Workbook 6 (July 2022)

Diploma in International Public
Sector Accounting Standards
Accounting for inventories,

accounting policies and events -
advanced level
Workbook 6
Accounting for inventories,
6 accounting policies and events -
advanced level
Learning objectives
In this workbook we will deal with part of syllabus learning aims B and C,
i.e.:
• Aim B: Describe the main requirements of IPSASs. (30% of the

syllabus).
• Aim C: Apply the requirements of IPSASs to determine the appropriate

treatment of events and transactions in financial statements. (40% of
the syllabus).
In the last four workbooks we have looked at several accounting

standards relating to the preparation of financial statements, and we will
continue by covering the following standards in this workbook:
• IPSAS 3 Accounting Policies, Changes in Accounting Estimates and

Errors
• IPSAS 12 Inventories
• IPSAS 14 Events after the Reporting Date
We will also briefly cover the following standards in this workbook,

although note that these are only examinable at level C in your Dip IPSAS
exam and hence you only need a broad understanding of the aims and
main principles of these standards:
• IPSAS 4 The Effects of Changes in Foreign Exchange Rates
• IPSAS 10 Financial Reporting in Hyperinflationary Economies
• IPSAS 27 Agriculture
• IPSAS 32 Service Concession Arrangements: Grantor
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IPSAS 3 Accounting Policies, Changes in Accounting Estimates and Errors
6.1 IPSAS 3 Accounting Policies, Changes in

Accounting Estimates and Errors
6.1.1 Overview
The ability to compare financial statements year on year for an individual entity
and between different entities is a fundamental process for stakeholders.
These include investors and funders of public sector entities and the entity’s
management alike. Effective comparisons allow an entity to benchmark itself
within a particular sector. Useful comparisons could not be undertaken if
financial statements were prepared on different bases.
It is also imperative that entities are restricted in their ability to select different
ways of treating the same information period on period as such an ability
would allow entities to choose the most beneficial outcome in that period.

provides the guidelines under which accounting policies can be changed and
therefore represents the structure that underpins the successful comparison of
financial statements.
6.1.2 IPSAS 3
The objective of IPSAS 3 is to enhance the relevance, faithful representation and
comparability of financial statements and should be applied by an entity to select
and apply its accounting policies. In addition, IPSAS 3 should be applied where
an entity changes its accounting policies or estimates, and for the correction of
errors arising in prior periods. Comparability is one of the key qualitative
characteristics of financial information.
Comparability allows both the identification of trends over time in relation to a

single entity and the evaluation of comparative performance across different
entities. To facilitate comparability, it is important that:
• all entities take account of the same types of income and expenditure in
arriving at the surplus or deficit for the period
• information is available about the accounting policies adopted by different

entities
• all entities treat changes in accounting policies or estimates and the

accounting for errors in the same way
• the scope for accounting policy changes is constrained.
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6.1.3 Accounting policies

Key definition
Accounting policies Accounting policies are the specific principles,

bases, conventions, rules and practices applied by an entity in preparing and
presenting financial statements.
In most instances accounting policies will be determined by reference to the

relevant IPSAS.
In the absence of specific guidance, management should use its judgment in

developing and applying an accounting policy that results in information that is
relevant to the economic decision-making needs of users and that is reliable.
Accounting policies shall be applied consistently for similar transactions.
6.1.4 Changes in accounting policies

Users of financial statements need to be able to compare the financial
statements of an entity over time to identify trends in its financial position,
performance, and cash flows. Therefore, the same accounting policies are
applied within each period and from one period to the next, unless a change
in accounting policy:
• is required by a new IPSAS
• results in financial statements providing faithfully representative and
more relevant information.
It is important to note how restricted the powers of management are in

relation to accounting policies. Accounting policies should be based on the
recognition and measurement requirements laid down in international public
sector accounting standards. Some standards provide choices which provide
management with more flexibility.
A change of an existing accounting policy to another policy of equal relevance

is not permitted on the grounds that, in these circumstances, comparability
should take precedence.
IPSAS 3 requires changes in accounting policies to be accounted for

retrospectively except where it is not practicable to determine the effect in
prior periods, or where a new standard includes specific transitional
provisions that require or permit a different treatment.
Key definition
Retrospective application Retrospective application is applying a new
accounting policy to transactions, other events and conditions as if that policy
had always been applied.
Retrospective application means that the financial statements of the current
period and each prior period presented are adjusted so that it appears as if the
new policy had always been followed. This is achieved by restating the
surpluses or deficits in each period presented and adjusting the opening
position by restating accumulated surpluses or deficits, held in the statement of
financial position as part of assets/equity.
Where it is not practicable to determine either the specific effect in a particular
period or the cumulative effect of applying a new policy to past periods, the
new policy should be applied from the earliest date that it is practicable to do
so.
Applying a requirement is impracticable when the entity cannot apply it after

making every reasonable effort to do so.
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Disclosure of changes in accounting policies

The reasons for and effects of a change in accounting policy should be
disclosed.
Where a new standard has been issued, but an entity is not yet required to
implement it and the entity has not implemented it early, it should disclose this
fact. The information provided should quantify the effect on future periods if
this can be reasonably estimated. This provides useful information to users of
the financial statements about an entity’s future reported performance.
6.1.5 Changes in accounting estimates

Key definition
Change in accounting estimate A change in accounting estimate is an

adjustment of the carrying amount of an asset or liability, or the amount of the
periodic consumption of an asset that results from the assessment of the
present status of, and expected future benefits from and obligations associated
with, assets and liabilities. Changes in accounting estimates result from new
information or new developments and, accordingly, are not correction of errors.
The preparation of financial statements requires many estimates to be made

on the basis of the latest available, reliable information. Key areas in which
estimates are made include:
• tax revenue due to government
• bad debts arising from uncollected tax
• the obsolescence of inventories
• the fair value of financial assets and financial liabilities
• the useful lives of non-current assets and
• warranty obligations.
As more up-to-date information becomes available, estimates should be

revisited to reflect this new information. Changes in accounting estimates
result from new information or new developments and accordingly are not
changes in accounting policies or correction of errors.
Changes in accounting estimates are applied prospectively, i.e. no restatement

of prior period balances occurs.
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Key definition
Prospective application Prospective application of a change in

accounting policy and of recognising the effect of a change in an accounting
estimate, respectively, are:
(a) Applying the new accounting policy to transactions, other events, and
conditions occurring after the date as at which the policy is changed; and
(b) Recognizing the effect of the change in the accounting estimate in the
current and future periods affected by the change.
Illustration: Change in accounting estimate

An entity is considering the recoverability of its receivables, consistent with
its accounting policy to recognise assets at no more than their recoverable
amount.
It decides that, as the economy is entering a period of recession, it should

raise its allowance for receivables from 2% of the total to 3%.
This is not a change in accounting policy. What has changed is the level of the
receivables that are recoverable. This is a change in estimate.
By its very nature the revision of an estimate to take account of more up to date
information does not relate to prior periods. Instead, such a revision is based
on the latest information available and therefore should be recognised in the
period in which that change arises. The effect of a change in an accounting
estimate should therefore be recognised prospectively, i.e. by recognising the
change in the current and future periods affected by the change.
Disclosure of a change in accounting estimates

An entity shall disclose the nature and amount of a change in an accounting
estimate that has an effect in the current period or is expected to have an
effect on future periods, except for the disclosure of the effect on future
periods when it is impracticable to estimate that effect. If the amount of the
effect in future periods is not disclosed because estimating it is impracticable,
the entity shall disclose that fact.
Worked example: Change in accounting estimate
A machine tool with an original cost of £100,000 has an estimated

useful life of 10 years and residual value of nil. The annual straight-line
depreciation charge will be £10,000 per annum and the carrying amount
after three years will be £70,000.
In the fourth year it is decided that, as a result of changes in the use of the
asset and its maintenance, the remaining useful economic life is a total of
14 years. The depreciation charge for that and subsequent years will be
calculated as the carrying value brought forward divided by the
revised remaining useful economic life (i.e. £70,000 / 14 years = £5,000
per annum). There should be no change to the depreciation charged for
the past three years, i.e. no retrospective restatement.
The effect of the change (in this case a decrease in the annual depreciation
charge from £10,000 to £5,000) in the current year, and the next 14 years,
should be disclosed.
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Exercise 6.1: Changes in accounting policies and accounting

estimates
Consider whether each of the following scenarios involves a change in

accounting policy or a change in accounting estimate:
Interest incurred in connection with the purchase of a non-current

asset was previously written off as an expense and charged to the
statement of financial performance. In the future, the organisation
plans to capitalise such expenses. This change will bring the treatment
of interest on the purchase of non-current assets in line with other
organisations operating in the sector, allowing users to make more
meaningful comparison between the financial statements produced.
An organisation has previously shown certain overheads within the

transport expenses line in the statement of financial performance.
It now proposes to show these overheads within administrative
expenses.
Previously depreciation on vehicles was charged at 30% using the

reducing balance method. The organisation now plans to depreciate
vehicles on a straight line basis over four years, as this better reflects
the consumption of economic benefits.
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6.1.6 Errors
Errors can arise in respect of the recognition, measurement, presentation or
disclosure of elements of financial statements. Financial statements do not
comply with IPSAS if they contain either material errors, or immaterial errors
made intentionally to achieve a particular presentation of an entity’s financial
position, financial performance or cash flows.
Key definition
Material Omissions or misstatements of items are material if they could,

individually or collectively, influence the decisions or assessments of users
made on the basis of the financial statements. Materiality depends on the
nature or size of the omission or misstatement judged in the surrounding
circumstances. The nature or size of the item, or a combination of both, could
be the determining factor.
Prior period errors are omissions from and misstatements in the

entity’s financial statements for one or more prior periods arising from a failure
to use, or a misuse of, faithfully representative information. that:
(a) Was available when financial statements for those periods

were authorized for issue; and
(b) Could reasonably be expected to have been obtained and

taken into account in the preparation and presentation of
those financial statements.
A prior period error is where an error has occurred even though reliable
information was available when those financial statements were authorised for
issue and could reasonably be expected to have been taken into account at
that time.
Examples of such errors are:
• mathematical errors
• mistakes in applying an accounting policy
• oversights or misinterpretation of facts
As such errors may relate to a number of past periods reported, IPSAS 3

requires that these errors are adjusted in those past periods in which the error
arose rather than in the current period. Adjustment in the current period would
lead to a distorted result in the period in which the error was identified.
We therefore use retrospective restatement to correct the financial statements

as if the prior period error had never occurred.
Key definition
Retrospective restatement Retrospective restatement is correcting

the recognition, measurement and disclosure of amounts of elements of
financial statements as if a prior period error had never occurred.
If it is impracticable to determine the effect on an individual period of an error,

then the adjustment should be made to the opening balance of the earliest
period in which it is possible to identify such information.
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It is important to distinguish between prior period errors and changes

in accounting estimates. Accounting estimates are best described as
approximations, being the result of considering what is likely to
happen in the future, for example how many customers will pay their
outstanding invoices and the period over which non-current assets
can be used productively within the business. By their very nature
estimates result from judgements made on the basis of information
available at the time they are made, so they may need to be adjusted
in the future, in the light of additional information becoming available.
Prior period errors, on the other hand, result from discoveries which undermine
the reliability of the previously published financial statements, for example
unrecorded income and expenditure, or the incorrect application of accounting
policies such as classifying maintenance expenses as part of the cost of non-
current assets. Prior period errors should be rare.
Disclosure of prior period errors

An entity should disclose the following information in respect of prior period
errors:
• the nature of the prior period error
• for each prior period presented, to the extent practicable, the amount of the
correction for each financial statement line item affected
• the amount of the correction at the beginning of the earliest prior period
presented
• if retrospective restatement is impracticable for a particular prior period,

the circumstances that led to the existence of that condition and a
description of how and from when the error has been corrected.
Financial statements of subsequent periods need not repeat these disclosures.
Exercise 6.2: Errors

Shortly after its 31 December 20X2 year end, the Strategy Agency
discovered material errors in its 20X1 accounts, which meant that
operating expenses of £1,328,000 had been completely omitted from the
prior year accounts owing to a mistake by the new senior accountant.
The 20X2 surplus was £11,008,765 and accumulated surpluses as at 31
December 20X1 as in the published 20X1 accounts were £3,763,007.
Explain how the error will affect accumulated surpluses in the 20X2
financial statements according to IPSAS 3.
308
Exercise 6.3: IPSAS 3

Match the change with the treatment:
Change Treatment
Prior period error Prospective application
Accounting policy Retrospective restatement
Accounting estimate Retrospective application
309
6.2 IPSAS 12 Inventories
6.2.1 Overview
IPSAS 12 covers inventories. Inventories include:
• goods purchased and held for resale
• work-in-progress
• finished goods
and are of major significance to some public sector entities. For private sector
entities, the level and significance of inventories depends not only on the type
of industry and market within which an entity operates, but also the manner in
which they are managed. For example, inventories in the retail sector consist
of goods held for resale and present few valuation problems. On the other
hand, manufacturing businesses have materials or supplies, goods in process
of production and finished goods held for sale, all of which can be made up
of a variety of costs and present more difficult measurement issues, often
involving judgement and uncertainty.
Additional measurement issues arise in the public sector, where inventories

are often held for distribution or for use in the provision of services at no
or nominal consideration and where inventories may be acquired for no or
nominal consideration.
The determination of the cost attributable to specific inventory items and its
subsequent recognition as an expense will have an effect on the surplus or
deficit reported for the period and is therefore an important consideration.
Consequently, the measurement, presentation and disclosures required by
IPSAS 12 Inventories provide important information to users of the financial
statements.
6.2.2 IPSAS 12
The objective of IPSAS 12 is to prescribe the accounting treatment for
inventories.
The main issue in accounting for inventories is determining what amount

of cost should be carried forward as an asset until related revenues are
recognised, or until the inventories are distributed or used to provide services.
IPSAS 12 applies to all public sector entities, but does not apply to types of
inventory covered by other standards, such as:
• work in progress under construction contracts (IPSAS 11)
• financial instruments (IPSAS 28, 29 and 30)
• biological assets (IPSAS 27)
Inventories are assets:
• held for sale or distribution in the ordinary course of business
• in the process of production for such sale
• in the form of materials or supplies to be consumed in the production
process or in the rendering of services
• in the form of materials or supplies to be distributed in the rendering of
services
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Inventories in the public sector may include:

• military inventories consumable stores
• maintenance materials
• spare parts for plant and equipment, other than those dealt with in
standards on property, plant and equipment
• strategic stockpiles (for example, energy reserves)
• stocks of un-issued currency
• postal service supplies held for sale (for example, stamps)
• work-in-progress, including: educational/training course materials
• client services (for example, auditing services), where those services are
sold at arm’s length prices, and; land/property held for sale.
6.2.3 Measurement
Inventories shall be measured at the lower of cost and net realisable value, except where
other considerations apply.
Cost
The cost of inventories shall comprise all costs of purchase, costs of
conversion and other costs incurred in bringing the inventories to their present
location and condition.
Net realisable value (NRV)

The net realisable value is the estimated selling price in the ordinary course
of operations, less estimated costs of completion and the estimated costs
necessary to make the sale, exchange or distribution. This is sometimes
referred to as fair value less costs to sell.
Valuing inventory at the lower of cost and NRV ensures that any surplus to be
gained on their sale is not recognised before the sale takes place, although
any loss is recognised as soon as it is identified.
6.2.4 Cost
The costs of purchase of inventories comprise:
• the purchase price
• import duties and other taxes
• transport, handling and other costs directly attributable to the acquisition of
finished goods, materials, and supplies
Trade discounts, rebates, and other similar items are deducted in determining
the costs of purchase.
The costs of conversion comprise:

• costs directly related to the units of production, such as direct labour
• a systematic allocation of fixed and variable production overheads that are
incurred in converting materials into finished goods
Other costs are included in the cost of inventories only to the extent that they
are incurred in bringing the inventories to their present location and condition.
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Fixed production overheads

Fixed production overheads are those indirect costs of production that
remain relatively constant regardless of the volume of production (for
example the cost of factory management, rent of the processing factory and
administration).
The standard emphasises that fixed production overheads must be allocated

to items of inventory on the basis of the normal capacity of the production
facilities.
Variable production overheads

Variable production overheads are costs incurred in the processing of raw
materials that vary directly, or nearly directly, with the volume of production
(for example indirect materials, labour and power).
Examples of costs excluded from the cost of inventories and recognised as

expenses in the period in which they are incurred are:
• abnormal amounts of wasted materials, labour, or other production costs
• storage costs, unless those costs are necessary in the production process
before a further production stage
• administrative overheads that do not contribute to bringing inventories to

their present location and condition
• selling costs
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IPSAS 12 Inventories
Worked example: Production overheads
How much should be added to the cost of each unit produced for the
following production overheads?
Production overheads
£
Indirect wages 25,500
Factory rent 6,525
Plant depreciation 4,605
Power 8,170
Total 44,800
Normal production: 500 units
Production this year: 400 units
Solution to worked example
Allocation of indirect production costs = £44,800/500 = £89.60
Therefore, to arrive at the full cost of each item you would add the cost of
purchase plus the direct production costs plus the allocation of indirect
production costs (based on the normal level of activity), i.e. £89.60 per
unit.
Exercise 6.4: Cost of inventories

Which of the following can be included as part of the cost of inventories?
Import duties
Abnormal wastage
Direct labour
Variable production overheads
Costs of storage of finished goods
Selling costs
Cost of delivery of raw materials
Admin overheads
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6.2.5 Cost formulas

Where inventories contain items, which are not interchangeable and/or are
produced for a specific project (for example a special order for a customer),
their costs shall be built up through specific identification of their individual
costs.
In all other cases, it is not usually possible to identify a sale of a specific

inventory item with the specific purchase of that item. Therefore, a cost
formula must be used which applies a logical way of identifying the cost of
purchasing inventory with the sale of that inventory. IPSAS 12 states that there
are two cost formulas that can be used: first-in, first-out (FIFO) or weighted
average cost (WAC) For example, if an entity purchases litres of oil every two
months and has 1,000 litres of oil at the end of the year, which is all held in
a single container, it is impossible to say when this oil was purchased and
at what price, as oil purchased early in the year will have been mixed with oil
purchased later in the year.
Even if it is physically possible (where the oil is kept in separate containers),

it may be impractical to attach a specific price to each item of inventory.
First-in, first-out, known as FIFO: this method assumes a physical flow of

items whereby those purchased or produced earliest are the first to be sold or
used. The items purchased or produced most recently remain in inventory, and
are valued at their applicable cost.
Weighted average cost: this method calculates an average cost of purchase

or production (calculated either on a periodic basis or after each delivery has
been received or new batch has been produced) and values inventory at that
average cost.
The last-in, first-out (LIFO) formula is not allowed per IPSAS 12.
An entity shall use the same cost formula for all inventories of a similar nature.
Worked example: Methods of determining cost
We can illustrate how these methods work by developing the oil example
above.
Let us assume that the oil was purchased as follows:
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Purchased Litres £ per litre

3rd January 500 0.44
9th March 600 0.48
1st May 500 0.50
22nd July 600 0.51
13th September 500 0.53
30th November 700 0.55
The FIFO method assumes that the 500 litres purchased in January at
£0.44 per litre, are used before the 600 purchased in March at £0.48 per
litre and so on. This means that the 1,000 litres left at the end of the year
must consist of the 700 litres purchased in November and 300 litres of the
500 purchased in September.
The cost of the inventory to be shown on the statement of financial

position will be (700 × £0.55) + (300 × £0.53) = £544.
If we used the weighted average approach, we assume that the inventory

at the end of the year consists of oil purchased at various times during the
year. We will need to know when oil was used so assume that usage was
as follows and that the opening valuation at the start of the year was 460
litres at 40p/litre.
Used Litres
12th January 220
1st March 150
21st June 450
22nd August 700
18th September 470
20th December 870
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We can determine the costs of the inventory as follows:
Litres £ £/ litre
purchased
/(used)
Opening 460 184 0.40
3rd January 500 220 0.44
Weighted average recalculated after 960 404 0.42
purchase
12th January1 (220) (92) 0.42

1 (150) (63) 0.42
1st March
9th March 600 288 0.48
Weighted average recalculated after 1,190 537 0.45
purchase
1st May 500 250 0.50
purchase
21st June1 (450) (212) 0.47

22nd July 600 306 0.51
purchase
22nd August1 (700) (336) 0.48

13th September 500 265 0.53
purchase
18th September1 (470) (230) 0.49

30th November 700 385 0.55
purchase
20th December1 (870) (453) 0.52

Closing valuation 1,000 512 0.51
1. Calculated using the rounded £/litre value. You will get a slightly
different answer if you use the absolute value − either method is fine.
IPSAS 12 allows the weighted average price to be recalculated either on

a periodic basis (say monthly) or after each purchase is received. Here
we have done the recalculation after each purchase and all exercises in
the Dip IPSAS materials will adopt the same basis. The standard
therefore allows either £544 or £512 to be used as a reasonable
approximation of the value of the oil held at the end of the year.
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Exercise 6.5: FIFO and weighted average

On 31 December 20X0 an organisation held 180 boxes of paper valued at
£18.00 each. Transactions during the year 20X1 were as follows:
Purchases Boxes £/ box

10 January 120 18.95
28 February 200 19.20
11 April 130 20.35
29 June 250 20.40
24 July 300 20.75
14 November 200 21.25
24 December 100 21.80
Boxes of paper were taken out of the inventory stores and used as
follows:
Boxes
13 January 110
2 March 190
21 April 90
2 May 140
21 August 320
19 December 120
Use the information above to value the inventory at the end of the year on
both the weighted average and FIFO methods.
Hint: Do the weighted average calculation first so that you know how
many units are held at year-end, which you need for the FIFO calculation.
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6.2.6 Net realisable value (NRV)

The net realisable value is the estimated selling price in the ordinary course
of operations less estimated costs of completion and the estimated costs
necessary to make the sale, exchange or distribution. As a general rule,
assets should not be carried at amounts greater than the future economic
benefits or service potential expected to be realised from sale, exchange,
distribution or use.
In the case of inventories this amount could fall below cost when items are
damaged or become obsolete, or when costs to complete increase or selling
price falls.
Net realisable value must be reassessed and compared with cost at the end of
each period, and previous write-downs reversed if NRV has risen above cost.
Exercise 6.6: NRV

Manufacturing costs in 20X0 for inventory held at the year-end are £60
million. All goods held at the year-end were sold in January 20X1, for £50
million. The selling costs incurred for the goods sold in January 20X1 were
£4 million. At what value should inventory be held on the Statement Of
Financial Position as at 31 Dec 20X0?
There are other important points to note with regard to NRV.

• In the case of incomplete items of inventories, NRV takes account of the
costs to complete.
• In making the assessment of whether NRV is lower than the cost of
inventory it may be appropriate to group items together. However, items
should only be grouped together when the individual items cannot be
valued separately. It is not appropriate to treat a whole class of inventory,
for example all goods held for sale, as a group. If NRV is less than cost the
write down of inventory will also be made on a group basis.
• In the absence of a contractually agreed selling price, the best estimate is
the likely selling price, less appropriate deductions.
• Materials to be incorporated into a finished good should only be written
down if the eventual finished good will be sold for less than the total cost.
It is important to determine the net realisable value of inventory as in some

instances the cost will not be fully recoverable, if:
• the inventory has been damaged;
• the inventory has become fully or partly obsolete;
• its selling price has declined, or;
• the costs of completing the inventory or the sale have increased.
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Exercise 6.7: Inventory valuation

How would you value the following items of inventory?
Medical supplies were bought by a hospital pharmacy for sale to private

patients. The following items were in stock on 31 December 20X0:
150 bottles of Drug A which cost £3 per bottle and which is normally
sold at £3.50 per bottle. New regulations mean that the drug has to be
put into new containers which cost £0.75 each.
10 litres of Drug B which costs £50 per litre and normally sells at £6
per 100ml. A check of individual items revealed that 2 litres of the drug
is now past its use by date.
500 bandages which cost £2 each and are normally sold to patients at
cost.
6.2.7 Inventories − other considerations

IPSAS 12 provides that where:
• inventories are acquired through a non-exchange transaction; their cost

shall be measured at their fair value as at the date of acquisition
• inventories are held for distribution, or consumption in the production

process of goods to be distributed at no charge or for a nominal charge,
they are measured at the lower of cost and current replacement cost.
Inventory acquired in a non-exchange transaction

Inventories may be transferred to the entity by means of a non-exchange
transaction. For example, an international aid agency may donate medical
supplies to a public hospital in the aftermath of a natural disaster. Under such
circumstances, the cost of inventory is its fair value as at the date it is
acquired.
Distributing goods at no charge or for a nominal charge

A public sector entity may hold inventories whose future economic benefits or
service potential are not directly related to their ability to generate net cash
inflows.
These types of inventories may arise when the entity intends to distribute the
goods at no charge or for a nominal amount. For example, a fire and rescue
authority may distribute fire alarms free of charge to vulnerable households.
In these cases, the future economic benefits or service potential of the

inventory for financial reporting purposes is reflected by the amount the entity
would need to pay to acquire the economic benefits or service potential (which
in our example would be the cost at which it could purchase replacement fire
alarms).
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Where the economic benefits or service potential cannot be acquired in the

market, an estimate of replacement cost will need to be made.
Inventory held for distribution (or consumption in the production process of

goods to be distributed) at no charge or for a nominal charge is measured at
the lower of cost and current replacement cost.
Exercise 6.8: Inventory acquired in a non-exchange

transaction/ distributing goods at no charge
A local supermarket has donated several tonnes of tinned food to a food

bank run by a local authority. The food will be distributed free of charge to
local families in need.
The food cost the supermarket £14,000. At the date when the food was
delivered to the bank, the total fair value was £13,200. The current
replacement cost at the reporting date is £12,600. If the food bank was to
sell each item of food individually at normal retail prices to local residents,
the total net realisable value would be £16,500.
Assuming that all the food is still held in inventory at the year-end, at how
much would the authority value the food under IPSAS 12 Inventories?
6.2.8 Recognition as an expense

When inventories are sold, or distributed the carrying amount is recognised as
an expense in the period in which the related revenue is recognised.
If there is no related revenue, the expense is recognised when the goods are
distributed or the related service is rendered.
Any write-down of inventories to NRV and all losses of inventories are

recognised as an expense in the period in which the write-down occurs.
Any reversal of any write-down of inventories, arising from an increase in

NRV, is recognised as a reduction in the amount of inventories recognised as
an expense in the period in which the reversal occurs.
6.2.9 Disclosure
The financial statements should disclose the:
• accounting policies adopted in measuring inventories, including the cost

formula used
• total carrying amount of inventories classified in a manner appropriate to

the entity
• carrying amount of inventories held at fair value less costs to sell (i.e. net
realisable value)
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• amount of inventories recognised as an expense during the period
• amount of any write-down that is recognised as an expense during the

period
• amount of any reversal of a write-down that is recognised during the

period, along with a description of the circumstances or events that led to
the reversal
• carrying amount of inventories pledged as security for liabilities.
Exercise 6.9: Inventory valuation: advanced question

A hospital is preparing its financial statements for the year-ended 31
December 20X2 and needs calculate the total value of inventory as at the
year-end. A count of all inventories gave a total value of £387,000 but the
hospital’s accountant was unsure of the treatment of the following:
3,000 vaccination kits donated to the hospital by an international aid

charity shortly before the year-end have been included at a value of
£1, as the accountant felt that since the kits had not cost the hospital
anything, this nominal amount would be a reasonable basis to include
them in the accounts. Upon checking the website of the company that
makes the kits, it appears that their value is £4.50 each.
The valuation includes £9,000 of medicines which were found to be out

of date during the inventory count. These medicines will need to be
disposed of. There will be no cost incurred during the disposal.
One of the hospital’s medicines is produced in-house, and the 1,220

bottles of this medicine held at the year-end have been included in the
year-end valuation at £6.50/bottle. This valuation has been calculated
by the accountant as follows:
Raw materials per item £3.00

Labour per item £2.00
Pharmacy overhead per item £1.50
The hospital’s management accountancy department had calculated

earlier in the year that the standard overhead to be attributed to each
bottle produced should be 80p, but the accountant decided to increase
this to £1.50 in the closing inventory valuation because fire damage in the
pharmacy during the year had led to a short-term increase in overhead
costs, and the accountant is keen that some of these costs are deferred
until next year by increasing the inventory valuation.
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4. The hospital has a large liquid oxygen storage tank which it uses to
refill the portable oxygen tanks used in various patient treatments.
The accountant remembers that the oxygen is usually valued on a
weighted average cost basis but couldn’t remember how to do the
calculation so it is currently valued at nil. The accountant provides
you with the following information:
• The prior year-end valuation was a total of 3,500 kilograms (kg) at

71p/kg
• During the year, two deliveries were received from the liquid oxygen
supplier. 15,500 kg were received on 1 April at a cost of 83p per kg
and a further 13,300 kg were received on 1 September at a price of
87p per kg
• Oxygen was taken from the bulk tank on 3 occasions during the
year to refill all of the hospital’s portable tanks. Dates and quantities
were as follows:
• 3 April: 4,900 kg
• 12 June: 6,300 kg
• 27 September: 7,050 kg
• As in previous years, the auditors have agreed that the oxygen held
in portable tanks is not material so no valuation is needed.
Calculate the closing inventory valuation to be included in the hospital’s

statement of financial position as at 31 December 20X2.
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IPSAS 14 Events after the Reporting Date
6.3 IPSAS 14 Events after the Reporting Date
6.3.1 Overview
In assessing entity performance, pertinent information sometimes arises
following the cut-off date for which financial statements are prepared that may
have important implications for the financial position and performance in the
year just ended. The end of the reporting period is a cut-off date and events
that happen after this point in time should not generally be recognised in the
financial statements of the period just ended.
However, information that comes to light after the end of the reporting period
may provide additional information about events that actually occurred
before the end of the reporting period and it is then appropriate to take it into
account.
Financial statements should reflect the most up to date facts about events
that existed at the end of the reporting period. It is sometimes difficult to
establish whether an event happening after the end of the reporting period is
new information about an existing event or a new event.
Users should be informed of significant events occurring after the end of the
reporting period such as the impacts of government reorganisations. The
provision of such information required by IPSAS 14 Events after the Reporting
Date will help users to understand the impact on future results.
6.3.2 IPSAS 14
The objective of IPSAS 14 is to provide guidance as to how to deal with events
that occur after the end of the reporting period, but before the date on which
the financial statements are authorised for issue. These are described as
events after the end of the reporting period.
The standard prescribes:
• when an entity should adjust its financial statements for events after the
reporting date
• the disclosures that an entity should give about the date when the financial
statements were authorised for issue, and about events after the reporting
date.
IPSAS 14 also requires that an entity should not prepare its financial statements
on a going concern basis if events after the reporting date indicate that the
going concern assumption is not appropriate.
Events after the reporting date are those events, both favourable and
unfavourable, that occur between the reporting date and the date when the
financial statements are authorised for issue. Two types of events can be
identified:
• Adjusting events − events that provide evidence of conditions that existed

at end of the reporting period
• Non-adjusting events − events that are indicative of conditions that arose

after the end of the reporting period.
In order to determine which events satisfy the definition of events after the
reporting date, it is necessary to identify both the reporting date and the date
on which the financial statements are authorised for issue.
The reporting date is the last day of the reporting period to which the financial
statements relate.
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The date of authorisation for issue is the date on which the financial statements
have received approval from the individual or body with the authority to finalise
those statements for issue.
For example, in the case of UK government departments the date of the

Accounting Officer’s authorisation for issue of the financial statements is
normally the same as the date of the Certificate and Report of the Comptroller
and Auditor General. This is because, in line with IPSAS 14, it is only after the
Comptroller and Auditor General has certified the accounts that they can no
longer be adjusted for events after the reporting date.
The standards distinguish between events that occur during this period, which
should be adjusted for in the financial statements (adjusting events) and
those that should instead only be disclosed (non-adjusting events).
6.3.3 Recognition and measurement: Adjusting events

Adjusting events provide evidence of conditions that exist at the end of the
reporting period. An entity should adjust the amounts recognised in the
financial statements to reflect any adjusting events that have been identified.
The following are examples of adjusting events:
• The settlement of an outstanding court case that was provided for, or

disclosed as a contingent liability, at the end of the reporting period.
The provision at the end of the reporting period should be amended to
reflect the actual settlement figure as this provides additional evidence
as to the amount of the provision as required by IPSAS 19 Provisions,
contingent liabilities and contingent assets. If a contingent liability was
initially disclosed at the end of the reporting period, the provision should
now be recognised, since the settlement provides information that a
present obligation which can be reliably measured existed at the end of
the reporting period.
• Information received after the end of the reporting period about the value
or recoverability of an asset recognised at the end of the reporting
period. This might be evidence that the net realisable value for
inventories was lower than estimated, in which case the inventories
figure should be written down accordingly.
• The finalisation of staff bonuses that were payable at the year-end.
• The discovery of fraud or errors which show that amounts recognised or

information disclosed at the end of the reporting period were incorrect.
6.3.4 Recognition and measurement: Non-adjusting

events
Non-adjusting events are those that are indicative of conditions that arose after
the end of the reporting period.
An entity shall not adjust the amounts recognised in its financial statements to
reflect non-adjusting events after the reporting date.
Non-adjusting events should instead be disclosed where the outcome of

such events would influence the economic decisions made by users of the
financial statements. Where the disclosure of such an event is required, the
entity should provide details of the nature of the event and an estimate of its
financial effect, or state that such an estimate cannot be made.
The following are examples of non-adjusting events:

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• An unusually large decline in the fair value of property carried at fair value,
unrelated to the condition of the property at the reporting date, but due to
circumstances that have arisen since the reporting date.
• The entity decides after the reporting date to provide/distribute substantial

additional benefits in the future either directly or indirectly to participants in
community service programs that it operates.
• A major public service combination, a disposal of a major controlled entity or

the outsourcing of all or substantially all of the activity of the entity
undertaken at the reporting date.
• Announcing a plan to discontinue an operation or major program, disposing

of assets, settling liabilities attributable to the operation or major program or
entering into a binding agreement to do so.
• The major purchase or disposal of assets such as property, plant and

equipment
• The destruction of assets caused by a fire occurring after the end of the
reporting period.
• The announcement of major government reorganisation.
• A significant fluctuation in foreign exchange rates that would affect amounts

reflected in the financial statements.
• Entering into major commitments or providing a significant guarantee.
• The commencement of litigation following an event that happened after the

end of the reporting period.
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Exercise 6.10: Adjusting and non-adjusting events

A central government department’s draft financial statements for the year
ended 31 December 20X1 were completed on 30 May 20X2, signed by the
Accounting Officer on 7 June 20X2, and laid before Parliament on 5 July
20X2.
The following events occurred after the end of the reporting period
(assume all amounts are significant to the entity). Are these events
adjusting or non-adjusting?
1. Notification was received on 18 January 20X2 that a customer owing

£100,000 as at 31 December 20X1 went into liquidation during
December 20X1. The financial statements already include a specific

allowance of £20,000 for this customer and the entity does not make
general provisions.
The entity announces a major reorganisation on 6 April 20X2.
Confirmation on 28 May 20X2 from the entity’s insurer that they will
pay £500,000 for inventories that were destroyed in a fire on 24
December 20X1. The entity had claimed £650,000 and included this as
a receivable in the financial statements.
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6.3.5 IPSAS 14 − Other considerations

IPSAS 14 makes specific reference to dividends, going concern and restructuring.
We will consider each in turn.
Dividends
Dividends may arise in the public sector when, for example a public sector
organisation controls and consolidates the financial statements of an organisation
that has outside ownership interests to whom it pays dividends.
In addition, some public sector entities adopt models that require them to pay
income distributions to their controlling body, such as central government
departments.
(Note that in jurisdictions which have adopted IPSAS, Government Business
Enterprises report under IFRS. The accounting treatment, however, is the same
under IPSAS and IFRS.)
If dividends on shares have been proposed or declared after the end of the
reporting period they do not meet the definition of a liability and therefore
cannot be recognised as a liability at the end of the reporting period.
To be recognised as a liability the entity should have an obligation at the end
of the reporting period. The obligation to pay the dividend only arises when
it has been declared, so it is at the declaration date that a liability should be
recognised. Where dividends have been proposed or declared after the end
of the reporting period, this should be disclosed in the notes to the financial
statements.
Going concern
Financial statements are usually prepared on what is described as the ‘going
concern’ basis. This assumes that the entity will continue to operate for the
foreseeable future.
Where the ‘going concern’ assessment changes after the end of the reporting period,
this will need to be disclosed and will normally affect other aspects of the presentation
of the financial statements.
IPSAS 14 provides public sector specific guidance. In the public sector, the
assessment of going concern is likely to be of more relevance for individual
organisations than for a government as a whole. For example, an individual
government agency may not be a going concern because the government of which it
forms a part has decided to transfer all its activities to another government agency.
However, this restructuring has no impact upon the assessment of going concern for
the government itself.
In assessing whether the going concern assumption is appropriate for an individual
organisation within government, those responsible for the preparation of the financial
statements, and/or the governing body, need to consider a wide range of factors.
Those factors will include the current and expected performance of the entity, any
announced and potential restructuring of organisational units, the likelihood of
continued government funding and if necessary, potential sources of replacement
funding. In the case of entities whose operations are substantially budget-funded,
going concern issues generally only arise if the government announces its intention to
cease funding the entity. If the going concern assumption is no longer appropriate,
IPSAS 14 requires an entity to reflect this in its financial statements. The impact of
such a change will depend upon the particular circumstances of the entity, for
example, whether operations are to be transferred to another government entity, sold,
or liquidated, which will determine if a change in the value of the assets and liabilities
is required.
Disclosure of the change in the basis of preparation should be provided in
accordance with IPSAS 1 Preparation of financial statements.
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Restructuring
Where a restructuring is announced after the reporting date and meets the
definition of a non-adjustable event, the appropriate disclosures are made in
accordance with IPSAS 14.
Guidance on the recognition of provisions associated with restructuring is

found in IPSAS 19. Simply because a restructuring involves the disposal
of a component of an entity, this does not in itself bring into question the
entity’s ability to continue as a going concern. However, where a restructuring
announced after the reporting date means that an entity is no longer a going
concern, the nature and amount of assets and liabilities recognised may
change.
6.3.6 Disclosure
Disclosure is required for all material non-adjusting events after the reporting
date because non-disclosure could influence the economic decisions of users
taken on the basis of the financial statements.
Accordingly, entities must disclose the following for each material category of
non-adjusting event after the reporting date:
• The nature of the event; and
• An estimate of its financial effect, or a statement that such an estimate

cannot be made.
Note that no such disclosures are required for adjusting events because they
have already been reflected in the financial statements.
In addition to disclosures that may arise from information on non-adjusting
events after the end of the reporting period, an entity should also disclose
the date when the financial statements were authorised for issue and who
provided that authorisation.
This date is important because events that occurred after it are not recognised
or disclosed in the financial statements.
If subsequent information comes to light after the end of the reporting period,
about conditions that existed at the end of the reporting period, the original
disclosures should be updated to reflect this new information.
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Exercise 6.11: Events after the reporting period
Explain how the following items should be treated in the financial

statements of a government trading activity for the year ended 31 December
20X2:
Receivables at 31 December 20X2 are £64,000. On 20 January 20X3 a

major debtor was declared bankrupt. It is now expected that although
the debtor owed £25,000 on 31 December 20X2 the organisation will
only receive £2,500.
A fire shortly after the reporting date has destroyed inventory valued
at £3,000. The total value of inventory held at 31 December 20X2 was
£600,000.
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6.4 IPSAS 4 The Effects of Changes in Foreign

Exchange Rates
6.4.1 Overview
Many public sector operations are conducted within a single jurisdiction with a
single currency, but most governments have some foreign exchange dealings.
The wider public sector includes entities operating in multiple currency areas
such as the European Union and transnational agencies such as NATO and the
United Nations bodies.
International activity can vary enormously from relatively straightforward

off-shoring of government activity through to holding investments in global
securities, financing arrangements in multiple currencies or maintaining
operations overseas, for example, foreign embassies.
Operating in multi-currency locations presents a number of accounting

challenges, including conversion, translation and accounting for exchange
gains and losses. These are addressed by IPSAS 4 The Effects of Changes
in Foreign Exchange Rates.
6.4.2 Objective
A public sector body may carry on foreign activities either by:
• Transacting in foreign currencies − for example purchasing a non-current

asset from an overseas supplier, exporting goods to an overseas customer,
or receiving grants or loans from other governments or international
agencies; or
• Having foreign operations − for example an embassy or overseas

consulate.
The objective of IPSAS 4 is to prescribe how to include foreign currency

transactions and foreign operations in the financial statements of an entity and
how to translate financial statements into a different currency for presentation
purposes.
6.4.3 Key requirements of IPSAS 4

Functional and presentational currency
The overall approach required by IPSAS 4 is for an entity to translate foreign
currency items and transactions into its functional currency.
Key definition
Functional currency Functional currency is the currency of the primary

economic environment in which the entity operates.
The primary economic environment is normally the one in which the government
entity primarily generates and expends cash. So, the functional currency of the
UK government is the pound sterling, because this is the currency of the UK.
Whilst the overall aims of IPSAS 4 are for the entity to translate its foreign
currency transactions into its functional currency, an entity is not required to
present its financial statements using this currency. An entity is permitted to
choose the presentation currency for the reporting of its financial statements.
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Key definition
Presentation currency The presentation currency is the currency in

which the financial statements are presented.
The presentation currency will usually be the same as the functional currency,
but not always. For example, a government organisation which receives
significant overseas aid may choose to adopt the presentational currency
such as the US Dollar so that its financial statements can be more easily
understood by its overseas donors.
For your Dip IPSAS exam, you need to understand how an entity translates
foreign currency items into its functional currency but you are not required
to know about the requirements for translating financial statements into a
presentational currency.
Monetary and non-monetary items

IPSAS 4 distinguishes between monetary and non-monetary items.
Key definitions
Monetary items Monetary items are units of currency held and assets
and liabilities to be received or paid in a fixed or determinable number of units
of currency.
Examples of monetary items are cash, receivables, payables and loans.
Non-monetary items Non-monetary items are therefore where there

is an absence of a right to receive (or an obligation to deliver) a fixed or
determinable amount of money.
Examples of non-monetary items include property, plant and equipment,

goodwill, inventories and intangible assets.
Reporting transactions in the foreign currency: Initial

recording
Foreign currency transactions are recorded in a public sector entity’s
accounting records using its functional currency. IPSAS 4 requires that an
entity does this by recognising each transaction at the exchange rate (a spot
rate) on the date that the transaction took place.
For example, if an entity whose functional currency is £Sterling buys supplies in

New Zealand Dollars (NZ$) for its embassy in New Zealand for NZ$1 million
when the spot exchange rate on that day is £1: NZ$2, then the transaction will
initially be recorded at £500,000.
Where there are high volumes of such transactions, then for practical reasons,
an average exchange rate over the relevant period may be used as an
approximation. However, if exchange rates fluctuate significantly over short
periods of time it is not appropriate to use an average rate since it would not
be a fair approximation for actual. Note that we will look at the effect that
reporting in a hyperinflationary economy has on the financial statements later
in this workbook.
Non-monetary items held at the reporting date

Consider the issue of inventory. If all inventory held has been expended by
the end of the reporting period there is nothing else to worry about. But, what
happens, if the inventory is still held by the entity at the end of the reporting
period?
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As this is a non-monetary item there is no need to restate the value recognised

in the statement of financial position. The cost of the asset has not changed
regardless of whether the exchange rate has changed or not. For example:
The same principle applies for other non-monetary items − i.e. there is
no need to restate them at the end of the reporting period using the latest
exchange rates. They are always carried at a value based on:
• the rate of exchange at the date of the original transaction; or
• the rate of exchange at the date when their fair value was determined for
assets carried at fair value.
Monetary items held at the reporting date

What about monetary items? The easiest example is cash.
If foreign currency of NZ$1,000 was received when the exchange rate was £1:
NZ$2, then the transaction will initially be recorded at £500. An asset of £500
would be recognised in the statement of financial position.
If the exchange rate has changed at the end of the reporting period and is
now £1:NZ$2.5 then our NZ$1,000 is now worth only £400. We would need
to recognise the asset at this lower amount. In other words, we would need
to restate the asset’s value based on the closing exchange rate.
The difference between the initial asset recorded of £500 and the restated
amount of £400 is referred to as an exchange difference.
The same principle applies for other monetary items − they are restated at the
end of the reporting period using the closing exchange rate.
Recognition of exchange differences

Exchange differences should normally be recognised in surplus or deficit for
the period, with the exceptions to this rule being outside the scope of your
syllabus.
The appropriate exchange rates depend on which item is being considered:
Item Exchange rate used

Monetary items Closing rate (i.e. the exchange rate at the end
of the reporting period)
Non-monetary items Rate of exchange at the date of the original
measured at historic cost transaction (for example the date of purchase
of the non-current asset)
Non-monetary items at fair Exchange rate at the date when fair value was
value determined
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IPSAS 4 The Effects of Changes in Foreign Exchange Rates
Worked example: Foreign currency

A government department has a year-end of 31 March 20X1 and uses
CU as its functional currency. On 25 October 20X0 the department buys
supplies on credit from an overseas supplier for N$286,000. The goods
are still held by the department as part of inventory at the year-end.
Exchange rates
25 October 20X0 CU1 = N$11.16
16 November 20X0 CU1 = N$10.87
31 March 20X1 CU1 = N$11.25
Scenario 1: On 16 November 20X0, the department pays the overseas

supplier in full.
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The department has paid more than expected to settle the liability
therefore an exchange loss of CU684 is recognised.
Scenario 2: The creditor remains unpaid at the year-end.
The department expects to pay less than originally expected to settle the
liability therefore an exchange gain of CU205 is recognised in surplus or
Exercise 6.12: Foreign currency
An organisation has a year-end of 31 March 20X2 and uses the CU as its

functional currency.
On 1 October 20X1 it purchases a machine on credit from an overseas

supplier for N$240,000 when the exchange rate was
CU1 = N$10.
At 31 March 20X2 the machine is still in use. The supplier has yet to be
paid. The exchange rate at 31 March 2011 is CU1 = N$12.
The organisation settles this debt on 1 June 20X2 when the exchange rate
is CU1 = N$8.
At what value is the machine initially recognised in the statement of

financial position?
At what value is the trade payable initially recognised in the statement

of financial position?
Assuming no depreciation is charged in the year of acquisition, at what

value is the machine recognised at 31 March 20X2?
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At what value is the trade payable recognised at 31 March 20X2? What

exchange gain or loss is recognised?
What exchange gain or loss is recognised on settlement of the payable

on 1 June 20X2?
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IPSAS 10 Financial Reporting in Hyperinflationary Economies
6.5 IPSAS 10 Financial Reporting in Hyperinflationary

Economies
6.5.1 Overview
Hyperinflationary economies are those with very high rates of general inflation
which have such a depreciating effect on the country’s currency that it loses
its purchasing power at a very fast rate.
This causes particular problems for entities operating in such economies since
money loses its purchasing power at such a high rate that comparisons are
at best unhelpful, and potentially misleading. This includes the comparison
of results between accounting periods and for similar transactions within the
same accounting period.
Thus, where an entity has operations in a hyperinflationary economy it is likely

that without the restatement required by IPSAS 10 Financial Reporting in
Hyperinflationary Economies the reporting of operating results and the financial
position in the local currency will become distorted over time.
6.5.2 Objective
The objective of IPSAS 10 is to present financial information of an entity
operating in a hyperinflationary economy without distorting the entity’s actual
performance.
IPSAS 10 applies to public sector whose functional currency is that of a

hyperinflationary economy (see previous section for the definition of functional
currency).
IPSAS 10 only measures general inflation. It requires financial statements

to be adjusted using a general price index to provide users of the financial
statements with more meaningful information and to allow useful comparisons
to be made.
6.5.3 General inflation and specific inflation

There are two types of price changes:
• General inflation: This is an average increase in a price index of different
goods typically purchased. It is a measure of the general purchasing power
of money.
• Specific inflation: This is a measure of changes in prices of specific types

of goods. For example, the price of land and property may be rapidly
increasing while inventories may be experiencing only modest increases.
IPSAS 10 only measures general inflation. IPSAS 10 does not identify an absolute rate
at which hyperinflation is deemed to arise. Instead it lists indicators that suggest that
hyperinflation is present.
• There is no universally accepted definition of hyperinflation. The only quantitative

guidance given in the standards is that a cumulative inflation rate over three years
approaching, or exceeding, 100% is indicative of hyperinflation.
• Other indications of hyperinflation include the tendency for people to keep their
wealth in non-monetary assets (such as property) and monetary amounts being
expressed in a stable currency, such as the US dollar, rather than in terms of the
local currency.
It is thus a matter of judgement when restatement under IPSAS 10 becomes necessary.

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Exercise 6.13: Hyperinflation

Are the following indicators that suggest hyperinflation is present
according to IPSAS 10?
Cumulative inflation over five years is approaching, or exceeding,
100%.
Inflation in any given period is approaching, or exceeding, 25%.
A tendency for people to keep their wealth in non-monetary assets
such as property.
A tendency for people to keep their money in shoe boxes under their
beds rather than in the bank.
A tendency for people to keep their wealth in stable currency such as
the US dollar.
6.5.4 Restatement of financial statements

IPSAS 10 requires the primary financial statements of an entity that reports in
the currency of a hyperinflationary economy to be expressed in terms of the
measuring unit current at the end of the reporting period.
This requires all values initially measured at an earlier date to be restated by

reference to the change in the general price index between the date of initial
measurement and the end of the reporting period. The restatement using the
current measuring unit required by IPSAS 10 applies to both the current year
and to comparative information for the previous year.
All items in the statement of financial performance should be expressed in

terms of the measuring unit current at the end of the reporting period. This
requires all amounts to be restated by applying the change in the general price
index from the dates when the items of revenue and expenditure were initially
recorded to the end of the reporting period. This can result in gains or losses
arising.
You will not be required to calculate gains or losses arising in the Dip IPSAS
exam but the following illustration may help you to understand this concept:
Illustration: Gains and losses on monetary assets

If an entity holds £1,000 in cash for a year while the price index doubles,
then the real value of that cash will fall by £500 (i.e. half its amount), which
represents the loss on the monetary position. The same applies to other
monetary assets such as receivables.
Conversely, if an entity owes £5,000 at the beginning of a year and the price
index doubles over the year, the real value of that loan will fall by £2,500 (i.e.
half its value). In this scenario, the entity has made a monetary gain of £2,500.
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By adding all monetary assets and liabilities together a gain or loss on the net
monetary position can be calculated and should be included in the surplus or
deficit for the period.
The gain or loss may be estimated by applying the change in a general

price index for the period to the weighted average of the difference between
monetary assets and monetary liabilities.
Non-monetary items are adjusted using a general price index because they are
stated at amounts that were current at the date of their acquisition and not at
the reporting date. Monetary items are not adjusted as they are already carried
at amounts that are current at the reporting date.
6.5.5 Economies ceasing to be hyperinflationary

Where an entity operates in an economy that ceases to be hyperinflationary it
is no longer required to apply the requirements of IPSAS 10. The restated
amounts that are recorded in the last reported financial statements should be
used as the carrying amounts going forward.
There should be no adjustment to restate amounts back to their original value

under the appropriate accounting basis.
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IPSAS 27 Agriculture
6.6 IPSAS 27 Agriculture
6.6.1 Overview
IPSAS 27 prescribes the accounting treatment and disclosures related to
agricultural activity, a matter not covered in other standards.
Key definitions
Agricultural activity Agricultural activity is the management by an entity
of the biological transformation and harvest of living animals or plants
(biological assets) for sale, or for distribution at no charge or for a nominal
charge or for conversion into agricultural produce or into additional biological
assets.
Biological assets A biological asset is a living animal or plant.
In many countries, IPSAS 27 would have no relevance as not all governments
are involved in agricultural activity. However, IPSAS 27 is relevant where,
for example, a government grows food or commodity crops itself for sale or
distribution to the population.
6.6.2 Requirements of IPSAS 27

All biological assets are measured at fair value less costs to sell, unless
fair value cannot be measured reliably, including assets received in a
non-exchange transaction.
For agricultural produce, this fair value would be the fair value at the point of
harvest. For example, if a government owned farm has a field of corn which,
at the reporting date, is three months away from harvest, then it would be
valued in the accounts at the fair value of harvested corn less the costs that
will be incurred between the reporting date and the harvesting date (fertiliser,
pesticides, harvesting costs, etc).
Any change in the fair value of biological assets during a period is reported in
surplus or deficit. If we take the example of a longer maturing biological asset,
such as cattle being reared for meat production, then an increase in fair value
of the maturing cows would be reported each year in surplus or deficit.
The best measure of fair value is generally quoted market price, but IPSAS 27
does provide other measurement bases where an active market does not
exist. If there is no active market at the time of recognition in the financial
statements, and no other reliable measurement method, then the cost model
is used for the specific biological asset reported upon. In this case, the asset
is measured at depreciated cost less any accumulated impairment losses.
This situation is unlikely to be common because active market exists for most
agricultural assets (such as corn and beef in our previous examples).
Note that IPSAS 27 only applied up to the point at which biological assets are
harvested. Once they are harvested and being stored ready for sale, IPSAS 12
Inventories applies (see Section 6.2).
Note also that IPSAS 27 does not apply to bearer plants. A bearer plant is a
living plant that:
(a) Is used in the production and supply of agricultural produce;
(b) Is expected to bear produce for more than one period; and
(c) Has a remote likelihood of being sold as agricultural produce, except for
incidental scrap sales.
339
IPSAS 27 Agriculture
Bearer plants include fruit trees, tea bushes, grape vines, oil palms and rubber
trees. Bearer plants are within the scope of IPSAS 17, Property, Plant and
Equipment. However, the produce growing on bearer plants, for example,
apples, tea leaves, grapes, oil palm fruit and latex, is within the scope of
IPSAS 27. Annual crops such as maize, and trees grown for lumber are not
bearer plants.
Exercise 6.14: Agriculture

How should the following assets be valued in the statement of financial
position of a government-owned farm?
Bushels of wheat which were harvested shortly before the year-end

and are now in the barn awaiting distribution.
Vines of grapes which will produce fruit about six months after the
year-end. The farm will have to pay for pesticides to be sprayed on the
crops shortly after the year-end, and will also incur substantial labour
costs to pay for the grapes to be hand-picked.
Trees in a plantation forest. The saplings were given to the farm by a

donor nation four years ago and the farm will eventually be able to sell
the felled trees on the international market for house-building timber.
A field of genetically-modified corn, which the farm is growing as an

experiment into drought-resistance crops. There is no market for these
crops, as they are not deemed fit for human or animal consumption,
and hence will have to be burned immediately after harvest.
340
IPSAS 32 Service Concession Arrangements: Grantor
6.7 IPSAS 32 Service Concession Arrangements:

Grantor
6.7.1 Overview
A service concession arrangement (SCA) is an arrangement (usually contractual)
whereby a private sector entity provides assets and related services that give
the public access to major economic and social facilities. Examples include
roads, schools and telecommunication networks.
Within such arrangements there are two parties, a concession operator

(normally a private sector entity) and a grantor (a public sector entity), who is
the party that grants the service concession arrangement. The operator is
compensated for its services over the period of the arrangement and in return
has the obligation to provide public services. At the end of the arrangement
the residual interest in any assets constructed or transferred as part of the
arrangement (for example the motorways, bridges or telecommunication
networks) is controlled by the grantor, not the operator.
Key definitions
Service concession arrangement A service concession arrangement

is a binding arrangement between a grantor and an operator in which:
a. the operator uses the service concession asset to provide a public

service on behalf of the grantor for a specified period of time
b. the operator is compensated for its services over the period of the
service concession arrangement.
Operator An operator is the entity that uses the service concession asset
to provide public services subject to the grantor’s control of the asset.
Grantor A grantor is the entity that grants the right to use the
service concession asset to the operator.
For example, a government department may enter into an SCA with a private
sector construction company whereby the private company agrees to
construct and operate a new motorway for a period of 25 years. In this case,
the operator is the private sector construction company and the grantor is the
government department. Note the operator might be compensated directly by
the government department (for example through monthly payments) or may
be compensated indirectly by being permitted to charge tolls to motorists who
use the new motorway.
The outsourcing of an entity’s internal services is not a service concession (for

example building maintenance and employee restaurant facilities), as these do
not involve the construction or transfer of assets.
SCAs have many of the characteristics of a finance lease contract (such as

the transfer of a non-current asset) but also include an executor contract.
Following widespread concern that there was a lack of guidance in this area,
IFRIC 12 Service Concession Arrangements was published by the IASB in
November 2006. This deals with service concession arrangements from the
point of view of the private sector concession operator. In October 2011, the
IPSASB issued IPSAS 32 Service Concession Arrangements: Grantor, which
looks at the treatment of SCAs from the point of view of the public sector
grantor.
341
6.7.2 Objective of IPSAS 32

The objective of IPSAS 32 is to prescribe the accounting treatment for service
concession arrangements by the grantor, a public sector entity.
6.7.3 Key provisions of IPSAS 32

The key issue for both grantors and operators of SCAs is who recognises the
SCA asset on their statement of financial position. The legal owner of the
asset will always be the operator, but as you will remember from our studies
of finance leases in workbook 3, legal ownership is not the only consideration
when deciding who recognises the asset.
IPSAS 32 provides two control tests:
1. The grantor controls or regulates what services the operator must provide
with the asset, to whom it must provide them, and at what price.
2. The grantor controls − through ownership, beneficial entitlement or

otherwise − any significant residual interest in the asset at the end of
the term of the arrangement.
If both of these tests are met then the grantor recognises the SCA asset. The
asset might have been provided by the operator or it might be an existing
asset of the grantor. Note that these are the same tests as those set out in
IFRIC 12, so in theory the private sector operator in any given arrangement
will treat the SCA in a consistent manner in their IFRS financial statements to
the public sector grantor in their IPSAS financial statements.
6.7.4 Grantor accounting

The grantor’s treatment of an SCA which meets the two control tests is similar
to the principles underling a lessee’s treatment of a finance lease. Where these
two tests are met, the grantor will initially recognise the asset at fair value, with
a liability for the corresponding amount.
The nature of the liability, and the accounting treatment after initial recognition,
depends on how the operator is compensated for providing the
infrastructure/service concession asset and the related services.
342
The grantor makes The grantor gives the

payments to the operator the right to charge
operator service users (e.g. road
tolls)
Nature of liability The grantor recognises a The grantor recognises a
financial liability, reflecting performance obligation,
its obligation to make reflecting its obligation to make
payments to the operator. the infrastructure/service
concession asset available to
the operator.
Accounting Payments made to the The performance obligation
treatment after operator are allocated into is reduced as access to
initial recognition three elements: payment the asset is provided. The
for services; a finance grantor recognises the
charge; and an element reduction in the performance
that reduces the finance obligation as revenue that is
liability. generated over the service
concession arrangement
term.
Where the grantor makes payments to the operator, and also gives the
operator the right to charge service users, the grantor will recognise both a
financial liability and a performance obligation, and will account for these
liabilities separately.
You can see in the table above the that accounting treatment after initial
recognition is the same as for finance leases where the SCA requires that
the grantor makes payments to the operator. However, where the SCA
remunerates the operator by giving it the right to charge service users, the
treatment is rather different, as shown in this worked example, because the
grantor has no financial liability to the operator but instead must recognise a
performance obligation.
Worked example: Grantor accounting
A private sector organisation agrees to construct and operate a section of

motorway. The fair value of the infrastructure/service concession asset is
£300 million. The service concession arrangement runs for 30 years and
will commence at the start of Year 2. The infrastructure/service concession
asset is made available for use at the end of Year 1.
The entity will generate revenue from tolls charged to users of the road.
The estimated useful economic life of the infrastructure/service concession

asset is 40 years.
Assuming performance of the service concession arrangement is as

estimated the financial statements will contain the following:
343
Year 1 Statement of financial position

Property, plant and equipment £300 million
Performance obligation £300 million
Year 2 Statement of financial position

Property, plant and equipment 292.5 million (£300m − 1/40)
Performance obligation £290 million (£300m − 1/30)
Year 2 Statement of financial performance

Revenue £10 million
Depreciation £7.5 million
Note that the Dip IPSAS exam will not require you to do any calculations
in relation to SCA accounting − this worked example is provided purely to
aid your understanding of the basic accounting requirements for grantors
in relation to SCA.
Exercise 6.15: Accounting for SCA (grantor)

The Eastern Health Authority enters into a service concession
arrangement for the provision of a new hospital and related services.
The authority will make annual payments to the operator over the
20-year period of the arrangement, after which time ownership of the
hospital will pass to the Eastern Health Authority.
As part of its policy of encouraging active lifestyles among residents,

Ferntree Municipal Authority enters into a service concession
arrangement whereby a private sector company will build a brand new
swimming pool and sports complex for use by local residents on land
owned by the authority. The authority is not required to make any
payments to the operator as the operator will recoup all of its costs by
charging local residents to use the facilities during the 25 year period
of the arrangement, with any increases in fees requiring the approval of
the authority.
Explain how the grantor will account for the SCA in each of the above
scenarios.
344
6.8 Summary
We have covered seven accounting standards in this workbook which you
need to study.
Three are of key importance for your exam:
• IPSAS 3 Accounting Policies, Changes in Accounting Estimates and Errors
• IPSAS 12 Inventories
• IPSAS 14 Events after the Reporting Date
As these three are critical to your exam, you need to ensure that your study
them in detail, using the numerical examples where applicable, to deepen your
knowledge and understanding.
We have also briefly covered the following accounting standards, which are
applicable for very specialised situations or types of transaction:
• IPSAS 4 The Effects of Changes in Foreign Exchange Rates
• IPSAS 10 Financial Reporting in Hyperinflationary Economies
• IPSAS 27 Agriculture
• IPSAS 32 Service Concession Arrangements: Grantor
As these four standards are only examinable at level C, you just need to ensure
that you understand the objectives and key provisions of each standard.
We will continue our studies in the next workbooks by looking at consolidated

financial statements (workbook 7) and the cash flow statement (workbook 8).
Exercise 6.16: The Environment Agency

The Environment Agency is in the process of preparing its financial
statements for the year-ended 31 December 20X3. Its trial balance at that
date is as follows:
£’000s £’000
s
Land 553
Buildings 1,520
Equipment 800
Motor vehicles 132
Accumulated depreciation at 31 December 20X3:
− buildings 870
− equipment 492
− motor vehicles 64
Salaries, wages and employee benefits 2,352
345
Summary
General operating expenses 2,460

Depreciation charge for the year (note 2) 160
Bank interest received 4
General grant for operating activities 4,038
Fees and charges 900
Receivables 564
Payables 280
Inventories at 1 January 20X3 54
Bank 33
General reserves 215
Provision (note 5) 200
Capital contributed by government 900
Accumulated surpluses 633
Suspense account (note 1) 34
8,629 8,629
The following still need to be dealt with before the financial statements
can be finalised:
1. As permitted by IPSAS 17, the agency has decided to revalue its land
to reflect fair value. An independent valuer has reported that land has
increased in value by £115,000 since it was originally purchased but
this has not yet been adjusted for in the trial balance.
2. The depreciation charge for the year for all depreciable assets held at
the start of the year has been calculated and included in the draft trial
balance above, but the following have not been taken into account:
• The suspense account relates to the purchase of a motor

vehicle on 24 December 20X3.
• Some obsolete equipment was disposed of on the last day of

the year for £56,000 but as the disposal proceeds were not
received until 4th January 20X4, the accountant has made no
entries in the accounts. The machinery disposed of had
originally cost £90,000 on 1 April 20X0.
• The agency’s policy is to depreciate equipment and motor

vehicles straight line over 5 years with no residual value. The
agency accounts for a full year of depreciation in the year of
acquisition and none in the year of disposal.
3. During the year ended 31 December 20X3 operating expenses of

£430,000 were paid and recorded within general operating expenses.
These expenses related to the financial year ended December 20X2
and should have been accrued for that year. On 19 January 20X4,
346
Summary
the agency was informed that an organisation who owed the agency
£120,000 had been declared bankrupt in late December 20X3, and the
debt is now unlikely to be paid.
The agency’s policy is to value inventory using the first in first out
(FIFO) method. Inventory was counted on 31 December 20X3 and was
found to consist of 5,540 barrels of minerals used to neutralise polluted
lakes. Included within general operating expenses are three purchases
of the minerals as follows:
1 February 2,500 barrels at £89 / barrel
3 July 2,500 barrels at £98 / barrel
18 September 2,500 barrels at £105 / barrel.
The provision relates to an unfair dismissal legal case which was due
to be resolved on 31 December 20X4. The agency’s policy is to
discount provisions using a discount rate of 2% and there have been
no changes in the expected outcomes of the case during the year.
Prepare the Environment Agency’s statement of financial performance and

statement of changes in equity for the year ended 31 December 20X3, and
its statement of financial position as at 31 December 20X3.
347
Summary
Answer
Exercise 6.1
Treatment of interest
The transaction is still being measured in the same way, but the
transaction is now being recognised as part of an asset rather than
as an expense. This means that there is a change in the presentation
of the transaction, with interest being included as a non-current asset
in the statement of financial position rather than an expense in the
statement of financial performance. As a consequence, this represents
a change in accounting policy.
Classification of overheads
Although there is no change in the way in which these overheads are
measured or recognised, they are being presented in a different way.
This represents a change of accounting policy.
Change in method of depreciation

Motor vehicles are being recognised and presented in the same way.
In addition, vehicles are still recorded at historical cost. The only
change is to the estimation technique used to measure the economic
benefits consumed during each accounting period. This is a change in
accounting estimate.
Answer
Exercise 6.2
The error needs to be adjusted retrospectively in accordance with

IPSAS 3, i.e. adjusted in the opening accumulated surpluses brought
forward as at 1 January 20X2.
Accumulated surpluses would be adjusted as follows:
Accumulated surpluses £
Balance at 31 December 20X1 3,763,007
Prior period adjustment (1,328,000)
Balance at 1 January 20X2 2,435,007
Surplus for 20X2 11,008,765
Balance at 31 December 20X2 13,443,772
348
Summary
Answer
Exercise 6.3
Prior period error: Retrospective restatement

Accounting policy: Retrospective application
Accounting estimate: Prospective application
Answer
Exercise 6.4
• Import duties − This can be included. It is part of the cost of bringing

the inventories to their current location and condition.
• Abnormal wastage − This is not a cost of bringing the inventories to

their current location and condition so cannot be included.
• Direct labour − Yes, this is part of the cost of bringing the inventories
to their current location and condition.
• Variable production overheads − This is part of the cost of bringing

the inventories to their current location and condition so can be
included.
• Costs of storage of finished goods − This cannot be included as it

is not a cost of bringing the inventories to their current location and
condition. If the storage costs are incurred as part of the production
process (for example, storage of an item whilst it is undergoing a
drying process before the next production process can begin), then
this can be included as a cost of inventories.
• Selling costs − This is not a cost of bringing the inventories to their

current location and condition.
• Cost of delivery of raw materials − This is part of the cost of bringing

the inventories to their current location and condition so should be
included.
• Admin overheads − This is not a cost of bringing the inventories

to their current location and condition so should be excluded from
assessing the cost of inventories.
349
Summary
Answer
Exercise 6.5
Weighted average calculation
Units £ £/ Unit
Opening 180 3,240 18.00
10-Jan 120 2,274 18.95
Recalculate weighted average after purchase 300 5,514 18.38
13-Jan (110) (2,022)
28-Feb 200 3,840 19.20
02-Mar (190) (3,572)
11-Apr 130 2,646 20.35
21-Apr (90) (1,747)
02-May (140) (2,718)
29-Jun 250 5,100 20.40
24-Jul 300 6,225 20.75
21-Aug (320) (6,531)
14-Nov 200 4,250 21.25
19-Dec (120) (2,488)
24-Dec 100 2,180 21.80
FIFO calculation
Consists of: £
100 purchased 24 December at £21.80 2,180
200 purchased 14 November at £21.25 4,250
210 purchased 24 July at £20.75 4,358
Total = 510 units (per weighted average calculation) 10,788
350
Summary
Answer
Exercise 6.6
Cost = £60m
NRV = £50m − £4m = £46m
So lower of cost and NRV = £46m
Answer
Exercise 6.7
a. Drug A:
Cost = 150 × £3 = £450

Net realisable value (NRV) = (150 × £3.50) − (150 × £0.75) = £525 −
£112.50 = £412.50
The lower of cost and NRV is £412.50 so value at NRV.
Note that the cost of putting the drugs into new containers is treated
as an additional cost needed to complete the sale of these drugs. It
could be argued that the cost of staff time should also be included in
this, but we do not have information in this example.
b. Drug B
Cost = (10 − 2) × £50 = £400

NRV = (10 − 2) × £60 = £480
The lower of cost and NRV is £400 so value at cost.
The two litres that are past their use by date are assumed to be
worthless and so their cost should be written off completely. Only
the cost and NRV of the remaining inventory should be compared to
determine the valuation to show under current assets.
c. Bandages
In this example the cost and NRV are the same, i.e. £1,000.
351
Summary
Answer
Exercise 6.8
As stated in paragraph 17 of IPSAS 12, inventories are held at the

lower of cost and current replacement cost where they are held for
distribution at no charge. Since the food was acquired through a
non-exchange transaction, the cost is measured at the fair value at the
date of acquisition per paragraph 16 (i.e. £13,200).
So, the lower of (deemed) cost of £13,200 and current replacement cost
of £12,600 is £12,600, i.e. it should be held at current replacement cost of
£12,600 in the authority’s statement of financial position.
Exam tip: Watch out for extra information in questions that are not needed
to calculate the correct answer! The examiner may include additional
information to test that your knowledge of the accounting standards is
very secure. Here, the original cost of the food for the supermarket and
the estimated net realisable value are not relevant to the calculation.
Answer
Exercise 6.9
Inventory valuation at 31 December 20X2
Draft valuation
Vaccination kits (1)
Remove £1 incorrect valuation
Include at fair value £4.50
Out of date medicines (2)
In house production (3): Remove abnormal overhead
(£1.50 − 80p) × 1,220
Liquid oxygen currently at £nil (4) − See weighted average 11,856
Final inventory valuation at 31 December 20X2 399,502
352
Summary
Weighted average cost of liquid oxygen
Kg Total £/ kg
Oxygen valuation at 31 December 20X1 3,500 2,485 0.71
Delivery 1 April 15,500 12,865 0.83
Recalculate weighted average after purchase 19,000 15,350 0.81
Used 3 April (4,900) (3,969) 0.81
Used 12 June (6,300) (5,103) 0.81
Delivery 1 September 13,300 11,571 0.87
Recalculate weighted average after purchase 21,100 17,849 0.85
Used 27 September (7,050) (5,993) 0.85
Closing valuation 14,050 11,856 0.85
Answer
Exercise 6.10
This is an adjusting event as it provides more up to date information
about an allowance that was recognised at the end of the reporting
period. The allowance should be increased to £100,000 (or the debt
written off entirely, depending on the circumstances).
This is a disclosable non-adjusting event. The announcement is

made after the reporting date, but is considered to be of significant
importance and should be disclosed in the financial statements.
This is an adjusting event since it is in relation to an asset that was

recognised at the reporting date. The receivable should be reduced
to £500,000.
Answer
Exercise 6.11
1. This is an adjusting event as the conditions were in place at the
balance sheet date. It is necessary to write off the debt that will not
be collected.
Dr Operating costs £22,500

Cr Receivables £22,500
2. This is a non-adjusting event as the conditions were not in place at the

reporting date.
The amount is not material (less than 1% of closing inventory) therefore

it is not necessary to disclose this in a note.
353
Summary
Answer
Exercise 6.12
The asset is recorded at N$240,000 / 10 = CU24,000.
The trade payable is recorded at N$240,000 / 10 = CU24,000.
The asset remains at its original cost of CU24,000.
The trade payable is retranslated using the closing exchange rate. It is

now recognised at N$240,000/12 = CU20,000. An exchange gain of
CU4,000 is recognised in surplus/deficit.
The organisation has paid N$240,000/8 = CU30,000. Hence an

exchange loss of CU30,000 − CU20,000 = CU10,000 arises. This loss
is recognised in surplus/deficit: −CU10,000
Answer
Exercise 6.13
a. No − IPSAS 10 refers to cumulative inflation over three years
approaching, or exceeding, 100%.
No − IPSAS 10 makes no reference to inflation rates in a single period.
Yes − This is an indicator included in IPSAS 10.
No − This is not mentioned in IPSAS 10.
Yes − This is an indicator included in IPSAS 10.
354
Summary
Answer
Exercise 6.14
IPSAS 27 only applies until the point at which agricultural assets are
harvested. The wheat has already been harvested so it will be valued
according to IPSAS 12, i.e. at the lower of cost and net realisable
value.
Per IPSAS 27, these grapes will be valued at fair value less costs to
sell, i.e. the current market value of grapes less the cost of pesticide
spraying and harvesting the grapes.
As with B, the trees will be valued at the current fair value of this type
of timber less the costs that the farm will incur in future years to tend
and harvest the trees. Note that the fact that the saplings were given
free of charge does not affect this.
This experimental corn is by its very nature unique and hence there is
no active market from which a fair value can be established. Therefore
it will need to be valued at depreciated cost less impairment losses.
As the corn will have to be immediately destroyed, it has a
recoverable amount of nil and hence would be valued at nil in the
farm’s statement of financial position.
355
Summary
Answer
Exercise 6.15
a. As asset will be recognised in the grantor’s statement of financial

position at fair value, and this will be depreciated over the 20 year term
of the SCA. The grantor (The Eastern Health Authority) has a liability
to make payments to the operator, so under IPSAS 32 this must be
recognised in the authority’s financial statements as a financial liability.
Payments made to the operator each year will be allocated into three
elements:
• payment for services
• a finance charge
• an element that reduces the finance liability.
b. The grantor (Ferntree Municipal Authority) has no liability to make

payments to the operator and so there is no financial liability to
recognise. However, the grantor must still reflect its obligation to make
the asset available to the operator so Ferntree Municipal Authority
must recognise the SCA asset at fair value and a corresponding
performance obligation liability.
The performance obligation is reduced as access to the infrastructure/

service concession asset is provided. The grantor recognises the
reduction in the performance obligation as revenue is generated
over the service concession arrangement term. The asset will be
depreciated over the 25 year term of the SCA.
356
Summary
Answer
Exercise 6.16
The Environment Agency statement of financial performance for

year-ended 31 December 20X3
Workings £’000
Operating revenue:
Grants 4,038
Fees and charges 900
Profit on disposal of equipment 56 − (90 − 54 (w1)) 20
Total operating revenue 4,958
Operating expenses
Wages, salaries and employee (2,352)
Benefits
Depreciation 160 + 7 − 18 (w1) (149)
General operating expenses 2,460 − 430 + 54 − 556 (1,528)
Bad debt written off (120)

Total operating expenses (4,149)
Surplus/(deficit) from operating 809
activities
Finance costs − unwinding of (4)
discount on provision
Bank interest received 4
Surplus (deficit) for the year 809
The Environment Agency statement of financial position as at 31

December 20X3
Workings £’000
ASSETS
Current assets
Inventories W2 556
Receivables 564 − 120 + 56 500
1,056
357
Summary
Non-current assets
Land W1 668
Buildings W1 650
Equipment W1 290
Motor vehicles W1 95
1,703
Total assets 2,759
LIABILITIES
Current liabilities
Payables 280
Provision for legal claim W3 204
Income in advance 33
517
Net assets 2,242
NET ASSETS/EQUITY
Capital contributed by 900
government
Revaluation reserve 115
General reserves 215
Accumulated surpluses 633 − 430 + 809 1,012
Total net assets/equity 2,242
The Environment Agency statement of changes in equity for

year-ended 31 December 20X3
Capital ccumulated otal

contributed reserves reserves surpluses
by govt.
£’000 £’000 £’000 £’000 £’000
Balance at 31 900 215 − 633 1,748
December 20X2
Prior year (430) (430)

adjustment
b/f 1 January 20X3 203
Revaluation of land 115 115
Net surplus for 809 809
year
Balance at 31 900 215 115 1,012 2,242
December 20X3
358
Summary
Working 1: Property, plant and equipment

Land Buildings
Equipment
£’000 £’000 £’000 vehicles
£’000
Cost or valuation
Per TB 553 1,520 800 132
Revaluation 115
Addition 34
Disposal (90)
Adjusted 668 1,520 710 166
Accumulated depreciation
Per TB 870 492 64
disposal (90 / 5 years × 3 years) (54)

Additional charge for year on motor
vehicle (34/5)
Accumulated depreciation at
Remove charge for year on (18)
disposed equipment (90 / 5)
Adjusted 870 420 71
Carrying value at year-end 668 650 290 95
Working 2: Inventory
£’000
5,540 barrels:
2,500 at £105 263
2,500 at £98 245
540 at £89 48
556
Working 3: Provision
£’000
Opening balance 200
To unwind by one year: X 204
1.02
Increase − to finance costs 4
Note that it is not necessary to calculate opening and closing discount
factors. To unwind a provision by 1 year you can simply multiply the
opening provision by 1+ discount rate, which will give the same
answer
far more quickly.
359

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Diploma in International Public

Sector Accounting Standards

Accounting for inventories,

• Aim B: Describe the main requirements of IPSASs. (30% of the

• Aim C: Apply the requirements of IPSASs to determine the appropriate

In the last four workbooks we have looked at several accounting

• IPSAS 3 Accounting Policies, Changes in Accounting Estimates and

• IPSAS 14 Events after the Reporting Date

We will also briefly cover the following standards in this workbook,

• IPSAS 4 The Effects of Changes in Foreign Exchange Rates

• IPSAS 10 Financial Reporting in Hyperinflationary Economies

• IPSAS 32 Service Concession Arrangements: Grantor

6.1 IPSAS 3 Accounting Policies, Changes in

IPSAS 3 Accounting Policies, Changes in Accounting Estimates and Errors

Comparability allows both the identification of trends over time in relation to a

• information is available about the accounting policies adopted by different

• all entities treat changes in accounting policies or estimates and the

• the scope for accounting policy changes is constrained.

6.1.3 Accounting policies

Accounting policies Accounting policies are the specific principles,

In most instances accounting policies will be determined by reference to the

In the absence of specific guidance, management should use its judgment in

Accounting policies shall be applied consistently for similar transactions.

6.1.4 Changes in accounting policies

It is important to note how restricted the powers of management are in

A change of an existing accounting policy to another policy of equal relevance

IPSAS 3 requires changes in accounting policies to be accounted for

Applying a requirement is impracticable when the entity cannot apply it after

Disclosure of changes in accounting policies

6.1.5 Changes in accounting estimates

Change in accounting estimate A change in accounting estimate is an

The preparation of financial statements requires many estimates to be made

• tax revenue due to government

• bad debts arising from uncollected tax

• the obsolescence of inventories

• the fair value of financial assets and financial liabilities

• the useful lives of non-current assets and

As more up-to-date information becomes available, estimates should be

Changes in accounting estimates are applied prospectively, i.e. no restatement

Prospective application Prospective application of a change in

Illustration: Change in accounting estimate

It decides that, as the economy is entering a period of recession, it should

Disclosure of a change in accounting estimates

Worked example: Change in accounting estimate

A machine tool with an original cost of £100,000 has an estimated

Exercise 6.1: Changes in accounting policies and accounting

Consider whether each of the following scenarios involves a change in

Interest incurred in connection with the purchase of a non-current

An organisation has previously shown certain overheads within the

Previously depreciation on vehicles was charged at 30% using the

Material Omissions or misstatements of items are material if they could,

Prior period errors are omissions from and misstatements in the

(a) Was available when financial statements for those periods

(b) Could reasonably be expected to have been obtained and

Examples of such errors are:

• mistakes in applying an accounting policy

• oversights or misinterpretation of facts

As such errors may relate to a number of past periods reported, IPSAS 3

We therefore use retrospective restatement to correct the financial statements

Retrospective restatement Retrospective restatement is correcting