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MNU Business School

ACCOUNTING STANDARDS
Bachelor of Accounting and Finance (BAF SEM5)
Individual Assignment

Ahmed Ramih (43048)

Advanced Financial Accounting


(ACC311)
Lecturer: Mr. Shan
Due Date: 7th April 2016
Table of Contents

1.0 Purpose................................................................................................................
2.0 Introduction..........................................................................................................
3.0 The Main Accounting Standards Relevant to the Company..................................
3.1 IAS 16 Property, Plant and Equipment............................................................
3.2 IAS 38 Intangible Assets.................................................................................
3.3 IAS 12 Income Taxes.......................................................................................
3.4 Financial Instruments........................................................................................
4.0 How the Company has applied/could apply the aforementioned Standards.........
4.1 IAS 16 Property, Plant and Equipment............................................................
4.2 - IAS 38 Intangible Assets..................................................................................
4.3 IAS 12 - Income Taxes........................................................................................
4.4 Financial Instruments......................................................................................
5.0 Conclusion..........................................................................................................
6.0 References..........................................................................................................

AHMED RAMIH 1
1.0 Purpose
The purpose of this report is to explore and analyze different accounting
standards and the role of such standards in financial reporting of an entity (State
Trading Organization PLC). To this end, we will first be summarizing some of the
standards relevant to STO PLC. We will then be analyzing how STO PLC has
applied these standards in their financial statements for the year ended 31 st
December 2014.

2.0 Introduction
In the early 1960's, the nation's socioeconomic outlook was not a very bright
one. The population was a mere 100,000. There was little communication
between the rest of the world. Transportation within and from the country was
very limited. The only resource available was tuna. Consumers were at the mercy
of importers. Even the most basic food items were expensive. (State Trading
Organisation PLC, n.d.)
The government then came to realize that a central organization to import goods
was necessary to elevate the living standards and advance growth. In 1964, a
fully state-funded business was set up by the Maldivian government with one key
charge to start with: strengthening national food protection. The primary project
of the troupe, then named Athireemaafannu Trading Agency (ATA), was to
purchase and import essential food items in bulk to be broadcast nationally via
local traders and ATA's own retail outlets. ATA sold its imports to the public at a
low mark-up and also bought supplies for the regime. (State Trading Organisation
PLC, n.d.)
ATA was the beginning of STO, and the catalyst for change in the Maldives. With
proven success in contributing to national development, ATA matured to go the
State Trading Organization (STO) on 9th June 1979. STO undertook all trading
and commercial activity on behalf of the Maldivian government. (State Trading
Organisation PLC, n.d.)
The country was growing and so were its commercial needs. STO then while
staying true to its original mission, expanded its imports, first to an increasing
number of commodity items, and then along to modern construction materials,
household appliances and consumer commodities. Today, it has significant and
focused interests in petroleum, cooking gas, construction materials (including
cement and roofing material), medical supplies and pharmaceuticals, home
appliances, electronics, supermarket products and insurance. The company is
geographically diverse with operations and developments throughout Maldives
and operations in Singapore. (State Trading Organisation PLC, n.d.)

AHMED RAMIH 2
3.0 The Main Accounting Standards Relevant to the
Company
3.1 IAS 16 Property, Plant and Equipment
The objective of this Standard is to prescribe the accounting treatment for
property, plant and equipment. As per the standard, the costs of an item of PPE
include:

The initial purchase price including any taxes


Any costs incurred in making the asset ready for use
An estimate of any costs to be incurred in restoring the site at which the
asset is to be used.
PPE is initially recognized at cost and subsequently at cost model or revaluation
model.
Cost Model: - Carrying value less any accumulated depreciation.
Revaluation Model: - The difference between the carrying value and the fair
value is compared and any increase from the carrying value is disclosed as
revaluation gain under other comprehensive income. If an assets carrying
amount is decreased as a result of a revaluation, the decrease shall be
recognized in profit or loss. However, the decrease shall be recognized in other
comprehensive income to the extent of any credit balance existing in the
revaluation surplus in respect of that asset.
The carrying amount of an item of property, plant and equipment shall be
derecognized:
a) on disposal; or
b) when no future economic benefits are expected from its use or disposal.
(Deloitte, 2016)

AHMED RAMIH 3
3.2 IAS 38 Intangible Assets
The objective of this Standard is to prescribe the accounting treatment for
intangible assets that are not dealt with specifically in another Standard. An
intangible asset is an identifiable non-monetary asset without physical
substance.
An intangible asset shall be recognized if, and only if:
a) it is probable that the expected future economic benefits that are
attributable to the asset will flow to the entity; and
b) the cost of the asset can be measured reliably.
An intangible asset is initially recognized at cost. Subsequently, cost or
revaluation model can be used.
Cost model: - Cost less any accumulated amortization and impairment
Revaluation model: - Revaluation is carried on the carrying amount of the
asset. For the purpose of revaluations under this Standard, fair value shall be
measured by reference to an active market. Revaluations shall be made with
such regularity that at the end of the reporting period the carrying amount of the
asset does not differ materially from its fair value.
Internally generated intangible assets

Internally generated goodwill cannot be recognized


No expenses incurred in a research phase of an internal project should be
recognized.
Development expenses should be recognized given they meet a certain
criterion.
Internally generated brands, mastheads, publishing titles, customer lists
and items similar in substance shall not be recognized as intangible
assets.
For assets with infinite lives, carrying out amortization is not required. Rather, an
entity is required to test an intangible asset with an indefinite useful life for
impairment by comparing its recoverable amount with its carrying amount
a) annually, and
b) whenever there is an indication that the intangible asset may be impaired.
(Deloitte, 2016)

AHMED RAMIH 4
3.3 IAS 12 Income Taxes
The objective of this Standard is to prescribe the accounting treatment for
income taxes.
Recognition: -

Current tax for current and prior periods shall, to the extent unpaid, be
recognized as a liability. If the amount already paid in respect of current
and prior periods exceeds the amount due for those periods, the excess
shall be recognized as an asset.
If it is probable that recovery or settlement of that carrying amount will
make future tax payments larger (smaller) than they would be if such
recovery or settlement were to have no tax consequences, this Standard
requires an entity to recognize a deferred tax liability (deferred tax asset),
with certain limited exceptions.
A deferred tax asset shall be recognized for the carryforward of unused tax
losses and unused tax credits to the extent that it is probable that future
taxable profit will be available against which the unused tax losses and
unused tax credits can be utilized.
Measurement: -

Deferred tax assets and liabilities shall be measured at the tax rates that
are expected to apply to the period when the asset is realized or the
liability is settled.
Deferred tax assets and liabilities shall not be discounted.

(Deloitte, 2016)

AHMED RAMIH 5
3.4 Financial Instruments
(a)IFRS 9 Financial Instruments
IFRS 9 specifies how an entity should classify and measure financial assets and
financial liabilities, including some hybrid contracts.
Recognition and initial measurement: An entity shall recognize a financial
asset or a financial liability in its statement of financial position when, and only
when, the entity becomes party to the contractual provisions of the instrument.
At initial recognition, an entity shall measure a financial asset or financial liability
at its fair value plus or minus, in the case of a financial asset or financial liability
not at fair value through profit or loss, transaction costs that are directly
attributable to the acquisition or issue of the financial asset or financial liability.
Subsequent treatments vary and include fair value through profit and loss, fair
value through other comprehensive income and at amortized cost. (Deloitte,
2016)
(b)IAS 32 Financial Instruments: Presentation
The objective of this Standard is to establish principles for presenting financial
instruments as liabilities or equity and for offsetting financial assets and financial
liabilities.
The issuer of a financial instrument shall classify the instrument, or its
component parts, on initial recognition as a financial liability, a financial asset or
an equity instrument in accordance with the substance of the contractual
arrangement and the definitions of a financial liability, a financial asset and an
equity instrument. The issuer of a non-derivative financial instrument shall
evaluate the terms of the financial instrument to determine whether it contains
both a liability and an equity component. Such components shall be classified
separately as financial liabilities, financial assets or equity instruments. (Deloitte,
2016)
(c) IFRS 7 Financial Instruments: Disclosures
The objective of this IFRS is to require entities to provide disclosures in their
financial statements that enable users to evaluate the financial statements more
effectively regarding the issue of financial instruments.
This standard applies to all entities including those with only few financial
instruments. An entity shall group financial instruments into classes that are
appropriate to the nature of the information disclosed and that take into account
the characteristics of those financial instruments. An entity shall provide
sufficient information to permit reconciliation to the line items presented in the
statement of financial position.
This standard complements IFRS 9 and IAS 32. (Deloitte, 2006)

AHMED RAMIH 6
4.0 How the Company has applied/could apply the
aforementioned Standards
4.1 IAS 16 Property, Plant and Equipment
For Property, Plant and Equipment, STO has used cost model to show the
appropriate values of the assets at year end. However, this is with the exception
of Freehold Land, for which revaluation model is suited and seems to have been
adopted. However, for this particular year end, there was no upward or
downward revaluation. This is because there were no indicators of such change
in value during this particular financial year
Below is an extract from the notes to Financial Statements for the year ended
31st December 2014 which shows the application of cost model in valuing Plant
and Machinery.

Detail MVR
Cost (Closing balance as at 31st December 2014) 64,155,505
Accumulated Depreciation (Closing balance as at 31 st December 58,736,076
2014)
Net Carrying Value 5,419,429

Though there was no revaluation during the year, let us explore the impact on
the financial statements if there was a revaluation.
Assuming that the Plant and Machinery was revalued to MVR 6,000,000 at the
year-end 2014, the following extra changes will be in effect as per IAS16.
Other Comprehensive Income

Detail MVR
Gain on Revaluation (6,000,000 5,419,429) 580,571

Statement of Financial Position (Extracts)

Detail MVR
Plant and Machinery Component 6,000,000

(State Trading Organization PLC, 2014)

AHMED RAMIH 7
4.2 - IAS 38 Intangible Assets
As per the annual report of STO for the year 2014, IAS 38 is applied in the
following ways:
(i) Recognition and Measurement
Intangible assets that are acquired by the Company, which have finite useful
lives, are measured at cost less accumulated amortization and accumulated
impairment losses. Costs that are directly associated with the purchase and
implementation of identifiable and unique software products by the Company are
recognized as intangible assets. Expenditures that enhance and extend the
benefits of computer software programmer beyond their original lives are
recognized as a capital expenditure.
(ii) Subsequent expenditure
Subsequent expenditure is only capitalized if costs can be measured reliably, the
product is technically and commercially feasible, future economic benefits are
probable and the Company has sufficient resources to complete development
and to use the asset.
(iii) Amortization
Amortization is recognized in profit or loss on a straight-line basis over the
estimated useful lives of intangible assets, other than goodwill, from the date
that they are available for use.
As per the notes to the financial statements provided in the annual report of
2014, the Software component of the Intangible Assets was accounted for in the
following way.

Details MVR
Cost (Closing balance as at 31st December 2014) 63,847,243
Accumulated Amortization (Closing balance as at 31 st December 43,115,656
2014)
Net Carrying Value 20,731,587

(State Trading Organization PLC, 2014)

The Net Carrying Value was used to calculate the total Intangible Assets to be
shown in the statement of financial position for the year ended 2014. The
amortization for the year was shown in the Statement of profit and loss for the
year ended 2014.

AHMED RAMIH 8
4.3 IAS 12 - Income Taxes
As per the annual report of STO for the year ended 2014, IAS 12 has been
accounted for in the following ways.
(i) Tax Expense
Tax expense comprises current and deferred tax. Current tax and deferred tax is
recognized in profit or loss.
Below are the extracts to notes to the financial statements which show this
calculation for STO for the year ended 2014.

Current Tax Expense MVR


Current Tax Expense 73,937,86
1
Adjustment for previous years (708,451)
73,229,41
0
Deferred Tax Expense
Deferred tax assets recognized (1,249,642
)
Deferred tax liability reversed
Income Tax Expense 71,979,76
8

(ii) Current tax


Current tax is the expected tax payable or receivable on the taxable income or
loss for the year, using tax rates enacted at the reporting date, and any
adjustment to tax payable in respect of previous years.
(iii) Deferred tax
Deferred tax is recognized in respect of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and the
amounts used for taxation purposes.
Examples of items that have resulted in deferred tax assets for the company
during the year end 2014 are shown below (Includes the temporary difference
and corresponding tax effect)

Details Temporary Tax Effect


Difference
MVR MVR
Property, Plant and Equipment 218,692,191 32,803,829
Specific Provisions on Trade and Related Party 175,921,602 26,388,240
Receivable

(State Trading Organization PLC, 2014)

AHMED RAMIH 9
4.4 Financial Instruments
We can observe that STO has strictly adhered to IAS 32 when disclosing their
financial instruments. As per the standard, they have disclosed separately the
available-for-sale financial assets, loans and receivables and held-to-maturity
financial assets.
For instance, as per the annual report of STO for 2014, it holds derivative
financial instruments to hedge its foreign currency risk exposure. Embedded
derivatives are separated from the host contact and accounted for separately if
certain criteria are met. Derivatives are recognized initially at fair value. Any
directly attributable transaction costs are recognized in profit or loss as they are
incurred. Subsequent to initial recognition, derivatives are measured at fair
value, and changes therein are generally recognized in profit or loss. The
following table is a summary of how STO has accounted for this particular
financial instrument at the year-end 2014. (State Trading Organization PLC,
2014)

Details 31/12/2014
MVR
Opening balance 17,890,509
Fair value realized during the year (7,878,932)
Closing balance 10,011,577

AHMED RAMIH 10
5.0 Conclusion
In conclusion, all of the standards discussed though out this report are of great
importance to ensure that the Financial Statements of the entity in question
show a true and fair view of the organization from a financial stand point.
STO PLC has very responsibly applied all the standards in question to the
greatest extent possible when preparing its financial statements for the year
ended 31st December 2014. However, one could argue that this is with the
exception of Freehold properties, which was carried over at the same value as its
opening balance. In a place like Male where land/property prices are rising at a
rapid rate, I believe it is important to test for change in the value of the non-
current asset in question. Furthermore, all the remaining items of PPE seem to be
valued at cost model. Perhaps revaluation model could have been considered too
for some of the items. Lastly, through the financial statements, it was only
possible to analyze the subsequent disclosure and valuation. Other issues
referred to in standards like initial recognition of non-current assets could not be
explored.

AHMED RAMIH 11
6.0 References
Deloitte. (2006). IFRS 7 Financial Instruments: Disclosures. Retrieved March 4,
2016, from iasplus.com: http://www.iasplus.com/en/standards/ifrs/ifrs7
Deloitte. (2016). IAS 12 Income Taxes. Retrieved March 5, 2016, from
iasplus.com: http://www.iasplus.com/en/standards/ias/ias12
Deloitte. (2016). IAS 16 Property, Plant and Equipment. Retrieved March 5,
2016, from iasplus.com: http://www.iasplus.com/en/standards/ias/ias16
Deloitte. (2016). IAS 32 Financial Instruments: Presentation. Retrieved March
5, 2016, from iasplus.com: http://www.iasplus.com/en/standards/ias/ias32
Deloitte. (2016). IAS 38 Intangible Assets. Retrieved March 6, 2016, from
iasplus.com: http://www.iasplus.com/en/standards/ias/ias38
Deloitte. (2016). IFRS 9 Financial Instruments. Retrieved March 5, 2016, from
iasplus.com: http://www.iasplus.com/en/standards/ifrs/ifrs9
State Trading Organisation PLC. (n.d.). About Us. Retrieved April 5, 2016, from
sto.mv: http://sto.mv/About_Us.aspx
State Trading Organization PLC. (2014). Annual Report 2014. Male' City: State
Trding Organization PLC.

AHMED RAMIH 12

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