Bestway Cement Limited - IAS - Inventory - PPE-CFS - Revenue
Bestway
Cement Limited
There is a Case Study to
check that whether Bestway Company follows IAS – Inventory – PPE – CFS and Revenue
or not. But, firstly discuss the introduction of this company. The company
deals in cement products. They are considered as best in their products.
Products
List of Products:
Ø Ordinary
Portland Cement
Ø Sulphate
Resistant Cement
Ø Quick
Setting Cement
Ø Low
Alkali Ordinary Portland Cement
Ø Clinker
All the products can be supplied either in standard packaging, in
bulk or packaged according to customers' requirements.
Now to check whether the
company is following international accounting standards given below or not.
IAS-2
Inventories
Objective
The objective of this standard is to prescribe the
accounting treatment for inventories.
Measurement
of inventory
From Bestway Cement Limited’s annual reports, it is
clear that they follow the IAS-Inventories in which inventories are measured at
lower of cost or net realizable value.
Cost
of inventories
Bestway Company Limited includes in their financial
Statements the Cost of inventories by considering the following points:
Ø Costs
of purchase (including costs of transport and handling) net of trade discounts
received
Ø Costs
of conversion (including fixed and variable manufacturing overheads) and
Ø Other
costs incurred in bringing the inventories to their present location and
condition
Following
Inventory Costs are not included in their Financial Statements:
Ø Abnormal
losses of material, labor etc.
Ø Storage
costs
Ø Administrative
overheads that are not to bring the inventories at present location or
condition
Ø Selling
costs
Ø Borrowing
costs (with some exceptions)
Ø foreign
exchange differences arising directly on the recent acquisition of inventories
invoiced in a foreign currency
Cost
Formulas
Bestway Cement Limited either use:
Ø FIFO
Ø Weighted
Average
For the cost of inventories for the sale the items.
It is also important to note that they do not use
Ø LIFO
Method for sale of inventories.
Perpetual
Inventory Method
They use this method
for physical counting of inventory in order to update the inventory daily. This
method is more suitable for their products due to larger quantity of cement and
quick sales.
Disclosure
Bestway Cement Company shows the following
disclosures according to IAS-2:
Ø Policy
to measure inventories including cost formula
Ø Total
carrying amount of inventory with classification
Ø Carrying
amount of inventory carried at net realizable value
Ø The
amount of any reversal of any write-down of inventory that is recognized as
revenue in the period
Ø The
circumstances and events that have caused this reversal
Ø Carrying
amount of inventories pledged as security against a liability
IAS-7
Cash Flows
Indirect
Method
From the annual reports
of Bestway Cement Company, it is clear that they follow Indirect method of Cash
Flows
There are two most important terms in cash flow
statement
Inflows
Of Cash
When cash is coming to
the business then there is inflow of cash. For example when Bestway Company issues
shares to the shareholders then there is inflow of cash.
Outflows
Of Cash
When cash is outgoing to the business, then there is
outflow of cash, like in the case of purchase of inventory, etc.
Operating
Activities
Under indirect method,
they include three types of activities:
- Operating Activities
- Investing Activities
- Financing Activities
Operating
Activities
These activities include those activities which are
used for operation of business that directly used for operating the business
like purchase of inventory, working capital changes etc.
Investing
Activities
They record in this
step, the purchase and sale of fixed assets. All this is according to IAS-7.
Financial
Activities
Bestway Cement Limited
Company uses these activities for loans financing and issuance of shares.
The use of Cash flow Statement for the Bestway company
is very important for raising finance and making investment in future.
Their annual reports show true and fair view of cash
flows statement according to IAS-7.
Cash
and cash equivalents
Cash and cash equivalents are
carried in the balance sheet at cost. For the purpose of cash flow
statement, cash and cash
equivalents comprise cash and bank balance, demand deposits, other
short term highly liquid
investments that are readily convertible to known amounts of cash and
which are subject to an insignificant risk of
change.
Disclosure
The following item should be
separately disclosed on the statement of cash flows by the company separately
Ø cash
flows from dividends received and paid
The cash flows should be classified
in a consistent manner from period to period by the company.
IAS-18
Revenues
Bestway Company also follows this IAS-18, because
they record their revenues by following the guidelines set by this IAS.
The purpose of this IAS is to recognize revenue
arising from certain transactions and circumstances are fully met by Bestway
Company.
Basically Bestway record following revenues:
Ø Sale
of goods (Cement)
Ø Rendering
services
Ø Interests,
yields, dividends etc.
However, they do not
recognize the following revenues
Ø Lease,
dividends on investment under equity method
Ø insurance contracts of insurance cost
Ø change in the value of financial assets or
liabilities
Ø changes in the value of other current assets
Ø biological assets
Fair
Value
Fair value is also recorded on the basis of this
IAS, that is value that is exchangeable
between knowledge and willing parties in an arm length’s transaction.
Measurement
of Revenue
Bestway
Cement Company measures on the following basis
The amount of revenues
recognized is generally calculated by cash or cash – equivalent value of other
assets (e.g. bills receivable) received from customers. This amount represents
the agreed price between buyer and seller at the time of sale.
Sale
of Goods (Cement)
The company recognizes
the revenue when following conditions are fulfilled:
Ø Revenue
from the sale of goods should be recognized when all the following conditions
have been satisfied:
Ø Significant
risks and rewards of ownership of goods is transferred to buyer
Ø Enterprise
retains neither managerial involvement nor control over goods sold
Ø The
amount of revenue can be reliably measured
Ø Its
is probable that the transactions economic benefits will flow to the enterprise
Ø The
cost related to the transaction can be measure reliably
Interest,
Royalties and Dividends
The company follows these
guidelines of this IAS and recognizes the interest, royalties and dividends.
Ø Interest
should be recognized on time proportion basis that takes into account the
effective yield on the asset
Ø Royalties
should be recognized on an accrual basis in accordance with the substance of
the relevant agreement
Ø Dividends
should be recognized when the shareholders’ right to deceive payment is
established
Disclosure
Important Disclosures relating to revenue
recognition are shown in Notes to the Accounts.
The company discloses
the following important disclosures relating to revenue recognition which
define how, when and what amount of revenue of recorded:
Ø The
accounting policies adopted for the recognition of revenue including the
methods adopted to determine the stage of completion of transaction involving
the rendering of services
Ø The
amount of each significant category of revenue recognized during the period
including revenue arising from:
Ø The
sale of goods
Ø The
rendering of services
Ø Interest
Ø Royalties
Ø Dividends
Ø The
amount of revenue arising from exchanges of goods or services included in each
significant category of revenue
IAS-16
Propery, Plant and Equipment
Objective
Bestway Cement Company
fulfills the following objective of this IAS.
The
objective of this IAS is to prescribe the accounting treatment for property,
plant and equipment. The timing of recognition of assets, carrying amount and
depreciation expense regarding them.
Scope
Bestway Cement Company also
meets the scope of this IAS
The
standard should be applied in accounting for property, plant and equipment
except when another IAS requires or permits a different accounting treatment.
Property, Plant and Equipment
These assets are used
for long term benefits and having life more than one year. The
Company reviews the useful lives and residual value of property, plant and
equipment on a regular basis. Any change in estimates
in future years which might affect the carrying amounts of
the respective items of property, plant and equipment with
a corresponding effect on the depreciation
charge and impairment loss.
From the annual report of Besway Cement Company, it
is evident that they follow this IAS.
Tangible assets
Owned
These are stated at
cost, which includes purchase price, import duties, directly attributable costs
and related borrowing
costs less accumulated depreciation and impairment loss, if any. Freehold
land is stated at cost
less impairment loss, if any.
Normal repairs and
maintenance are charged to the unconsolidated profit and loss account as and
when incurred whereas
major improvements and modifications are capitalized
Capital work in
progress is stated at cost including where appropriate, related borrowing costs
less impairment loss,
if any. These costs are transferred to operating fixed assets as and when
assets are available
for use.
Depreciation is charged
to income applying the reducing balance method except leasehold land,
buildings and plant and
machinery. Buildings and plant and machinery are depreciated on
straight line method.
Leasehold land is amortized over the remaining period of the lease. Rates of
depreciation /
estimated useful lives are mentioned in note 14.1.
Depreciation is charged
on prorated basis from the month in which an asset is acquired or
capitalized, while no
depreciation is charged for the month in which the asset is disposed off.
Days
in excess of fifteen days are considered as full month for the purpose of
calculation of
depreciation.
Gains and losses on
disposals of property, plant and equipment are taken to the unconsolidated
profit and loss
account.
Recognition of Property, Plant and
Equipment
The company recognizes
as an asset when:
Ø It
is probable that future economic benefits related to the asset will flow to the
organization
Ø The
cost of the asset to the enterprise can be measured reliably
Initial Measurement of Property, Plant
and Equipment
The company measure an
asset initially measured at cost. The cost has the following components:
Ø Purchase
price
Ø Import
duties
Ø Directly
attributable costs of bringing the asset to working condition for its intended
use
Ø Trade
discounts and rebates are deducted in arriving at the purchase price
Ø The
estimated cost of dismantling and removing the asset and restoring the site
Subsequent Expenditure
The company adds in the
carrying amount of the asset if it is probable that the future economic
benefits, in excess of the originally assessed standard of performance of the
existing assets, will flow to the enterprise. For example:
Ø Modification
of an item to extend its useful life, including its capacity
Ø Upgrading
machine parts to achieve a substantial improvement in the quality of output
Ø Adoption
of a new production process enabling a substantial reduction in previously
assessed operating costs.
Revaluation
In revaluation, the
company following conditions according to this IAS:
Ø The
fair value is usually assets market value. This is determined by appraisal done
by qualified valuers.
Ø When
an item is revalued the entire class of property, plant and equipment to which
that asset belongs should be revalued.
Ø Increase
in the value of an asset should be directly credited to equity in the head of
revaluation surplus.
Ø If
the value of an asset is decreased due to revaluation then it should be shown
as an expense.
Depreciation
Useful Life
To determine the useful life of an asset the
following points is considered by the company:
Ø Expected
usage of the asset
Ø Expected
physical wear and tear
Ø Technical
obsolescence
Review of useful life and depreciation method
The company reviews the useful life of an asset and
depreciation method on the following basis:
Ø The
useful life should be reviewed periodically and depreciation allowance should
adjusted accordingly.
Ø The
depreciation method should be changed if there is a change in the pattern of
economic benefits that are expected from the asset.
Disclosure
The company discloses about property, plant and
equipment on the following basis according to this IAS:
Ø The
measurement basis used for determining the gross carrying amount
Ø The
depreciation method used
Ø Useful
lives or the depreciation rates
Ø Gross
carrying amount and accumulated depreciation at the start and end
A reconciliation of the
carrying amount at the beginning and end of the period showing the following:
Ø Additions
Ø Disposals
Ø Acquisitions
through business combinations
Ø Increase
or decrease through revaluation or impairment
Ø Depreciation
Ø The
net exchange difference arising on the translation of the financial statement
of a foreign entity
Ø Other
movements
Further
Disclosure
The
company also discloses in future revaluation of assets changing in accounting
policies in according to this IAS:
Ø Details
related to assets pledged.
Ø Accounting
policy for restoring the costs of site items.
Ø The
amount of expenditure on account of property, plant and equipment in the course
of construction.
Ø The amount of commitments for the acquisition of
property, plant and equipment.
Disclosure for revalued
assets
The company discloses the following in accordance with this IAS:
Ø Basis
used to revalue the assets
Ø Effective
date of revaluation
Ø Whether
an independent valuer was involved
Ø The
nature of any indices used to determine replacement cost
Ø The
revaluation surplus
Conclusion
Bestway Cement Company
follows all of the four following Standards:
Ø
IAS-2 - Inventories
Ø
IAS-7 - Cash Flow Statement (CFS)
Ø
IAS-16 - Property, Plant
and Equipment (PPE)
Ø
IAS- 18 - Revenues
So, their financial
statements give true and fair view of the results and their cash flows are in
good position.
References
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