Core Activity D - Measure performance Flashcards
Accounting treatment, performance risk, business model risk, interpreting FS, Improving performance FS
What is IAS 24 and it’s purpose?
IAS 24, Related Party Disclosures.
The scope extends to related party relationships & related party transaction’s.
Its purpose is to alert users of the financial statements to relationships with, and transactions between, related parties, that could impact the financial statements. Ie non arms length type transactions.
Describe the application of IAS 12 ?
Prescribes the accounting treatment for income taxes.
Pre tax profit + depreciation - less Capital allowances = Taxable profits
Booked by Journaling Provision for Corporation Tax
Dr Corporation Tax (Expense)
Cr Provision for CT (Liability)
If the provision at year end is different to the Tax return figure, an under or over provision (Adjustment) can be journaled in the current FY.
Also describes the treatment for deferred tax assets and liabilities
What is IAS 33?
Financial reporting standards for Earnings Per Share.
EPS is mandatory for publicly listed companies, those not listed but wishing to report EPS also follow IAS 33.
Ordinary EPS
(Profit After Tax - irredeemable preference share dividends)/ ordinary shares outstanding
Diluted EPS
Profit after tax + notional extra earnings / basic ordinary shares + notional extra shares
Extra notional earnings = impact on earnings due to interest payment savings less tax owed on additional profits
Share options calculated via treasury share method
For Groups
Net profit attributable to the group / number of ordinary shares of the parent
What is IFRS 15 ? And the 5 step process?
- Identify the contract with the customer.
- Identify the performance obligations in the contract.
- Determine the transaction price.
- Allocate the transaction price to the performance obligation.
- Recognise revenue when or as the performance obligation is met.
What’s the 3 criteria for recognising a provision ?
IAS 37 Provisions, contingent liability and assets states that 3 criteria must be met in order to satisfy that we recognise the provision.
Is there a present (legal or constructive) obligation?
Is it probable that the outflow will occur?
A reliable estimate can be made of the amount ?
If not, but it’s possible, a contingent liability may need to be disclosed
Describe IFRS 16 and how it should be applied?
Lease accounting for lessors
New rules on balance sheet!? must understand
Classification of the lease as
A) Finance Lease
B) Operating Lease
Determining factor for classification is whether the lease transfers substantially all of the risk & rewards of owning the underlying asset.
IFRS 9 & 32
Financial instruments
Under what criteria allows items to be recognised an internally generate Intangible asset ?
IAS 38 - identifiable non monetary asset without physical substance
Purchase / developed criteria
Purchased criteria
Defined as an asset
- controlled by an entity as a result of past events
- from which future economic benefits are expected to flow to the entity
- It must be probable that the expected future economic benefits attributable to the asset will flow to the entity
- and the cost of the asset can be measured reliably.
Developed criteria
Profitable
Intention to use or sell
Resources available
Ability to use or sell
Technically feasible
Expenditure can be reliable measured
Explain the Integrated Reporting Framework & 6 capitals
- Financial capital
- Manufactured capital
- Intellectual capital
- Human capital
- Social and relationship capital
- Natural capital
Describe the application of IAS 12 with reference to deferred Tax?
Temporary differences occur when the Accounting treatment differers to the Tax treatment of Assets.
Asset depreciation of 15k less a Capital allowance of 25k results in a temporary difference between the carrying book value & carrying tax base value. 10k* Tax rate .19 = $1900 Deferred Tax.
Describe the application of revaluations in accordance with IAS 16
Dr Fixed Asset Account
Cr Other comprehensive income (revaluation surplus)
Describe the application of IFRS 2 ?
IFRS 2 share based payments
Describe the application of IFRS 3?
IFRS 3, Business combinations
What’s the definition of an accrual ?
An accrual is a liability to pay for goods or services that have been received, but not yet been invoiced or paid.
What’s the definition of a provision?
As defined by IAS 37 - a provision is a liability of uncertain timing or amount.
Whats the recognition criteria for How and When provisions accounted for ?
IAS 37
- There’s a present obligation (legal or constructive) as a result of a past event
- It is probable that it will be paid ie over 50%
- The amount can be estimated reliably
Describe the general accounting treatment & steps for provisions, contingent liabilities & contingent assets.
IAS 37 defines a provision as a liability of uncertain timing or amount.
Provision - recognised in financial statements when three criteria are met
Present obligation (legal or constructive)
Probable that there will be future transfer
Measure reliable
Contingent Liability - disclosed in notes when the outcome is possible, but not probable (Likely).
Contingent Asset - disclosed in notes when the outcome is probable (almost certain)
Which contracts does IFRS 15 not apply to ?
- Lease contracts within the scope of IFRS 16. Transfer of an asset (not a good or service)
- Insurance contracts within the scope of IFRS 17, insurance contracts.
- Contracts within the scope of IFRS 9, financial instruments.
- Contracts for certain non monetary exchanges.
For Lessors, describe the accounting treatment for an operating lease in accordance with IFRS 16?
For an operating lease, the accounting treatment reflects a rental agreement, with the lessor recognising the lease payments as income over the lease term.
New IFRS 16 rules state that the NPV of the rental payments must be shown on the balance sheet.
For Lessors, describe the account treatment for an finance lease in accordance with IFRS 16?
For a finance lease, the accounting treatment reflects there having been a sale, with the lessor de recognising the leased asset, and recognising a finance lease receivable, equal to the net investment in the lease (Gross investment discounted using the interest rate implicit in the lease).
The lessor recognises finance income over the lease term, increasing the balance of the lease receivable for finance income, and reducing the balance of the lease receivable as payments are received.
How should foreign currency be accounted for ?
Foreign currency transactions should be translated into functional currency and are governed by (IAS 21)
Any Foreign currency gains or losses should be treated as items of other operating income or expense.
What is the accounting standard and following steps to take when considering to recognise an internally generated intangible asset?
IAS 38 -
Research costs are written off to the P&L
Development costs can be recognised at costs as intangible non current asset if
Profitable
Intention to use or sell
Resources available
Ability to use or sell
Technically feasible
Expenditure can be reliable measured
Cannot recognise internally generated goodwill
Describe Issues that could arise from calculating Goodwill at acquisition?
Fair value issues
Assets
Property - many components, replacement cost, asset lifecycle / price per m2
Fixtures and fittings
Contents
Intangible assets - student app ? Pv of all future cost savings
Inventory - furniture?
Liabilities
External loans - PV calculation
Could be leases ?
What accounting standard might flathall use to improve its statement of financial position?
Revaluation method governed by IAS 16 Property, plant and equipment.
This will increase the carrying amount of land and buildings and create a revaluation surplus.
It’s affect will be to increase the NAV and reduce gearing.
It will also increase depreciation potentially
When is Flathalls year end ?
August
What is Goodwill?
Goodwill is the difference between the price paid for the company and the fair value of the subsidiaries net assets. Or total value or equity
How would you calculate goodwill?
Consideration transferred
Non-Controlling Interest
Total value of subsidiary at acquisition
Less
Fair value of the net assets (Total Equity)
Share Capital
Share premium
Retained earnings
Revaluation surplus
= Goodwill at acquisition
What is the correct accounting treatment of goodwill?
Intangible, non-current asset
Consolidated statement of financial position
Indefinite useful life
No amortisation
Subject to annual impairment review
What issues could arise when calculating goodwill?
Method chosen for calculating the NCI
But mostly, valuation methods in relation to the fair value of net assets due to difficulties when calculating fixed assets and intangibles… NPV of leases etc.. is there an open market?
Market price of similar properties, comparison of price per square meter
How is IFRS 3 related to Goodwill?
IFRS 3 business combinations governs that there are 2 options for calculating the NCI
Fair value method (listed company?)
Proportionate share of net assets (private company?)
How does IAS36 relate to Goodwill?
IAS 36 governs the application of accounting treatment for the impairment of Assets
How do you calculate an impairment loss?
Required when the carrying amount exceeds the recoverable amount
Higher of
Fair value less disposal costs (recoverable amount)
Value in use (PV of future cash flows)
what’s the definition of risk ?
‘Something that can be anticipated and quantified and can be pre-empted by management action’
‘The potential that future outcomes may be different to what we anticipated or planned’
what are the 2 types of risk outcomes ?
Upside risk (positive)
Downside risk (negative)
what is the formula for risk ?
Risk = Impact x probability
What tools can be used to understand the impact of certain risks?
Sensitivity analysis (individual variables)
Standard deviation & coefficient of variation
Scenario planning
What’s the definition of uncertainty?
A situation where lack of data or understanding means that it’s not possible to make any reliable assessment of impact or probability
Natural disaster
War
Pandemic
Global recession
what tools or models can be used to help mitigate Risk & Uncertainty?
SWOT (SW internal/ OT external)
PESTEL
what if analysis / scenario planning (best case/ worst case/ likely case)
Maximax
Maximin
Minimax regret
Tara
Risk register
What factors increase uncertainty?
Dynamism (rate of change)
Complexity (Number of factors affecting outcome)
What are examples of intangible assets ?
- Computer software
IP - licences
- patents
- trademarks
- films
- music catalogue rights
- copyrights
Not goodwill as accounted for under IFRS 3 business combinations
What is a patent?
A patent is a type of intellectual property that gives the holder the legal right to exclude others from using, making or selling a specific invention over time and are an important element in encouraging innovation.
What is a trademark ?
A trademark is a type of intellectual property that allows the holder the protection of its brand / logo.
What risks are there in the context of digital business models?
Strategic - Goals not met, change of direction required
Operational - Achieve objectives
Privacy - personal data breach
Regulatory - building regs
Data leakage
Cyber
Technology - tech failure
Third party data sharing
Interdependence - systems reliant on each other, one breaks all break
What are the broad main categories for business risk and can these be related to Flathall?
Strategic
Operational
Compliance
Product
Reputation
How do you conduct an impairment review ?
Via a goodwill test - does the carrying amount exceed the recoverable amount of the asset ? (Fair value less disposal costs) or value in use (NPV)
Goodwill is allocated to cash generating units to determine this test. Ie each subsidiary
How would a foreign currency journal look accounting for a gain or loss?
On invoice date
Debit accounts receivable
Credit revenue
On payment date
Debit cash received
Debit P&L (Fx gain/loss)
Credit acounts receivable
What are the steps involved when assessing goodwill impairment?
Date
Carrying amount
Recoverable amount / fair value
Goodwill impairment is required when the carrying amount on the books exceeds the recoverable amount
What are the types of business risk?
Strategic - plan not working
Product risk
Operational risk
Reputational risk
Compliance risk
Describe IAS 21
Determines the companies functional currency is the currency of its primary economic environment.
Primary economic environment is where it mostly generates and spends its cash.
Justified judgement, rather than definitive conclusion
What does IFRS 3 business combination state about contingent liability of the subsidiary’s impact on the parents statement of financial position at the date of acquisition?
A contingent liability is recognized in a business combination if it meets the definition of a liability and if it can be measured reliably. A contingent liability that is a present obligation arising from past events is recognized as a liability by the group whether or not it is probable that an outflow of economic benefits will take place, but only if it can be measured reliably.
once settles a post acquisition adjustment can be journaled
Describe IFRS 13
Fair value - fair value represents the value of the asset on the date and is often based on external market considerations if applicable
Describe IFRS 13
Fair value - fair value represents the value of the asset on the date and is often based on external market considerations if applicable
What are the criteria required to define control as set out by ifrs 10?
Investor demonstrates control over the investee when it has all of the following traits
Ability to direct relevant activities (‘direct’ on the board .. eg appointing senior management, impact investment decisions, funding structure)
Has exposure, or rights to, variable returns (substantive voting rights requiring professional judgment)
Ability to use its power to affect returns (if the shares are owned via a management company or intermediary, there is no practical ability that the investor can use the power to affect returns)
What types of change exist in the ‘Types of change model’?
Adaption
Evolution
Reconstruction
Revolution
What types of change exist in the ‘Types of change model’?
Adaption
Evolution
Reconstruction
Revolution
