IAS 16: Depreciation of Cost Significant in Relation to Total Cost

The assignment content discusses the implementation of International Financial Reporting Standards (IFRS) in Marvin Co. Ltd., specifically IAS 16 and IFRS 9. The content highlights the importance of evaluating the requirements for implementing these standards to ensure compliance with accounting regulations. Additionally, it provides an analysis of the company's current balance sheet and statement of comprehensive income, highlighting potential adjustments and provisional amounts that may need to be made. The assignment also touches on the concept of compensation payments and unsecured creditors, as well as the recognition of allowance for expected credit losses under IFRS 9.

Current Issues in Financial Reporting
01. IFRS Regulation on Lease of Equipment
Current Situation
Under the current rules, all right-of-use assets are classified same as other non-financial
assets and are detailed in the Balance Sheet under Property, Plant and Equipment. The
lease liabilities are also treated as other financial liabilities. This allows the lessee to charge
depreciation of a right-of-use asset as a deductible expense along with the interest paid on
the lease liability. Moreover, as stipulated under IAS 7, the lessee bifurcates the payment
and shows it as Principal and Interest Payment in the annual statement of cash flows,
assert Ault, Arnold & Gest, (2010).
Although the lessee should treat a lease asset as a right-to-use asset, the system has not
been effective in checking this and lessee entities are measuring all lease assets and
liabilities on the present value basis, similar to Property, Plant and Equipment. The
measurement does not take into consideration the optional lease periods, nor does it
explain the options of extending or terminating the lease. In nearly all such cases, the
initial value of the lease asset equals the value of lease liability shown in Balance Sheet, as
per Wilmot, (2012).
New IFRS Operating Lease Rules
The new IFRS rules suggest a fundamental shift in recognizing lease assets and liabilities
through implementation of IFRS 16, which state that a lessee, who has leasing assets,
should show such assets and liabilities under a separate head in the Balance Sheet.
Changes on the Company’s Balance Sheet
IFRS 16 will eliminate the current classification of operating leases or finance leases for
the lessee. Instead, the lessee will treat all leases as Finance Leases after applying IAS 17.
Leases shall be ‘capitalised’ and shall be shown, either separately as Lease Assets or with
Property, Plant and Equipment, details Hanks, (2007).
IFRS 16 and Company’s Income Statement
The lessee shall no longer classify its leases either as operating or finance leases. IFRS 16,
which replaces IAS 17 from 1 January 2019, will have the following two provisions:
1. Existing Finance Leases: These shall continue to be listed as Finance Leases.

2. Existing Operating Leases: These shall have the option to opt for a full or limited
restatement as per the requirements of IFRS 16.
Exemptions
Lessee using IFRS 16 will not be required to recognise those assets and liabilities which
are (a) short-term leases of 12 months or less and (b) leases of low-value assets, such as a
personal computer.
Effect on Marvin Co. Ltd.
The case study of Marvin Co. Ltd. is for the year ended 31 December 2016. Since the
transition from the current system to implementing IFRS 16 shall come into force from 1
January 2019, the management is not obliged to use the new guidelines for finalising this
Balance Sheet. An analysis of the situation for the current Balance Sheet of Marvin Co.
Ltd. has been provided in Appendix – A at the end of this paper.
02. IAS 37: Provisions & Contingent Liabilities
Objective of IAS 37
Currently used Standard IAS 37 has set the criteria for recognising and measuring:
A. Provisions
Provision refers to liabilities which are of uncertain timing or amount. Use of uncertain
here is of importance because in cases where time and amount become certain, then the
payment is not considered as a provision but is referred to either as payable or accrual.
B. Contingent Liabilities
A contingent liability is either a possible obligation which arises from a past event and
needs to be confirmed by a future event or is a present obligation, arising from a past
event, but either:
 the outflow of certain economic benefits for satisfying this obligation is not
probable or
 the amount of the obligation cannot be reliably measured, says Marsden, (2010).
Overview
With the introduction of IFRS 15 – Revenue from Contracts with Customers, most of the
Retail and Consumer Product entities may have to change certain aspects of their
accounting principles for revenue, as described by Nethercott, Devos & Richardson,
(2010). This new revenue recognition standard, which is being implemented jointly by the

International Accounting Standards Board (the IASB) and the Financial Accounting
Standards Board (the FASB) is proposing to supersede all previous revenue recognition
guidelines under IFRS.
The standard, which shall come into effect for the annual reporting periods starting on or
after 1 January 2017 is also allowing an early adoption. IFRS 15 shall be dealing with all
revenue which arises from contracts with customers and shall affect all those entities which
enter into contracts for providing goods or services to their customers, says Renton, (2012)
IFRS 15 shall be used for all transactions which are common in the retail and consumer
products sector, including those controlled by licences and franchise arrangements and
which deal with sale of goods which come with right-to-return. Options granted to
customers include Material Returns or Consideration Payment and these are some of the
areas which may be covered under the new rule. It is in the interest of the entities dealing
in consumer goods, which have substantial amounts tied to Warranties should start their
preliminary assessment of the affects as early as possible, so that the management and the
accounts teams can prepare towards implementation of IFRS 15,explain Deutsch et al,
(2011).
Effect on Marvin Co. Ltd.
Although the impact, both financial and administrative, will vary from entity to entity, it is
in the best interest of Marvin to start an evaluation of the requirements needed for
implementing IFRS 15. Although the case study of Marvin Co. Ltd. is for the year ended
31 December 2016 and IFRS 15 is to come into force from 1 January 2017, the boards are
allowing an early implementation. An analysis of the situation for the current Balance
Sheet of Marvin Co. Ltd. has been provided in Appendix – A at the end of this paper.
03. IAS 16: Revaluation Surplus
Revaluation of Fixed Assets
A revaluation of the fixed assets is such an action which needs to be carried out accurately,
so as to give in detail the true value of the capital assets owned by a business. This needs to
be distinguished from the planned depreciation process in which the recorded decline in
the value of an asset is calculated on the basis of its age, according to Smith & Koken,
(2011).

Revaluation Reserve on the Balance Sheet
Revaluation reserves are actually Revaluation Surplus Reserves and these arise when
value of a capital asset becomes greater than that value at which it was brought forward
from the previous balance sheet and it increases the shareholder funds. This gain, derived
from the revaluation is known as Revaluation Surplus Reserve. In case the revalued asset is
no longer in use in the business, the remaining revaluation surplus is eventually credited to
the Retained Earnings Account in the Balance sheet of the entity.
Revaluation Surplus as Income
In case the revaluation of the asset produces a decrease in the carried forward amount of
the capital asset, then the decrease is reflected through the profit or loss of the entity.
However, in case of a credit balance of the revaluation surplus, decrease the
comprehensive income in order to offset the credit balance, explain Reimer, Urban &
Schmid (ed.), (2011).
Fair Value of Assets
The International Accounting Standards Board (IASB) defines fair value of an asset as "an
amount at which an asset could be exchanged between knowledgeable and willing
parties in an arms-length transaction".
IAS 16
IAS 16: Property, Plant and Equipment is used for outlining accounting treatment to be
given to a variety of property, plant and equipment which are most commonly used in a
business. The in-use Property, Plant and Equipment is determined initially at its cost value
and is subsequently determined by using either the cost or the revaluation model. This is
then depreciated in such a manner that the amount of depreciation is allocated on an equal
and systematic basis over the total useful life of the asset. IAS 16 was re-issued with effect
from December 2003 and has since been in use for the annual periods beginning on or after
1 January 2005, as detailed by Reimer, Urban & Schmid (ed.), (2011).
The unit of measure, used for recognition of a capital asset has not been defined under IAS
16. Hence, what constitutes as an item under the head of Property, Plant and Equipment in
a Balance Sheet is not defined in IAS 16.9, however, each part of an item of Property,
Plant and Equipment, having a cost and which is significant in relation to the total cost of
that item, needs to be depreciated separately, as explained under IAS 16.43. IAS 16 itself
recognises that certain parts of an item, shown under the Property, Plant and Equipment,

can be subjected to replacement at regular intervals. Thus, the carrying amount of the item
shown under Property, Plant and Equipment, also includes the cost of replacing such a part
of the item. The carrying amount of such parts, which have been replaced, is derecognised
as per the de-recognition provisions given under IAS 16.67-72, says Wilmot, (2012).
Effect on Marvin Co. Ltd.
Although the impact, both financial and administrative, will vary from entity to entity, it is
in the best interest of Marvin to start an evaluation of the requirements needed for
implementing IFRS 16. An analysis of the situation for the current Balance Sheet of
Marvin Co. Ltd. has been provided in Appendix – A at the end of this paper.
04. Compensation Payments & Unsecured Creditors
COMPENSATION PAYMENTS
Are employees secured creditors?
The first tier of unsecured creditors are those who are entitled to receive money from the
company, but their claims are not secured or guaranteed. This group of creditors includes:
bank lenders, employees, the government (taxes), suppliers and investors who have
unsecured bonds, asper Ault, Arnold & Gest, (2010).
UNSECURED CREDITORS
Unsecured Creditors
In some cases, the authorities allow the best interest test under which the debtor is required
to pay all the creditors in full. In this context, entities use Chapter 11 for paying their
debtors and fulfil the best interest test by paying creditors with only a fraction of the
outstanding debt, explain Ault, Arnold & Gest, (2010).
IFRS – 9
Under this standard, entities are required to recognise an allowance of either a 12-month or
a lifetime Expected Credit Losses (ECLs) and this depends on the condition if there is a
significant increase in credit risk since the initial recognition. However, for assessing if
there is a significant increase in the credit risk, new data and processes will be required.
While adopting the ECLs, entities will require to make significant changes in their current
system and process. The ECL impairment requirements are to be adopted from 1 January
2018, although early application is permitted, details Renton, (2012).
Effect on Marvin Co. Ltd.

Although the impact, both financial and administrative, will vary from entity to entity, it is
in the best interest of Marvin to start an evaluation of the requirements needed for
implementing IFRS 9. An analysis of the situation for the current Balance Sheet of Marvin
Co. Ltd. has been provided in Appendix – A at the end of this paper.
LIST OF REFERENCES
Ault, H. J., Arnold, B. J. and Gest, G. 2010. Comparative income taxation: a structural
analysis. 3rd ed. Kluwer Law International, Amsterdam, The Netherlands.
Deutsch, R., Friezer, M., Fullerton, I., Gibson, M., Hanley, P. and Snape, T. (2011)
Australian tax handbook. Thomson Reuters, Pyrmont, NSW.
Hanks, L. W. 2007. The busy family's guide to estate planning: 10 steps to peace of mind.
Nolo, Berkeley, CA.
Marsden, S. J. 2010. Australian Master Bookkeepers Guide, 3rd ed. CCH Australia
Limited, Sydney, NSW.
Nethercott, L., Devos, K. and Richardson, G. 2010. Australian taxation study manual:
questions and suggested solutions, 20th ed. CCH Australia Limited, Sydney, NSW.
Reimer, E., Urban, N. and Schmid, S. (ed.). 2011. Permanent Establishments. a Domestic
Taxation, Bilateral Tax Treaty and OECD Perspective. Kluwer Law International,
Amsterdam, The Netherlands.
Renton, N. E. 2012. Family Trusts: A Plain English Guide for Australian Families of
Average Means, 4th ed. John Wiley & Sons, Milton, QLD.
Smith, B. and Koken, E. 2011.The Superannuation Handbook. John Wiley & Sons, Milton,
QLD.
Wilmot, C. 2012. FBT Compliance Guide 2012. CCH Australia Limited, Sydney, NSW.

APPENDIX – A
MARVIN Co. LIMITED
Draft Consolidated Statement of Financial Position as at 31 December 2016
(All amounts are in million $)
Particulars Provisional Adjustment Final Amount
ASSETS
Non-Current Assets
Property, Plant and Equipment 265.00 (-7.00) 258.00
Investment Property 22.00 0.00 22.00
Intangible Assets 15.00 0.00 15.00
Total Non-Current Assets 302.00 295.00
Current Assets
Inventories 110.00 110.00
Trade Receivables 60.00 -1.00 59.00
Cash and Cash Equivalents 34.00 -0.50 33.50
Total Current Assets 204.00 202.50
TOTAL ASSETS 506.00 497.50
EQUITY AND LIABILITIES
Ordinary Share Capital 150.00 150.00
Revaluation Surplus 6.00 (-6.00) 0.00
Retained Earnings 165.00 (-1.00) (-1.50) 162.50
Total Equity 321.00 312.50
Non-Current Liabilities
Loans 156.00 156.00
Current Liabilities 29.00 29.00
Total Liabilities 185.00 185.00
TOTAL EQUITY AND LIABILITIES 506.00 497.50
MARVIN Co. LIMITED
Draft Consolidated Statement of Comprehensive Income for the Year Ended 31 December 2016
(All amounts are in million $)
Particulars Provisional Adjustment Final Amount
Revenue 248.00 248.00
LESS: Coat of Sales -80.00 (+0.40) (+0.25) -80.65
Gross Profit 168.00 167.35
LESS: Operating Expenses -32.00 +0.50 -32.50
Profit from Operations 136.00 134.85
LESS: Finance Costs -10.00 -10.00
Profit Before Taxation 126.00 124.85
Taxation -25.00 -25.00
Profit for the Year 101.00 99.85
Other Comprehensive Income
Revaluation +0.00 +0.00
Total Comprehensive Income for the Year 101.00 99.85