ACCOUNTING STANDARDS

Individual Assignment

Ahmed Ramih (43048)

Advanced Financial Accounting (ACC311)

Lecturer: Mr. Shan
Due Date: 7th April 2016

MNU Business School

Bachelor of Accounting and Finance (BAF SEM5)
 Table of Contents

1.0 Purpose ............................................................................................................................................. 2

2.0 Introduction ...................................................................................................................................... 2
3.0 The Main Accounting Standards Relevant to the Company ............................................................. 3
3.1 IAS 16 Property, Plant and Equipment....................................................................................... 3
3.2 IAS 38 Intangible Assets ............................................................................................................. 4
3.3 IAS 12 Income Taxes................................................................................................................... 5
3.4 Financial Instruments .................................................................................................................... 6
4.0 How the Company has applied/could apply the aforementioned Standards .................................. 7
4.1 IAS 16 Property, Plant and Equipment....................................................................................... 7
4.2 - IAS 38 Intangible Assets .............................................................................................................. 8
4.3 IAS 12 - Income Taxes ................................................................................................................... 9
4.4 Financial Instruments .................................................................................................................. 10
5.0 Conclusion ....................................................................................................................................... 11
6.0 References ...................................................................................................................................... 12

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

2.0 Introduction
In the early 1960's, the nation's socioeconomic outlook was not a very bright one. The population was
a mere 100,000. There was little communication between the rest of the world. Transportation within
and from the country was very limited. The only resource available was tuna. Consumers were at the
mercy of importers. Even the most basic food items were expensive. (State Trading Organisation PLC,
n.d.)

The government then came to realize that a central organization to import goods was necessary to
elevate the living standards and advance growth. In 1964, a fully state-funded business was set up by
the Maldivian government with one key charge to start with: strengthening national food protection.
The primary project of the troupe, then named Athireemaafannu Trading Agency (ATA), was to
purchase and import essential food items in bulk to be broadcast nationally via local traders and ATA's
own retail outlets. ATA sold its imports to the public at a low mark-up and also bought supplies for the
regime. (State Trading Organisation PLC, n.d.)

ATA was the beginning of STO, and the catalyst for change in the Maldives. With proven success in
contributing to national development, ATA matured to go the State Trading Organization (STO) on 9th
June 1979. STO undertook all trading and commercial activity on behalf of the Maldivian government.
(State Trading Organisation PLC, n.d.)

The country was growing and so were its commercial needs. STO then while staying true to its original
mission, expanded its imports, first to an increasing number of commodity items, and then along to
modern construction materials, household appliances and consumer commodities. Today, it has
significant and focused interests in petroleum, cooking gas, construction materials (including cement
and roofing material), medical supplies and pharmaceuticals, home appliances, electronics,
supermarket products and insurance. The company is geographically diverse with operations and
developments throughout Maldives and operations in Singapore. (State Trading Organisation PLC,
n.d.)

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

The initial purchase price including any taxes

Any costs incurred in making the asset ready for use
An estimate of any costs to be incurred in restoring the site at which the asset is to be used.

PPE is initially recognized at cost and subsequently at cost model or revaluation model.

Cost Model: - Carrying value less any accumulated depreciation.

Revaluation Model: - The difference between the carrying value and the fair value is compared and
any increase from the carrying value is disclosed as revaluation gain under other comprehensive
income. If an assets carrying amount is decreased as a result of a revaluation, the decrease shall be
recognized in profit or loss. However, the decrease shall be recognized in other comprehensive income
to the extent of any credit balance existing in the revaluation surplus in respect of that asset.

The carrying amount of an item of property, plant and equipment shall be derecognized:

a) on disposal; or
b) when no future economic benefits are expected from its use or disposal.

(Deloitte, 2016)

AHMED RAMIH 3
3.2 IAS 38 Intangible Assets
The objective of this Standard is to prescribe the accounting treatment for intangible assets that are
not dealt with specifically in another Standard. An intangible asset is an identifiable non-monetary
asset without physical substance.

An intangible asset shall be recognized if, and only if:

a) it is probable that the expected future economic benefits that are attributable to the asset
will flow to the entity; and
b) the cost of the asset can be measured reliably.

An intangible asset is initially recognized at cost. Subsequently, cost or revaluation model can be used.

Cost model: - Cost less any accumulated amortization and impairment

Revaluation model: - Revaluation is carried on the carrying amount of the asset. For the purpose of
revaluations under this Standard, fair value shall be measured by reference to an active market.
Revaluations shall be made with such regularity that at the end of the reporting period the carrying
amount of the asset does not differ materially from its fair value.

Internally generated intangible assets

Internally generated goodwill cannot be recognized

No expenses incurred in a research phase of an internal project should be recognized.
Development expenses should be recognized given they meet a certain criterion.
Internally generated brands, mastheads, publishing titles, customer lists and items similar in
substance shall not be recognized as intangible assets.

For assets with infinite lives, carrying out amortization is not required. Rather, an entity is required to
test an intangible asset with an indefinite useful life for impairment by comparing its recoverable
amount with its carrying amount

a) annually, and
b) whenever there is an indication that the intangible asset may be impaired.

(Deloitte, 2016)

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3.3 IAS 12 Income Taxes
The objective of this Standard is to prescribe the accounting treatment for income taxes.

Recognition: -

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

Measurement: -

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

(Deloitte, 2016)

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3.4 Financial Instruments
(a) IFRS 9 Financial Instruments

IFRS 9 specifies how an entity should classify and measure financial assets and financial liabilities,
including some hybrid contracts.

Recognition and initial measurement: An entity shall recognize a financial asset or a financial liability
in its statement of financial position when, and only when, the entity becomes party to the contractual
provisions of the instrument. At initial recognition, an entity shall measure a financial asset or financial
liability at its fair value plus or minus, in the case of a financial asset or financial liability not at fair
value through profit or loss, transaction costs that are directly attributable to the acquisition or issue
of the financial asset or financial liability.

Subsequent treatments vary and include fair value through profit and loss, fair value through other
comprehensive income and at amortized cost. (Deloitte, 2016)

(b) IAS 32 Financial Instruments: Presentation

The objective of this Standard is to establish principles for presenting financial instruments as liabilities
or equity and for offsetting financial assets and financial liabilities.

The issuer of a financial instrument shall classify the instrument, or its component parts, on initial
recognition as a financial liability, a financial asset or an equity instrument in accordance with the
substance of the contractual arrangement and the definitions of a financial liability, a financial asset
and an equity instrument. The issuer of a non-derivative financial instrument shall evaluate the terms
of the financial instrument to determine whether it contains both a liability and an equity component.
Such components shall be classified separately as financial liabilities, financial assets or equity
instruments. (Deloitte, 2016)

(c) IFRS 7 Financial Instruments: Disclosures

The objective of this IFRS is to require entities to provide disclosures in their financial statements that
enable users to evaluate the financial statements more effectively regarding the issue of financial
instruments.

This standard applies to all entities including those with only few financial instruments. An entity shall
group financial instruments into classes that are appropriate to the nature of the information
disclosed and that take into account the characteristics of those financial instruments. An entity shall
provide sufficient information to permit reconciliation to the line items presented in the statement of
financial position.

This standard complements IFRS 9 and IAS 32. (Deloitte, 2006)

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

Below is an extract from the notes to Financial Statements for the year ended 31 st December 2014
which shows the application of cost model in valuing Plant and Machinery.

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

Though there was no revaluation during the year, let us explore the impact on the financial statements
if there was a revaluation.

Assuming that the Plant and Machinery was revalued to MVR 6,000,000 at the year-end 2014, the
following extra changes will be in effect as per IAS16.

Other Comprehensive Income

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

Statement of Financial Position (Extracts)

Detail MVR
Plant and Machinery Component 6,000,000

(State Trading Organization PLC, 2014)

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4.2 - IAS 38 Intangible Assets
As per the annual report of STO for the year 2014, IAS 38 is applied in the following ways:

(i) Recognition and Measurement

Intangible assets that are acquired by the Company, which have finite useful lives, are measured at
cost less accumulated amortization and accumulated impairment losses. Costs that are directly
associated with the purchase and implementation of identifiable and unique software products by the
Company are recognized as intangible assets. Expenditures that enhance and extend the benefits of
computer software programmer beyond their original lives are recognized as a capital expenditure.

(ii) Subsequent expenditure

Subsequent expenditure is only capitalized if costs can be measured reliably, the product is technically
and commercially feasible, future economic benefits are probable and the Company has sufficient
resources to complete development and to use the asset.

(iii) Amortization

Amortization is recognized in profit or loss on a straight-line basis over the estimated useful lives of
intangible assets, other than goodwill, from the date that they are available for use.

As per the notes to the financial statements provided in the annual report of 2014, the Software
component of the Intangible Assets was accounted for in the following way.

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

(State Trading Organization PLC, 2014)

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

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4.3 IAS 12 - Income Taxes
As per the annual report of STO for the year ended 2014, IAS 12 has been accounted for in the
following ways.

(i) Tax Expense

Tax expense comprises current and deferred tax. Current tax and deferred tax is recognized in profit
or loss.

Below are the extracts to notes to the financial statements which show this calculation for STO for the
year ended 2014.

Current Tax Expense MVR

Current Tax Expense 73,937,861
Adjustment for previous years (708,451)
73,229,410
Deferred Tax Expense
Deferred tax assets recognized (1,249,642)
Deferred tax liability reversed
Income Tax Expense 71,979,768

(ii) Current tax

Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using
tax rates enacted at the reporting date, and any adjustment to tax payable in respect of previous
years.

(iii) Deferred tax

Deferred tax is recognized in respect of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts used for taxation purposes.

Examples of items that have resulted in deferred tax assets for the company during the year end 2014
are shown below (Includes the temporary difference and corresponding tax effect)

Details Temporary Tax Effect

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

(State Trading Organization PLC, 2014)

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4.4 Financial Instruments
We can observe that STO has strictly adhered to IAS 32 when disclosing their financial instruments. As
per the standard, they have disclosed separately the available-for-sale financial assets, loans and
receivables and held-to-maturity financial assets.

For instance, as per the annual report of STO for 2014, it holds derivative financial instruments to
hedge its foreign currency risk exposure. Embedded derivatives are separated from the host contact
and accounted for separately if certain criteria are met. Derivatives are recognized initially at fair
value. Any directly attributable transaction costs are recognized in profit or loss as they are incurred.
Subsequent to initial recognition, derivatives are measured at fair value, and changes therein are
generally recognized in profit or loss. The following table is a summary of how STO has accounted for
this particular financial instrument at the year-end 2014. (State Trading Organization PLC, 2014)

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

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5.0 Conclusion
In conclusion, all of the standards discussed though out this report are of great importance to ensure
that the Financial Statements of the entity in question show a true and fair view of the organization
from a financial stand point.

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

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6.0 References
Deloitte. (2006). IFRS 7 Financial Instruments: Disclosures. Retrieved March 4, 2016, from
iasplus.com: http://www.iasplus.com/en/standards/ifrs/ifrs7

Deloitte. (2016). IAS 12 Income Taxes. Retrieved March 5, 2016, from iasplus.com:
http://www.iasplus.com/en/standards/ias/ias12

Deloitte. (2016). IAS 16 Property, Plant and Equipment. Retrieved March 5, 2016, from
iasplus.com: http://www.iasplus.com/en/standards/ias/ias16

Deloitte. (2016). IAS 32 Financial Instruments: Presentation. Retrieved March 5, 2016, from
iasplus.com: http://www.iasplus.com/en/standards/ias/ias32

Deloitte. (2016). IAS 38 Intangible Assets. Retrieved March 6, 2016, from iasplus.com:
http://www.iasplus.com/en/standards/ias/ias38

Deloitte. (2016). IFRS 9 Financial Instruments. Retrieved March 5, 2016, from iasplus.com:
http://www.iasplus.com/en/standards/ifrs/ifrs9

State Trading Organisation PLC. (n.d.). About Us. Retrieved April 5, 2016, from sto.mv:
http://sto.mv/About_Us.aspx

State Trading Organization PLC. (2014). Annual Report 2014. Male' City: State Trding Organization
PLC.

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