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Assets Flashcards

1
Q

What is the definition of an asset according to the Conceptual Framework?

A

A present economic resource controlled by the entity as a result of past events.

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2
Q

What are the three key characteristics of an asset?

A

-Gives rise to a right (e.g., cash, goods, or services).
-Has the potential to produce future economic benefits.
-Is controlled by the entity due to a past event.

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3
Q

What are the recognition criteria for an asset?

A

Provides relevant and faithfully represented information.

Must not have:
-Uncertainty about existence
-Low probability of future benefits
-High uncertainty about measurement

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4
Q

What happens if a resource fails the recognition test?

A

It is treated as a contingent asset and disclosed in the notes to the financial statements.

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5
Q

What is included in the initial measurement of an asset?

A

All costs incurred to bring the asset to the condition for use or sale.

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6
Q

What is subsequent measurement?

A

The process of determining the asset’s value on the reporting date after acquisition.

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7
Q

What are subsequent costs?

A

Expenditure incurred after initial recognition.

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8
Q

How are assets expensed over time?

A

Through:

-Depreciation (tangible assets)
-Amortisation (intangible assets)
-Impairment
-Cost of Sales (for inventory)

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9
Q

What is depreciation?

A

The systematic allocation of the depreciable amount of a tangible asset over its useful life

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10
Q

What is the depreciable amount?

A

Cost of asset less residual value.

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11
Q

What are common depreciation methods?

A

-Straight-line
-Diminishing balance
-Units of production

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12
Q

What is amortisation?

A

The depreciation of intangible assets over their useful life.

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13
Q

Are all intangible assets amortised?

A

No, indefinite-life intangibles are tested for impairment annually instead.

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14
Q

What is impairment?

A

An asset cannot be carried at more than its recoverable amount.

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15
Q

What are the three steps for identifying impairment?

A

-Look for signs of impairment
-Calculate recoverable amount (higher of value in use or fair value less costs to sell)
-Reduce carrying amount if recoverable amount is lower

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16
Q

Can impairment be reversed?

A

Yes, but only up to the amount the asset would have been without the impairment.

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17
Q

What is ‘cost of sales’?

A

Expense recognised when inventory is sold. Includes direct costs and adjustments like losses or write-downs.

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18
Q

What is the process of removing an asset from the accounting records called?

A

Derecognition

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19
Q

When is an asset derecognised?

A

When it is disposed of (sold, scrapped, or no longer provides economic benefit).

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20
Q

What is recognised when an asset is sold for cash?

A

Cash or receivable for the sale proceeds.

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21
Q

How is gain or loss on disposal calculated?

A

Sale proceeds minus carrying amount of the asset.

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22
Q

Where is the gain or loss on disposal reported?

A

In the statement of comprehensive income.

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23
Q

What is the period between the reporting date and finalisation of financial statements called?

A

The period after the reporting date (or events after the reporting period).

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24
Q

What are ‘adjusting events’ after the reporting period?

A

Events that provide evidence of conditions that existed at year-end and require adjustment in the financial statements.

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25
What are 'non-adjusting events' after the reporting period?
Events that reflect conditions arising after year-end. These do not require adjustments, but may require disclosure.
26
When should non-adjusting events be disclosed?
When they are significant enough to influence users’ decisions.
27
Do adjusting events affect the figures in the financial statements?
Yes, they result in changes to recognised amounts.
28
Do non-adjusting events change the figures in the financial statements?
No, they are only disclosed in the notes if material.
29
What qualifies an asset to be classified as PPE?
It must be tangible, used in the production/supply of goods or services, rental, or administration, and expected to be used for more than one period.
30
Which types of PPE are depreciated?
All PPE with a limited useful life (e.g., machinery, vehicles, computers).
31
Why is land generally not depreciated?
Because it usually has an indefinite useful life.
32
What is the most commonly used depreciation method?
Straight-line depreciation.
33
What happens if the useful life or residual value of an asset changes?
The depreciation charge is adjusted prospectively—affecting only current and future periods.
34
How is depreciation affected by an impairment?
Depreciation is recalculated based on the asset’s new carrying amount after impairment.
35
Is depreciation a cash expense?
No, it's a non-cash expense.
36
Where is depreciation recorded in the financial statements?
-As an operating expense in the income statement -Added back in the cash flow statement (indirect method)
37
What is the defining characteristic of investment property according to IAS 40?
Property held to earn rentals, for capital appreciation, or both.
38
How does the fair value model for investment property differ from the revaluation model for PPE?
-Changes go to profit or loss, not OCI -Annual revaluation required -No depreciation under fair value model
38
What are the two subsequent measurement models for investment property?
The cost model and the fair value model.
39
What distinguishes investment property from PPE?
Investment property is held solely for financial returns, while PPE is held for use in operations (e.g., production or administration).
40
How are gains/losses from investment property under the fair value model reported?
Directly in profit or loss.
41
What happens to an asset held for sale instead of for rentals or appreciation?
It is classified as a non-current asset held for sale, not an investment property.
42
What does the cost model involve for investment property?
Carrying the asset at cost less accumulated depreciation and impairment.
43
Is depreciation applied under the cost model?
Yes, if the asset has a limited useful life, depreciation is charged over its useful life.
44
Is impairment testing required under the cost model?
Yes, impairment is tested when indicators exist, and losses are recognized if the carrying amount exceeds recoverable amount.
45
How does the cost model differ from the fair value model in terms of updates?
Cost model is not updated annually for fair value, unlike the fair value model which must be updated yearly.
46
How does the cost model compare to PPE accounting?
It’s similar, using historical cost, less depreciation and impairment — just applied to investment property.
47
How are changes in fair value treated under the fair value model for investment property?
Reported as gains or losses in profit or loss
48
Is depreciation charged under the fair value model?
No, depreciation is not applied under the fair value model.
49
How does the fair value model offer a different financial reflection than the cost model?
It provides a real-time economic value, showing performance through market price changes, unlike the historical cost approach.
50
What purpose does the fair value model emphasize for investment property?
Generating financial returns via market appreciation or rental income.
51
How is Inventory defined within the context of asset categories?
Inventory includes assets held for sale, in the production process for sale, or in the form of materials/supplies for production or service delivery. It is classified as a current asset and is part of working capital.
52
How is Inventory initially measured?
At cost, which includes raw materials, import duties, transport, handling, depreciation of manufacturing assets, direct labour, factory admin costs, and other directly attributable costs.
53
What costs are excluded from the initial measurement of inventory?
Advertising and selling costs, storage costs (unless necessary), non-manufacturing admin costs, and abnormal waste expenses.
54
What cost formulas can be used for inventory when individual costs can't be identified?
IFO (First-In, First-Out) or Weighted Average Cost formulas are permitted under IFRS.
55
How is inventory measured after initial recognition?
At the lower of cost and net realisable value (NRV). Inventory is never revalued upwards, except for commodity broker-traders.
56
What is net realisable value (NRV)?
NRV is the estimated selling price of inventory in the ordinary course of business, less costs of completion and selling.
57
How is the cost of inventory expensed?
As Cost of Sales when inventory is sold. It includes write-downs, perished/lost inventory, and reversals of previous write-downs.
58
What is Work-in-Progress (WIP) within inventory?
WIP is partially completed goods or services. In service industries, it includes costs of services delivered but not yet billed or recognised as revenue.
59
How is Work-in-Progress initially measured and expensed?
Measured at cost, including labour and overheads. Expensed as cost of services or cost of sales when the service is rendered or product sold.
60
What is the role of Raw Materials and Supplies in inventory?
They are initial inputs in the production process. Their costs flow into WIP and finished goods and are expensed as cost of sales upon completion.
61
Why is the Lower of Cost and Net Realisable Value rule important?
It ensures inventory is not overstated in the financial statements and reflects a prudent valuation based on expected recoverability.
62
What are "Loans and Receivables" in accounting?
Loans and receivables are financial assets representing amounts owed to a business by customers, employees, or third parties. They are measured initially at present value and subsequently at amortised cost.
63
When are receivables discounted during initial measurement?
When credit terms exceed 12 months and no interest is charged at market-related rates, the future payment is discounted to present value using a market interest rate.
64
when is discounting of receivables unnecessary?
If the credit period is 12 months or shorter, or if the business charges interest at market-related rates, the time value of money is immaterial and discounting is not required.
65
What is "Amortised Cost" in the context of loans and receivables?
It's the subsequent measurement basis where the carrying amount of a receivable is gradually increased over time by recognising interest income until the full value is collected.
66
How is interest income recognised under amortised cost?
Interest income is calculated yearly by multiplying the carrying amount at the start of the year by the discount rate. It is added to the carrying amount of the receivable.
67
What is meant by "Unwinding the Discount"?
It refers to the annual recognition of interest income as the discounted receivable increases in value until it reaches the full payment amount.
68
Why is unwinding the discount important?
It reflects the time value of money and ensures that receivables grow to their face value by the payment date, offering a true financial position of the business.
69
What happens when a debtor fails to pay?
The receivable is impaired or derecognised, and the loss is recorded as a bad debts expense in the income statement.
70
What is the "Allowance for Doubtful Debts"?
It is an estimate of the portion of receivables that may not be collected, used when individual defaulting debtors cannot be identified.
71
Why is impairment necessary in accounting for loans and receivables?
It ensures receivables are reported at their net realisable value and aligns expenses with revenue under the accrual principle.
72
What two conditions must a financial asset meet to be measured at amortised cost?
1) It must be held to collect cash flows. 2) The cash flows must be solely payments of principal and interest.
73
What is a financial instrument?
A contract that gives rise to a financial asset for one party and a financial liability or equity instrument for another.
74
What are examples of financial instruments?
Shares, bonds, and derivatives.
75
What are the two main ways financial assets are measured?
Amortised cost and fair value.
76
What conditions must be met for a financial asset to be measured at amortised cost?
-Held to collect contractual cash flows. -Cash flows are solely payments of principal and interest (SPPI).
77
When is a financial asset measured at fair value?
When it does not meet the conditions for amortised cost—such as being held for trading or producing dividends instead of interest.
77
Why are shares usually measured at fair value?
Because they provide dividends and capital gains, not fixed payments of principal and interest.
78
What is marking to market?
Adjusting financial assets measured at fair value to reflect their market value at the reporting date.
79
Where are gains or losses from marking to market usually recognised?
In profit or loss.
80
What is the OCI option for shares?
For shares not held for trading, gains/losses from fair value changes can be recognised in Other Comprehensive Income (OCI) instead of profit or loss.
81
What is a derivative?
A complex financial contract whose value is derived from an underlying asset (e.g., currency, interest rate, commodity).
82
How do derivatives reduce risk in hedge accounting?
They hedge against risks such as exchange rate, interest rate, commodity price, and credit rating changes.
83
What is hedge accounting?
An accounting method used when a derivative is used to hedge a transaction, reducing volatility by recognising gains/losses in OCI.
84
What is the role of hedge accounting in financial statements?
It matches the impact of hedging instruments with hedged items to reduce profit/loss volatility.
85
What is the purpose of using OCI in hedge accounting?
To avoid profit/loss volatility by recognizing fair value changes of hedging instruments in OCI.
86
What two components make up agricultural assets?
Biological assets (living animals and plants) and agricultural produce (harvested products like meat, eggs, and nuts).
87
How are biological assets and agricultural produce measured?
At fair value less costs to sell.
88
What does "fair value less costs to sell" mean?
It's the estimated selling price in an orderly transaction minus the costs needed to sell the asset.
89
How are changes in the fair value of agricultural assets treated?
Recognised as gains or losses in profit or loss each year.
90
What impacts profit or loss in relation to agricultural assets?
Fluctuations in market value and changes in estimated selling costs.
91
What distinguishes agricultural assets from other assets in financial reporting?
They are uniquely and consistently measured at fair value less costs to sell, with changes reported directly in profit or loss.

Part 1 (6 decks)

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