Chapters 17-20 Flashcards
whats a foreign operation
a sub that operates in a foreign currency
can a foreign operation have its own functional currenvy
yes if it can be a stand alone company - not if its just an extension of the parents
what rate do you use for equity when translating the sub
historical rate
what rate do you use for dividends when translating the sub
actual
what rate do you use for P/L when translating the sub
average
exchange differences in the year on translation of net assets working
closing net assets at closing rate
less opening net assets at opening rate
less retained profit
plus or minus difference on goodwill
how do you calculate exchange difference in goodwill
calculate as normal in foreign currency
translate it at closing rate
for impairment losses what exchange rate do you use
you can use average or year end as the IAS does not state which one
what is the net investment in foreign operations
the amount of the reporting entitys in the net assets of a foreign operation
whats a cash equivalent
short term highly liquid investments
two methods of cash flows
indirect and direct - indirect is much more detailed operating cash flows but will result in same figure
what method does IAS prefer for cash flows
direct - but it is a choice as its just presentational
what do you need to eliminate from a consolidated cash flow
anything internal
what section are dividends to NCI
Financing
proforma for NCI Dividends
opening balance from SOFP \+ NCI share of total comp income \+ acquisition of sub -disposal of sub - non cash ie gain on foreign exchange -dividends to sub ( Balancing figure) closing balance from SOFP
How to calculate dividends received from associate
opening balance ( SOFP) \+group share of profit for the year \+group share of OCI \+acquisition of associate or joint venture -disposal of associate or joint venture -non cash items -dividends ( Balancing figure ) closing balance (SOFP)
how to calculate cash paid from acquiring a sub
- cash paid + subs cash
how to calculate cash received from disposal of a sub
+ cash proceeds - subs cash
what is the effect on assets and liabilities if the sub is acquired in the year
they need to be added in to the cash flow as they have been consolidated for the first time
what is the effect on assets and liabilities if the sub is acquired in the year
they need to be deducted as they have been deconsolidated for the first time
criticisms of IAS 7
Direct method of cash flow is preferred but rarely used in practice as it requires lots of additional workings
harder for users of FS to compare if people are using seperate methods
easier to hide the misclassifications in the indirect method and manipulate the cash flow
why is relevance an issue when doing FS for an SME
some standards are just not relevant such as IAS 33 - Earnings per share. SME’s dont always operate on the stock market so this is irrelevant
why is relevance an issue when doing FS for an SME
an underlying principle is that cost and effort required to prepare FS should not outweigh the benefits to users
what is the IFRS for SME’s focus on
needs of lendors and creditors
who counts for an SME
companies who do not have public accountability and do not publish general purpose financial statements
if you transition to an SME how do you apply the IFRS
retrospectively
what are the key omissions from the IFRS for SMEs
earnings per share
iterim reporting
segmental reporting
assets held for sale
difference in IFRS for SMEs and full IFRS - investment property
FV through P/L must be used - usually you can choose between FV and cost model
difference in IFRS for SMEs and full IFRS - intangible assets
revaluation is not permitted, must be held at cost - depreciation
difference in IFRS for SMEs and full IFRS - gov grants
SMEs recognise is at income straight away unless its on performance obligations, then they recognise as soonas the obligation is met.
usually grants are recognised over a period and presented as deferred income
difference in IFRS for SMEs and full IFRS - borrowing costs
SME’s cannot capitalised borrowing costs
difference in IFRS for SMEs and full IFRS - development costs
cannot be capitalised, non SME’s can when IAS 38 is met
difference in IFRS for SMEs and full IFRS - pension actuarial gains and losses
SME’s can recognise in P/L or OCI, usually you can only measure in OCI
difference in IFRS for SMEs and full IFRS - financial instruments
classified at cost, amortised cost or FV
How is revenue recognised differently for SME’s
recognised when risks and rewards are transferred, instead of when performance obligations are satisfied as per IFRS 15 revenue recognition
How is intangibles recognised differently for SME’s
all intangibles are amortised and useful life cannot exceed 10 years. impairment test is only required if its indicated.
this differs from full IFRS standards where you amortise only if theres a finite life and an impairment test is requird annually
How are separate financial statements of investors recognised differently for SME’s
investments for SMEs can be held at cost or fair value through the P/L, FV for IFRS is through OCI
3 current issues
presentation and disclosures
materiality in the context of financial reporting
management commentary
what are digital assets
crypto currency and crypto assets
hierarchy for accounting for cryptocurrency
look for IFRS standards looking at similair issues
look at the framework
look at annoucements for other GAAPs
can cryptocurrency be considered any type of financial or tangible asset
no - they dont meet the definiton of cash and they dont have any physical substance
what is the IAS most close to accounting to crypto
IAS 38 intangible assets
what is an official coin offering
is a means by which an entity raises funds through the issue of cryptoassets
accounting for ICOs
the entity receives cash from supporters of the ICO - this is recorded as an asset
if there is event after the reporting period, when do you adjust for it
if it happens between the time of the year end and the preparation of the FS
what might you need to consider for a major event
Gov grants
going concern
adjusting or non adjusting events
impairment of assets
what are the key features of the new proposal ( ED 2019/7) to replace IAS 1 Presentation of FS
Defined sub totals in P/L
Disaggregate information in a more useful way
disclose information about alternative performance measures
what does ED 2019/7 proposal suggest the P/L Categories should be
operating
integral associated and joint ventures
investing
financing
why would dis aggregation be useful
to not be able to lump large expenses together such as large balances in other expenses
what does ED 2019/7 proposal suggest for disaggregation
for operating expenses to be analysed by nature (eg depreciation or employee benefits) OR function (eg admin exps, cost of sales) but not both
for unusual income and expenses - define why it is unusual and present a single note to disclose each unusual item
it also states useful descriptions must be used and not other
what does ED 2019/7 proposal suggest for performance management measured
define the measures and measures should be disclosed in a single note
what does ED 2019/7 proposal suggest for improvements to IAS 7
Operating profit must be the starting point for cash flows from operating activities when using indirect method
requite cash flows from investments and ventures to be split between integral and non integral
remove choice for interest and dividends to go into financing or investing. the proposal states paid must be financing and received should be investing
what is the disclosure problem
too much irrelevant info
ineffective communication
not enough relevant info
new definition of materiality from IFRS Practice Statement 2
Information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions ( added obscuring)
why was IFRS Practice Statement 2 made
companies were unsure on materiality judgements, so it encourages a greater application of judgement
what two areas does materiality judgements apply to
recognition and measurement - you only need to use the recognition criteria when the effect of applying them is material
Presentation and disclosure - you don’t need to make a disclosure if its on something immaterial even if the IAS states you have to
who should disclosures focus on
for primary users - investors, lenders, creditors (existing and potential)
if you assessing materiality on a quantitative factor, what percentage would be material
5%
what is IFRS 1
First-time adoption of IFRS’s
what do you need to comply with IFRS 1
You need to adjust your prior year to IFRS’s so you can compare, any adjustments go through retained earnings
examples of alternative performance measures in which the focus on is increasing
economic value added
employee well being
environmental impact
why are financial performance measures useful
PY Comparision comparison to other companies industry averages benchmarks budgets or forecasts
what is IAS 33
Earnings per share
which two EPS figures must be disclosed
Basic EPS and diluted EPS
What is basic EPS
dividing net profit attributable to ord share holders by weighted average number of ord shares
what is dluted EPS
Adjusting net profit and weighted average number of ord shares to reflect the impact of potential shares - then calc using basic way
how should you attempt an ethics question
state the relevant standard(s) and state whether they are allowed to do this
apply the rule to the scenario
explain the ethical issues and link to fundamental principles
advantages of EBITDA ( Earnings before interest, tax, depreciation and amortisaion)
used by managers as it represents earnings of a business that management actually have control over
disadvantages of EBITDA ( Earnings before interest, tax, depreciation and amortisaion)
can be manipulated as managers can choose whats included
advantages of EVA ( Economic Value added)
maximisation of EVA will create real wealth for shareholders
disadvantages of EVA ( Economic Value added)
can encourage focus on short term performance
large number of adjustments required
advantages of APM’s (alternative performance measurements )
ehances understanding the users
gives management more freedom to tailor measures to entity
allows users to evaluate the FS through eyes of management
disadvantages of APM’s (alternative performance measurements )
terminology used is not defined
may be subject to management bias
no standards governing use of APMs
guidelines for APM’s
define APM Reconcile APM to closest IFRS Line item explain why APM is included do not present them more prominently than IFRS If you stop using one - explain why
what must non financial performance measures be
specific and measurable
4 parts of a balanced scorecard
customers - what do they value about is
internal - how can we achieve targets
innovation and learning - Can we continue to improve?
financial - value for SH’s
definition of sustainability
limiting the use of depleting resources to a level that can be replenished
definition of sustainable development
development that meets the needs to the present without compromising the ability of future generations to meet their own needs
what is sustainability reporting
an organisations practise of reporting publicly on its economic, environment and or social impacts
what are things involved in social accountability
human rights, modern slavery
what is integrated reporting
traditional financial reporting + sustainability reporting
3 fundamental concepts of IR framework ( integrated reporting)
value creation - increases, decreases or transformations in the entitys capitals
the capitals - stocks of value that are increased, decreased or transformed
the value creation process - the process by which an enity uses its capital as inputs and converts them into outputs
6 examples of the capitals
financial capitals ( loans)
manufactured capitals - man made
intellectual capital- R&D
natural capital - includes water fish etc
social and relationship capital - relationships with other entity’s and stakeholders
human capital - Management and employees
7 guiding principles that IR framework requires an organisation to demonstrate
strategic focus connectivity of info stakeholder relationships materiality conciseness reliability & completeness consistency and comparability
what is management commentary
a narrative report that relates to FS that have been prepared in accordance with IFRS can give historical explanations, entity’s prospects
what is the issue with non binding guidance on management commentary
management can give positive spin and it will be difficult to compare between company’s
when is segmental reporting required
when debt or equity instruments are sold on a public market
what is the operating segment (IFRS 8: Appendix A)
A component of an entity:
that engages in business activities from which it may earn income or expenses
whose operating results are regularly reviewed buy chief operating decision maker
for which discrete financial info is available
criterial for reportable segment
must meet operating segment rules and ANY of the below:
its revenue is 10% more of total revenue
its reported profit or loss is 10% or more of all segmental profit or loss ( whichever is greater)
its assets are 10% of more
what is the extra rule for reportable segments
if external revenue is at least 75% of revenue it must also be reported
what is IAS 34
Interim financial reporting
what are the minimum requirement of IAS 34
Condensed SOFP Condended P/L and OCI Condensed Cash flow Condensed SOCIE Selected explanatory notes
3 main factors in deciding on functional currency
currency that influences sales prices for goods and services
currency of the country whose competitive forces and regulations determine the sales price
currency that mainly influences labour, material and other costs
2 additional factors in deciding on functional currency
currency in which funds from financing activities are received
currency in which receipts from operating activities are usually retained
