Accounting for Transactions in Financial Statements
The core measurement rules
IAS 2: inventories are held at the lower of cost and net realisable value, tested item by item; cost includes purchase price, conversion costs and costs of bringing the item to its present location and condition, but excludes abnormal waste, storage (unless necessary in the process) and selling costs. IAS 16: property, plant and equipment is capitalised at cost, split into significant components, and depreciated over useful life to residual value; under the revaluation model a surplus goes to OCI and a deficit to profit or loss, except that each reverses the other first. IFRS 15: five steps - identify the contract, identify performance obligations, determine the transaction price (constrain variable consideration; account for a significant financing component), allocate to obligations on stand-alone selling prices, and recognise revenue when control passes. IFRS 16: a lessee recognises a right-of-use asset and a lease liability at the present value of lease payments, producing depreciation plus front-loaded interest. IAS 37: a provision needs a present obligation from a past event, a probable outflow and a reliable estimate; discount where the effect is material.
Traps
- Raw material NRV is based on replacement cost when the finished goods will be sold at a loss.
- Lease term includes extension periods the lessee is reasonably certain to exercise.
- A contingent liability is disclosed, not recognised; only a remote one is ignored.
- Revaluation gains are not distributable as dividends.
Worked example. A machine costs $500,000 and carries a ten-year decommissioning obligation estimated at $120,000; at an 8% discount rate the present value factor for year 10 is 0.463. Recognise a provision of $55,560, add it to the cost of the asset, and depreciate $555,560 over the asset's life while unwinding the discount to finance cost each year.