Accounting treatments Qs Flashcards
How does preparation of FS under FRS 105 layout differ to FRS 102?
The income statement (profit and loss account) shows expenses classified by nature, rather than by function.
So amounts are presented for cost of raw material and consumables, rather than purchases and COS.
Notes to FS are more limited in scope and are shown at the foot of the balance sheet.
How does preparation of FS under FRS 105 layout differ to FRS 102?
The income statement (profit and loss account) shows expenses classified by nature, rather than by function.
So amounts are presented for cost of raw material and consumables, rather than purchases and COS.
Notes to FS are more limited in scope and are shown at the foot of the balance sheet.
What are the inherent limitations to FS?
Presentation is very structured, so may not alow full understanding of some more complicated issues. The aggregation of information only provides an overview, rather than specific details.
It uses historical data, so can’t be used to look forward or make predictions reliably. They are backwards looking
There is often a delay between the financial year end and the finalising of the year end accounts, the longer this takes, the less useful the information becomes
There is a limited amount of narrative in financial statement, and its the narrative that ofte provides the most useful ifnromation into the company’s future. E.g. doesn’t show company future plans, risks being faced by the company (like cmpetitiors), or the management structur
FS contain estimates and judgements. This can be reduced by an audit, but it is never going to be an exact number.
Companies can use different accounting policies, which means they might not always be able to make exact comparisons. However, disclosure of account policies mean they can be identified.
Having taken a career break, what recommendations would you make to an ICAEW CA to ensure they have maintained their professional competence level?
Suggest they take a refresher course
Explain any errors they have made
Ensure the work they’ve done is correct
Keep a detailed record of any discussions had
How are assets under construction’s interest dealt with?
There is an asset under construction that will take a significant period of time to be available for normal use.
When this is the case, under FRS102 Section 25
Borrowing Costs, there is an option for companies to capitalise any borrowing costs directly associated with the borrowing of funds to construct the asset.
Therefore, the X is a qualifying asset, as it is not ready for use.
Borrowings costs can only be capitalised if they could’ve been avoided has the asset not been under construction. The loan was taken out specifically to help construct the asset, therefore it remains a qualifying asset.
Interest can only be capitalised once it has met ALL the following criteria:
- The business must be actively constructing the work (and this was met in the question on…[date] because… )
- Finance costs must be being incurred (and this was met in the question on… because…)
- Expenditure on the construction must be being incurred.(and this was met in the question on… because…)
If the borrowing costs are taken from a general pool, an average weighting must be taken of the interest rates to be capitalised.
When capitalising the interest costs, any incoming interest earned from the re-investment of borrowing costs until they are used, or any income from a temporary use for the construction site that earns interest, must be deducted from the capitalised amount.
Initial treatment
An asset under construction can be recognised in the accounts, as at the year end another £100,000 needed to be spent before the asset will be available for normal use.
The interest paid was incorrectly recognised as an expense in the P&L, this should’ve been capitalised.
Must deduct the interest earned on the amounts not expensed immediately
Total borrowing costs to capitalise = Interest payable - interest receivable.
Subsequent treatment
Assets under construction are not depreciated until they are available for normal use, therefore no depreication charge is required subsequently
Subsequently, interest earned should continue to be netted off against interest payable on the asset until completion.
Impact on Financial Statements
This will increase profits for the year, as there are less interest expenses being incurred
IFRS and UK GAAP differences re goodwill
UK GAAP: Requires goodwill to be amortised over its useful life, with rebuttable presumption that shouldn’t exceed 10 years
IFRS: No amortisation, subject to annual impairment review
UK GAAP: Impairment losses re goodwill can be reversed
IFRS: Not allowed to reverse impairment losses
UK GAAP: Aq related costs are added to cost of acquisition
IFRS: Acquisition related costs are expensed
UK GAAP: -ve goodwill presented on BS/ in FA directly under +ve goodwill as -ve assed
IFRS: -ve goodwill recog in RE
UK GAAP: NCI must be measured using proportionate method
IFRS: Can use proportionate method or the FV method
IFRS and UK GAAP differences re goodwill
UK GAAP: Requires goodwill to be amortised over its useful life, with rebuttable presumption that shouldn’t exceed 10 years
IFRS: No amortisation, subject to annual impairment review
UK GAAP: Impairment losses re goodwill can be reversed
IFRS: Not allowed to reverse impairment losses
UK GAAP: Aq related costs are added to cost of acquisition
IFRS: Acquisition related costs are expensed
UK GAAP: -ve goodwill presented on BS/ in FA directly under +ve goodwill as -ve assed
IFRS: -ve goodwill recog in RE
UK GAAP: NCI must be measured using proportionate method
IFRS: Can use proportionate method or the FV method
UK GAAP: Recog implicit GW on acq of ass/JV and requires it to be amortised
IFRS: No Separate GW recognised
UK GAAP: No specific requirement to reassess contingent consideration each year
But where amount isn’t probable/reliably measured it shouldn’t be subsequent measured and the amount related bar to acquisition date, hence impacting GW figure
IFRS: Requires measurement of contingent consideration to be reassessed at FV, each year with diffs taken to P/L
How do you calc distributable profits for group statements? (3 marks)
For entities within the group, distributable profits must be made for each individual entity, rather than the consolidated group
So ditributable profits are only those distributable by the parent (1)
Basic rule is it is measured as accumulated distributable profits less accumulated distributable losses, which is usually the P&L reserve for the company (1)
Rules are stricter for limited companies.
However, if there has been adjustments into dividends paid between the groups, these would need to be added back in
Consider any changes to P&L that Parent has paid for relating to the subsidiaries to adjust for:
Parent P&L figure X (1/2 mark for this)
Adjustments each 1/2 mark
remember: the wordy bits would get you 2/3 and then 1/2 mark for just putting in parent only P&L figure from TB
Explain the treatment of an associate in group consolidated BS and P&L, and provide calculations
Per FRS 102 Section 14 Inv in Associates, as the acquisition has been the parent controlling interest, they should be treated as an associate in CFS, using the equity method.
In CP&L, group’s share of associated profit after tax should be presented as a single line as ‘share of profit of associate’. If the associate is acquired mid year, then the results should be time apportion.
Where FV of net assets of the associate at acq exceeded the carrying amount, the original cost of the inv will effectively have included a FV uplift.
Additional deep’s on the group share of FV uplift therefore needs to be deducted from group share of associates PAT
THEN SHOW CALC
In consolidated BS, interest in associate should be presented as a single line under FA described as ‘Investment in associate’
Associate should initially be recognised at cost, and subsequently adjusted in each period for the parent’s share of the post-acquisition change in NA (P&L acc).
This equates to the group share of post-act prof less any div received
Group P&L reserves should include the group’s share of the associates post-acc reserves
When doing a PURP, where does the PURP go if
a. Sold by parent
b. Sold by subsidiary
A. If sold by parent, goes into W5 (and need to adj for amount they own, as they can recog the proportion sold to NCI)
B. If sold by subsidiary, goes into W2
Affects the SELLER
Explain treatment of associate Short hand answer
- Acquisition is between 20-50% to suggest they have significant influence, but not control (1)
- Use equity accounting for associates (1)
- Equity acc = put one line is SFP and one line in P&L
- In P&L, 1 line of share of profit for year including share of profit and FV dean
- BS: one single line should be shown under FA by itself, SHOW CALC
- post acq profits are recorded subsequently each year, adding into this amount each year. SHOW CALC
- originally just recorded as consideration paid
DONT MIX UP JV AND ASSOCIATE IN EXAM, BOTH UNDER EQUITY ACCOUNTING BUT HAVE DIFFERENT SECTIONS IN FRS 102.
What are the differences between joint ventures and associates?
DONT MIX UP JV AND ASSOCIATE IN EXAM, BOTH UNDER EQUITY ACCOUNTING BUT HAVE DIFFERENT SECTIONS IN FRS 102.
they are both treated the same but have different justifications about WHY they are treated as they are
Compare diff standards
How would you prioritise the consolidated statement of changes in equity calc in consolidated Q?
- Write out pro-forma P&L Reserve Acc & NCI column along top
Lines that may be included
- Total comp income (split between owners & NCI)
- Dividends
- Added on acquisition - Add in profit from P&L and NCI amount from
- Dividends can be easy start
- B/f if have them in Q
Rest of it is dog shit, just fill in what you can
How do you calc Re and NCI b/f figure
Start with W2 net assets of subsidiary that already had at the start of the year
Instead if Rep date Acq columns, need B/F and acq -> post acquisition
Calc b/f RE as P&L reserve for year end given in Q, less profit for the year given in Q, and add back any dividends paid
Would need to include any FV uplifts and subsequent deepen in the b/f part
To DO
Q41
Q51
