ILLUSTRATION Entity A extended the sum of N10million as a grant to Entity B (reporting entity) at the beginning of year 5 as a support for the construction of an industrial building to carry out economic activities in pursuant of its objectives. Entity A specifies that Entity B should use it for the construction of an industrial building & should employ additional two hundred (200) staffs within two years from the grant date. If two hundred staffs are not employed within the stated period, the grant amount relating to the portion of the staffs not employed would be due to be returned by Entity B. At the end of the year 5, Entity B had employed 130 staffs & still committed to recruit at least 70 staffs in year 6. How should the above be treated under i.                     IAS 20 ii.                    IFRS for SMEs iii.                  IPSAS 23 (Transfer)    TREATMENT IFRS- IAS 20 At the time of receipt or when it became receivable, entity B recognises the grant as an asset if there is a reasonable assurance that the entity will comply with the condition & that the grant would be received.  Since it is a grant related to asset, the entity presents the grant either as a deferred income or as a deduction from the assets gross carrying amount and allocate the grant to the income statement (income) on a systematic basis that is consistent with the basis for allocating the cost of the asset in which the grant is financing. This means, if the asset is expected to have a useful life of ten years & a depreciation method of straight line, the grant should also be recognised as an income in the statement of profit or loss on a straight line basis over ten years. IFRS FOR SMEs Since there exists a future performance condition attached to the grant, revenue cannot be immediately recognised. At the time of receipt, the grant should be recognised as an asset & a liability (deferred income). At the end of year five, 130 staffs out of 200 have been employed, which denotes that 65% of the performance condition has been met. Therefore, 65% of the grant recognised as an asset should be recognised as income in year five (Dr Deferred income,   Cr Income statement). IPSAS 23    The focus here is on the type of stipulation.   If the stipulation is “restrictive in substance”, the grant should be recognised as a revenue in the statement of financial performance at the time of receipt or when receivable.    Based on the information provided in the illustration, the stipulation tends towards a “condition”, therefore, at the time of receipt of the grant, the grant should be recognised as a liability(deferred revenue) since the stipulation has not been met. At the end of year five, 65% of the stipulation has been met, the entity should recognise N6,500,000 as revenue, leaving a balance of N3,500,000 as liability.