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AAT Level 4 - FSLC > Chapter 8 > Flashcards

Chapter 8 Flashcards

1
Q

What are the relevant accounting standards?

A

IAS 12 income taxes
IAS 17 leases
IAS 37 provisions, contingent assets, contingent liabilities
IAS 10 events after reporting period
IFRS 15 revenue from contracts with customers

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2
Q

What is current tax?

A

Amount of tax payable or recoverable in respect of profit or loss in the period

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3
Q

How to include tax in the accounting records?

A 
DR tax (SPLOCI)
CR tax liability (SOFP)
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4
Q

What will the current tax year comprise of?

A

A current year tax charge and an adjustment in respect of the previous period.

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5
Q

What is deferred tax?

A

Not an actual tax. It is a way of applying accruals concept to accounting for current tax. It arises due to temporary differences.

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6
Q

What is a lease?

A

A contract that conveys the right to use an asset for a period of time in exchange for consideration (cash)

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7
Q

What is a lessee?

A

The person who leases FROM someone else

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8
Q

Who is the lessor?

A

The person who leases the asset out TO someone else

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9
Q

What is the lease term?

A

The non cancel label period for which the lessee has the right to use an asset

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10
Q

What is fair value?

A

The amount for which an asset could be exchanged (or a liability settled), between knowledgable, willing parties in an arms-length transaction

(Be the same as purchase price in exam)

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11
Q

What is the interest rate implicit in the lease?

A

The interest charge that takes account of the time value of money.

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12
Q

What is the incremental borrowing rate?

A

The interest rate that a lessee would have to pay to borrow over a similar term the funds necessary to obtain an asset of similar value to the right of use asset in a similar economic environment.

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13
Q

What is depreciation?

A

The asset is depreciated over the shorter of the lease term and the useful life of the asset

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14
Q

What recognition of leases does IFRS 16 require?

A

ALL LEASES except short term leases and leases where the asset is of low value.

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15
Q

How do you know if right to control is present?

A

Present if the entity has the right to:

Obtain substantially all economic benefits from the use of the asset within the parameters of the lease

Direct the use of the asset

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16
Q

What must be in the contract for it to be identified as a Lease?

A

Right to control (who has it)
Identified asset ( what is the lease for?)
Period of time

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17
Q

Why must the asset be identified in order to be a lease?

A

Because the customer does not have the right to use the asset if the supplier has substantive rights to substitute the asset through the period of use

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18
Q

How to recognise a lease at the beginning of the contract?

A

DR ROU asset

CR lease liability

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19
Q

How to account for depreciation of an asset?

A 
DR Depreciation (SOFP)
CR ROU (accum. Depreciation) (SOFP)
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20
Q

What should the depreciation period be?

A

IF OWNERSHIP TRANSFERS AT END OF LEASE TERM: the useful life of the asset

IF NO TRANSFER OF OWNERSHIP: the shorter of the lease term and the useful life of the asset

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21
Q

What is the lease liability measured at the start of the lease?

A

At the present value of future lease payments including any expected payments at the end of the lease, discounted at the interest rate implicit at the lease

22
Q

What is the rate cannot be readily determined?

A

Use the lessees incremental borrowing rate

23
Q

How to increase the lease liability with interest double entry?

A

Dr finance costs

Cr lease liability

24
Q

How to reduce the lease liability? And double entry?

A

Reduce it by lease payments paid

Dr lease liability
Cr cash

25
Q

What is a short term lease?

A

Leases with a lease term of 12 months or less. This election is made by class of underlying asset. A lease that contains a purchase option CANNOT be a short term lease.

26
Q

What is a low value lease?

A

Leases where the underlying asset has a low value when new (laptops, office furniture etc). This election can be made on a lease by lease basis

27
Q

What conditions must apply to be called a low value lease?

A

The leases can benefit from using the underlying asset.

The underlying asset is not highly dependent on, or highly interrelated with other assets

28
Q

Accounting treatment for these leases?

A

Recognised as an expense in the profit or loss on a straight line basis over the lease term unless some other systematic basis is representative of the pattern of benefit.

29
Q

What is a provision?

A

A liability of uncertain timing or amount.

30
Q

When will a provision be recognised as a liability in the financial statements?

A

A company has a present obligation as a result of past events

It is PROBABLE than an outflow of economic benefits will be required to settle the obligation (not certain)

A reliable estimate can be made of the obligation.

31
Q

How many of the conditions must be met in order to record a provision in the FS?

A

ALL MUST BE MET.

32
Q

What is an obligating event?

A

An event which creates a legal or constructive obligation resulting in so alternative but to settle the obligation.

33
Q

How to recognise the change in value of a provision?

A

As an expense to the SPL.

34
Q

What is a contingent liability and where should it be recognised in the FS?

A

A liability which is not wholly in the company’s control that is is not probable that outflow of economic benefits will occur,

35
Q

Where should a contingent liability be recognised in FS if remote possibility?

A

No disclosure required.

36
Q

What is a contingent asset?

A

Is a possible asset that arises from past events whose existence will be confirmed only by the potential occurrence or non occurrence of one or more uncertain future events not within the company’s control

37
Q

When should a contingent asset be disclosed and where in the financial statements?

A

Only disclosed when an inflow of economic benefits is probable. And in the notes to FS with info including a brief description and a estimates financial effect.

38
Q

What is an adjusting event?

A

An event which provides evidence of conditions that existed at year end. If they are material, the financial statements should be altered.

39
Q

Examples of adjusting events?

A

The settlement after year end of a court case which confirms that a present obligation existed at year end date.

Assets where a valuation shows impairment.

Inventory, when NRV falls below cost

Trade Recievables, where a customer has become insolvent.

40
Q

What is revenue?

A

An entities income from its main operating activities- accounting is governed by IFRS 15.

41
Q

What does income include?

A

Revenue and gains

42
Q

What is revenue in terms of income?

A

Income arising in the ordinary course of an entities activities, such as sales and fees.

43
Q

What is the key principle of IFRS 15?

A

Revenue is recognised to depict the transfer of promised goods or services to customers at an amount that the entity EXPECTS to be entitled to in exchange for the goods or services.

44
Q

What is the 5 step model for recognising revenue?

A

Identify contracts with the customer

Identify the obligations of the contract

Determine the transaction price

Allocate the transaction price to the obligation in the contract = payment

Recognise revenue when / as the entities satisfies a performance obligation

45
Q

What is a contract

A

An agreement between two or more parties that creates enforceable rights and obligations.

46
Q

What is a customer

A

A party that has contracted with an entity to obtain goods or services that are an output of the entity’s ordinary activities in exchange for consideration.

47
Q

What is a performance obligation?

A

A promise in a contract to transfer a good or service to the customer that is distinct.

48
Q

What is the transaction price?

A

Amount of consideration which an entity expects to be entitled do in exchange for transfer of promised goods / services.

49
Q

What does revenue not include?

A

Does not include sales taxes, VAT, or goods and service taxes as they are collected for third parties.
If working as an agent, you can only recognise revenue as the commission you make, not the whole thing.

50
Q

How is revenue measured?

A

Transaction price taking into account trade discounts and volume rebates.

51
Q

How should you account for revenue in terms of sale or return?

A

Revenue should be recognised as the amount of consideration which the entity expects to be entitled to, and not recognised for expected returns.

52
Q

How to recognise expected returns?

A

With a refund liability. Inventory cost of items should be excluded from cost of sales and instead remain within inventory.

AAT Level 4 - FSLC (6 decks)

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