Chapter 5 Flashcards
Usefulness and purpose of B/S
- provide information about entity at a point in time
- Evaluates liquidity and financial flexibility
- Aids in assessing risk and predicting future cash flows
liquidity
ability to pay obligations (current assets vs. current liabilities)
limitations of the B/S
- current value is not always reflected
- estimates and judgements must be used (collectibility of receivables)
- Omit many items that are of financial value to the business (value of HR and R&D not reported)
- amount shown are result of policy choices made
- Numbers are often consolidated between subsidiaries and this can hide important detail
- some amounts don’t show up on the B/S, if they don’t meet definition
Current assets
Resources expected to be turned into cash, sold or consumed within one year or the operating cycle (whichever is longer)
Considerations for current assets
intent and marketability important to classify short term investments
restricted cash
excluded from current assets, shown in notes if needed
current liabilities
obligations reasonably expected to be liquidated through the use of current assets or creation of other current liabilities
current liabilities reported
in the order they will be paid
some liabilities that will be paid within a year are reported as long-term liabilities
- short term debt expected to be refinanced (put into non-current so that current ratio is better)
- debt that will be retired out of non-current assets
non-current investments
readily marketable may be classified as current or long term depending on management intent for holding them
consist of : debt securities and others sinking funds, tangible assets as investment
non-current equity investment
subsidiary -consolidation, significant influence on equity method and non-consolidated subsidiaries or investment where no control or influence exists (FV or cost)
PPE (property plant and equipment)
IFRS allows an option to carry these assets at FV (instead of historical cost) using revaluation or FV method. written down if impaired
Investment property and biological assets
ASPE does not have separate category for it.. part of PPE
Intangible assets
resources that lack physical substance but provide economic rights and advantages i.e. patents, franchises, trademarks and organization costs
goodwill
excess purchase price of a company over the fair value acquired (earnings potential, if no assets, no goodwill)
Intangibles
carried at cost less acc. amortization if finite lives, at cost if indefinite lives (provided they are not at fair value). Both written down if impaired (included in other assets)
Expenditures for intangible assets such as R&D is
expensed as incurred, not capitalized
Other assets
special classification for unusual items that cannot be included in one of the other asset categories. i.e. deferred charges, non-current receivables, advances to subsidiaries
classification of the item depends on
nature AND use
long term liabilities
obligations that are not reasonably expected to be liquidated within the normal operating cycle, but payable at some date later
3 types of long term liabilities
- obligations from specific financing situations where additional assets are required
- obligations from ordinary operations of the enterprise (pension obligation or deferred income tax)
- obligations dependent upon occurrence or not of one or more future events to confirm the amount payable, payee or date
any premium or discount on bonds payable is
disclosed separately as add/less from bonds
the currently maturing portion of long term debt classfieid
current liability with remainder being non-current (related premium/discount also as current)
supplementary info
existence of debt covenants and restrictions, terms of the debt (maturity dates, interest rates, amounts of securities to support debt)
Shareholder’s equity
net assets (assets - liabilities)
shareholder’s equity of corporations
- share capital (common/preferred: how much shareholders have invested)
- contributed surplus (increase on equity as gains on transactions)
- retained earnings; undistributed earnings of corporation
- accumulated other comprehensive income (net of tax)
- non-controlling interest: claim to the subsidiary’s net assets not controlled by the parent
contingencies
uncertainty as to possible losses or gains that will be resolved by a future event (litigation, environmental issues, tax assessments or gov investigation)
contingent losses are recorded if
- likely >50%
- measurable
if not disclose in notes
Under ASPE contingent liabilities
recorded at lowest end of the range when all points of the range are equally likely
Under IFRS contingent liabilities
use of expected value probabilities (accrue midway point)
Valuation and accounting policies
should all be disclosed , in the first note or separate summary of significant accounting policies
Contractual situations
mandatory that essential provisions of lease contracts, pension obligations be clearly states in notes
Subsequent events
events that occur after the fiscal year end but before financial statements are prepared. If they provide further evidence of conditions that existed at the B/S date adjust financial statements –> if not in notes if yes or no there will be a change
refinancing troubled debt
under IFRS a liability can be re-classed from current to non-current IF an agreement was reached with lender at B/S date, under ASPE any day before release of B/S
Techniques of disclosure
- parenthetical explanations (prior year comparative)
- notes (accounting policies and contingencies)
- cross-reference and contra items (bond discounts)
- supporting schedules (lease disclosure)
- Additional disclosure required: reportable segment, related party transaction
Operating cycle
amount of time it takes to convert raw materials into final product and sold
current/non-current classification
be disclosed separately except if presentation is based on liquidity would provide information that is reliable and relevant –> all presented broadly in order of liquidity
working capital
current assets and liabilities
deferred income tax
IFRS always non-current
ASPE: depends on what it is linked to
breach of covenant/long term agreement
makes the liability due on demand at the B/S date, classified as current –> a new agreement must take place to reclassify as non-current
Reverse liquidity format
show non-current before current
Accounting errors
under IFRS: adjusted for at the earliest period affected by the change (retrospective with restatement) or simply adjust cumulative effects of the error on an opening B/S to reflect the cumulative effects of the change (modified retrospective approach)
