Welcome to another episode of #AccountingStandards with Iwelabi.
In today’s episode, we’ll look at a simple technique for demonstrating your technical knowledge of the applicability of some International Accounting Standards (IAS) when you appear to have been caught off guard in an interview with a highly experienced Interviewer.
Assume you’re in an interview, and you’ve been doing an excellent job of introducing yourself and sharing your experience until your interviewer says…
Interviewer: How familiar are you with IASs and IFRSs, and how many of them can you apply comfortably in practice?
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Given that you are a recent graduate, you lack relevant experience.
Alternatively, you have always worked with startups and have always felt that all of those standards are never applicable to startups.
Your own condition could be that you have always worked as an Account Payable Officer in a Multinational and have never had the opportunity to work directly with your organization’s Financial/Corporate Reporting Team.
Now, this interview feels more like you’re winning and on your way to a dream job. It’s about to go crazy. Not to worry, I’ve compiled a list of at least 5 standards that you can discuss together so that by the end, your Interviewer will be wowed beyond words.
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Interviewer: Young man, are you here at all? 🤔
Iwelabi: Yes, sir! – with a grin 😃 I’m not sure where to begin, but I can confidently discuss the applicability of IAS 16, IAS 23, IAS 20, IAS 40, IAS 36, and IFRS 5 right away.
Iwelabi: Suppose that your company built this tower we are in, which is only used for its’ office operations. The tower cost N50m to build. However, while constructing the tower, we only had N30m and borrowed N20m from CBN with N3m interest. How do we treat this in our book?
Iwelabi: Since it is obvious that this tower is an asset, the total cost of this asset would be N53m according to IAS 16 – PPE, as the interest of N3m paid on the loan collected to build the tower is to be added to the total cost of a total. Technically, the interest on the loan is called Borrowing Cost.
Iwelabi: Even though the N3m represents the interest we paid on the CBN loan, it is possible that not all of the N3m meets the capitalisation criteria of IAS 23, which addresses how to treat Borrowing Cost. Let’s say the loan we received from CBN is repayable + interest in 10 months, and the construction of this tower was completed during the 8th month; if this is the case, we won’t be adding the N3m to the total cost of the tower, but rather N2.4m, with the remaining N600k treated as an expense. This is due to IAS 23, which states that capitalisation of Borrowing Cost ceases once the asset is ready for use – in this case, completed. The interest on the loan would be charged as an expense to the profit or loss account after the asset is ready, rather than being added to the total cost of the asset.
Iwelabi: Assume that the CBN loan is no longer a loan but a grant from the FG or another party. That is, IAS 23 will not apply again, but IAS 20, which discusses how to deal with Government Grants. In this case, let us assume that the FG has given us the N30m and that we are confident that we will meet all of the FG’s conditions for receiving the money, which means that we can record the grant in our books. Because this is related to an asset, the standard refers to it as a capital grant (we also have revenue grants, which are related to expenses), and the treatment is as follows:
Once we received the money, we…
Dr. Bank – N30m
Cr. Deferred Income (Liability) – N30m
According to the standard, the N30m grant is to be charged as income to the profit or loss account based on the useful life of the asset. Say the Tower is to have a useful life of 10years, that means every year, we will…
Dr. Deferred Liability – N3m
Cr. Other Income – N3m
We will do this every year until the end of the useful life of the asset.
Iwelabi: Again, suppose we decided to leave this tower and rent it out. Because we decided to rent it out, IAS 16 will no longer apply to the asset because the tower is now considered an Investment Property and will be treated under IAS 40 because the Tower will generate us rental income and capital appreciation. Once this is decided, we must stop depreciating the Tower and revalue it, with the gain or loss on revaluation charged to the profit or loss account. At every year-end, we must continue to watch out for the Fair Value of the Tower if we decided to use the Revaluation Model for our investment property subsequent recognition.
Iwelabi: In the event that after we rented the tower out and one of the tenants, out of negligence, set fire 🔥 on some part of the tower, we will need to test the asset for impairment in accordance with the provision of IAS 36. This is so that we don’t go ahead to record N40m for the tower in our book when it is only worth N30m if we are to sell it or continue using it after the fire incident. IAS 36 suggested that we record the higher of Value in Use (if we continue using it, what it can generate for us) and Fair Value less Cost to Sell (if we are to sell it, how much are we going to sell it, including any cost we need to incur while selling). Let’s say, the Value in use is N30m and the Fair Value less Cost to Sell is N25m. The standard requires that we choose N30m since that is higher and more favorable for us.
Iwelabi: Let’s say, after all of this, we’ve decided to sell the tower, and we’re confident we’ll be able to do so within the next 12 months. That means we’ll have to reclassify the tower as Non-current Held For Sale and treat it in accordance with IFRS 5 – NCA Held for Sale. To do so, we must value the Tower based on its Carrying Amount (the amount currently in our book) and Fair Value Less Cost to Sell. If the CA in our book is N40m and the FVLCS is N25m. That means we’ll have to record the tower as NCA Held-for-Sale of N25m and expense the N15m difference as impairment (loss of value).
Interviewer: Wow 👌 👏 😍 We should stop here.
Iwelabi: Thank you, Ma.
