Accounting Standards

Question 1

IFRS 16 - LEASES

Answer 1

A lease if contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.
1. Right to control - gains substantially all economic benefits
2. Identified Asset - must specify an asset in the contract - relate to question
3. Period of time - less than a year is expensed to profit or loss, otherwise create a lease liability
- Lease liability is the present value of future lease payments discounted at interest rate.
- The lease liability may be increased by a finance cost and reduced by instalments paid.
4. Consideration - rent usually.

A right of use asset should also be recognised on the statement of financial position (capitalise) - this can then be depreciated over the shorter of the lease term or UEL.

Question 2

IFRS 15 - REVENUE FROM CONTRACTS WITH CUSTOMERS

Answer 2

5 steps in recognising revenue
1. Identify the contract with the customer
2. Identify the performance obligations
3. Determine the transaction price. The amount the seller is entitled to.
4. Allocate the transaction price to the performance obligations
5. Recognise revenue when (or as) the performance obligation is satisfied

Deferred revenue (like loyalty points) should be classed as a contract liability until recognised - at the earlier of the redemption or expiry date

• Principals - Controls the specified goods or service before transfer to the customer. Then the commission paid out is an expense in PnL.
• Agents - its performance obligation is to arrange for goods or services for another party. Recognise revenue only from their slice of commission

Question 3

IAS 16 - PROPERTY, PLANT AND EQUIPMENT

Answer 3

1. The initial cost of an asset includes all costs directly attributable to bringing the asset to the location and condition necessary for its use.
2. Requires only directly attributable costs are capitalised including site preparation, delivery, installation and assembly costs, testing costs and professional fees (legal and architects)
3. The cost of opening a facility, advertising, staff training and admin costs CANNOT be capitalised and are expensed.

Question 4

IAS 24 - RELATED PARTY DISCLOSURES

Answer 4

Related Parties
A person or close member of their family is a related party to an entity if they:
1. Have control or joint control
2. Has significant influence
3. Is a member of key management personnel

An entity is a related party to another entity if it:
1. Is controlled by a person above (i)
2. Members of the same group
3. Is significantly influenced by a person above (i)
4. The entity provides key management personnel services

Disclosures
1. Nature of relationship
2. Information about related party transactions, including: the amount of the transactions and the amount of any outstanding balances
NB. Disclose the transactions regardless of whether they are at or below market value.

Question 5

IAS 2 - INVENTORIES

Answer 5

1. Inventories carried at lower of cost and net realisable value (NRV)
2. Contaminated stock written off should be expensed
3. Contaminated stock reduced should expense the lost revenue

Question 6

IAS 21 - EFFECTS OF CHANGES IN FOREX RATES

Answer 6

Foreign Currency Transactions
- Initially measured at the spot rate
- Then for:
1. Monetary assets and liabilities restated at the closing rate
2. Non-monetary items measured historically stay historic
3. Non-monetary items measured at fair value are restated at the exchange rate of the fair value calculation

Foreign Subsidiaries
- Assets and Liabilities translated at the closing rate
- Share capital, premium and pre-acquisition reserves translate at the historic rate
- Post-acquisition reserves find as a balancing figure
- Income, expenses or other comprehensive income translate at the average rate
- Exchange differences in the year should be recognised in OCI (translation reserve)

Question 7

IAS 12 - INCOME TAXES

Answer 7

1. Current tax expensed to the profit or loss
2. Tax liabilities or assets recognised on the SOFP
3. Deferred tax liabilities or assets are created when there’s a difference between the tax base and the accounting base

Question 8

IAS 38 - INTANGIBLE ASSETS

Answer 8

An identifiable non-monetary asset without physical substance
1. Acquired intangible assets are always recognised
2. Internally generated
- Research is not recognised and is expensed on the profit or loss
- Development is recognised if it meets the PIRATE criteria, we can then capitalise it.

PIRATE
- Probable economic benefit
- Intention to complete and use / sell
- Resources adequate to complete asset
- Ability to use / sell
- Technical feasibility of completing asset
- Expenditure can be measured reliably.

Measure at cost - purchase price / sum of expenditure plus any directly attributable costs

Question 9

GOODWILL

Answer 9

1. Internally generated goodwill follows IAS 38 Intangible Assets and is not recognised
2. Positive purchased goodwill follows IFRS 3 and is capitalised as an intangible asset
3. Negative purchased goodwill follows IFRS 3 and is expensed to the profit or loss

Question 10

IFRS 3 - BUSINESS COMBINATIONS

Answer 10

Provisions should only be recognised when there is an obligation

Question 11

IFRS 13 - FAIR VALUE MEASUREMENT IN ACQUISITIONS

Answer 11

• The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
• Requires a market value measurement