Masaryk UniversityFaculty of Economics and Administration

Masaryk UniversityFaculty of Economics and Administration

Faculty of Economics and Administration

Field of study: Accounting

Financial reporting for non-current and current assets under national

GAAP and global IFRS for SME. Evidence from Belarus

Master’s Thesis

Supervisor: Author: Ing. Oleksandra LEMESHKO Mikhail BALYKA

Brno, 2019

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MASARYK UNIVERSITY

Faculty of Economics and Administration

MASTER’S THESIS DESCRIPTION

Academic year: 2018/2019

Student: Mikhail Dmitrievich Balyka

Field of Study: Finance (Eng.)

Title of the thesis/dissertation: Financial reporting for non-current and current assets under national

GAAP and global IFRS for SME. Evidence from Belarus.

Title of the thesis in English: Financial reporting for non-current and current assets under national

GAAP and global IFRS for SME. Evidence from Belarus.

Thesis objective, procedure and methods used: Aim of thesis:

On the basis of evaluation of impact of reporting for non-

current and current assets under national BY GAAP and

global IFRS on performance and financial position of

chosen SME from Belarus to identify advantages and

disadvantages of both reporting frameworks and to

make a set of recommendations for their further

revision

Plan of thesis:

Introduction

1. Financial reporting for non-current and current assets

under global IFRS for SME.


under Belarusian BY GAAP.


in the chosen SME from Belarus.

4. Pros and cons of both reporting frameworks and a

set of recommendations for their further revision.

Conclusion

Methodology: literature review, analysis, comparison, synthesis

Extent of graphics-related work: According to thesis supervisor’s instructions

Extent of thesis without supplements: 60 – 80 pages

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Literature: Accounting and reporting Act of July 12th 2013 57-Z. :

Ministry of Finance of the Republic of Belarus, 2013.

Decree of the Ministry of Finance of the Republic of Belarus of April 12th 2012 №25 "Concerning approval of the instruction on intangible assets accounting". 2012.

Decree of the Ministry of Finance of the Republic of

Belarus of April 30th 2012 №26 "Concerning approval

of the instruction on PPE accounting". 2012.


Belarus of November 12th 2010 133 ”Concerning

approval of the instruction on inventory accounting”.

2010.


Belarus of September 30th 2011 No.102 ”Concerning

approval of the instruction on revenues and expenses

accounting”. 2011.

IFRS Manual of accounting (global edition) two-

volume set. 2016. ISBN 978-0-7545-5439-4.

International financial reporting standard for small and

medium-sized entities (IFRS for SMEs). London:

International Accounting Standards Board, 2009. 230

s. ISBN 9781907026171.

Thesis supervisor: Ing. Oleksandra Lemeshko

Thesis supervisor’s department: Faculty of Economics and Administration

Thesis assignment date: 2018/04/22

The deadline for the submission of Master’s thesis and uploading it into IS can be found in the academic year calendar.

In Brno, date: 2019/05/07

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Name and surname of the author : Mikhail Balyka

Master’s thesis t i t le: Financial reporting for non-current and current

assets under national GAAP and global IFRS for

SME. Evidence from Belarus

Department : Finance

Master’s thesis supervisor: Ing. Oleksandra Lemeshko

Master’s thesis date : 2019

Annotation

The goal of the submitted thesis: “Financial reporting for non-current and current assets under

national BY GAAP and global IFRS. Evidence from Belarus” to identify advantages and

disadvantages of both reporting frameworks and to make a set of recommendations for their further

revision on the basis of evaluation of impact of reporting for non-current and current assets under

national BY GAAP and global IFRS on performance and financial position of chosen SME from

Belarus.

Keywords

Belarus, property plant and equipment, intangible assets, inventories, comparison, IFRS, IAS16,

IAS38, IAS 2

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Declaration

„I certify that I have written the Master’s Thesis ‘Financial reporting for non-current and current

assets under national GAAP and global IFRS for SME. Evidence from Belarus’ by myself under

the supervision of Oleksandra Lemeshko and I have listed all the literary and other specialist

sources in accordance with legal regulations, Masaryk University internal regulations, and the

internal procedural deeds of Masaryk University and the Faculty of Economics and

Administration.“

Brno,

Author’s s ignature

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Table of contents

INTRODUCTION ......................................................................................................................... 11

CHAPTER I. COMPARISON OF THE REPORTING UNDER INTERNATIONAL

FINANCIAL REPORTING STANDARDS AND BELARUSIAN GENERALLY ACCEPTED

ACCOUNTING PRINCIPLES ..................................................................................................... 13

1.1 Property, plant and equipment ................................................................................................. 14

1.1.1 Recognition and measurement ...................................................................................... 14

1.1.2 Subsequent measurement .............................................................................................. 15

1.1.2.1 Depreciation............................................................................................................ 15

1.1.2.2 Revaluation ............................................................................................................. 17

1.1.2.2 Impairment ............................................................................................................. 19

1.1.2.3 Modernization, reconstruction, repair .................................................................... 22

1.1.3 Derecognition and disposal ........................................................................................... 23

1.2 Intangible assets ....................................................................................................................... 23


1.2.2 Subsequent measurement .............................................................................................. 26

1.2.2.1 Amortisation ........................................................................................................... 26

1.2.2.2 Revaluation ............................................................................................................. 29

1.2.2.3 Impairment ............................................................................................................. 30

1.2.3 Goodwill ........................................................................................................................ 31

1.2.4 Derecognition and disposal ........................................................................................... 32

1.3 Inventories ............................................................................................................................... 32


CHAPTER II. EVALUATION OF THE IMPLEMENTAION OF INTERNATIONAL

FINANCIAL REPORTING STANDARDS AND ITS IMPACT ON FINANCIAL REPORTING

OF BEK-EXPERT ......................................................................................................................... 39

2.1 Company profile ...................................................................................................................... 39

2.2 Methodology ............................................................................................................................ 40

2.3 Case study I: Acquisition of PPE. Depreciation charge. Repairment costs ............................ 40

2.3.1 Case summary ............................................................................................................... 40

2.3.2 Recognition and initial measurement ............................................................................ 41

2.3.3 Subsequent measurement. Depreciation ....................................................................... 41

2.3.4 Repairment costs ........................................................................................................... 42

2.3.5 Useful life review under IFRS ...................................................................................... 43

2.4 Case study II: Acquisition of PPE. Borrowing costs ............................................................... 46

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2.4.1 Case summary ............................................................................................................... 46

2.4.2 Recognition and initial measurement ............................................................................ 47

2.4.3 Disposal ......................................................................................................................... 50

2.5 Case study III: Acquisition of PPE. Precious metals............................................................... 51

2.5.1 Case summary ............................................................................................................... 51

2.5.1 Precious metals treatment.............................................................................................. 52

2.6 Case study IV: Acquisition of IA. Recognition criteria ......................................................... 57

2.6.1 Case summary ............................................................................................................... 57

2.6.2 Recognition ................................................................................................................... 57

2.6 Case study V: Acquisition of inventories. Net realisable value ............................................. 59

2.6.1 Case summary ............................................................................................................... 59

2.6.1 Recognition ................................................................................................................... 59

2.6.2 Measurement of inventories. Cost of purchase ............................................................. 59

2.6.3 Net realisable value ....................................................................................................... 60

Recommendations for BY GAAP ................................................................................................. 62

Conclusion ..................................................................................................................................... 64

List of literature ............................................................................................................................. 66

List of tables .................................................................................................................................. 68

List of abbreviations ...................................................................................................................... 70

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INTRODUCTION

Since independence, Belarus has been harmonizing the national accounting and auditing

system with international standards. During these 25 years different stages of accounting

development has been passed through: in the beginning the accounting system was extremely strict

and facilitated the needs of tax authorities. This set a stamp upon accountants’ perception of actions

the can take within the scope of their professional area. The next stage in the development of

accounting system was related to the creation of the union with Russia and, as a result, convergence

with Russian accounting system. The present stage characterized with a movement of accounting

system towards the international practice.

As of today, International Financial Reporting Standards (hereinafter – IFRS) in Belarus are

required by domestic public companies (i.e. all listed companies and financial institutions).

For all the other companies national standards are used. And the first problem here is that

officially there is the only body which sets accounting standards: Ministry of Finance, but in fact

there could be different bodies.

And this is the issue because sometimes clashes between different legal acts appear for the

same transactions and in that case we need to use the one which was issued later. To find solutions

on these issues we will observe, compare and analyze Belarusian accounting standards and IFRS.

Importance of the topic chosen is confirmed by the fact that Belarus, being a European

country, should not stay on the sideline from the global development trends in financial reporting.

Like many countries in the world, Belarus is involved in the harmonization of the national

accounting system in accordance with IFRS.

The importance of IFRS in modern financial relations is that the use of such standards

contributes to that companies become opened to the world investment market, thus, obtaining

loans in foreign banks, and attract investments from foreign companies. These areas are very

relevant for our country.

The goal of the diploma thesis is to identify advantages and disadvantages of both global full

IFRS (also IFRS for SMEs) and Generally Accepted Accounting Principles (hereinafter – BY

GAAP) reporting frameworks and to make a set of recommendations for their further revision on

the basis of evaluation of impact of reporting for non-current and current assets under national BY

GAAP and global IFRS on performance and financial position of chosen SME from Belarus.

The aim of the diploma thesis is accomplished within the following structure of thesis. Thesis

comprises two parts:

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- the first one is a theoretical review and comparison of accounting standards for property,

plant and equipment (hereinafter – PPE), intangible assets (hereinafter – IA) and inventories, using

domestic legislation acts, international accounting standards and articles on its application;

-the second part is the implementation of the results made on the basis of the theoretical review

using the examples from the business activity of the Belarusian company, BEK-expert, in 2012-

2018.

Based on the analysis performed one general conclusion can be made: National accounting

and reporting standards are highly harmonized with IFRS. On the other hand, BY GAAP is more

rule-based, while IFRS is more judgement based. Although, Accounting and reporting Act of July

12th 2013 57-Z declares the priority of economic substance, but in reality, BY GAAP are more

focused on legal form, accounting procedures and documentation requirements and, to a lesser

extent, the economic substance of operations.

Methodology used in the work: literature and legislation review in the theoretical part

comparative analysis (в практике) of impact of IFRS based reporting and BY GAAP based

reporting on financial performance and position of the chosen company.

Based on the conducted study it is recommended to continue gradual harmonization with IFRS

while avoiding complete adoption. That is fair value concept should be introduced in a separate

document as it is done in IFRS 13; depreciation approach should be reviewed for the assets retired

from the active use; recognition criteria for intangible assets should be changed; the concept of net

realizable value for inventories should be implemented.

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CHAPTER I. COMPARISON OF THE REPORTING UNDER

INTERNATIONAL FINANCIAL REPORTING STANDARDS

AND BELARUSIAN GENERALLY ACCEPTED ACCOUNTING

PRINCIPLES

Belarus is continuing the convergence of the national accounting and auditing system with

international standards. Accounting and reporting act, which establishes a multi-level accounting

system was adopted, as well as the Act on Auditing.

The introductory period (1990-1994) was characterized by the development of national

approaches of the accounting standards in connection with the state formation.

The accounting methodology was actually tailored to the needs of the tax system. The

composition of the costs included in the cost of production (work delivery, service rendering) was

strictly regulated.

The core stage (1995 - 1998) began with the entry into legal force of the laws on accounting

and auditing. This stage was characterized by the emergence of a new level of regulation in

connection with the introduction of the concept of an accounting policy of the organization, as

well as a steady trend towards strengthening the fiscal function of accounting.

The system development stage (1999 - 2008) was associated with the need to unify the

legislations of Belarus and Russia in connection with the conclusion of the Treaty on the creation

of the Union State of Russia and Belarus. This event determined a significant impact of the Russian

accounting practice on the development of accounting in our country. There is a new type of

accounting – tax accounting. As a result, the fiscal accounting function has been decreased. At this

stage, two sets of accounting documents were adopted (for banks and for the corporate sector) and

a system of audit rules.

At the present stage (2009 - present), measures are being implemented for the adoption of

International Financial Reporting Standards (hereinafter – IFRS) in the territory of the Republic

of Belarus, enshrined in a number of policy documents. Our country has ratified three international

agreements, having committed to unify the rules of accounting for financial market participants.

Currently, the first and the main task is to introduce IFRS as technical regulatory legal acts.

The second task is the development of a system of national standards. The third task is to organize

certification with the subsequent issuance of certificates of professional accountants.

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1.1 Property, plant and equipment

1.1.1 Recognition and measurement

According to Decree of the Ministry of Finance of the Republic of Belarus of April 30th, 2012

№26 "Concerning approval of the instruction on PPE accounting" (hereinafter referred to as

Decree №26) assets are recognized as PPE if:

assets are intended for using in a company’s business activity (i.e. production, work

delivery, rendering of services, administrative needs or assignment for temporary use;

it is assumed that a company will receive economic benefits associated with the usage of

an asset;

the cost of an asset can be measured reliably.

assets are intended for use within more than 12 months;

a company doesn’t expect these assets to be sold within 12 months from the date of

acquisition;

All these requirements are mentioned on IAS 16 except the last one.

In Belarus PPE that are expected to be sold should be transferred to another account “Fixed

assets held for sale”.

Also, a company may define in its accounting policy a minimum threshold (amount of money)

for assets that are assumed to be recognized as PPE.

According to Decree №26 an item of PPE initially should be recorded at cost. The cost of

acquired PPE is the sum of actual:

cost of acquisition, included:

contractual value of PPE;

customs fees and duties;

loans interest;

freight insurance;

cost of services related to bringing an asset to “ready-for-use” condition;

other costs directly associated with acquisition, delivery, installation and assembly.

In addition to this in IAS 16 there is one more criterion:

the initial estimate of cost of dismantling and removing an item of fixed assets and restoration of

the area occupied by it an obligation for which a company assumes either when an asset is

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acquired, or because of its use over a certain period for purposes other than the production of

inventories during that period1.

In Belarus this is not obligatory - a company has the right to include this estimated cost. For

this purpose, a provision should be created.

The initial cost of self-constructed assets is determined in the amount of actual direct and

variable indirect costs incurred during its construction2.

The cost of assets which were an owner’s capital contribution is determined based on an

estimate of their value made in accordance with the law.

The cost of donated assets is determined based on their fair value as of the recognition date.

If PPE was acquired in exchange for a non-monetary asset or combinations of monetary and

non-monetary assets its cost is measured as a value of these non-monetary assets according to

Decree №26 and as a fair value according to IAS16.

The cost of PPE identified during assets reconciliation is determined on the date of the

recognition based on documents confirming the price of similar assets (price lists, catalogs and

others), or based on valuation reports made by persons conducting valuation activities.

1.1.2 Subsequent measurement

1.1.2.1 Depreciation

In IFRS, depreciation of fixed assets is not described under a separate document and included

in IAS 16 and IAS 38. But for understanding of approaches we should also address to some other

standards of IFRS.

Determination of a depreciable item in IAS 16 based on the idea of recognizing an asset,

primarily as controlled by the company and bringing her economic benefits over a period of time.

Pursuant to paragraph 55 of IAS 16 depreciation begins when it is available for use, but not

when it is put for use as it is stated in Belarusian standard.

IFRS requires that the depreciable amount of an asset should be mandatory allocated on a

systematic basis over its useful life3. Hence, if an asset works and participates in a flow of

economic benefits, non-depreciation, as it is allowed by Belarusian legislation, is prohibited4.

1 Paragraph 16 of IAS 16 “Property, plant and equipment” of June 30th, 2014; paragraph 17.10 of IFRS for SMEs,

IASB, ed. 2015 2 Paragraph 10 of Decree of the Ministry of Finance of the Republic of Belarus of April 30th, 2012 №26

"Concerning approval of the instruction on PPE accounting", paragraph 22 of of IAS 16 “Property, plant and

equipment” of June 30th, 2014 3 Paragraph 50 of IAS 16 “Property, plant and equipment” of June 30th, 2014; paragraph 17.16 of IFRS for SMEs,

IASB, ed. 2015 4 Resolution of the Council of Ministers of Belarus №802 ”On depreciation non-charging of PPE and intangible

assets in 2018 and further years” as of October 30, 2017

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Depreciable amount is the cost of an asset less its residual value and as it was mentioned above

it should be allocated over an asset’s useful life. According to paragraph 51 of IAS 16 residual

value should be restated in the end of each financial year if an entity’s current expectations differ

from the previous evaluations. Using of a residual value is not a requirement but a recommendation

due to Belarusian accounting standards5.

Paragraph 55 of IAS 16 emphasizes that depreciation does not cease when an asset becomes

idle or retired from active use unless it is fully depreciated, except in the case when it is already

fully depreciated. Unlike Belarusian standards, IAS does not require to change source of

depreciation during repair, idle time, etc.

Useful life of an asset is determined in terms of expected utility of the asset and it is a matter

of professional judgement based on the entity’s experience with similar assets.

As an analogue of this rule in Belarusian accounting, to some extent, is considered a work of

a depreciation commission that is created to define an asset’s useful life. Initially the commission

should determine so called standard operation time using the Decree of the Ministry of Economics

as of 30.09.2011 №161 “On determining PPE’s standard operation time” (hereinafter Decree

№161). This document represents a list of tables with number of years assigned against each group

of assets. With the reference to this table the commission then define an asset’s useful life within

the prescribed range:

for buildings – 0.8-1.2 of the standard operation time;

for machines, mechanisms and equipment – 0.5-1.5 of the standard operation time;

computers – 0.5-1.5 of the standard operation time;

transport vehicles – 0.5-1.5 of the standard operation time6.

IAS 16 declares that the depreciation method used should reflect the scheme in which an asset’s

expected future economic benefits will be consumed. Herewith, p. 62 of IAS 16 offers to use the

straight-line method, the diminishing balance method and the units of production method.

National accounting standard disclose two additional methods – sum of years’ digits and

inversed sum of years’ digits methods.

The first method is an accelerated method that allows to depreciate and quickly replace an

asset which wears very fast and thus loses its productivity efficiency in the first years. Under this

method, a depreciation expense is computed by dividing the remaining useful life of an asset by

the sum of the useful life years’ digits and multiplying it by the carrying amount.

5 Paragraph 7-1 of Decree of the Ministry of Economics, Ministry of Finance, Ministry of Architecture № 37/18/6

“On depreciation of PPE and amortization of intagible assets” 6 Appendix 3 to Decree of the Ministry of Economics as of 30.09.2011 №161 “On determining PPE’s standard

operation time”

17

The inverse method of the sum digits is to determine the annual amount of depreciation based

on the depreciable amount of assets and the ratio, in the numerator of which is the difference

between the useful life and the number of years remaining until the end of the useful life, increased

by 1, and in the denominator - sum of numbers of years of useful life. At its core, the inverse

method of a slow depreciation, which in the first years of use of an item of fixed assets makes it

possible to charge minimum depreciation amounts with a gradual increase in subsequent years.

Upon that, the method applied is a subject to review at least each financial year-end7. If a

significant change is found in the expected consumption pattern of future economic benefits

embodied in the asset, this method should be adjusted to reflect this change. Such an adjustment

is should be accounted for as a change in an accounting estimate according to IAS 88.

Note that this does not mean that a company can change the depreciation method in order to affect

its financial results, as it is allowed in paragraph 46 of Decree № 37/18/6 “On depreciation of PPE

and amortization of intangible assets”.

According to this clause an entity has the right to change a depreciation method the straight-

line method in case of unforeseen changes in production conditions sales of goods, products,

services that causes losses.

In paragraph 43 of IAS 16, each component of an item of fixed assets, the cost of which is

significant compared to the total cost of the item, should be necessarily depreciated separately. In

Belarus, it is also possible to depreciate different parts of the same item at different useful lives.

Thus, in accordance with paragraph 6 of Decree №26, in the case if an item has several parts

with different useful lives, each such part is accounted for as an independent inventory item. But

in IFRS in books it is recognized as a unit item, not as separate ones.

Pursuant to Decree №26 an asset’s cost is not subject to change, except of the following cases:

revaluation of PPE;

impairment of PPE;

reconstruction (modernization, restoration) of PPE.

1.1.2.2 Revaluation

IFRS provide for two models of PPE carrying after its recognition: cost model and revaluation

model. According to the first model an entity’s PPE should be carried at its cost less depreciation

and impairment, but the second model requires to use a fair value instead of a cost9. Fair value is

7 Paragraph 61 of IAS 16 “Property, plant and equipment” of June 30th, 2014; paragraph 17.19 of IFRS for SMEs,

IASB, ed. 2015 8 Paragraph 32 of IAS 8 “Accounting Policies, Changes in Accounting Estimates and Errors” as of October 31st,

2018; paragraph 10.15 of IFRS for SMEs, IASB, ed. 2015 9 Paragraph 28 of IAS 16 “Property, plant and equipment” of June 30th, 2014; paragraph 17.15 of IFRS for SMEs,

IASB, ed. 2015

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a market-based measurement that takes into account a market participant’s ability to generate

economic benefits by using the asset in its highest and best use. The highest and best use is

determined from the perspective of market participants that would be acquiring the asset, but the

starting point is the asset’s current use. It is presumed the current use is the asset’s highest

and best use, unless market or other factors suggest that a different use would be result in a

higher value10.

Contrary to IAS 16, Decree №26 does not allow an entity to choose either the cost or

revaluation model for carrying of PPE after a recognition11. According to Decree №26 it is

compulsory to revaluate the following classes of PPE: buildings, pipelines, electrical transmission

lines. It has to be done in case if a November’s inflation rate reaches the level of 100% to the last

mandatory revaluation date (last time it happened in January 2014)12. The current inflation rate

according to Statistics Committee is 57,8%13, which means that entities are not obliged to make a

revaluation, but they are eligible to make it on a voluntary basis – for the all entity’s PPEs or just

for a chosen group.

Under Presidential Decree №622 the following methods are used in the revaluation of an

organization’s property:

direct appraisal - recalculation of the value of PPE into prices for January 1 of the year

following the reporting year using documents prepared by an entity itself, or an entity

engaged in appraisal activities;

recalculation of foreign currency - restatement of the value of property in foreign currency

at the official rate of the National Bank as of December 31 of the reporting year;

index method - revaluation by the index method involves the calculation of the revalued

amount by multiplying the cost of the property recorded before the revaluation by the rate

of change in the value of PPE that is published by the National Statistical Committee of

the Republic of Belarus each January following the reporting date.

IAS16 allows using the following two methods for revaluation methods:

index method

write-off method.

Depending on the method chosen, the calculation and the reflection of the revaluation will

10 Paragraph 29 of IFRS 13 “Fair value measurement” of December 12th, 2013; paragraph 2.34 of IFRS for SMEs,

IASB, ed. 2015 11 Paragraph 10 of Decree of the Ministry of Finance of the Republic of Belarus of April 30th, 2012 №26

"Concerning approval of the instruction on PPE accounting" 12 Paragraph 1.1.1 of Decree of the President of the Republic of Belarus of October 20th, 2006 №. 622 “Concerning

revaluation of fixed assets” 13 http://www.belstat.gov.by/ofitsialnaya-statistika/makroekonomika-i-okruzhayushchaya-sreda/tseny/operativnaya-

informatsiya_4/ob-urovne-inflyatsii/ob-urovne-inflyatsii-v-noyabre-2018-g-k-date-provedeniya-posledney-

pereotsenki/

19

differ.

Index method - according to it, the amount of accumulated depreciation (3) is recalculated in

proportion (1) to the change in the gross carrying amount of an asset (2), so that the carrying

amount after revaluation equals the revalued amount. This method is often used when an asset is

revalued using an index in order to determine its depreciable recoverable amount.

The following formulas are used:

𝐼𝑟 =𝐹𝑎𝑖𝑟 𝑣𝑎𝑙𝑢𝑒

𝐶𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝑎𝑚𝑜𝑢𝑛𝑡 (1)

𝐶𝑜𝑠𝑡𝑟 = 𝐶𝑜𝑠𝑡 × 𝐼𝑟 (2)

𝐴𝑐𝑐𝑢𝑚. 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛𝑟 = 𝐴𝑐𝑐𝑢𝑚. 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 × 𝐼𝑟 (3)

Write-off method - its peculiarity is that it provides for the elimination of the accumulated

depreciation. The value of an asset obtained after this is revalued in such a way to make it equal

to the fair value. In other words, the cost becomes equal to the fair value, and the accumulated

depreciation becomes equal to zero. Mostly this method is used for revaluation of buildings.

IAS 16 does not require to involve a professional appraiser. The standard does not contain a

requirement for professional appraisal performed by an independent company or for engaging a

professional value for this purpose, although in practice entities often use professional appraisal

services14.

Revaluation frequency is not prescribed by IAS 16. The only requirement is that revaluations

should be made with sufficient regularity to ensure that the carrying amount does not differ

materially from the fair value at the end of the reporting period15.

The date of any voluntary revaluation in Belarus is only January 1 of the year following the

reporting year. A revaluation that is made in accounting more than once a year or on a different

reporting date contradicts the law16.

1.1.2.2 Impairment

Based on the concept of prudence in the process of accounting and the preparation of financial

statements, it is necessary to ensure that assets and revenues of an entity should not be

overestimated. To comply with this requirement in accordance with Decree № 26, an entity may,

based on a decision of its manager, reflect in books at the end of the reporting period the amount

of impairment of fixed assets. It must be equal to the amount of the excess of the carrying amount

14 E&Y LLP, Wiley,2016. International GAAP2016 under IFRS,p.1298 15 Paragraph 31 of IAS 16 “Property, plant and equipment” of June 30th, 2014;paragraph 17.15B of IFRS for SMEs,

IASB, ed. 2015 16 Paragraph 1.2 of Decree of the President of the Republic of Belarus of October 20th, 2006 №. 622 “Concerning

revaluation of fixed assets”

20

of an asset over its recoverable amount. This requires the availability of documentary evidence of

indication of impairment of the fixed asset and the possibility of reliable measurement of the

amount of impairment17.

Hence, recognition of impairment is a right in the Republic of Belarus, and not an obligation

for entities. This is a much more liberal approach than in IFRS, where testing of certain assets for

impairment is mandatory, and if there are relevant indicators, items should be accounted for at cost

less accumulated depreciation and accumulated impairment losses18.

In particular, paragraph 9 of IAS 36 "Impairment of Assets" (hereinafter - IAS 36) states that the

organization should assess at the end of each reporting period whether there are any indications of

impairment of assets. If any indication exists, the entity should estimate the asset's recoverable

amount.

In turn, in accordance with paragraph 63 of IAS 16, an entity applies IAS 36 to determine

whether an impairment has occurred with an item of PPE. This standard explains how an entity

analyzes the carrying amount of its assets, how it determines the recoverable amount of an asset

and when it recognizes or reverses impairment losses.

Based on the paragraph 16 of Decree № 26, and paragraph 12 of Decree №25 “On Accounting

of Investment Real Estate”, an entity should specify in its accounting policy whether it will apply

the procedure for impairment of assets. If impairment of assets is foreseen, then the accounting

policy should also disclose the procedure for determining of the discount rate.

International framework offers different ways for determining of discount rate if it is not

available at market. For instance, an entity could use its WACC, incremental borrowing rate or

other market rates19. Conversely, Decree №26 offers just one approach: using of key rate set by

the National Bank.

According to p. 16 of Decree № 26 the following indications should be considered in assessing

whether there is impairment (for the period from the beginning of the year to the reporting date):

a significant (more than 20%) decrease in the current market value of an asset;

significant changes in the technological, market, economic environment in which an entity

operates;

increase in market interest rates;

a significant change in the use of the asset;

physical damage;

17 Paragraph 16 of Decree of the Ministry of Finance of the Republic of Belarus of April 30th, 2012 №26

"Concerning approval of the instruction on PPE accounting"; paragraph 17.24 of IFRS for SMEs, IASB, ed. 2015 18 Paragraph 30 of IAS 16 “Property, plant and equipment” of June 30th, 2014; "; paragraph 17.24 of IFRS for

SMEs, IASB, ed. 2015 19 Paragraph 57 of IAS 36 “Impairment of assets” of May 29th, 2013

21

other signs of impairment of the asset.

Notably, that these indications are almost the same we those described by p.12 IAS 36, but do

not include the indicator, when net assets of the company higher than market capitalization.

Obviously, it was missed because there are no capital markets in Belarus and only some companies

who are listed in foreign exchanges.

And the last indicator presented in this list makes a room for an accountant’s professional

judgement such as;

asset is idle, part of a restructuring or held for disposal;

worse economic performance than expected;

for investments in subsidiaries, joint ventures or associates, the carrying amount is higher

than the carrying amount of the investee's assets, or a dividend exceeds the total

comprehensive income of the investee, that were mentioned in IAS 36.

Decree № 26 does not specify which documents should confirm the presence of these

indications and how to evaluate the possibility of reliable assessment of the amount of impairment.

Apparently, the first issue should be enshrined in an accounting policy, and the second should be

determined by the professional judgment of an accountant.

A decrease in the current market value of an asset can be confirmed by the results of an

independent or internal assessment20.

Significant changes in the technological, market, economic environment in which the

organization operates, as well as the method of using the asset can be confirmed by referring to

business plans, production programs, management accounting data, decisions of the board of

directors etc.

If there are signs of impairment of the asset, its recoverable amount at the end of the reporting

period should be determined. It is the higher of the fair value of the asset, less the estimated costs

directly attributable to its sale, and the value in use of the asset21.

Value in use is the present (discounted) value of future cash flows from the use of the asset

and its disposal at the end of the useful life. It is calculated by multiplying the discounting rate and

the amount of future cash flows from the use of the asset. At the same time, future cash flows are

determined for the period not more than 5 years. The principle of calculating of value in use is the

same for IFRS and national accounting standards.

20 Paragraphs 5,8 of Decree of the President of the Republic of Belarus as of 13.10.2006 № 615 "On valuation

activity in the Republic of Belarus". 21 PwC LLP, Global Accounting services, 2016.Manual of accounting: IFRS 2017,p. 137, ISBN 978-0-7545-5439-4

22

1.1.2.3 Modernization, reconstruction, repair

Investments in the reconstruction, modernization or restoration of PPE are widely distributed

in a business practice of entities. The procedure for accounting and reporting of these capital

investments raises many questions both within the framework of Belarusian accounting standards,

and in the preparation of financial statements under IFRS.

IAS 16 does not describe specific criteria for qualifying costs associated with existing assets,

as capitalization costs for reconstruction, modernization or restoration. The concept of

reconstruction in IFRS does not exist as well.

Companies should be guided by the general rules for capitalizing expenses related

to fixed assets22, as well as requirements for the measuring of subsequent costs included in IAS

16. Thus, an entity should not recognize in the book value of PPE costs of day-to-day maintenance

of facilities, including the cost of repairs and routine maintenance23. However, in some cases,

subsequent costs associated with an asset might be capitalized, in particular, the cost of regularly

replacing parts of an asset, as well as the cost of regular major technical inspections necessary to

continue its operation. Moreover, the subsequent costs capitalization is possible only if the general

criteria for their recognition in the book value of the asset are met24:

likelihood of obtaining (increasing) future economic benefits associated with the item;

the possibility of a reliable measurement of the cost of the item.

The decision on whether costs met the capitalization criteria or not relates to the professional

judgment of an accountant, which can be based on information received from technical specialists,

calculations of the financial and economic departments regarding the economic efficiency of

investments made etc.

In contrast with international accounting rules Belarusian accounting legislation has a clearer line

regarding the concepts of such costs.

Indeed, the appendix №5 to the Decree №37/18/6 “On depreciation of PPE and amortization of

intangible assets” provides the following definitions:

repair - a set of actions which is intended to restore the correct functioning or operability

of an item (or its parts with bringing the item into compliance with the requirements defined

by technical regulatory legal acts) as well as to prevent their further intensive wear and

tear;

modernization - a set of works to improve the item by replacing its structural elements and

22 Paragraph 4.3 of “Conceptual Framework for financial reporting” issued by IASB, March 2018 23 Paragraph 12 of IAS 16 “Property, plant and equipment” of June 30th, 2014; "; paragraph 17.15 of IFRS for

SMEs, IASB, ed. 2015 24 Paragraphs 7, 13, 14 of IAS 16 “Property, plant and equipment” of June 30th, 2014

23

systems with more efficient ones, leading to an increase in the technical level and economic

characteristics of the item.

In accordance with paragraph 20 of the Decree № 26, actual costs associated with the

reconstruction (modernization, restoration) of PPE, and other similar works are included in its

costs.

Hence, we can find the main difference in two approaches: IFRS allows in some circumstances

to capitalize costs related to repair of an asset whereas national BY GAAP prohibit it and capitalize

only those costs, which improve the characteristics of the asset.

1.1.3 Derecognition and disposal

In IAS16 derecognition of an item takes place when:

it is disposed;

no future economic benefits are expected from its use.

Gain or loss arising from derecognition of an item of PPE is included in profit or loss at the

time of derecognition of the item.

If PPE that is to be derecognized contains precious metals, then they must be collected and

recognized in the manner prescribed by Decree № 34 “Concerning use of precious metals and

stones”.

Thus, the value of PPE containing precious metals (precious stones), during its transfer or sale

must not be lower than the cost of the precious metals (precious stones) contained in it, calculated

at prices of the first day of month when these assets were derecognized.

When an asset is disposed the value of precious metals it contains should be recognized as a

current asset and a profit from this disposal is recognized as well. Afterwards precious metals

should be sold to the state25.

Accumulated depreciation is eliminated against an asset’s cost and if there is revalue surplus

it should go to retained earnings – these principles are the same for both IFRS and Belarusian BY

GAAP.

1.2 Intangible assets


The procedure of recognition of intangible assets in entities is determined by the Decree of the

Ministry of Finance of the Republic of Belarus of April 30th, 2012 №25 " Concerning approval of

25 Paragraphs 71,75 of Decree № 34 “Concerning use of precious metals and stones” of March 15 th, 2004.

24

the instruction on intangible assets accounting" (hereinafter referred to as Decree №26). For

accounting purposes assets are recognized as intangible assets by a company if they do not have a

physical form and when certain criteria are met:

they must be identifiable, i.e. separable from other assets of an entity;

it is assumed that a company will receive economic benefits associated with the usage of

an asset and is able to block access of others to these benefits;

cost of an asset can be measured reliably;

assets over a period of more than 12 months;

an entity does not expect assets to be sold within 12 months from the date of the acquisition.

All these requirements except the last two we can find in IAS 38 “Intangible assets”. The list

of items that can be accounted as intangible assets of an entity in accordance with the Belarusian

legislation differs from that under IFRS. According to IAS 38, these include trademarks, brand

names, software, licenses and franchises, copyrights, patents and other industrial property rights,

service and maintenance rights, recipes, formulas etc.

In Decree № 25 trademarks, trade names are excluded from the list of possible items of

intangible assets.

IAS 38 applies for costs incurred on advertising, development training, and start-up research

expenses. Assets obtained under a finance lease agreement may also be intangible if the terms for

acquisition were more favorable than market terms. These items are also not mentioned as possible

intangible assets in Decree № 25. Such a restriction of the range of assets that may be considered

as intangible may lead to an underestimation of value of assets of an enterprise as when it is sold

to external investors26.

Also, Belarusian standard requires an entity that created an item of intangible assets to have

documents confirming the ownership (patents, certificates)27, while IAS 38 (paragraph 13) states

that legal enforceability of the right is an optional condition for control28.

In practice, these documents become the main obstacle to the reliable accounting of the main

part of intangible assets - intellectual property rights. Because all the documents noted in the decree

except just one (brand registration certificate) are not right stating documents. As a result, there

may be errors in accounting for intangible assets, its amortization, tax calculation, nullity of license

agreements and alienation of property rights.

From the standpoint of accounting, the main problem that one has to face in practice is a legal

paperwork related to confirmation of existence of an asset itself. To properly qualify these

26 Zubkov A.S., 2017 Changing the value of intangible assets. Glavnaya kniga, 24, p. 5 27 Paragraph 9 of Decree of the Ministry of Finance of the Republic of Belarus of April 30th, 2012 №25

"Concerning approval of the instruction on intangible assets accounting" 28 Paragraph 13 of IAS 38 “Intangible assets” of May 12th, 2014; paragraph 18.16 IFRS for SMEs, IASB, ed. 2015

25

documents, you must have sufficient legal knowledge in the field of copyright and patent law. The

lack of this knowledge among practicing accountants causes difficulties in deciding on the

allocation of costs for the acquisition of an asset that does not have a tangible form29.

Contrary to Belarussian accounting, the structure of costs that can be allocated to intangible

assets on its initial measurement depends on the method of acquisition of intangible assets.

Unlike this rule, Decree №25 states that an intangible asset should be measured at its cost on

initial recognition i.e.:

acquisition cost of intangible assets;

customs fees and duties;

interest on loans and borrowings;

the cost of the services of other persons related to bringing intangible assets into a condition

suitable for use;

other costs directly related to the acquisition of intangible assets and bringing them into a

condition suitable for use30.

All these costs are similar to those mentioned in IAS 38 for separate acquisition cases. In

addition to it, acquisitions can be made through business combinations, government grants,

exchange of assets or internal generation. When an item acquired as a result of a business

combination or an asset exchange, it is measured at fair value. When an item of intangible assets

was internally generated an entity needs to assess whether the item meets the requirements for

recognition by classifying the process of its generation into two phases31:

research;

development.

Research refers to planned work aimed at obtaining new scientific and technical knowledge,

activities on application of the results, as well as the search for alternative materials, devices,

products, processes, systems, services, etc.

Costs incurred at the research phase are not capitalized but are recognized as expenses during

the period in which they were incurred, because at the research phase a company cannot

demonstrate assurance in receiving future economic benefits32.

Development - the application of research results in manufacturing engineering, new or

significantly improved materials, products, etc. before the start of their commercial production.

The costs incurring at the development stage are associated with the design, construction and

29 Zubkov A.S., 2017 Changing the value of intangible assets. Glavnaya kniga, 24, p. 5 30 Paragraph 13 of Decree of the Ministry of Finance of the Republic of Belarus of April 30th, 2012 №25

"Concerning approval of the instruction on intangible assets accounting" 31 Paragraph 52 of IAS 38 “Intangible assets” of May 12th, 2014;paragraph 18.14 IFRS for SMEs, IASB, ed. 2015 32 Paragraph 54 of IAS 38 “Intangible assets” of May 12th, 2014; paragraph 18.15 IFRS for SMEs, IASB, ed. 2015

26

testing of experimental samples of products, which, due to their scale, are not suitable for

commercial use. These costs may be considered as components of the value of intangible assets

when the following conditions are met33:

the creation of an intangible asset is technically feasible, an entity plans to complete the

development phase and has resources for this;

created asset can be used by an entity or be sold;

there is a rationale for how the company will receive economic benefits from an asset;

the cost of creating an asset during the development phase can be reliably measured.

All costs incurred prior to the fulfillment of the above conditions and written off for the

expenses of the period cannot be recovered and included in the value of an asset.

1.2.2 Subsequent measurement

1.2.2.1 Amortisation

In IAS 38 useful life is generally defined in the same way as the useful life of PPE in IAS 16.

Under IAS 38, the useful life is:

the period during which an asset is expected to be available for use by an entity; or

the number of units of production or similar units that an entity expects to receive from the

use of an asset.

In accordance with IAS 38, when assessing the useful life of an intangible asset, many factors

should be taken into account, among which are:

the expected use of an asset by a company;

typical asset life cycle for an asset and publicly available information on estimates of useful

lives of similar assets that are operated in the same way;

technical, technological, commercial and other types of asset obsolescence;

the stability of the industry in which the asset is involved, and changes in market demand

for products or services produced using the asset;

expected actions of competitors (including potential competitors);

the period of control over an asset, legal or other restrictions on the use of the asset;

dependence of the useful life of a relevant asset on the useful life of the other assets of an

entity.

As already noted, IAS 38 does not provide any mandatory requirements regarding useful usage

of intangible assets for more than 12 months. This is due to the fact that the use of such intangible

33 Paragraph 57 of IAS 38 “Intangible assets” of May 12th, 2014; paragraph 18.17 IFRS for SMEs, IASB, ed. 2015

27

assets such as new technologies and software may be short due to their rapid obsolescence. The

maximum useful life is also not limited.

IAS 38 regulates the regular revision of the useful life of intangible assets at least once at the

end of each reporting year34.

This international standard provides several methods for the amortisation of intangible assets.

Method that is used must comply with the scheme of obtaining economic benefits from the item

of intangible assets. IAS 38 recommends the following methods for the depreciation of intangible

assets:

straight-line method;

diminishing balance method;

units of production method.

The listed methods do not differ from the depreciation methods for fixed assets, therefore, they

do not require separate clarification.

For intangible assets with an indefinite useful life amortisation is not charged. Goodwill is also

not amortised when purchase price of the acquisition exceeds the fair value of the assets and

liabilities acquired.

IAS 38 necessitate to revise the method of amortisation of intangible assets at least once at the

end of each fiscal year. If there has been a significant change in the pattern of economic benefits

from an asset, the amortisation method needs to be changed.

Depreciable amount under IAS 38 is equal to the original (or revalued) value of an item,

reduced by its residual value. Residual value is defined in IAS 38 as the estimated amount that an

entity would have received from the disposal of an asset after deducting the estimated costs of

disposal.

Residual value of an intangible asset under IAS 38 differs from zero only if an entity intends

to sell an asset at the end of its useful life. Residual value should be reviewed at least at the end

of each fiscal year35.

Amortisation should begin from the moment when an intangible asset becomes available for

use, i.e. when its location and condition provide the possibility of its use in accordance with the

intentions of the management of a company. Amortisation should cease at the earlier of the two

dates:

the date when the asset is classified as held for sale (or included in a disposal group

classified as held for sale) in accordance with IFRS 5;

at the date of its derecognition.

34 Paragraph104 of IAS 38 “Intangible assets” of May 12th, 2014; paragraph 18.21 IFRS for SMEs, IASB, ed. 2015 35 Paragraph102 of IAS 38 “Intangible assets” of May 12th, 2014; paragraph 18.20 IFRS for SMEs, IASB, ed. 2015

28

Decree № 37/18/6, in contrast to IAS 38 for intangible assets, establishes a useful life of at

least 12 months. At the same time, contrary to this international standard, the Belarusian regulation

does not require an annual check on the useful life of intangible assets, but it can be reviewed if

an asset’s functioning is prolonged or resumed36. The factors that should be taken into account in

Decree № 37/18/6 when assessing the useful life of intangible assets are not clearly described as

it done in IAS 38. According to the Belarusian act, the useful life of these assets is determined

based on the following:

expected physical wear and tear, depending on conditions of production: operating mode

(number of shifts), environmental impact;

obsolescence as a result of increase in efficiency of newly introduced similar assets;

restrictions on the use of an asset.

The decision is made by the depreciation commission based on the specified conditions,

reproduction needs, approved business plans, plans for technological renewal and restructuring of

production, established competitiveness of goods, products, works, services. Obviously, the list of

factors listed in IAS 38 is much wider than that presented in Decree № 37/18/6.

Moreover, the Decree put limits on maximum useful life duration of different groups of

assets37:

intellectual property designations – up to 40 years;

for industrial property rights – up to 20 years;

other intangible assets – up to 10 years.

The methods of amortisation calculation of intangible assets correspond to the methods

prescribed by IAS 38. Unlike the international standard, the Decree does not require to revise the

method of amortisation of intangible assets.

The procedure for evaluation of the depreciable amount of intangible assets in domestic and

international standards is somewhat different. Decree № 37/18/6 does not include residual value

(which is used in IAS 38) when calculating the depreciable amount. In this regard, the amount of

amortisation of intangible assets calculated in accordance with Belarusian accounting standard

may be higher than the amount of amortisation defined in accordance with IAS 38.

There is no indefinite useful life duration mentioned in Decree № 37/18/6, which means that

every item of intangible asset should be amortised all other conditions being equal.

In IFRS and national accounting standards, the dates of beginning and cease of the amortization

36 Paragraph 24 of Decree of the Ministry of Economics, Ministry of Finance, Ministry of Architecture № 37/18/6

“On depreciation of PPE and amortization of intagible assets” 37 Paragraph 20 of Decree of the Ministry of Economics, Ministry of Finance, Ministry of Architecture № 37/18/6

“On depreciation of PPE and amortization of intagible assets”

29

of intangible assets do not coincide. In contrast to IAS 38 for Decree № 37/18/6, amortisation

starts on the 1st day of the month following the month when these assets are booked (and not from

the moment when these intangible assets become available for use). Amortisation of intangible

assets according to Decree № 37/18/6 cease from the 1st day of the month following the month of

full amortisation or derecognition of these assets from accounting (and not earlier than two dates:

a) on the date of classification of these assets as held for sale or b) on the date of their derecognition

- as provided for by IAS 38).

1.2.2.2 Revaluation

According to paragraph 17 of Decree №25, cost of intangible assets is not subject to change,

except for cases established by law. Decree № 25 discloses one of the cases of change in the initial

value of these assets, namely, their revaluation at the current market value when it can be reliably

measured from the active market data of these assets.

To carry out revaluation of intangible assets in Belarus in practice is hard if not impossible

due to immaturity of the market for the vast majority of intangible assets. The reasons for this lie

in some types of intangible assets, and in the insufficiency of the number of producers for these

types of assets. Intangible assets items such as copyright, as well as items of industrial property

law (inventions, industrial designs, production secrets, etc.), The results of scientific and technical

activities have unique characteristics, are made in single copies and can not be repeated in other

assets of this type. The market for these assets is represented by single copies of the product and

operates in the absence of competition or slight competition. Thus, pricing of assets of this type

can not be of a market nature, where the ratio of supply and demand is crucial38.

Some types of intangible assets, such as computer software and databases, are represented on

the market by several development companies. However, at present, the market for each type of

software is controlled by certain companies. Prices in such conditions are not determined by the

influence of market factors but are set by developers on a cost basis and are often tied to the dollar

(euro) rate. Therefore, their value remains relatively stable and changes mainly with the change in

the exchange rate of the national currency. As a result, the revaluation of intangible assets at market

value is also virtually impossible.

Similar to IAS 16, IAS 38 allows companies to use to model after recognition39:

cost model;

revaluation model.

38 Zubkov A.S., 2017 Changing the value of intangible assets. Glavnaya kniga, 24, p. 5 39 Paragraph 74 of IAS 38 “Intangible assets” of May 12th, 2014

30

If revaluation model is chosen, an asset should be carried at a revalued amount, which is fair

value less any accumulated amortisation and impairment loss. The frequency is not prescribed, but

it is required to perform revaluations that by the end of reporting year an asset carrying amount

would not differ materially from its fair value40. Belarusian standard allows to revalue assets just

once per year.

1.2.2.3 Impairment

Based on the principle of prudence41 in the process of accounting and the preparation of

financial statements it is necessary to ensure that the accounting estimate of the assets and income

of an organization is not overstated.

In order to comply with this requirement under BY GAAP, an organization is entitled, on the

basis of a decision of its manager, to recognize at the end of the reporting period the amount of

impairment of intangible assets42. It must be equal to the amount of the excess of the residual value

of the asset over its recoverable amount. This requires the availability of documentary evidence of

indicators of impairment of the asset and the ability to reliably determine the amount of the

impairment.

Thus, recognition of impairment is a right in the Republic of Belarus, and not an obligation

for organizations. This is a much more liberal approach than in International Financial Reporting

Standards, where testing certain assets for impairment is mandatory, and if there are relevant

indicators, PPE and intangible assets, should be accounted for at cost less accumulated

depreciation impairment losses.

In particular, paragraph 9 of IAS 36 specifies that an entity should assess at the end of each

reporting period whether there are any signs of impairment of assets. If any such indication

exists, the entity must estimate the asset's recoverable amount.

Regardless of whether there are any indications of impairment, the entity also43:

tests an intangible asset with an indefinite useful life or an intangible asset that is not yet

ready for use for impairment annually by comparing its book value with the recoverable

amount.

This impairment test may be carried out at any time during the annual period, provided that it is

held at the same time every year. Various intangible assets can be tested for impairment at different

40 Paragraph 75 of IAS 38 “Intangible assets” of May 12th, 2014; paragraph 18.21 IFRS for SMEs, IASB, ed. 2015 41 Paragraph 2.16 of “Conceptual Framework for financial reporting” issued by IASB, March 2018; section 3,

paragraph 8 of “Accounting and reporting Act” of July 12th 2013 57-Z 42 Paragraph 18 of Decree of the Ministry of Finance of the Republic of Belarus of April 30th, 2012 №25

"Concerning approval of the instruction on intangible assets accounting" 43 Paragraph 10 of IAS 36 “Impairment of assets” of May 29th, 2013; paragraph 27.7 IFRS for SMEs, IASB, ed.

2015

31

times. However, if such an intangible asset was initially recognized during the current annual

period, then it should be tested for impairment before the end of the current annual period;

tests goodwill acquired in a business combination for impairment annually.

In IAS 36, it is noted that the ability of an intangible asset to produce future economic benefits

in an amount sufficient to recover its carrying amount is usually subject to greater uncertainty

before the asset is started to be used than after the start of its use. Therefore, IAS 36 prescribes that

an entity should conduct an impairment test at least once a year for the carrying amount of an

intangible asset that is not yet ready for use44.

A company under IFRS framework should test an intangible asset with an indefinite useful life

for impairment by comparing its recoverable amount with its book value annually, as well as every

time when there are indications of a possible impairment of the intangible asset45.

Under BY GAAP an entity should specify in its accounting policy whether it will apply the

asset depreciation procedure. If impairment of assets is foreseen, then the accounting policy should

also indicate the procedure for determining the discount rate.

If there are indications of impairment, a recoverable amount of an item of intangible assets at

the end of the reporting period is determined as the higher of the current market value of the item

less the estimated costs directly related to its sell and the value in use.

The calculation of value in use is similar to that, described in the chapter 1.1.2.2, hence, there

is no need for the further clarification.

1.2.3 Goodwill

Belarusian legislation did not define goodwill before January 1st, 2015, when National

Standard №46 “Consolidated financial statement” (hereinafter - Standard №46) was implemented.

In the previous years accountants did not have the opportunity to recognize goodwill as a separate

item of financial statement.

This standard defines goodwill as an asset arising at the date of acquisition in the amount of

excess of investments of a parent company in the authorized capital of a subsidiary or associated

company over the value of the share capital of a subsidiary or associated company owned by the

parent company46.

According to paragraph 13 of Standard №46, goodwill is included in the consolidated

statement as an item of fixed assets.

44 Paragraph 11 of IAS 36 “Impairment of assets” of May 29th, 2013; paragraph 27.10 IFRS for SMEs, IASB, ed.

2015 45 Paragraph 108 of IAS 38 “Intangible assets” of May 12th, 2014; paragraph 27.9 IFRS for SMEs, IASB, ed. 2015 46 Paragraph 2 of National Standard №46 issued by the Ministry of Finance of the Republic of Belarus of June 30th,

2014

32

Under IFRS there are two standards that define the treatment of goodwill. IFRS 3 “Business

combinations” defines goodwill as an asset representing the future economic benefits arising

from other assets acquired in a business combination that are not individually identified and

separately recognized47. This standard sets out the principles on the recognition and measurement

of assets and liabilities acquired through a business combination and the determination of

goodwill. It requires an acquirer to recognize goodwill as the difference between:

the aggregate of: the consideration transferred measured in accordance with this IFRS,

which generally requires acquisition‑date fair value; the amount of any non‑controlling

interest in the acquire measured in accordance with this IFRS; and in a business

combination achieved in stages, the acquisition‑date fair value of the acquirer’s previously

held equity interest in the acquiree.

the net of the acquisition‑date amounts of the identify able assets acquired and the

liabilities assumed measured in accordance with this IFRS.

1.2.4 Derecognition and disposal

According to paragraph 112 of IAS 38 an intangible asset should be derecognized in two

cases: on its disposal or when the future economic benefits from the use of an asset are not expected

anymore.

As for Decree № 25 – it does not provide the clear situations as it is done in IAS 38, but it

establishes forms of different source documents that should be used when an item of intangible

assets is disposed, swelled or donated. Thus, it is put an emphasis on the documentation, but not

on disclosure or providing a guideline for accountants.

As a result, we can imagine a situation when an entity under IFRS should derecognize an asset

because it does not provide the company with economic benefits whereas under BY GAAP is not

required to derecognize the asset because expectation of economic benefits is an initial recognition

criterion, but it does note arise from the absence of this criteria in the future that an entity must

derecognize such a type of assets.

1.3 Inventories


Inventories are a critical component of the accounting records of commercial organizations

engaged in the production and sale of products. Their assessment as an element of the

47 Appendix A to IFRS 3 “Business combinations” of October 22nd, 2018

33

organization’s current assets is taken into account when determining its solvency. The higher the

estimate of inventories recognized in a balance sheet asset, the higher a current liquidity ratio,

which is calculated as the ratio of the entity’s current assets to its current liabilities. The greater its

value, the more solvent in the eyes of stockholders is the reporting entity.

On the other hand, the accounting methodology for assessing a company’s inventories has an

impact on the users' impression of the profitability of a business entity. From this point of view,

the cost of inventories is the capitalized expenses of the entity, which form the financial result of

the reporting period at the time of their decapitalization, that is, the write-off when sales are

booked.

The change in the value of the financial result (profit or loss), that is visible to users of

financial reports, forms the opinion of the users on the profitability of the entity. After all,

profitability indicators are calculated by comparing the amount of profit with a number of

indicators: WACC, costs, revenue, equity and others.

The volume of capitalization and decapitalization of costs for the purchase (creation) of an

entity’s inventories depends on the methods of allocating costs, which are determined by its

accounting policy regarding the accounting of the entity’s inventories48.

In formulating its main objective, IAS 2 indicates that the main issue in inventory accounting

is to determine the amount of costs to be recognized as an asset and transferred to the next reporting

periods before recognizing the corresponding revenue. This means that eventually, the meaning of

all accounting methodologies in the field of inventory accounting is to distribute the costs incurred

by an entity for the purchase (creation) of stocks between the balance sheet (capitalized part that

does not decrease the profit of the reporting period) and the profit and loss statement (the

decapitalized part, which forms the profit of the reporting period). This decision determines the

values of analytical indicators to assess profitability and solvency.

An important point in applying the requirements of IAS 2 is to determine its scope. First of all,

IAS 2 defines the concept of inventories. According to IAS 2, stocks are defined as assets49:

intended for sale during the main activity of the company;

created in the course of production for sale during the main activity of the company;

representing raw materials or materials intended for use in the production process or in the

rendering of services.

Compliance with at least one of the criteria, mentioned above, allows the relevant asset to be

classified as inventories.

48 Bancevich E.E., 2014 Inventories in IFRS. Ilex, 35, p.8 49 Paragraph 6 of IAS 2 “Inventories” of December 18th, 2003; paragraph 13.1 IFRS for SMEs, IASB, ed. 2015

34

IAS 2 states that inventories acquired also include items purchased for resale. These include,

for example, goods purchased by a retailer, or land and other property held for resale. Inventories

also include work in progress, produced by an entity, raw materials and materials intended for

further use in the production process. In service companies, inventory includes the cost of unsold

services, that is, those for which the entity has not yet recognized the related revenue.

Along with the special definition of the term “inventories”, IAS 2 separately introduces two

concepts: “net realisable value” and “fair value”.

According to IAS 2, the net realisable value of inventories is the estimated selling price in the

normal course of business less selling costs50.

The fair value of inventories is the amount by which an asset can be exchanged, or an

obligation settled when a transaction is made between well-informed, willing to make such a

transaction and independent from each other parties.

Two separate definitions of these concepts in the text of IAS 2 indicates that the net realisable

value of inventories may not be equal to their fair value less costs to sell. The fact is that the net

realisable value is related to the net amount that an entity expects to receive from the sale of stocks

in the course of normal activities, that is, is determined by management decisions of a particular

company. The fair value of inventories reflects the amount for which it is theoretically possible to

exchange similar stocks in a transaction between well-informed, willing buyers and sellers in the

market to make such a deal.

IAS 2 establishes a general rule that an entity’s inventories should be booked at the lower of

two values: cost and net realisable value51. According to IAS 2, the cost of inventories includes all

the acquisition costs, processing and other costs incurred in order to bring the stocks to their current

condition and place. Thus, the idea of determining the cost is to calculate the full

amount of costs incurred to purchase or produce an item of assets, attributable to inventories. The

cost of an entity’s acquisition of inventory in IAS 2 may include their purchase price, import

customs duties and other taxes (except those that are later refunded to companies by tax authorities,

such as VAT in domestic taxation practices), as well as the costs of transportation, processing and

other costs directly related to the acquisition of the item.

Defining the accounting treatment for the cost of inventory conversion, IAS 2 sets the rules

for capitalization and decapitalization of fixed and variable, direct and indirect costs associated

with the production and processing of stocks.

According to IAS 2, fixed overhead production costs are those indirect production costs that

remain relatively constant regardless of the volume of production, such as depreciation and

50 Paragraph 7 of IAS 2 “Inventories” of December 18th, 2003; paragraph 31.8 IFRS for SMEs, IASB, ed. 2015 51 Paragraph 9 of IAS 2 “Inventories” of December 18th, 2003; paragraph 13.14 IFRS for SMEs, IASB, ed. 2015

35

maintenance of buildings and equipment and administrative and management costs.

Variable overhead production costs are those indirect production costs that are directly or

almost directly dependent on changes in the volume of production, such as raw materials costs and

indirect labor costs.

The procedure for assigning fixed costs to the units of production is determined by the

accounting policy of the entity, which should take into account the specifics of the conditions of

its activities as much as possible.

A calculation of the fixed costs of the company attributable to the expenses of the reporting

period affects the amount of profit for the current reporting period. The more fixed costs are

recognized as an expense (decapitalized), the lower the profit and, accordingly, the entity's

profitability indicators are more modest.

IAS 2 contains a special list of examples of costs that are not attributable to the cost of

inventories but are recognized as expenses in the period in which they are incurred. These

include52:

above-limit loss of raw materials, labor or other production costs;

storage costs, unless they are necessary in the production process to proceed to the next

stage;

administrative overhead costs that are not related to bringing stocks to their present location

and condition;

costs of sale.

Another important aspect of inventory accounting in accordance with IAS 2 is the choosing a

method for measurement of interchangeable inventories, which allows to determine the cost of

inventories transferred to production (or sale), the batches of which have different acquisition price

or cost price. At the same time, it is important that IAS 2 establishes a general rule that the cost of

individual stock items that are not interchangeable, as well as goods and services intended for

special projects, should be determined by identifying individual item of inventories and costs. IAS

2 states that the calculation of actual costs for specific inventory units means that certain stocks

are allocated to certain items of expenses. IAS 2 determines that when there is a large amount of

inventories that can be interchanged, to obtain predetermined effects on P/L the method of

selecting those inventories that remain capitalized in the balance sheet can be used. IAS 2

establishes that the cost of inventories, which are interchangeable and do not belong to the group

of inventories that are intended for special projects, is determined by the FIFO method (first in -

first out, the first purchased - the first sold) or by the weighted average cost method. At the same

52 Paragraph 16 of IAS 2 “Inventories” of December 18th, 2003; paragraph 13.13 IFRS for SMEs, IASB, ed. 2015

36

time, according to IAS 2, an entity is required to apply the same valuation methods for all

inventories of similar nature53.

The meaning of these methods is familiar to domestic accounting specialists. In accordance with

Decree of the Ministry of Finance of the Republic of Belarus of November 12th 2010 №133

"Concerning approval of the instruction on inventory accounting"(hereinafter - Decree №133), the

cost method for accounting of raw materials, materials and other material resources is made in

accordance with the accounting policies adopted by an entity and includes the following methods:

by average prices; accounting prices, taking into account deviations from their actual value; at first

purchase prices (FIFO)54.

Thus, the domestic accounting practice suggests the possibility of using a larger number of

methods for estimating decapitalization of inventories than provided by IAS 2.

The use of inventory valuation methods (FIFO or average prices) can change the

measurement of two indicators of financial statements: financial result and the value of inventories

as an item of an entity’s current assets.

IAS 2 determines that when using the FIFO method, stocks purchased or produced first

will be written off first, respectively, inventories remaining in the balance sheet at the end of the

reporting period were the last to be acquired or produced. At the same time, it is of fundamental

importance that the FIFO method does not allow to take into account the effect of inflation rates

in the market. In this method, inventories are written-off at "outdated" prices that do not reflect

their current value, or, in other words, the cost of resources necessary for the continuation of the

entity’s activities. At the same time, stocks reflected at the end of the reporting period in the asset

balance, on the contrary, receive an estimate as close as possible to their replacement cost. Since

the latter is closer to a fair assessment, the FIFO method, which focuses on the informational

priority of the balance sheet over the profit and loss statement, in conditions of significant price

movements is more consistent with the task of presenting information about the entity’s solvency

compared to evaluating the profitability.

Using the method of average prices allows to level the effect of the dynamics of prices for

accounting information. According to the weighted average cost method, the cost of each item of

decapitalized inventories is determined from the weighted average cost of similar items at the

beginning of the period and the cost of the same stocks purchased or produced during the period.

The average value can be calculated on a periodic basis or upon purchase of each additional batch,

depending on the circumstances of the company.

53 Paragraph 25 of IAS 2 “Inventories” of December 18th, 2003; ; paragraph 13.18 IFRS for SMEs, IASB, ed. 2015 54 Paragraph 14 of Decree of the Ministry of Finance of the Republic of Belarus of November 12th 2010 №133

"Concerning approval of the instruction on inventory accounting"

37

The use of methods of accounting prices, taking into account deviations from their actual value

for inventories released into production or written off for other purposes can be carried out in

domestic practice with the following options:

based on the average monthly actual cost, the calculation of which includes the quantity

and cost of materials at the beginning of the month and all purchases for the month

(reporting period);

by determining the actual cost of the material at the time of its release, when the calculation

of the average price includes the amount and cost of materials at the beginning of the month

and all purchases until the release.

The option of calculating the average prices of materials should be disclosed in the accounting

policies of the organization.

According to IAS 2, the cost of inventories may not be recoverable if these stocks are

damaged, if they are completely or partially obsolete, or if their possible selling price has

decreased. IAS 2 states that entities must revaluate inventories to the net realisable value (contrary

to Decree №133)55, which follows the general rule of international standards, according to which

assets should not be taken into account above the amounts expected from their sale or use. IAS 2

defines a number of requirements for calculating the net realisable value of inventories. It is

important to remember that the net realisable value of inventories is not a possible selling price,

but the difference between the estimated possible selling price and the value of the expected

possible costs associated with their sale. The net realisable value of inventories held for sale of

rendering of services is based on the price determined in contracts. If the sales contract is for less

than stocks, then the net realisable value of the remaining part of the stocks is based on the general

level of the selling prices. If inventories are expected to be sold not lower than the cost, then raw

materials and other materials in the stocks, which may be included in the cost price of such

products, are not impaired below their cost price. However, when the reduction in the price of raw

materials indicates that the cost of finished products exceeds the net realisable value, that is, the

possible selling price (minus the cost of sales), then the raw material is written down to the net

realisable value. In this case, the best measurement of the net realisable value is determined the

cost of replacing the raw materials.

In each reporting period, a new assessment of the net realisable value of stocks should be

made. In cases when the circumstances that caused the need to write down inventories ceased to

exist or when there was evidence of an increase in the net realisable value of stocks due to changes

in economic conditions, the corresponding amount of the write-down should be reversed to the

55 Paragraph 28 of IAS 2 “Inventories” of December 18th, 2003; paragraph 13.4 IFRS for SMEs, IASB, ed. 2015

38

extent of the original write-down to bring the new value to the lesser of two values: cost or revised

net realisable value. Also, IAS 2 indicates that any amount of reversal of the write-down

(decapitalized) cost of inventories caused by an increase in net realisable value should be

recognized as a decrease in the value of inventories recognized as an expense (decapitalized)

during the period of reversal.

The ability to use different methods of inventory valuation provided by IAS 2 makes it

necessary to include in IAS 2 prescriptions on what information should be disclosed in financial

statements of entities applying it. An important aspect is the disclosure of the contents of the

accounting policies adopted for valuation of inventories, including the method used to calculate

their cost and method for evaluating interchangeable inventories.

The conducted study allows to conclude that the approaches to the assessment of objects

of decapitalized inventories in the national accounting system of the Republic of Belarus do not

contradict international experience and accounting standards.

39

CHAPTER II. EVALUATION OF THE IMPLEMENTAION OF

INTERNATIONAL FINANCIAL REPORTING STANDARDS

AND ITS IMPACT ON FINANCIAL REPORTING OF BEK-

EXPERT

2.1 Company profile

BEK-Expert JLLC is one of the divisions of the FEC group of companies, the share of foreign

investments in the authorized capital of the company is 99%.

The company was established in accordance with the legislation of the Republic of with the aim

of carrying out economic activities aimed at making a profit.

FEC group of companies is the largest supplier of foreign electronic components for the

development, production and repair of consumer and industrial electronics in the Republic of

Belarus. The head office is located in Minsk. The range of goods supplied is more than 300

thousand items and is divided into the following main groups:

- optoelectronic devices and display elements;

- capacitors, resistors;

- relays;

- connectors;

- transformers, fuses, fans, etc.;

- components for the repair of consumer and industrial electronics;

- measuring devices, power supply equipment, etc.;

- housing for electronic equipment.

There is a huge range of components supplied from leading global manufacturers:

- digital, analog and specialized chips: Motorola, Fairchild, Infineon Technologies, National

Semiconductor, ON Semiconductor, Texas Instruments, Toshiba, Vishay, Intersil,

STMicroelectronics, MAXIM, Fujitsu, Liner Technology;

- power electronics: IGBT, MOSFET, Power MOSFE, International Rectifier, Semikron, Vishay,

Motorola, Toshiba, IXYS, EUPEC;

- optoelectronics: LITE-ON, KingBright, Vishay, Agilent Technologies, Rohm, Infineon, Para

Light;

- passive components: Vishay, Epcos, Murata, Rohm, BC Components, Yageo, Phycomp;

- connectors and terminal blocks: Tyco Electronics AMP Gmbh, Molex, WAGO, Excel Cell,

Schlemmer, HTS;

40

- buttons and switches: Cherry, Augat, Omron;

- optical, inductive and capacitive sensors: Turck, LEM;

-relay: Telecom, Reed, industrial, automotive, Tyco Electronics, Axicom, Tyco Electronics,

Schrack, Relpol, Omron, Meder, NAIS;

- coils: Murata, Vishay, Epcos, Siemens;

- buzzer, piezo emitters: Hitpoint;

- network transformers, small-sized: Marschner, MYRRA;

- a wide range of domestic electronic components.

An important role in the effective and profitable work of BEK-expert is played by a rational

work organization and a well established management system.

The structure of management of the organization is determined in the management scheme,

in the organizational charts. The company is managed in accordance with the current legislation

and the company statute.

According to the organizational charts as of 01.01.19. the number of employees of the

company was 18 people. Financial and economic work at BEK-expert is organized and carried out

by the financial and economic departments.

The level of automation of the company's management process is at a fairly high level.

Accounting is performed in the software “1C: Enterprise 7.7”.

2.2 Methodology

In this chapter the cases from the business activity of BEK-expert are represented to evaluate

the impact of different accounting frameworks on financial statements. This part captures 7 years

of the company’s activity starting from 2012. Accounting treatment of a particular assets is shown

in the tables in the form of journal entries and comments to these tables. For this purpose,

information from the company’s general ledger has been used to represent the treatment under BY

GAAP, and the author’s computations derived from the international accounting standards are

used to evaluate the transaction happened according to IFRS. Recommendations are given based

on the conducted study.

2.3 Case study I: Acquisition of PPE. Depreciation charge. Repairment costs

2.3.1 Case summary

BEK-expert in May 2014 entered into a contract with a third-party contractor. According to

the agreement the contractor should make a street led advertisement banner (dimensions are 6 m

x 0.89 m), which will be located directly on its office roof, the cost of work is 3,160 BYN

(including VAT 527 BYN), installation costs are 474 BYN (including VAT - 79 BYN). The work

41

on creating the asset were done on 26 May, 2016 and all the documents for accounting purposes

were received on the same day. The banner was shipped to the customer location and installed on

27 May, 2016.

2.3.2 Recognition and initial measurement

First of all, we need to check whether this banner meets all the requirements to be recognized

as an item of PPE; the comparison of the PPE recognition requirements is represented in Table 1:

Table 1. The recognition criteria for PPE under IFRS and BY GAAP

Decree №26 IAS 16

Used in the company’s business activities

Probable that future economic benefits associated with the asset will flow to the company

Cost can be measured reliably

Intended for use during more than 12 months Expected to be used during more than one

period

Not expected to be sold within 12 months -

Source: Author’s own comparison based on IAS 16 and Decree №26

Thus, both domestic and international accounting standards allows to recognize the item as

PPE, besides, both accounting approaches capitalize costs of installation and as it follows, in Table

2 we can see the following entries:

Table 2. Journal entries at the recognition

Date Transaction Debit Credit Amount (BYN)

27.05.2014 The item received, put in use and recognized as PPE

PPE

AP

3,028

27.05.2014 Input VAT is booked Input VAT AP 606

Source: BEK-expert’s journal entries based on IAS 16 and Decree №26

2.3.3 Subsequent measurement. Depreciation

Depreciation in domestic accounting starts in the month, following the date when an asset was

put in use which differs from IFRS, where it begins, when the asset is available for use or, more

precisely, when the asset is in the desired condition and location which perfectly meets our case.

Thus, in domestic accounting Depreciation starts in June and according to IFRS it starts in May.

The commission on depreciation decided to determine the asset’s useful life equal to 5 years

according to Decree №161 and straight-line method was chosen for the asset’s depreciation as it

reflects the pattern of future economic benefits consumption. We assume the same decision is

made by accountants following the IFRS rules. The only difference arising here is that domestic

depreciation starts in June and international depreciation begins in May.

42

It is assumed that zero residual value is used according to IFRS (due to the high level of the

asset’s customization which results in inability to sell it) and according to domestic standards the

company uses its right not to apply residual value concept.

The entries represented in Table 3 appear on the company’s accounts during the asset’s useful

life on a monthly basis:

Table 3. Journal entries on the depreciation

Date Transaction Debit Credit

Amount (BYN) BY GAAP IFRS

Last day of each month starting from

June 2014 (last charge is on May

2019)

Last day of each month starting from May 2014 (last charge is on April

2019)

Depreciation charge

P/L Accumulated depreciation

50.47*

Source: BEK-expert’s journal entries based on IAS 16 and Decree №37/18/6. Note: *3,028/60

2.3.4 Repairment costs

In December 2016 after a windstorm the metal construction of the banner as well as the light

emitting diode array was damaged and needed to be replaced. Repairing was performed on 26

December, 2016 by an external company and costed 450 BYN (including VAT of 75 BYN).

Decree №26 and Decree №37/18/6 offer different treatment for the costs incurred during

modernization and repairment. Repairment can not be capitilized in contrast with IAS 16,

paragraph 13, which allows to capitalize some repair costs if they meet recognition criteria.

Domestic legislation defines repairment as an activity aimed at restoring performance of an asset,

and modernization is aimed at improving it. Therefore, there are two different ways to account for

this transaction. In Table 4 it is represented accounting of repairment under domestic standards:

Table 4. Journal entries on the repairment costs incurred under BY GAAP

BY GAAP


26.12.2016 Repairment costs P/L AP 374


Source: BEK-expert’s journal entries based on Decree 26 and Decree №37/18/6

In IFRS parts that are replaced during a repair should be derecognized according to paragraph

13 of IAS 16. In addition, paragraph 70 of IAS 16 allows to determine amount of replaced parts

equal to the replacement costs. Thus, in Table 5 we obtain the following entries:

Table 5. Journal entries on the repairment costs incurred under IFRS

IFRS


26.12.2016 Repairment costs PPE AP 374


26.12.2016 Derecognition of the

replaced parts P/L PPE 374

Source: Author’s own computations based on IAS 16

43

2.3.5 Useful life review under IFRS

Domestic legislation does not allow to review an asset’s useful life after repairments even it

gives the right to review it in the beginning of every financial year (paragraph 24 of Decree

37/18/6). In turn, paragraph 51 of IAS 16 requires to review an asset’s useful life at least at each

financial year-end. Let’s assume, the company reviewed the asset’s useful life and defined it equal

to 7 years. As a result, starting from January 2017 the depreciation charge for the assets will differ

from the one, calculated according to IFRS (see Table 6).

Table 6. Journal entries on the depreciation after review


BY GAAP: last day of each month starting from June 2014 Depreciation

charge P/L

Accumulated depreciation

50.47*

IFRS: last day of each month starting from January 2017

27.17**

Source: Author’s own computations based on IAS 16. Note: *3,028/60; **1,413/52

Carrying amount of the asset by the date of its useful life revision equals 3,028 −

(50.47 × 32) = 1,413 and the remaining useful life is not 28 months as it was before revision,

but 24 months more. Thus, we devide the carrying amount by the remaining useful life in months

(52) and get a new depreciation charge.

Table 7 sums up the transactions happened in 2014 under IFRS and BY GAAP and shows the

year-end difference in the asset’s carrying amount.

Table 7. Journal entries for the year 2014

2014

Date Transaction

IFRS BY GAAP

Dr Cr Amount (BYN)

Dr Cr Amount (BYN)

27.05.2014 PPE received

and recognized

PPE AP 3028 PPE AP 3028

27.05.2014 Input VAT

booked Input VAT

AP 606 Input VAT

AP 606

31.05.2014- 31.12.2014

Depreciation charge


403,76 P/L Accumulated depreciation

353,29

Closing balance carrying amount

2624,24 2674,71

Source: Author’s own computations based on IAS 16, BEK-expert’s journal entries based on Decree 26

and Decree №37/18/6

The asset’s carrying amount is higher because of the earlier starting date of the depreciation

under IFRS; the impact on the balance sheet and profit and loss statement: both IFRS and BY

GAAP recognize 3б028 BYN the same cost of PPE in the balance sheet, but since under IFRS

depreciation starts earlier, the carrying amount under BY GAAP will be more: 2,674.71 BYN

against 2,624.24 BYN under IFRS reporting, and 353.29 BYN and 403.76 BYN will be recognized

as items of P/L under BY GAAP and IFRS respectively.

44




2015

Date Transaction

IFRS BY GAAP

Dr Cr Amount (BYN)

Dr Cr Amount (BYN)

31.01.2015- 31.12.2015

Depreciation charge


605.64 P/L Accumulated depreciation

605.64


2,018.6 2,069.07




under IFRS; the impact on the BS and P/L: since under IFRS depreciation starts earlier, the

carrying amount under BY GAAP will be more: 2069.07 BYN against 2018.6 BYN under IFRS

reporting, and the same amount of 605.64 BYN will be recognized as items of P/L under both

approaches.




2016

Date Transaction

IFRS BY GAAP

Dr Cr Amount (BYN)

Dr Cr Amount (BYN)

26.12.2016 Repairment PPE AP 374 P/L AP 374

26.12.2016 Input VAT Input VAT

AP 76 Input VAT

AP 76

26.12.2016 Derecognition of the replaced

parts P/L PPE 374

-

31.01.2016- 31.12.2016

Depreciation charge


605.64 P/L Accumulated depreciation

605.64


1,412.96 1,463.43


and Decree 37/18/6


under IFRS; the impact on the BS and P/L: since under IFRS depreciation starts earlier, the

carrying amount under BY GAAP will be more: 1,463.43 BYN against 1,412.96 BYN under IFRS

reporting, and the same amount of 979.64 BYN will be recognized as items of P/L under both

approaches.

Table 10 sums up the transactions happened in 2017 under IFRS and BY GAAP and shows

the year-end difference in the asset’s carrying amount.

45


2017

Date Transaction

IFRS BY GAAP

Dr Cr Amount (BYN)

Dr Cr Amount (BYN)

31.01.2017- 31.12.2017

Depreciation charge

P/L Acc.

depreciation 326.04 P/L

Acc. depreciation

605.64


1,086.92 857.79




under IFRS and the depreciation charge had changed as a result of reviewed useful life; the impact

on the BS and P/L: after review of the asset’s useful life, the depreciation charge has changed and

as a result by the end of month we obtain the higher carrying amount under IFRS: 1,086.92 BYN

against 857.79 BYN under BY GAAP reporting, and 326.04 BYN and 605.64 BYN will be

recognized as items of P/L under IFRS and BY GAAP respectively.

Table 11 sums up the transactions happened in 2018 under IFRS and BY GAAP and shows

the year-end difference in the asset’s carrying amount.


2018

Date Transaction

IFRS BY GAAP

Dr Cr Amount (BYN)

Dr Cr Amount (BYN)

31.01.2018- 31.12.2018

Depreciation charge

P/L Acc.

depreciation 326.04 P/L

Acc. depreciation

605.64


760.88 252.12



By the end of the 5-year period the asset under IFRS has three times bigger carrying

amount recognized in BS and still has 28 months of the remaining useful life, whereas the asset

under BY GAAP has just 5 months remaining. It means that IAS16 allows to reflect the benefits

consumption pattern in a better way, because in May 2019 when under BY GAAP the item is fully

depreciated, it will still be in operation. Thus, the matching principle of expenses and revenues

will be violated. The impact on P/L is the following 605.64 BYN are recognized as expenses in

P/L under BY GAAP and just 326.04 BYN under IFRS.

46

2.4 Case study II: Acquisition of PPE. Borrowing costs

2.4.1 Case summary

The company in September 2013 acquired from an individual a used car worth 24,000 BYN

for management needs. The payment was made in advance on 10 September 2013, a 15-months

loan was taken for this purpose.

The loan was issued with the floating interest rate equal to the refinancing rate of the National

Bank of Belarus + 2%, without the possibility of early repayment.

The car was received by the company on September 11. On the same day, a contract of

compulsory insurance of civil liability for drivers of vehicles for a period of 15 days was signed

and the insurance premium was paid in the amount of 30 BYN.

The car is registered in the traffic police and recognized as an item of PPE on September 14.

The entity paid the fee for registration in the amount of 90 BYN. The total kilometers logged at

the date of acquisition is 16,984 km. Table 12 lists the refinancing rates set by the National Bank

of Belarus during the loan agreement.

Table 12. Refinancing rates, September 2013-June 2014

Month Rate, %

September 2013 23.5

October 2013 23.5

November 2013 23.5

December 2013 23.5

January 2014 23.5

February 2014 23.5

March 2014 23.5

April 2014 22.5

May 2014 21.5

June 2014 21.5

July 2014 20.5

August 2014 20

September 2014 20

Source: Official website of the National Bank of the Republic of Belarus

All the costs directly attributable to an acquisition of PPE are included in cost of an item both

in IAS 16 and in Decree №26. Paragraph 1 of IAS 23 specifies that only borrowing costs incurred

for a qualifying asset (an asset that takes a lot of time to get ready for its use). Domestic standard

allowed entities to capitalize borrowing costs during January 2013 - December 2016.

The useful life of the car was determined by the commission equal to 500,000 km. Units of

production depreciation method was chosen for the car. Information on the kilometers covered is

shown in Table 13. The company does not intend to use the asset for more than 5 years with an

average annual mileage of 15,000 km.

For IFRS purposes it is assumed that residual value estimated by accountants for depreciation

purposes equals to 10,000 BYN (5 years of expected use multiplied by 15,000 km and compared

47

to the useful life with respect to obsolescence). Contrary, Decree №26 does not require to use

residual value concept.

Table 13. Car usage, 2013-2018

Year Kilometers covered

2013 4,214

2014 14,629

2015 15,037

2016 16,452

2017 14,728

2018 9,269

Source: Official website of the National Bank of the Republic of Belarus

2.4.2 Recognition and initial measurement

As it was described in the first case, an asset should meet certain requirements to be

recognized as an item of PPE (see Table 14).

Table 14. The recognition criteria for PPE under IFRS and BY GAAP

Decree №26 IAS 16


Probable that future economic benefits associated with the asset will flow to the company


Intended for use during more than 12 months Expected to be used during more than one

period

Not expected to be sold within 12 months -

Source: Author’s own comparison based on IAS 16 and Decree №26

Table 15 represents the transactions related to the car recognition and initial measurement.

Table 15. Journal entries at the recognition under BY GAAP

BY GAAP

Date Transaction Dr Cr Amount (BYN)

10.09.2013 The loan received Bank account Loans 24,000

10.09.2013 Payment for the

asset AP Bank account 24,000

11.09.2013 The car received Investments in

fixed assets AP 24,000

11.09.2013 Registration fees paid Investments in

fixed assets AP 120

14.09.2013 Interest incurred

before the car was put in use

Investments in fixed assets

Interest expense

85

14.09.2013 The car recognized

as PPE PPE

Investments in fixed assets

24,205

31.10.2013-31.12.2013

Depreciation charge P/L Accumulated depreciation

204

31.09.2013-31.12.2013

Interest recorded Interest expense

Interest payable 1,694.77

31.12.2013 Interest capitalized PPE Interest expense

1,609.77

The item of PPE closing balance at 31.12.2013 25,814.77

The item of PPE accumulated depreciation at 31.12.2013 204

Source: BEK-expert’s journal entries based on Decree 26. Notes:*24,205/500,000*4,214; **1,694.77-85

48

Under IFRS the costs capitalized to the item of PPE are different: interest expense is not

included (see Table 16), because the car does not meet the definition of a qualifying asset under

IAS 23, paragraph 5.

Table 16. Journal entries at the recognition under IFRS

IFRS


10.09.2013 The loan received Bank account Loans 24,000

10.09.2013 Payment for the asset AP Bank account 24,000

11.09.2013 The car received PPE AP 24,000

11.09.2013 Registration fees paid PPE AP 120

31.09.2013-31.12.2013


14,120/500,000* *4,214=119

31.09.2013-31.12.2013

Interest recorded P/L Interest payable 1,694.77

The item of PPE closing balance at 31.12.2013 24,120

The item of PPE accumulated depreciation at 31.12.2013 119

Source: Author’s own computations based on IAS 16 and IAS 23

Difference in the car’s depreciation charge is mainly due to the IAS 16 requirement to apply

residual value concept. Thus, under BY GAAP requirements the amount of 25,610.77 BYN

(25,814.77-204) was recognized in the BS, whereas under IFRS it is 24,101 BYN (24,120-119).

On the other hand, all the interest expenses in the amount of 1,694.77 BYN go directly to P/L

under IFRS, but not capitalized as it was done under BY GAAP. The journal entries for the years

2014-2018 are shown in Tables 17-20.

Table 17. Journal entries for the year 2014 under BY GAAP

BY GAAP


31.01.2014-31.12.2014


761.71= 25,814.77/(500,000-

4,214)*14,629

31.01.2014-31.09.2014

Interest recorded Interest expense Interest payable 1,755.08

31.12.2014 Interest capitalized PPE Interest expense 1,755.08


The item of PPE accumulated depreciation at 31.12.2014 965.71

Source: BEK-expert’s journal entries based on Decree 26 and Decree 37/18/6

In the end of 2014 the interest expense incurred was also capitalized by the end of the year

and the depreciation charge per 1 kilometer changed, whereas under IFRS there is the interest

expense that is attributed directly to P/L as a result the following amounts went to the statements:

under BY GAAP the carrying amount of 26,604.14 BYN (27,569.85-965.71) was recognized in

the balance sheet, whereas under IFRS it is 23,587.88 BYN (See Table 17). On the other hand, all

the interest expenses in the amount of 1,755.08 BYN go directly to profit and loss statement under

IFRS, but not capitalized as it was done under BY GAAP.

49

Table 18. Journal entries for the year 2014 under IFRS

IFRS


31.01.2014-31.12.2014


413.12

31.01.2014-31.09.2014

Interest recorded P/L Interest payable 1,755.08




Since the loan was paid out in 2014 and no more interest expenses were recorded on accounts

starting from 2015, there was just one entry related to the asset during January 2015- July 2018.

Table 19. Journal entries for the years 2015-2018 under BY GAAP

BY GAAP


31.01.2015-31.12.2015


861.61


The item of PPE accumulated depreciation at 31.12.2015 1,827.32

31.01.2016-31.12.2016


942.68


The item of PPE accumulated depreciation at 31.12.2016 2,770

31.01.2017-31.12.2017


843.9



31.01.2018-31.07.2018


531.1



Source: BEK-expert’s journal entries based on Decree 26 and Decree 37/18/6

During the period represented in Table 18 just normal depreciation took place.

Table 20. Journal entries for the years 2015-2018 under IFRS

IFRS


31.01.2015-31.12.2015


424.65



31.01.2016-31.12.2016


464.6



31.01.2017-31.12.2017


415.92



31.01.2018-31.07.2018


261.76

The item of PPE closing balance at 31.07.2018 24120



50

By the end of the asset’s useful life the carrying amount under BY GAAP was equal to

23,424.85 BYN and 22,020.05 BYN under IFRS. Through 2015-2018 the amount of 3,179.29

BYN went to P/L in the form of depreciation under BY GAAP and 1,566.93 BYN under IFRS.

2.4.3 Disposal

In the beginning of August 2018 the company decided to sell the car and placed an advert on

different car-selling websites. Before the sale the car was still in use, it was sold on 28 August,

2018 for 16,500 BYN (excluding VAT).

Under IFRS there is a separate standard that classifies assets as held for sale – IFRS 5. To be

classified as held for sale an asset should meet some requirements: if it is considered that an asset

carrying amount will be recovered through a sale, but not through a continuing use, also the asset

should be available for immediate sale and the sale should be highly probable.

This perfectly meets the case; thus, the car should be accounted for as held for sale starting from

August.

Depreciation ceases for assets held for sale according to paragraph 25 of IFRS 5.

Assets should be measured at lower of its carrying amount and fair value, when classified as held

for sale. In this example for IFRS purposes the selling price is used as fair value.

Domestic legislation has the same concept of accounting for the assets, intended for sale, which is

described in Decree №25.

Besides the criteria listed in Decree №25, to be classified as held for sale, an asset should not

be used by a company and this contradicts the case. Thus, from domestic accounting’s point of

view the car is accounted for as an item of PPE (see Table 21) as it was accounted before.

Table 21. Journal entries for the car’s disposal under BY GAAP

BY GAAP


28.08.2018 Recognized revenue

from the sale AR P/L 19,800

28.08.2018 Output VAT P/L Output VAT 3,300

28.08.2018 Accumulated

depreciation was written-off


PPE 4,145

28.08.2018 Carrying amount of PPE was written-off

P/L PPE 23,424.85

28.08.2018 Financial result from

the sale Loss P/L 6924.85

Source: BEK-expert’s journal entries based on Decree 26 and Decree 37/18/6. Notes:

Accounting treatment under IFRS (see Table 22) differs in the way that the asset meets the

requirements of IFRS 5 and qualified as held for sale, its depreciation cease in the month, when

it is qualified as held for sale.

51

Table 22. Journal entries for the car’s disposal under IFRS

IFRS


01.08.2018 Accumulated

depreciation was written-off


PPE

2,099.05

01.08.2018 The car was

classified as held for sale

Assets held for sale

PPE 22,020.95

28.08.2018 Carrying amount of PPE was written-off

P/L Assets held for

sale 16,500

28.08.2018 Impairment recorded P/L Assets held for

sale 5,520.95*

28.08.2018 Recognized revenue

from the sale AR P/L 19,800**

28.08.2018 Output VAT P/L Output VAT 3,300

28.08.2018 Financial result from

the sale Loss P/L 5,520.95

Source: Author’s own computations based on IAS 16 and IFRS 5. Notes: *22,020.95-16,500;

**16,500*120%

Based on the example described above, it can be concluded that the domestic legislation for

borrowing costs, used during 2013-2017 contradicted the prudence concept (not to overestimate

assets) and decreased the level of relevance of financial information represented in financial

statements.

Concerning the treatment of assets held for sale it can be said that it is important for investors

and stakeholders to have information reflected in financial statement separately, when a company

decides to sell an asset. And domestic accounting standards give this opportunity, but due to some

differences in criteria needed for classification of assets as held for sale, in this example it led to

the different approaches used under IFRS and BY GAAP, which also makes a presentation of

financial statements under BY GAAP less faithful.

2.5 Case study III: Acquisition of PPE. Precious metals

2.5.1 Case summary

On 24 October, 2012 the company acquired four personal computers for the prices listed in

Table 23.

Table 23. Price list of computers acquired, BYN

Computer №1 1,105.7

Computer №2 451.83

Computer №3 377.6

Computer №4 586.25

Source: BEK-expert’s accounting data based on the delivery note

Computer №2 broke in March 2016, and in May 2016 computer №4 broke. In computer № 2,

the system unit was broken. Computer №4 - the monitor, keyboard and mouse. Repair of these

52

components was not possible. The depreciation commission decided to write off both computers.

Spare parts, that were in operating conditions, were received as a result of the write-off of these

computers.

Later, it was decided to use spare parts to create a new computer.

From the write-off of the computer № 1, a monitor, mouse and keyboard suitable for further use

were capitalized. From computer № 2 - the system unit. The cost of these components is

determined by the company based on the value of similar assets, considering the degree of wear

and tear, made up at 250 BYN (150 BYN –spare parts from computer №2). Useful life was

determined by the commission equal to 17 months.

Broken components received from the write-off of the computers were transferred to the third

party for dismantling and primary processing. The cost of services for primary processing – 57,61

BYN.

The act of the results of primary processing of scrap was received from the contractor in May

2016. According to it, the content of precious metals in the system unit, monitor, mouse and

keyboard is: gold - 0.91 g, silver - 1.62 g, palladium - 0.35 g.

The estimated prices for precious metals from 01.05.2016 amount to 1 g: gold – 81.24 BYN;

silver – 0.97 BYN; palladium – 32.34 BYN.

Scrap containing precious metals was transferred to the State Fund.

Carrying amount and accumulated depreciation of the computer № 2 under BY GAAP was 150.61

and 301.22 BYN respectively, of the computer №4 – 175.88 and 410.38 BYN respectively.

According to the accounting policy, depreciation on computers is charged on a straight-line

basis, useful life is 5 years.

When fully depreciated, computers were transferred to the third party for dismantling and

primary processing. The cost of services for primary processing – 152.71 BYN.

The act of the results of primary processing of scrap was received from the contractor in October

2017. According to it, the content of precious metals in the computers is: gold - 1.71 g, silver -

4.15 g, palladium - 0.74 g.

The estimated prices for precious metals from 01.12.2016 amount to 1 g: gold – 77.3 BYN;

silver – 1.01 BYN; palladium – 56.18 BYN. Scrap containing precious metals was transferred to

the State Fund.

2.5.1 Precious metals treatment

After the write-off of computers, it is prohibited to throw away the faulty components (system

unit, monitor, keyboard and mouse). Because they contain precious metals. And this means that

all the precious metals must be removed and handed over to the state to replenish the State Fund.

Entities are obliged to account precious metals in all types and states.

In this situation, the disassembly of the system unit, monitor, keyboard and mouse to extract

53

scrap containing precious metals was made by a third-party.

The cost of scrap is determined based on the weight of these precious metals in it (in grams)

and estimated prices for them, which are set by the Ministry of Finance. For calculation, prices are

taken on the first day of the month when scrap is accepted for accounting.

Table 24 represents the journal entries for the computers during their useful life.

Table 24. Journal entries for the computers under BY GAAP

BY GAAP


24.10.2012 PPE received PPE AP 2,521.43

24.10.2012 Input VAT Input VAT AP 504.29

30.11.2012- 29.02.2016

Depreciation charged till March 2016


1,680.95

March 2016 Accum. depreciation

write-off Accumulated depreciation

PPE 301.22

March 2016 Carrying amount write-

off P/L PPE 150.61

March 2016 Inventories from

disposal recognized Inventories P/L 150

31.03.2016-30.04.2016

Depreciation charge for the remaining 3

computers P/L


68.99

May 2016 Accum. depreciation


PPE 410.38

May 2016 Carrying amount write-

off P/L PPE 175.88

May 2016 Inventories from


31.05.2016 Depreciation charge for

the remaining 2 computers


24.72

May 2016 New item of PPE was

created PPE Inventories 250

March-May 2016

Precious metals received

Inventories P/L 86.82*

March-May 2016

Cost of the precious decapitalized

P/L Inventories 86.82

March-May 2016

Revenue from transferring the

precious metals was recognized

AR P/L 86.82

March-May 2016

Costs from extracting of precious metals

recognized P/L AR 57.61

30.06.2016- 31.10.2017


670.28

31.10.2017 Accum. depreciation


PPE 1733.35

October 2017 Precious metals

received Inventories P/L 177.95 **

October 2017 Cost of the precious

decapitalized P/L Inventories

177.95

October 2017

Revenue from transferring the

precious metals was recognized

AR P/L 177.95

October 2017 Costs from extracting

of precious metals recognized

P/L AR 152.71

Source: BEK-expert’s journal entries based on Decree 26, Decree 34 and Decree 37/18/6 Notes: *(0.91 x

81.24) + (1.62 x 0.97) + (0.35 x 32.34);** (1.71 x 77.3) + (4.15 x 1.01) + (0.74 x 56.18)

54

Even under IFRS the company should follow legislation of its residence and account precious

metals as it is stated in Decree №34.To account for precious metals under IFRS the concept of

residual value should be used as it is required by paragraph 6 of IAS 16. The company can use

technical documentation of PPE to make an estimation of the value of precious metals.

Moreover, this residual value should be reviewed annually according to paragraph 51 of IAS

16. For this purpose, prices for precious metals published by the Ministry of Finance can be used

(see Table 25).

Table 25. Prices for precious metals set by the Ministry of Finance of Belarus

Date\Price Gold (BYN) Silver (BYN) Palladium (BYN)

31.12.2012 44.85 0.84 15.93

31.12.2013 35.6 0.57 20.65

31.12.2014 39.19 0.54 26.62

31.12.2015 58.48 0.78 30.37

31.12.2016 71.95 1.01 46.31

Source: Official website of the Ministry of Finance of the Republic of Belarus

Besides, for the purposes of determining the residual value and its annual reviewing the

information on precious metals in the computers acquired can be found in Table 26.

Table 26. Content of precious metals in the computers acquired

Gold, g Silver, g Palladium, g

Computer №1 0.96 1.65 0.38

Computer №2 0.92 1.62 0.36

Computer №3 0.90 1.59 0.34

Computer №4 0.90 1.60 0.34

Source: Technical documentation of the computers

For the computer, created from the spare parts, containing of the precious metals is determined

as an average of its “parental” computers: №2 and №4.

Multiplying the data from these two tables above we will obtain residual value of the

computers for each year in use (see Table 27).

Table 27. Residual value for the computers for IFRS purposes, BYN

Date\Residual value Computer №1 Computer №2 Computer №3 Computer №4

31.12.2012 51.50 50.36 50.12 51.13

31.12.2013 43.96 43.11 42.97 43.97

31.12.2014 49.63 48.51 48.18 49.19

31.12.2015 69.97 68.00 67.20 68.21

31.12.2016 89.34 86.50 85.11 86.12

Source: Author’s own computations based on the data from Tables 23 and 24

In consideration of the matters described above, Table 28 represents the accounting treatment

of the computers and the precious metals they contain in accordance with IFRS

55

Table 28. Journal entries for the computers under IFRS

IFRS


24.10.2012 PPE received PPE AP 2,521.43

24.10.2012 Input VAT Input VAT AP 504.29

31.10.2012- 29.02.2016

Depreciation charged till March 2016


1,584.46

March 2016 Accum. depreciation


PPE 274.38

March 2016

Carrying amount write-off

(excluding residual value)

P/L PPE 109.45

March 2016 Inventories from


31.03.2016-30.04.2016

Depreciation charge for the remaining 3

computers P/L


58.33

May 2016 Accum. depreciation


PPE 381.8

May 2016 Carrying amount

write-off P/L PPE 136.24

May 2016 Inventories from


May 2016 New item of PPE was

created PPE Inventories 250

March-May 2016

The precious metals capitalized in inventories

Inventories P/L 136.21

March-May 2016

Revenues from precious metals

AR P/L 86,82*

March-May 2016

The precious metals were decapitalized


March-May 2016

Costs from extracting of precious metals

recognized P/L AR 57.61

31.05.2016- 30.09.2017


483.98

30.09.2017 Accum. depreciation


PPE 1,470.59

30.09.2017

Carrying amount of depreciated

computers was written-off and

precious metals capitalized in inventories

P/L PPE

262.76

Inventories P/L

October 2017 Revenues from precious metals

AR P/L 161.5**

October 2017 The precious metals were decapitalized


October 2017 Costs from extracting

of precious metals recognized

P/L AR 152.71

Source: Author’s own computations based on IAS 16. Notes:*(0.91 x 81.24)+(1.62 x 0.97)+(0.35 x

32.34);** (1.71 x 71.95) + (4.15 x 1.01) + (0.74 x 46.31)

Decree №34 that requires to account for precious metals in PPE has no analogues in IFRS,

but it still can be done using the concept of residual value, described in IAS 16. In the same time

56

it puts a burden on accountants and increases administrative costs, whereas the benefits from such

a treatment are doubtful.

To summarize, Table 29 shows the impact of IFRS framework and BY GAAP framework on

items of the balance sheet and the profit and loss statement during 2012-2017.

Table 29. Impact of the accounting treatment on the company balance sheet

Balance sheet

Item BY GAAP (BYN) IFRS (BYN) Difference (BYN)

2012

PPE (less depreciation)

+2,437.38 +2,405.51 +31.87

2013


-504.29 -463.66 -40.63

2014


-504.29 -471.42

-32.87

2015


-504.29 -463.61 -40.68

2016


-530.25 -377.74 -152.51

2017


-394.28 -492.87 +98.59

Source: Author’s own computations based on IAS 16 and Decree 26

In 2012 the company recognizes PPE for the same amount of 2,521.43 BYN under BY GAAP

and IFRS, but due to the different depreciation charges that also go to profit and loss statement

(see Table 30), stemmed from the residual value concept used under IFRS, the carrying amount

differs from year to year.

Table 30. Impact of the accounting treatment on the company profit and loss statement

Profit and loss statement


2012

Operating expenses +84.05 +115.92 -31.87

2013

Operating expenses +504.29 +463.66 +40.63

2014

Operating expenses +504.29 +471.42 +32,87

2015


2016


Operating income +423.64 +473,03 -49.39

2017

Operating expenses +724.94 +908.34 -183.4

Operating income +355.9 +424.26 -68.36

Source: Author’s own computations based on IAS 16 and Decree 37/18/6

57

2.6 Case study IV: Acquisition of IA. Recognition criteria

2.6.1 Case summary

In June 2016 BEK-expert for the purposes of promotional campaign of devices used for

cryptocurrency mining creates a landing page on its own. The term of use of the site is set equal

to the duration of the promotion - 12 months.

When creating the website, the company incurred expenses:

- for the development of the site - 200 BYN;

- domain name registration – 12 BYN (including VAT- 2 BYN);

- hosting – 24 BYN (including VAT – 4 BYN.).

2.6.2 Recognition

Table 31 represents the comparison of requirements applied to assets to be recognized as items

of IA. And according to Decree №25 the website cannot be recognized as an item of IA.

Table 31. IFRS and BY GAAP recognition and definition criteria comparison

Decree №25 IAS 38

Identifiable non-monetary asset without physical substance

Probable that future economic benefits associated with the asset will flow to the company and the company can restrict the access of others to these benefits



-

Not expected to be sold within 12 months

X Intended for use during more than 12 months


As it is represented in the table above, domestic accounting standards does not allow to

recognize the website, which is used during 12 months as an item of intangible assets, this is

reflected in Table 32.

Table 32. The website treatment under BY GAAP

BY GAAP


June 2016 The website was

created P/L Wages payable 200

June 2016 Other costs incurred during the website

creation P/L AP 30

June 2016 Input VAT Input VAT AP 6

Source: BEK-expert’s journal entries based on Decree 25 and Decree 102

Thus, under Belarusian BY GAAP this type of a website is accounted for as an expense, but

not as an intangible asset.

58

Since the website meets both recognition and definition criteria mentioned in IAS 38, it should

be accounted as it is shown in Table 33 – as an item of intangible assets.

Table 33. The website treatment under IFRS

IFRS


June 2016 The website was

created IA Wages payable 200

June 2016 Other costs incurred during the website

creation IA AP 30

June 2016 Input VAT Input VAT AP 6

June 2016- May 2017


19.17

May 2017 The website write-off Accumulated depreciation

IA 230


To summarize, Table 34 shows the impact of IFRS approach and BY GAAP approach on

items of the balance sheet and the profit and loss statement.


Balance sheet


2016

Intangible assets (less amortization)

- +95.81

(=230-134.19) -95.81

2017

Intangible assets (less amortization)

- -95.81 +95.81


Under BY GAAP the company does not recognize 230 BYN in intangible assets during 2016,

but directly attribute it to expenses. The temporary difference in the expenses arises only for 95.81

(134.19 BYN went to P/L through amortization during 2016) and it was eliminated by the end of

2017 (see Table 35).




2016

Operating expenses +230 +134.19

(amortisation) +95.81

2017

Operating expenses - +95.81 -95.81


Wear and tear of intangible assets might be very rapid, especially concerning assets, related

to information technologies. As a result, items of intangible assets might become obsolete even

59

within one year. IFRS in this case facilitates better presentation of financial information, allowing

entities to account items that have quite short useful lives as items of intangible assets.

2.6 Case study V: Acquisition of inventories. Net realisable value

2.6.1 Case summary

In November 2014 BEK-expert signed a contract with the customer for delivery of fifty

connectors, the connectors are used in the space industry. In December 2014, the company

mistakenly ordered one hundred connectors instead of fifty pieces initially agreed with the

customer.

The connectors were delivered on 23 December, 2014; total amount of the invoice is

3,319.7 USD (payment terms is 30 days from the invoice date), customs duty is 8%, customs

fee is 68,65 BYN, import VAT is 719,92 BYN.

Fifty connectors were sold to the customer on 27 December, 2014 for 2076 BYN (excluding

VAT). The remaining amount of 50 connectors was left in the stock.

Due to the asset specificity it was not possible to sell it to another customer, as a result in

December 2014 it was agreed that the remaining 50 connectors would be sold to the same customer

with 50% discount, transaction took place on 12 January, 2015.

Table 36. Exchange rates of USD to BYN

Date Exchange rate USD/BYN

22.12.2014 1.004

23.12.2014 1.005

Source: Official website of the National Bank of Belarus

2.6.1 Recognition

Paragraph 6 of IAS 2 and paragraph 2 of Decree №133 contain the same definition of

inventories. Regarding the case, the assets are recognized as inventories under BY GAAP and

IFRS since they meet the following requirement: assets, which are held for sale in the ordinary

course of business. Thus, the connectors are recognized as inventories under the both treatments.

2.6.2 Measurement of inventories. Cost of purchase

Paragraph 7 of Decree №133 lists costs that are included in the cost of inventories. These are

the costs such as purchase costs, customs fees and duties (see Table 31), costs incurred to bring

inventories to their location and condition, conversion costs. This list is similar to the one

mentioned in paragraphs 10-15 of IAS 2.

Importation of goods into the territory of the Republic of Belarus is a subject to VAT.

60

Import VAT is collected by customs. It is calculated and paid in Belarusian rubles. If for

calculating of VAT it is necessary to convert foreign currency into Belarusian rubles, the official

exchange rate of the National Bank of Belarus, set on the day of registration of the customs

declaration, is used (Table 37).

2.6.3 Net realisable value

IAS 2 contains comprehensive guidance on the identification of net realisable value. When it

is below cost, inventory must be written down.

The cost of inventory should be reduced to its net realisable value if the inventory has become

damaged, is wholly or partly obsolete, or if its selling price has declined.

Estimates of net realisable value must also take into account the purpose for which the

inventory is held. Therefore, inventory held for a particular contract has its net realisable value

based on the contract price, and only any excess inventory held would be based on current market

prices.

According to paragraph 23 of IAS 2 when the circumstances that previously caused

inventories to be written down below cost no longer exist, or when there is clear evidence of an

increase in net realisable value because of changed economic circumstances, the amount of the

write-down is reversed. The reversal cannot be greater than the amount of the original write-down,

so that the new carrying amount will always be the lower of the cost and the revised net realisable

value.

Table 37. Journal entries for the inventories under BY GAAP

BY GAAP


23.12.2014 Goods received Inventories AP 3,336.30

23.12.2014 Import duty Inventories AP 266.64

23.12.2014 Import fee Inventories AP 68.65

23.12.2014 Import VAT Input VAT Bank account 719.92

27.12.2014 Revenue from goods

sold is recognized AR P/L 2,491.2

27.12.2014 Output VAT P/L Output VAT 415.2

27.12.2014 The cost of goods is

written-off P/L Inventories 1,835.9

31.12.2014 Import VAT was

recovered Output VAT Input VAT 719.92

Inventories closing balance at 31.12.2014 1,835.9






Source: BEK-expert’s journal entries based on Decree 133

61

As it was mentioned above, contrary to IFRS treatment (see Table 38) Decree 133 does not

require to write down the cost of inventories and as a result, even when entities store inventories

that cannot be sold for the prices used in past transactions (due to different reasons: damage,

obsolescence, wrong ordering) these inventories will be overestimated that contradict the concept

of prudence.

Table 38. Journal entries for the inventories under IFRS

IFRS


23.12.2014 Goods received Inventories AP 3,336.30

23.12.2014 Import duty Inventories AP 266.64

23.12.2014 Import fee Inventories AP 68.65

23.12.2014 Import VAT Input VAT Bank account 719.92






31.12.2014 Import VAT was

recovered Output VAT Input VAT 719.92

31.12.2014 The cost of goods is written-down to the

NRV P/L Inventories 797.9

Inventories closing balance at 31.12.2014 1,038





written-off P/L Inventories 1,038


Approach, when NRV is used allows to provide relevant information about the assets the

company poses, which helps to provide users of financial information with more relevant data on

the company’s financial performance.

Tables 39 and 40 shows the impact of using and non-using of NPV concept on the company’s

financial statements.

Table 39. Impact of the accounting treatment on the company’s balance sheet

Balance sheet


2014

Inventories +1,835.9 +1,038 +797.9

2015

Inventories -1,835.9 -1038 -797.9


62

As it was represented in Tables 33 and 34, by the end of 2014 the company under BY GAAP

has a bigger amount of inventories than it has under IFRS approach.

Table 40. Impact of the accounting treatment on the company’s profit and loss statement



2014

Revenue +2,076 +2,076 -

Cost of goods sold +1,835.9 +1,835.9 -

Operating expenses +797.9 -797.9

2015

Revenue +1,038 +1,038 -

Cost of goods sold +1,835.9 +1,038 +797.9


Hence, as it was mentioned above, the company overestimates its assets and regarding P/L

statement: the company recognizes write-down in the inventories cost, when it is obvious that the

goods’ market price has drastically reduced.

Recommendations for BY GAAP

Accounting and reporting Act of July 12th 2013 57-Z, that defines the general principles for

accounting, has already encompassed the principles defined in IFRS Conceptual framework.

It means that the ground for succesful harmonization with IFRS has been created. The

problem of Belarusian accounting stems from its history, when the main goal of accounting was

to satisfy the needs of the state as a beneficiary of taxes. As a resulted it created a strictly regulated

system that prohibits any professional judgement and stimulated conservatism in the profession.

As a result, even now, when the system is highly harmonized with IFRS, accountants stick to the

old habbits.

One of the important principles of IFRS is the priority of the substance over the form.

According to it, operations and events should be reflected on the basis of their economic content,

and not of a legal form. This means the following: if an accountant, accepting a contract for

execution, sees that the essence of the transaction is completely different, he must ignore the

contract, ignore the primary documents and reflect the transaction, taking into account how he

understands it. This is represented in every case from the conducted study: in the first case, when

under BY GAAP the significant costs in comparison with the asset’s value were incurred, but not

capitalized due to the prohibition from the legislative acts; depreciation charge that begins when

an asset is available for use is also shown in the first case, and even the impact of the particular

asset used in the example is small, in practice, when the amount of an asset is high and the gap

between the months when it was available for use and when it was actually put in use is big, the

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difference might be material – a company will pay taxes, that it could avoid; the second case,

which described the borrowing costs capitalization is the ambiguous one, because according to

Belarusian standards of that period it was allowed to capitalize this type of costs, which, in the

author’s opinion better represents the value of the asset and comprises all the costs directly related

to the asset, but in the same time, considering the fact that companies under IFRS should impair

assets, when there are any indicators that show that carrying amount of assets differs from the

market it makes this step useless from the point of view of international standards.

Belarusian accounting as a heir of the Soviet accounting system still includes some

questionable rules like the precious metals treatment that is represented in the third case. Such

requirements should be removed from the accounting principles and transferred to waste

legislation treatment, because it makes the accounting more rule-based and overwhelming for

accountants; moreover, the costs of this usually exceed the benefits from it. This treatment can be

easily replaced by international standards, what is shown in the case.

The fourth case represents one of the main differences with IFRS accounting in intangible

assets treatment. BY GAAP still has the recognition requirement for IA to be used more than 12

months. This perfectly shows conservatism of the national accounting that does not take in to

account the fact that the modern world is developing rapidly and as a result some classes of

intangible assets become obsolete in a short period of time. These assets can not be recognized as

items of IA even if they meet the remaining requirements, which leads to discrepancies in the

company’s financial statements in comparison with IFRS and does not meet the criterion of

relevance for financial statements.

The set of recommendations made on the basis of the conducted study is the following:

for fixed assets revaluation model should be added to Decrees №25 and №26;

a separate document introducing fair value concept should be created;

decree №34 on precious metals treatment should be repealed due to a high burden on

accounting department and negligible benefits;

from the list of recognition criteria of intangible assets should be excluded the clause that

requires items of intangible assets to be intended for use during more than 1 year;

useful life determination for fixed assets should be liberalized;

net realizable value concept should be included into Decree №133 on inventories.

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Conclusion

IFRS is an international business language that allows to build a quality system of modern

economic information in a company, which contributes to making optimal management and

economic decisions not only by external users, but also by internal ones.

The financial statements under IFRS should reflect the real picture of the business and the

financial situation of a company. IFRS reporting is not information for a manager, tax authorities

or statistical authorities. Such information is primarily intended for the management of the

company.

Approaches in IFRS differ from those used by national standards. This is due to the fact that

IFRS - information about the future of the company, and national standards - about its past.

Reporting users are not interested in what the company has achieved, but what awaits it, what

prospects the company has, what cash flow it is going to create, what are their amounts, terms and

risks. In connection with this, all definitions in the preparation of statements change: assets are

considered not as property, but as future cash flows and the opportunity to earn. The same applies

to obligations that represent future cash outflows. You must correctly estimate how much the

company will have to pay. Recall that the difference between assets and liabilities is capital, i.e.

cash flow generation potential of the company. Note that different companies have different

potential.

Terminology IFRS is not tied to the terms of national law. For example, IFRS does not use

the legal concept of “ownership”, but economic concepts - “transfer of benefits and risks”,

“transfer of control over an asset”.

One of the important principles of IFRS is the priority of the substance over the form.

According to it, operations and events should be reflected on the basis of their economic content,

and not of a legal form. This means the following: if an accountant, accepting a contract for

execution, sees that the essence of the transaction is completely different, he must ignore the

contract, ignore the primary documents and reflect the transaction, taking into account how he

understands it.

With the use of IFRS, accounting ceases to be an exact science and becomes evaluative. Due

to the uncertainties inherent in business activities, many items of financial statements cannot be

accurately calculated, they can only be evaluated. In this case, the assessment implies judgments

that are based on the most up-to-date, accessible and reliable information. Using sound estimates

is an important part of preparing financial statements, which does not make it less reliable. It is

necessary to take into account that in the understanding of IFRS accounting valuation is not an

estimate made by an accountant, but an estimate used in accounting. It can be carried out by any

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competent person or authorized to such action. The main thing that such an assessment was

reasonable, and also was confirmed by an auditor. Therefore, the use of the term “accounting

estimate” rather than “accounting valuation” is recognized as more correct.

Regarding the issues of interaction with tax accounting: tax legislation has goals that are

different from the purpose of accounting under IFRS, therefore problems may arise when using

IFRS for tax accounting of property value and profits. All tax calculations must be carried out in

accordance with national legislation. The financial result under IFRS may differ significantly from

the financial result for tax accounting. Reporting under IFRS will always have differences

compared to tax reporting. It is believed that the 15 years that were spent in Belarus to separate

tax and accounting is a failed experiment and should be turned to the practice when taxes are

calculated on the basis of accounting. However, if tax accounting is based on accounting, and

accounting is based on IFRS, problems with tax authorities can immediately appear. The

accountant runs the risk of being dragged into a lengthy explanation of why the valuation of certain

assets (liabilities) is underestimated (overestimated).

Recommendations that were made to improve the national accounting can be summarized in

the following way: gradual harmonization should be continued without one-time adoption, tax

accounting should be converged with the financial accounting to avoid big discrepancies and

reduce the burden on accountants as well as administrative costs, documentary-based system

should be eliminated, many of accounting standards should be reviewed and merged, which will

allow to avoid ambiguity during the application of accounting principles.

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List of literature

IAS 16 “Property, plant and equipment”, IASB, June 30th, 2014, paragraphs 7, 12-16, 22, 28, 30,

31, 50, 61

Decree of the Ministry of Finance of the Republic of Belarus of April 30th, 2012 №26 "Concerning

approval of the instruction on PPE accounting", paragraphs 10, 16

Resolution of the Council of Ministers of Belarus №802 ”On depreciation non-charging of PPE

and intangible assets in 2018 and further years” of October 30th, 2017

Decree of the Ministry of Economics, Ministry of Finance, Ministry of Architecture № 37/18/6

“On depreciation of PPE and amortization of intangible assets”, paragraphs 7-1, 20, 24

Decree of the Ministry of Economics as of 30.09.2011 №161 “On determining PPE’s standard

operation time”, appendix 3

IAS 8 “Accounting Policies, Changes in Accounting Estimates and Errors”, IASB of October 31st,

2018, paragraph 32

IFRS 13 “Fair value measurement”, IASB of December 12th, 2013, paragraph 29

Decree of the President of the Republic of Belarus of October 20th, 2006 №. 622 “Concerning

revaluation of fixed assets”, paragraphs 1.1.1, 1.2

Official website of National Statistical Committee of the Republic of Belarus:

http://www.belstat.gov.by/ofitsialnaya-statistika/makroekonomika-i-okruzhayushchaya-

sreda/tseny/perativnaya-informatsiya_4/ob-urovne-inflyatsii/ob-urovne-inflyatsii-v-noyabre-

2018-g-k-date-provedeniya-posledney-pereotsenki/

E&Y LLP, Wiley,2016. International GAAP2016 under IFRS, p.1298, ISBN 978-1-119-18048-7

IAS 36 “Impairment of assets”, IASB of May 29th, 2013, paragraphs 10, 11, 57

Decree of the President of the Republic of Belarus as of 13.10.2006 № 615 "On valuation activity

in the Republic of Belarus". Paragraphs 5, 8

IASB, IFRS foundation, 2018 “Conceptual Framework for financial reporting”, paragraphs 2.16,

4.3

Decree № 34 “Concerning use of precious metals and stones” of March 15th, 2004., paragraphs

71-75

ZUBKOV A.S., 2017 Changing the value of intangible assets. Glavnaya kniga, 24, pp. 5-6

Decree of the Ministry of Finance of the Republic of Belarus of April 30th, 2012 №25 "Concerning

approval of the instruction on intangible assets accounting", paragraphs 9-18

IAS 38 “Intangible assets”, IASB of May 12th, 2014, paragraphs 13, 52-57, 102-108, 74, 75

Ministry of Finance of the Republic of Belarus “Accounting and reporting Act” of July 12th 2013

57-Z, section 3 paragraph 8

67

Ministry of Finance of the Republic of Belarus, National Standard №46 “Preparation of financial

statements „of June 30th, 2014, paragraph 2

IFRS 3 “Business combinations”, IASB of October 22nd, 2018, appendix A

BANCEVICH E.E., 2014 Inventories in IFRS. Ilex, 35, p.8

IAS 2 “Inventories”, IASB of December 18th, 2003, paragraphs 6-9, 16, 25-28

Decree of the Ministry of Finance of the Republic of Belarus of September 30th 2011 №.102

”Concerning approval of the instruction on revenues and expenses accounting”. 2011.

Decree of the Ministry of Finance of the Republic of Belarus of November 12th 2010 №133

”Concerning approval of the instruction on inventory accounting”. 2010.

IASB, 2015. International Financial Reporting Standards for Small and Medium-sized Entities,

paragraphs 2.34, 10.15, 13.1-13.18, 17.10-17.19, 18.14-18.21, 27.7-27.10, 31.8

PwC LLP, Global Accounting services, 2016.Manual of accounting: IFRS 2017, p. 137, ISBN

978-0-7545-5439-4

68

List of tables

Table 1. The recognition criteria for PPE under IFRS and GAAP

Table 2. Journal entries at the recognition

Table 3. Journal entries on the depreciation

Table 4. Journal entries on the repairment costs incurred under GAAP

Table 5. Journal entries on the repairment costs incurred under IFRS

Table 6. Journal entries on the depreciation after review






Table 12. Refinancing rates, September 2013-June 2014

Table 13. Car usage, 2013-2018

Table 14. The recognition criteria for PPE under IFRS and GAAP

Table 15. Journal entries at the recognition under GAAP

Table 16. Journal entries at the recognition under IFRS

Table 17. Journal entries for the year 2014 under GAAP

Table 18. Journal entries for the year 2014 under IFRS

Table 19. Journal entries for the years 2015-2018 under GAAP

Table 20. Journal entries for the years 2015-2018 under IFRS

Table 21. Journal entries for the car’s disposal under GAAP

Table 22. Journal entries for the car’s disposal under IFRS

Table 23. Price list of computers acquired, BYN

Table 24. Journal entries for the computers under GAAP

Table 25. Prices for precious metals set by the Ministry of Finance of Belarus

Table 26. Content of precious metals in the computers acquired

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Table 27. Residual value for the computers for IFRS purposes, BYN

Table 28. Journal entries for the computers under IFRS



Table 31. IFRS and GAAP recognition and definition criteria comparison

Table 32. The website treatment under GAAP

Table 33. The website treatment under IFRS



Table 36. Exchange rates of USD to BYN

Table 37. Journal entries for the inventories under GAAP

Table 38. Journal entries for the inventories under IFRS

Table 39. Impact of the accounting treatment on the company’s balance sheet

Table 40. Impact of the accounting treatment on the company’s profit and loss statement

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List of abbreviations

GAAP – generally accepted accounting principles

IFRS – international financial reporting standards

PPE – property, plant and equipment

IA – intangible assets

NRV- net realizable value

VAT – value added tax

SME – small and medium-sized entities

WACC – weighted average cost of capital

P/L – profit and loss statement

BS – balance sheet

Masaryk UniversityFaculty of Economics and Administration

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