- Reasons for and against capitalization of borrowing costs
The main reasons in favor of capitalization of borrowing costs include: First, under the revised IAS 23, borrowing costs specifically due to the purchase, development or output of a qualified asset are part of the expense of the asset. Secondly, eliminating one alternative would result in better comparability between individuals. Thirdly, higher parity can be obtained between inherently created assets and assets purchased by third entities.
On the contrary, the reasons against this phenomenon is that capitalization of borrowing cost criterion for the abolition of the expense approach does not provide adequate clarification and theoretical justification for capitalization. Secondly, the capitalization approach require extra expenses for some businesses that are still using the expense method, as the capitalization approach is more difficult to implement and as there is a lack of implementation guidelines in the standard. Lastly, the financial reporting of an organization requires a distinction of financing, operational and investing operations.
- The Earnings per share for the year ended December 31 2018
- The Earnings per share for the year ended 31 December 2019
- Adjusted EPS
|Dates||Time proportion i.e. number of months/12 (A)||Number of shares (B)||Bonus Factor ©||Adjusted number of shares D=B*C||Weighted average number of shares E=A*D|
|Jan 1 – 30th June 2019||0.50||1000||1.053||1053||526.5|
|1st July – 31 December 2019||0.50||1250||1||1250||625|
Adjusted EPS is then:
|Year||Earnings (A) ‘000||Weighted average number of ordinary shares as per Step above (B) ‘000||EPS = A / B|
Basic EPS is a standard determinant that aims to indicate how much of the company’s earnings are attributed to each ordinary shares issued. In the other hand, diluted EPS changes the basic EPS statistic to indicate the proportion of the company’s earnings attributed to every common shareholder in a hypothetical situation under which all dilutive securities are convertible into ordinary shares. The key difference is that basic EPS is measured taking into consideration the remaining shareholders whereas Diluted EPS involves convertible shares such as employee stock rights, warrants and debt in its estimation.
From scenario 1, discontinued operations as per IAS 35 could be described operations which are no longer feasible by a corporation and are called to be shut down by the board to shut down (Bellandi, 2012). An activity may be terminated for a range of factors, including the closing of a division which is unable to generate or maintain revenue as per the case of Rolle Company Ltd (resulting in redundant roles). IAS 35 lays forth guidelines for disclosing details on discontinuation of activities (as defined), thereby providing the opportunity for viewers of financial statements to forecast cash flows, earnings-generating capability and financial status of an entity, through segregating information on discontinuation of activities from details on ongoing operations. The rule does not set down any standards of acknowledgment or calculation in regards to discontinuation of operations – they are dealt with under the other IAS.
Disclosures are necessary if the disposition agreement is authorized and officially released after the end of the fiscal period, but prior to the financial reports for that period are certified (IAS 35). In the time after termination is first accepted and declared but before completion, the financial report shall amend the previous disclosures, providing a summary of the substantial adjustments in the sum or timing of cash flows related to the liabilities and assets to be disposed off and the reasons of those changes (IAS 35.33). The disclosure proceed until the disposal is done, and there could also be cash payments to be made (IAS 35.35-36].
The comparable details contained in the financial statements prepared after preliminary disclosure ought be reaffirmed in order to distinguish remaining and discontinuing assets, liabilities, revenues, expenditures and cash flows. This assists in the study and forecasting of patterns (IAS 35.45). Earnings and expenses related to discontinuation of activities must not be reported as exceptional products (IAS 35.41). Earning and costs related to discontinued activities could be found on items listed in the corporation income statement under “Continuing operations income” and above “Net income.” The notes to the interim financial statements should reveal details on discontinuation of activities (IAS 35, 47). Therefore, the Clerk should provide for the closure of division since IAS 37 necessitates for provision for contingent liabilities and contingent assets given that sufficient disclosure information are provided in the notes section. This guideline provides that a provision must be recognized only when there is a liability from previous operations of this discontinued business operations.
From the second scenario, Rolle Company Ltd is reported to offer clients with warranties at time of purchase for possible replacement or repair of defect products. Clerk should provide warranties in the financial statements. The value recognized as a provision must be the most proximate figure to the total expenditure needed to settle the possible or potential liabilities in the financial statement of position. This, in the financial reporting, reflects the amount that Rolle Company Ltd will reasonably pay to cover for this obligation at the balance sheet date or outsourced company (IAS 37.36). For instance, provisions for several events of warranties claims from buyers of company products. This provision is for contingent liabilities that is imminent upon clients’ claims
From scenario 3, and with regards to IAS 37, an abandoned leasehold with four years to run and no possible re-letting circumstance necessitates for a provision to be recognised for the unavoidable lease payments. Clerk should also consider IAS 37. 1 – 6 exclusion clause that requires obligations and contingencies arising from non-onerous executory contracts, and Leases applied to lease obligations (IAS 17) to be excluded from provisions. For this case Rolle Company operates profitably from a factory that it has leased under an operating lease. But the December 2019 relocation of the entity operations to a new factory creates possible onerous contract which is need reporting to the financial statements. Because there is an existing lease contract, legal obligations might ensue from non-compliance to the signed agreement. The onerous lease contract then embodies streams of cash outflow and a provision must be recognized for the best approximation of the obligatory lease payments.
From scenario 4, Rolle dividend of $40,000 declared for the year ended December 31st 2019 and paid by 12 January 2020 is considered as Event after the reporting period. Therefore, because Rolle Company declared dividends after the reporting period, the company shall not recognize these dividends as a company liability at the end of the reporting period since they are now non-adjusting event (IAS 10.12) (IAS, 2020).
Secondly from the fifth and last scenario, a going concern is questioned after the company failed to insure against fire that occurred and damaged the manufacturing with an amount of $2,000,000 as carrying value. According to IAS (2020), Rolle Co. Ltd is not required to prepare its financial statements on a going concern base if administration there delineates after the end of the reporting period either that it meant to liquidate the entity or to terminate transactions, or that it has no genuine substitute but to do so as in this fire case (IAS 10.14).