CFAR - Financial Accounting & Reporting - Part 2

Overview

You’re looking at a quiz that mixes several “high-yield” CPALE FAR areas that often feel unrelated—intangibles, mineral resources, biological assets, held-for-sale rules, and contingencies—but they’re connected by one theme: when costs become assets vs. when they must hit profit or loss. In this vlog-style lesson, we’ll build a mental map for each standard, then practice the decision recipes examiners expect. You’ll learn what disclosures are typically tested, how remeasurement works (cost vs revaluation vs fair value), and how to avoid the classic traps (especially around legal fees, exploration costs, and “probable vs possible” obligations). By the end, you should be able to justify treatments in words—not just memorize rules.

Concept-by-Concept Deep Dive

PAS 38 Intangibles: Recognition, Subsequent Measurement, and Disclosures

• What it is (2–4 sentences).
  PAS 38 governs identifiable non-monetary assets without physical substance (e.g., patents, software, trademarks) that are controlled by the entity and expected to generate future economic benefits. The standard is heavily tested on (1) what qualifies as an intangible asset, (2) what costs can be capitalized, and (3) what must be disclosed by class.

Recognition: the “3-gate test”

• Identifiable: separable (can be sold/licensed) or arises from contractual/legal rights.
• Control: the entity can obtain benefits and restrict others’ access (often via legal rights).
• Future economic benefits: probable inflows such as revenue, cost savings, or other benefits, and the cost can be measured reliably.

Capitalize vs expense: the “directly attributable” filter

Capitalization is generally limited to costs directly attributable to preparing the asset for its intended use. Many intangible-related costs feel “asset-like” but fail the filter because they are too uncertain, too promotional, or not controlled.

Examples of costs that often fail capitalization (pattern-based, not exhaustive):

• Broad advertising/branding spend (even if it “builds reputation”).
• Training and start-up/launch expenditures.
• General overhead not directly attributable.

Subsequent measurement models: cost vs revaluation

• Cost model: carry at cost less accumulated amortization and impairment (if finite life).
• Revaluation model: allowed only when fair value can be measured by reference to an active market (this condition is a frequent exam hinge).

Disclosure mindset: “by class” + “movement”

PAS 38 disclosures commonly tested include:

• Measurement basis used (cost or revaluation) and amortization methods/rates for finite-life intangibles.
• Reconciliation (movement schedule) by class: opening balance, additions, disposals, amortization, impairment, revaluations, etc.
• Restrictions/pledges and significant commitments (when relevant). Think of disclosures as: What is it? How is it measured? What changed during the period?

Common misconceptions and how to fix them

• Misconception: “If it’s legal, it’s automatically an asset.”
  Fix: Legal rights help with identifiability/control, but you still need probable benefits and reliable measurement—and the cost must be directly attributable.
• Misconception: “Revaluation is always allowed if management estimates fair value.”
  Fix: PAS 38 is strict: revaluation generally requires an active market, which is rare for many intangibles.
• Misconception: “All intangible costs after acquisition are capitalized.”
  Fix: Subsequent spend is capitalized only if it enhances the asset beyond originally assessed performance and meets recognition criteria.

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Revaluation Model Mechanics for Intangibles (PAS 38): Carrying Amount After Revaluation

• What it is (2–4 sentences).
  Under the revaluation model, an intangible is carried at a revalued amount: fair value at the revaluation date minus subsequent amortization and impairment. The exam focus is not just “use fair value,” but how the carrying amount resets, and what happens afterward.

Key moving parts

• Revaluation date fair value: the new “starting point” for carrying amount.
• Accumulated amortization handling: typically eliminated against the gross carrying amount or restated proportionately (approach depends on how the entity applies the method; exams often test the concept that the carrying amount becomes the revalued amount).
• Post-revaluation amortization: based on the revalued amount over remaining useful life (if finite life).

Step-by-step reasoning recipe

1. Confirm revaluation model is permitted (active market condition).
2. Determine fair value at revaluation date.
3. Reset carrying amount to the revalued amount (then continue amortization/impairment going forward).
4. Treat upward/downward revaluation effects consistently with the revaluation framework (often via OCI/equity unless reversing prior decreases, but the exact presentation depends on prior history).

Common misconceptions and how to fix them

• Misconception: “After revaluation, you still show historical cost and just add a revaluation reserve line.”
  Fix: The statement of financial position shows the revalued carrying amount, not historical cost.
• Misconception: “Revaluation replaces impairment testing.”
  Fix: Impairment principles still apply; revaluation doesn’t exempt an asset from impairment considerations.

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Legal Fees and Patents: Registration vs Defense (Capitalize vs Expense)

• What it is (2–4 sentences).
  Legal costs around patents are a classic exam scenario because timing and purpose matter. Some legal fees are directly attributable to securing the legal right (more likely capitalizable), while others relate to protecting or maintaining an existing right (often expensed unless they clearly enhance future benefits beyond original expectations).

How to analyze legal fees (practical framework)

Ask: What did the legal cost accomplish?

• Securing the right (creating/obtaining the identifiable resource): often directly attributable to bringing the intangible into existence.
• Defending the right: can be tricky—sometimes viewed as maintaining the asset’s benefits, but you must evaluate whether it meets recognition criteria as a cost of the intangible (e.g., preserving enforceability may be necessary for control). Many exams differentiate between routine protection vs costs that create measurable future benefits.

Step-by-step decision recipe

1. Identify the intangible asset unit (the patent right).
2. Classify the legal spending as: obtaining/creating vs maintaining/defending vs enhancing.
3. Apply the recognition test: probable benefits + reliable measurement + directly attributable.
4. Decide whether to capitalize to the patent’s carrying amount or expense when incurred.

Common misconceptions and how to fix them

• Misconception: “All defense costs must be expensed because they occur after initial recognition.”
  Fix: Timing alone doesn’t decide; purpose and recognition criteria do.
• Misconception: “If the defense is successful, it’s automatically capitalized.”
  Fix: Success helps support future benefits, but you still need to link the cost to the asset and apply the directly attributable criterion.

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Depreciation vs Depletion: Similarities and the One Big Difference

• What it is (2–4 sentences).
  Depreciation allocates the cost of a tangible asset over its useful life; depletion allocates the cost of a natural resource over the units extracted or time. Exams often ask you to spot what’s similar (systematic allocation) and what’s fundamentally different (the basis of allocation and the role of reserves/units).

Similarities (what to anchor)

• Both are cost allocation, not valuation.
• Both aim for systematic and rational matching with benefits.
• Both can affect inventory/cost of sales when production-related (depending on the asset’s use).

The key difference (highly testable)

• Depreciation is usually based on time and usage patterns of the asset’s service potential.
• Depletion is often based on units extracted relative to estimated total recoverable units (reserves). That estimate drives the per-unit rate.

Step-by-step depletion recipe (conceptual)

1. Determine depletable base (acquisition + development + restoration, net of residual value, depending on policy).
2. Estimate total recoverable units.
3. Compute depletion per unit = depletable base / total units.
4. Multiply by units extracted (or sold, depending on how the question frames cost flow).

Common misconceptions and how to fix them

• Misconception: “Depletion is just depreciation with a different name.”
  Fix: Depletion depends heavily on reserve estimates and extraction volumes; it’s not merely time-based.
• Misconception: “Both always go straight to expense.”
  Fix: Either can be included in inventory cost when tied to production.

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IFRS 6 Exploration & Evaluation (E&E) Assets: Policy Choices and When You Can Change Them

• What it is (2–4 sentences).
  IFRS 6 deals with expenditures incurred in exploring for and evaluating mineral resources before technical feasibility and commercial viability are demonstrable. It’s unusual because it allows entities to keep existing accounting policies for E&E costs, within limits, and sets special impairment indicators.

What qualifies as E&E expenditures (conceptual boundary)

E&E is typically after the entity has obtained legal rights to explore and before the project is proven feasible/viable.