Accounting. Leases, impairments etc.

Question 1

What is a lease?

Answer 1

A lease is a contract, or part of a contract,
that conveys the right to use an asset (the underlying asset) for a period of time * in exchange for consideration.
An underlying asset is an asset that is the subject of a lease, for which the right provided to by a lessor to a lessee

-substance over form: judges over economic and not legal form
-different rules between acc standards and depending on the type of leasing.

Question 2

What is a finance lease?

Answer 2

is a lease that transfers substantially all the risks and rewards incidental to the ownership of an underlying asset

→long lease term
→payment represents large portion of total value.
→ Economic risk is transferred to lessee.
→recognized as an asset in the lessee’s balance sheet and must be depreciated/impaired over time.
→leased asset disappears from the lessor’s balance sheet and instead a receivable for the incoming leasing payments is created (in full, at their present value)

Question 3

what is an operating lease?

Answer 3

→Asset is leased for a foreseeable period of time
→leasing payment only represents a small part of the total value
→Economic risk remains with the lessor
→leased item is recognized as an asset in the lessors i.e. the owners balance sheet and leasing expenses are recognized in the balance sheet of the lessee (leasing person i.e. non-owning)

Question 4

What is an impairment?

Answer 4

• Extraordinary depreciation of an asset i.e., unexpected loss of value in an asset (e.g. through an accident)
• Classified as “value-adjustment” or “write-downs” in the case of current assets
• Circumstances that can lead to an impairment: obsolescence, changes in sales market, pamdemic etc.
  and new regulatory framework.
• Intangible assets and goodwill must be subject to an impairment test every year!
  -goodwill impairment can be reverted (only goodwill)

Question 5

basis of impairment

Answer 5

-If the carrying amount (amount in the balance sheet) is lower than the expected future inflow of benefits = impairment is necessary!)
- expected future inflows of benefits = the higher number of “fair value - costs to sell” and”value in use.”
problem: many assets don’t contribute directly to benefit inflow but indirectly to work out their expected future benefits and perform an impairment test, they must be grouped into Cash Generating Units (CGU)
- CGAs shouldn’t be too large
- impairments may have to be reversed at a certain point and must be revalued
- only up to the amount before the impairment

(other apuntes)
Identifying an asset that may be impaired:
1) All assets covered by IAS 36
a. At the end of each reporting period: Assets where there is any indication thatan asset may be impaired:
b. External sources of information
i. Unusual significant decline in asset’s market value
ii. Significant changes in the technological, market, economic or legal environment
iii. Increase in market interest rates or other market rates of return on investments
iv. Carrying amount of the net assets of the entity is more than it’s market capitalization
c. Internal sources of information
i. Evidence of obsolescence or physical damage of an asset
ii. Plans to discontinue or restructure the operation to which an asset belongs
iii. Evidence available from internal reporting that economic performanceof an asset is/will be worse than expected
2) Intangible assets with indefinite useful life or not yet available for use and goodwill
a. Annual impairment test required, regardless of any indications

Question 6

defined contribution pension

Answer 6

→company must make fixed contributions to pension fund (often monthly payments to an insurance company or pension fund). the entity´s obligation i slimited to the amount it agrees to contribute
-the actuarial and investment risk is placed on the employee
-
ACC–> accounting pension expenses are booked in the income statement and transferred to pension fund

Question 7

Defined Benefit Pension

Answer 7

→company promises employee a pension at a certain level (e.g. half the salary until end of life)
→company mustn’t make certain contributions but is obliged to provide certain benefits as long as the employee is alive
→provisions must be formed for future payments (assumptions that are required: how long will employee live? how long will the employee work? etc.)

→ process:
1 Estimate total pension payments (dependent on life expectancy, retirement age and wage development)
2 Estimate yearly provisions to achieve retirement capital (dependent on remaining worktime and interest rates development)

Question 8

What is a financial instrument?

Answer 8

• Contractual rights or obligations involving an exchange of cash
• E.g. receivables, loans, bonds, shareholding, derivatives
• Differing definitions by accounting standards
• Different from liquid assets (e.g. cash) who are short nature and have little value fluctuations

Question 9

Measurement of financial instrument

Answer 9

→initial measurement: measurement at the time when a financial instrument is recognized on the balance sheet i.e. acquisition costs
→subsequent measurement: measurement of a financial instrument at the end of the accounting period following acquisition (e.g. monthly, quarterly, yearly)
- Most common alternatives to subsequent Valuation: (?)
1. Measurement at amortized costs
2. Measurement at Current Market Prices (changes into income statement)
3. Measurement at current market prices (changes are initially not included in
income statement, but revaluation reserved formed in equity)

Question 10

Income taxes

Answer 10

• Accounting is the basis for taxation
• Principle of prudence (OR) -> company will show low profits, leading to a low tax
  burden -> principle abandoned in the case of taxation, own rules
• Those with the most resources should pay more taxes

Question 11

Current Taxes

Answer 11

• Taxes that result through the determination of taxable income
• Paid immediately (e.g. advance payments) or through provisions at year-end
• Tax payments must be recorded in annual financial statements

Question 12

Deferred Taxes

Answer 12

• • Arise when result determined in accounting differs from the result after determination of taxable profit
    →when there is no book-tax conformity (Often when a company does not prepare the statements in accordance with OR, but has to prepare it in accordance with IFRS, GAAPs)

Question 13

Differences between old and new acc standards and US GAAP and IFRS regarding leasing

Answer 13

complete