Financial Reporting: IFRS 16, IAS 17, IAS 16, and IAS 2 Analysis

This report provides a detailed analysis of key International Financial Reporting Standards (IFRS), focusing on IFRS 16 (Leases), IAS 17, IAS 16 (Property, Plant and Equipment), and IAS 2 (Inventories). The report begins by explaining IFRS 16 and its impact on lease accounting, differentiating between finance and operating leases, and outlining the accounting treatments for both lessors and lessees. It then delves into the accounting for property, plant, and equipment under IAS 16, clarifying the distinction between capital and revenue expenditures, and demonstrating the calculation of asset costs. Finally, the report examines IAS 2, explaining how the cost of inventories should be determined. The report includes practical calculations, such as implicit interest rate calculations and journal entries, to illustrate the application of these standards. The content covers the key elements of each standard, providing a comprehensive overview for financial reporting and accounting students.

International Financial
Reporting

Contents
INTRODUCTION.....................................................................................................................................3
MAIN BODY.............................................................................................................................................3
PART 1: LEASE-IFRS 16/IAS 17..........................................................................................................3
PART 2: PROPERTY, PLANTS AND EQUIPMENTS – IAS 16..........................................................9
PART 3: INVENTORIES – IAS 2........................................................................................................12
CONCLUSION........................................................................................................................................19
REFERENCES........................................................................................................................................20

INTRODUCTION
In order to record financial transactions and preparation of financial reports, there are a
range of standards which need to be followed by companies who are operating at global level.
The international financial reporting can be defined as a process of presenting financial
statements in a manner that is adopted commonly by all companies at international stage (Eng
and Neiva De Figueiredo, 2019). There are different kinds of standards which need to be
consider various types of transactions. The project report consists three parts and each of them is
based on various IAS (International accounting standards). The part one is related to lease
transactions and for which IFRS 16/IAS 17 are described. Part two is related to property, plants
and equipment transactions while the last part of report covers information about IAS 2 which
linked to inventories.
MAIN BODY
PART 1: LEASE-IFRS 16/IAS 17
(a) Discuss the IFRS 16 required lease accounting treatment and reporting by lessor for
finance leases and operating leases as carried forward by IAS 17.
IFRS 16 is a reformed accounting standard which was evolved by IASB (International
accounting standards board) in January 2016. This accounting standard replace the
previous standard IAS 17 (Segal, and Naik, 2019). The objective of this accounting
standard to provide way through which companies can record their lease transactions at
the time of financial disclosure. IFRS 16 enables a specific lessee accounting approach
and needs a lessee to identify assets and liabilities for all leases whose durability is more
than one year. As per this standard, it is essential for lessee to identify a right of use
assets presenting the right to use the underlying leased assets. As well as lease liability
presenting the obligation in order to do payment of leases.
Reason to replace IAS 17: IAS 17 divided leases in two forms which are finance and
operating leases. As per this standard, finance lease was exploited in the balance sheet
and reported in the profit & loss statement as an interest and depreciation expense. On the

other hands, operating lease was reported in the working notes of financial statements and
not exploited in the balance sheet. In addition to this, the traditional method of reporting
operating lease reduced accuracy in actual financial position of firms. As a consequence,
this was not easy for investors to assess actual value of a company so that they can make
investment accordingly.
Reporting by lessor for finance leases and operating leases: The difference between
operating and finance lease is reduced for lessees and a new lease assets and liabilities are
identifying for all leases. As above discussed that lessees must recognize a right of use of
assets and liabilities which are based on discounted pay and needed to the lease. In order
to determine lease term will need judgement that was not required before operating lease
because it did not change the expense recognition. Lessor accounting does not change
and continue to reflect the underlying assets that is subject to lease management in the
balance sheet for leases which are divided as operating. In order to financial
arrangements, the balance sheet informs a lease receivable as well as residual interest of
lessor. It consists some key elements which are needed to followed by lessor such as:
ACCOUNTING FOR FINANCE LEASE BY LESSOR: For lessor, finance lease is
divided in two types. The first one is that if present value of all lease payments is similar
to carrying value of leased assets that is known as direct financing lease (Tóth, 2019).
The second type is that if present value of lease payments is more than carrying value of
leased assets which is known as sales type lease. These both types of finance lease are
recorded by lessor in different financial statements in such manner:
 Balance sheet: The value of receivables from lease is recorded along with the assets
which are decreased by book value of leased assets.
 Income statement: The value of interest revenue is recorded which is computed in
accordance of lease receivables.
 Cash flow statement: The value of interest aspect of lease revenue is recorded in the
operating activity and principle aspect is recorded in investing activities in cash flow.
ACCOUNTING FOR OPERATING LEASE BY LESSOR:
 Balance sheet: Under it, leased assets is recorded.

 Income statement: The value of interest revenue is recorded along with depreciation
related to assets.
 Cash flow statement: In this periodic lease payment is recorded as operational activity.
(b) In accordance with the provisions of IFRS 16, explain how leases should be accounted
for in the financial statements of the lessee.
In the IFRS 16, there are a range of provisions which are needed to be followed by lessor
and lessee during preparation of financial statements. For lessee, there are different types
of aspects which must be covered in their financial statement in such manner:
A lessee is the person who makes use of leased assets and do payment to lessor. The
accounting for different kinds of leases is mentioned as:
ACCOUNTING FOR FINANCE LEASE:
 Balance sheet: In the balance sheet of lessee both leased assets and liabilities are
recorded. The value which is recorded is considered as market value of leased
assets.
 Income statement: In their income statement, interest expense is included whose
value is computed in accordance of lease payables at the starting by help of
implied interest rate (Toferer, 2019). Basically, rate of interest that used is the
lower of borrowing rate of lessee and implicit rate of lessor. In the case when,
leased assets can be depreciated then depreciation expenditure is also recorded.
 Cash flow statement: In the cash flow statement, interest aspect of lease pay is
recorded in operating activities while principle repayment aspect which
minimizes that lease payable is recorded in financing activities. On the other
hands, interest expense can be recorded in operating or financing activity.
ACCOUNTING FOR OPERATING LEASE:

 Balance sheet: Under this, neither assets nor liability is recorded.
 Income statement: In the income statement of lessee, expense of rent of assets is
recorded whose value can be similar to lease payment.
 Cash flow statement: In the cash flow statement, lease payment or rent of assets
can be recorded in the operational activities.
IMPACT OF LEASE ACCOUNTING ON LESSEE’S FINANCIAL STATEMENTS:
Due to variation of accounting of both kinds of leases, different elements of financial
statements can be affected such as:
 The value of assets, liabilities, operational income and cash flow from operating
activities are more in finance lease as compared to operating lease.
 Net income at the initial stage cash flow from financing activities are low in
finance lease as compared to operating lease (Tóth, 2020).
 The value of entire total income and cash flow endure same in both types of lease.
(c) Leasing assets:
(I) Calculate the interest rate implicit in this lease arrangement:
The implicit interest rate implies to interest rate which is not specified in a commercial
transaction. Any accounting agreement involving a series of payments extended over a number
of future years must have interest rate, even though no rate is specified in the relevant contract.
Therefore, lease does not reflect risk of making payments for a length of time recognized as
interest costs.
Lease Rental = 1950 per quarter
Annual Lease Rental 1950 * 4 = 7800
Total Lease Rental 7800 * 8 years 62400
Total Lease Value = 30000

Implicit Rate of Return = (62500 / 30000 * 100 = 2.08
or in excel “=Rate ( 4 * 8, -1950,
30000) 5.23%
Cross Verification:
Period Lease Rental / 1 + Implicit rate of return
1 1853.08
2 1760.98
3 1673.46
4 1590.29
5 1511.25
6 1436.14
7 1364.76
8 1296.93
9 1232.48
10 1171.22
11 1113.01
12 1057.69
13 1005.13

14 955.17
15 907.70
16 862.58
17 819.71
18 778.97
19 740.26
20 703.47
21 668.50
22 635.28
23 603.70
24 573.70
25 545.19
26 518.09
27 492.34
28 467.87
29 444.62
30 422.52
31 401.52

32 381.56
Total 29989.20
(ii) Accounting entries over the life of the lease as required in the books of Roy Joy Limited:
Journal Entries
Asset 30000
Lease Liability 30000
Lease Rental 1950
Cash 1950
(c)
PART 2: PROPERTY, PLANTS AND EQUIPMENTS – IAS 16
(a) Difference between capital expenditure and revenue expenditure.
Basis Capital expenditure Revenue expenditure
Term This is a long term expense and
due to which it has long term
impact on firms. Its benefits can
be received in some years. For
example, purchasing of a
machinery cost of a machinery
can be covered in some years
It is a short term expense whose
benefits can be derived during
current financial year. For example,
cost of salary expenses can be
covered in similar accounting
period.

(Phiri, 2019).
Physical
existence
This type of expense has a
particular physical existence
except intangible assets. For
example, building, machine has
physical evidence.
The revenue expenditure has no
physical existence. For example,
payment of wages is a form of
revenue expenses which cannot be
seen.
Occurrence The capital expenditure has
nature of non-recurring. For
instance, a company purchase
building for once during entire
life.
While, revenue expenditures occur
repeatedly. Such as companies have
to pay daily wages to their labors.
Presentation The amount of all capital
expenditures are presented in
balance sheet. Such as value of
machine, building, goodwill is
shown in balance sheet in assets
side.
On the other hands, revenue
expenditures are presented in profit
and loss statements. For instance,
salary expenses, wages, material
cost etc. are shown in P&L
statement.
Impact on
revenue
This type of expenditure does not
impact to the revenues of a
company. Like if a business
purchases any fixed assets then it
does not make any impact on
revenues.
While, this type of expense makes a
significant impact on overall
revenues of a company. For
example, if a company purchase raw
material then this is considered
under cost of sales and due to which
revenue can be affected.
Impact on company’s accounts if capital expenditure is considered as revenue
expenditure:
In the case when a company’s accountant records capital expenditure as revenue
expenditure then this may impact on expense, assets and depreciation accounts (Chung,
2019). This is so because initial journal entry will overstate the expenditures and

understate the assets. For instance, if a company makes a capital expense then the journal
entry will be as:
Assets a/c DR
To cash a/c
In the case when capital expense is considered as revenue expense then this will change
the journal entry that will be as:
Expense a/c DR
To cash a/c
Due to this wrong entry, depreciation value will also wrong as well as tax value will also
affected. As a result, company’s income statement, trial balance and balance sheet will be
wrong for all years till business run. This is so because capital expenditure is a huge
expense which is done usually for once in entire business life (Moudud-Ul-Huq, 2019).
(b) Tom and Jerry limited:
As per IAS16, calculation of cost figure at which machine bought by Tom Ltd:
Tom Limited
Factory Machine 420000
Cost of Machine as pet the Rules of IAS
16:
Machine's Price 380000
Less: Trade Discount 38000

342000
Delivery Charges 6800
Installation Cost 29600
Spare Small Parts 14600
Total cost of Machinery 393000
Note 1: Maintenance annual costs are revenue expenses and not capital expenditure.
Note 2: Here it has been assumed that small spare parts are essential part of machine and will
provide future economic benefits. Thus this expense should be capitalized.
PART 3: INVENTORIES – IAS 2
(a) In accordance with IAS 2, explain how the cost of inventories should be determined.
The main aim of IAS 2 is to provide a way through which all transactions related to
inventories can be recorded in an effective manner (HAZAR, 2020). This provides
gaudiness which are essential to compute value of cost of stock.
Determination of cost of inventories:
In order to measure cost of stock, below mentioned cost need to be consider such as-
Type of cost Examples
Cost of purchase Taxation, transportation charges,
maintenance cost.
Conversion cost Fixed and variable manufacturing cost.
Other cost This includes cost which may occur in

order to make an assets usable after
purchasing.
In order to measure cost of stock, below mentioned cost need to not be consider such as-
S. No. Type of cost
1 Cost of abnormal wastage
2 Cost of storing inventory
3 Expenses which are not related to manufacturing such as administration
cost
4 Cost of sales
5 Cost of interest
Notes:
 In order to compute value of included cost, standard and retail method can be
used.
 As per the IAS 2, items which are interchangeable FIFO, LIFO and weighted
average method is used.
 The above mentioned methods are used for all those assets who have similar
characteristics.
 As per the IAS 2, items which are not interchangeable the cost are recognized to
particular individual item of stock (Duţescu, 2019).
(b) Valuation of inventories
Journal entries towards revaluation of the Jerry’s Ltd.’s freehold property:

Provided Information:
Jerry Limited'
01/01/07 Freehold property
Land 300000
Buildings 500000
Total 800000
Useful life of building 40 years
Residual Value Nil
01/01/17 Land Revalued at: 400000
Building Revalued at: 450000
Calculation of Depreciation to be charged for Building:
Buildings as on 01/01/2007 500000
Depreciation = 500000 / 40 years 12500
Depreciation form 01/01/2007 to
01/01/2017 = 12500 * 10 years 125000
Book Value of Building as on 01/01/2017 500000 – 125000 375000

Add: Revaluation 75000
Building after revaluation 450000
Depreciation for year 2017 = 450000 / (40 – 10) 15000
Journal Entries Debit Credit
Building Account 75000
Revaluation Reserve 75000
Revaluation Reserve 75000
Retained Earnings 75000
Depreciation Account 15000
Building Account 15000
Computation of value of inventory of vehicles as on 28 February 2018 as per IAS2 Inventories,
the to be shown in accounts of Kelford Plc and abnormal wastage:
Vehicle
Purchase Costs Conver Expected Expected Expected Selling Abnorm

Price
incurre
d
on
bringin
g to
present
location
sion
costs
incurre
d to
date
further
costs
before sale Selling Price Expenses
al
Wastag
e 20%
of
Convers
ion
Cost
W 9470 1080 880 - 14000 840 176
X 12830 940 1540 150 19300 1158 308
Y 3550 750 1260 600 6000 360 252
Z 7680 460 - 2000 11800 708 -
Material P Usage Cost
Jan
5 Purchased 25 550
7 Used 19
20 Purchased 20 520
28 Used 18
Feb
7 Used 4
15 Purchased 15 315

28 Used 3
Computation of Cost of inventories
Vehicle
Purchase
Price (A)
Costs incurred
on bringing to
present location
(B)
Conversio
n costs
incurred to
date ( C )
Abnormal
Wastage (D)
Total Cost as per IAS 2
[ A + B + C – D]
W 9470 1080 880 176 11254
X 12830 940 1540 308 15002
Y 3550 750 1260 252 5308
Z 7680 460 - 8140
Computation of Net Realizable Value
Vehicle
Expected Selling
Price
Expected
Selling
Expenses
Expected
further costs
before sale (E) Net Realizable Value
W 14000 840 - 13160
X 19300 1158 150 17992
Y 6000 360 600 5040

Z 11800 708 2000 9092
Valuation of Inventories as per IAS 2 (Cost or Net Realizable Value whichever is lower)
Vehicle Cost Net Realizable Value
LOWER OF :Cost or
Net Realizable Value
W 11254 13160 11254
X 15002 17992 15002
Y 5308 5040 5040
Z 8140 9092 8140
Material P (see working note) 39772
Value of Inventories 39436
Working Note:
Material
P Usage Cost Cost per Unit
Closing Value of
Inventories
Jan
Remaini
ng Units
5 Purchased 25 550 22 550

7 Used 19 6 132
20 Purchased 20 26 520 26 652
28 Used 18 8 208
Feb
7 Used 4 4 104
15 Purchased 15 19 315 21 419
28 Used 3 16 336
CONCLUSION
From above study it has been articulated that international-financial reporting is wider
field which covers modern accounting and reporting aspects. It consists of globally accepted
accounting principles, standards, concepts which are required to be followed while reporting at
international level. Main aim of it is to bring uniformity in accounting and reporting practices.
For multinational corporation it is essential to prepare their final accounts as per IAS/IFRS and
other obligations as proposed by governing authorities to make their financial statements
compatible with global financial reporting norms.

REFERENCES
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