All Flashcards
What is the criteria as per IAS 37 for creating a provision?
Per AS 37 Provisions, Contingent Liabilities and Contingent Assets, a provision should be recognised where:
i) there is a present obligation, which may be a legal or constructive one, as a result of a past event (e.g. the claim arising from the sale of faulty goods);
ii) it is probable that an outflow of resources will be required to settle the obligation (payment of the claim); and
iii) the amount can be estimated reliably (e.g. it is being the estimate made by the lawyers).
Why presenting P/L by nature may be better that presenting the P/L by function?
What is the impact on profit?
i)Presentation by nature is particularly suitable for a manufacturing organisation and is often used by smaller entities. It groups expenses under categories such as work capitalised, cost of raw materials,
employee costs and depreciation/amortisation.
ii) If this is the presentation used by many of an entities competitors it may be that it is considered more appropriate and therefore would allow users of the financial statements to make better and easier comparisons.
Whichever presentation is adopted there is no overall impact on net profit.
How to record a foreign currency transac for purchases?
When would a gain/loss on translation occur?
Record the purchases using the foreign exchange rate which existed at the transaction date.
A gain or loss on translation may occur when there is a significant timing diferrence between the transaction date and the date of settlement of the invoice, or the invoice has not been settled at YE (and need to adjust payable). YOU PAY THE INVOICE AT THE FOREX AT SETTLEMENT DATE AND HENCE THIS MAY BE LOWER/HIGHER THAN THE PAYABLE RECORDED ON TRANSACTION DATE.
How to record a foreign currency transac for purchases?
When would a gain/loss on translation occur?
Record the purchases using the foreign exchange rate which existed at the transaction date. At year end adjust the payables balance to reflect the exchange rate at the reporting date. This will therefore result in a gain/loss on exchange rate diferrences, in SoPL.
A gain or loss on translation may occur when there is a significant timing diferrence between the transaction date and the date of settlement of the invoice, or the invoice has not been settled at YE (and need to adjust payable). YOU PAY THE INVOICE AT THE FOREX AT SETTLEMENT DATE AND HENCE THIS MAY BE LOWER/HIGHER THAN THE PAYABLE RECORDED ON TRANSACTION DATE.
How to record purchases of assets in a foreign currency under:
i) the cost model
ii) Revaluation model
i) Record using forex rate at transaction date. No need to adjust cost at year end, only payable balance (if not settled).
ii) Revaluations made using the forex rate at the date of valuation. Record any gain or loss arising from forex differences in OCI.
“On 1/4/18, B plc purchased a recycling centre for £120,000. The centre has a UEL of 10 years and conditions of purchase require B plc to decommission the centre and restore the land at the end of the 10 years. Estimated decomission/restoration costs are £40,000.” YE = 31/9/19 and discount rate was 6%.
Must discount the decommision costs using the 6% discount rate to the value in 10 years, and record this amount on day one as a CL. There will be a finance cost recognised on this amount at the 6% finance cost rate year on year.
When to recognise a provision for a liability and asset?
Recognise a provision for liabilities when >50% chance on the liability.
Recognise an asset when it is “virtually certain” (95%) to receive a claim.
How to account for the following:
“On 1/1/20 A ltd issued 500,000 £1 5% irredeemable preference shares at par. The preference shares were correctly accounted for at date of issue. The dividend associated with these shares is discretionary and has been accrued as a finance cost. The dividend has not been declared at 31/12/20 (year end).” The TB had a credit balance of 25000 for accrued finance cost
- Recog irredeemable preference shares as equity
- Reverse the accrued finance cost recognised in the TB. The preference shares are discretionary and hence there should be a dividend payment not a finance cost.
- No need to recognise a dividend as there was nothing declared in the period
How to calculate EPS when there is a RI?
- Calculate the TERP. This is the weighted average of the shares before and after the rights issue (i.e. shares before RI x Market price before issue + shares as result of RI x market price on RI). Then divide the total market value by the number of shares.
- Calculate the bonus factor which is the pre existing rights price divided by theoretical ex rights price (TERP) (calculated above)
- In the WANOS calculation for the number of shares column: take the number of shares before the RI and multiply this by the bonus factor. Everything after the RI take the number of shares before RI and add the RI shares. Then proceed as normal and multiply by months/12
How to calculate the LL under IFRS16?
What happens when there is a payment in advance?
- Take the yearly payment and discount it by the EIR for the year. (year 1 = 1/1.0X, year 2=1.1.0X^2)
- Split the LL in to CL and NCL. The NCL is the closing balance at the end of the 2nd year
When payment in advance, for year 1 of the LL calc we don’t deduct a payment for that year. BUT MAKE SURE TO ADD THAT AMOUNT TO THE ROU ASSET AMOUNT.
What happens if the question states that you dispose of a NCA part way through the financial year?
- Depreciate the asset up to the date of sale. and charge this to the profit or loss.
- Clear the cost and acc dep’n amounts and recognise a gain or loss on disposal in SoPL
How to treat the following:
“On 1/1/20 A Ltd purchsed a zero coupon bond for £90720, paying an additional £2,500 in broekers fees. The brokers fees were debited to administrative expenses and credited to the UK bank account. The nominal value of the bond was £98,000. the bond is quoted in an active market and the company expects to hold it until its redemption at a premium of 7% on 31/12/22. The bond has an effective interest rate of 4% per annum.”
Recognise a financial asset and carry this at amortised cost. Cost would be carried at £90,720 + £2,500 (£93,220).
- To carry at amortised cost you charge a finance income year on year at 4% (as its a financial asset). The double entries would be: Cr Finance income Dr Financial asset
How to deal with the following:
“On 1/1/18 A Ltd issued 200,000 £1 redeemable preference shares at par. The preference shares are redeemable in 3 years time at a premium of 9%. The dividends due for the year on these shares were paid shortly after the year end, although no accounting entries were made at year end (31/12/18) for these dividends. The preference shares have an effective interest rate of 6.8% per annum.”
The shares are redeemable preference shares and hence should be classified as a non-current liability.
For the year end recognise a finance cost for the year and the charge paid.
The finance cost charge should be made at 6.8% as a:
Dr Finance cost
Cr preference shares (NCL)
The payment should then be made at 4%: Dr Preference shares (NCL); Cr Cash/TP
What is the difference in inventory value in single entity FS and group FS?
In single entity FS inventory should be valued at the lower of NRV and cost.
In group FS you value inventory at FV as all assets should be valued at FV on consolidation
What is a discontinued operation under IFRS 5?
A component of an entity being disposed of, or is classified as held for sale, and:
- represents a major line of businees or geographical area of operations;
- Is part of
