FAR Flashcards
What are the 2 fundamental principles ?
Relevance and faithful representation
What are the 4 enhancing characteristics?
Comparability
Verifiability
Timeliness
Understandability
What are the elements of FS?
Assets
Liabilities
Equity
Income
Expenses
What must be met for the recognition of an element?
Must meet the requirements for an element
Must be relevant and faithfully represented
What is the conceptual framework for financial reporting?
A document that explains the principles behind the financial statements. It helps to facilitate the consistent and logical formulation of IFRS standards. Also provides a basis for use of judgement in resolving accounting issues.
It is not a standard.
What is historical cost?
The consideration paid to acquire or create an asset when it was purchased including any transaction costs.
What is fair value?
Price that would be received to sell and asset in an orderly transaction in the open market at the measurement date.
What is the value in use?
Present value of the cash flows or other economic benefits an entity expects to derive from the use of an asset and its ultimate disposal
What is current cost?
The cost of an equivalent asset at the measurement date
What are the 5 fundamental principles for ICAEW
Integrity
Objectivity
Competence and due care
Confidentiality
Professional behaviour
What are the 5 threats?
Self interest
Self review
Advocacy
Familiarity
Intimidation
What are some examples of safeguards to the threats to the fundamental principles?
Entry requirements
CPD
Professional Standards
Ethics programmes (workplace)
Internal controls
Leadership
When are changes in accounting policies allowed? (Relates to IAS 8)
Only allowed if:
Required by an IFRS Accounting Standard
Results in the financial statements providing more relevant or reliable information (RARE)
How to account for changes in accounting policy in line with IAS 8?
Account for retrospectively - adjust previous years as if the new accounting policy had been in place.
How to account for prior period errors?
Account for retrospectively - go back and change and ‘restate’
How to account for changes in developments in accounting estimates?
Account for prospectively - no requirement to retrospectively review
What does IAS 1 relate to?
The presentation of financial statements
How to account for underprovision of the expected tax liability in the following year?
Increase next years tax charge in tbe PL
How to account for over provision in the estimated tax liability?
Decrease the tax charge in the following year
What does IFRS 5 relate to?
Non current assets held for sale and discontinued operations
What is a discontinued operation?
A component of an entity that has either been disclosed or is classified as held for sale and:
- represents a separate major line of business or geographical area of operations
- is part of a single coordinated plan to dispose of a separate line of business
- is a subsidiary acquired exclusively with the view to resale
What must a discontinued operation be to be classified as a discontinued operation?
Have been disposed of
Be held for sale
What rules apply to foreign currency items in the SOFP subsequent to year end?
a) restate foreign currency monetary items using the closing rate
b) do not restate non monetary items that are measured at historical cost - these should be translated using the exchange rate at the date of the transaction instead of closing rate.
c) restate non monetary items measured at fair value using the exchange rate at the date that the fair value was measured.
Where is an exchange difference recognised?
On monetary items: in the P/L
What should happen where a gain or loss is recognised in other comprehensive income?
Any exchange differences should also be recognised in OCI
What 2 models for measuring PPE are set out by IAS 16?
Cost model
Revaluation model
What is the cost model?
Where an item of PPE is carried at cost less accumulated depreciation and impairment losses
What is the revaluation model?
An item of PPE is carried at the revalued amount being fair value less accumulated depreciation and impairment losses
How to account for an increase in value on revaluation?
1) Increase (debit) original asset cost to fair value.
2) remove the accumulated depreciation to date (debit)
3) credit revaluation surplus within other comprehensive income and equity
How to account for a decrease in value (downward revaluation) on a lab asset that has not been previously revalued upwards?
DR P/L Expense
CR PPE (carrying amount)
How to account for a decrease in value which reverses a previous increase?
The deficit should be;
a) recognised in OCI to the extent of any remaining reval surplus on the same asset
b) the excess (balancing figure) is expensed in the PL
How to account for an increase in value which reverses a previous decrease?
The surplus should be recorded in profit and loss to the extent of the previous decrease.
Any excess is recognised in OCI / Revaluation Surplus. The credit to OCI / Revaluation Surplus should be the amount as if the previous downward revaluation had never taken place.
What is the formula for the transfer between reserves?
Amount of transfer = annual depreciation charge now LESS old depreciation prior to revaluation
What is the double entry for recording a transfer between reserves?
DEBIT Revaluation Surplus
CREDIT Retained Earnings
Show transfer in SOCIE
Which assets must be tested for impairment annuallly?
An intangible that has an indefinite useful life
Goodwill acquired in a business combination
What is the recoverable amount of an asset?
The HIGHER of:
Fair value less costs to sell
The value in use of the asset
How to account for impairment on an asset that has been depreciated at historic cost?
The impairment loss is charged to the P/L
Dr PL Expense
Cr NCA Cost
How to account for impairment on an asset that has previously been revalued upwards?
Impairment loss is first charged to OCI to the extent to which there is a revaluation surplus to clear this to 0 for this asset.
Any further impairment is incurred as an expense to the PL
What are the 3 criteria for capitalisation?
It incurs expenditures for the asset.
It incurs borrowing costs.
It undertakes activities that are necessary to prepare the asset for its intended use.
When should an entity cease capitalising borrowing costs?
When substantively all activities necessary to get the asset ready for its intended use or sale are complete.
What should the entity disclose in relation to borrowing costs?
The costs which have been capitalised in the current period
The capitalisation rate used to determine the amount of borrowing costs
How to account for the derecognition of PPE when the asset has been held at depreciated cost?
1) Remove asset from SOFP -
CR Asset Cost
DR Accumulated Depreciation
2) Recognise the Cash -
DR Cash (proceeds)
3) Balancing Figure Gain / Loss
DR/CR Gain / Loss in disposal (P/L)
What is the double entry to realise the income from the disposal of an asset that has previously been revalued?
Same as normal de recognition however any remaining balance in revaluation surplus must be transferred to retained earnings:
Dr Revaluation Surplus (clear to 0)
Cr Retained Earnings
When should an item be classified as held for sale?
If an asset is available for immediate sale in its current condition
If the sale if an asset is highly probable.
What are the indicators for a highly probable sale?
Management commitment to sell the asset - discussed in board meeting
Active programme to locate a buyer - employed an agent.
Marketing for sale at a price that is reasonable.
Expectation for the sale to take place within a year from date of classification.
No likelihood of significant changes to the plan.
Conditions for an intangible asset to be recognised?
Should be identifiable and under the control of the entity
What makes an asset identifiable?
Separable (capable of being disposed of individually)
Arises from contractual or other legal rights
When can recognition of an asset only occur under IAS 38?
Probable that the future economic benefits associated with the item will flow from the entity
Item has a cost or value that can be measured with reliability
What costs should be included in the costs of asset?
Purchase price
Any directly attributable costs
Examples of directly attributable costs?
Employee costs
Legal and professional fees
Costs of testing
What expenditure should not be included in the costs of an intangible asset?
Advertising and promotion costs
Cost of conducting business in a new location
Admin and overhead costs
Staff training costs
What intangibles cannot be recognised?
Internally generated goodwill, brands, customer lists etc
As their cost cannot be reliably measured
EXCEPT FOR R&D costs
Costs during which phase of research and development should be capitalised?
Development phase - capitalise
Research phase - expensed
What are the 6 criteria for capitalising costs in the development phase of an asset?
- technical feasibility of completing the asset (working prototype)
- intention to complete asset for use and sale
- ability to use or sell the intangible (demand?)
- how the intangible will generate probable future economic benefits
- availability of technical, financial and other resources
- ability to reliably measure the expenditure attributable to the intangible during development.
How are intangibles measured after development?
Cost
Or
Revaluation (RARE)
Borrowing costs - FRS 102 vs IAS 23?
Under FRS 102 - entities can choose whether to capitalise borrowing costs or expense them
Under IAS 23 - capitalisation is required.
IFRS 5 - Assets held for sale:
Comparison to UK?
There is no equivalent concept in the UK - gain or loss is only recognised when the disposal is made.
Intangible assets - FRS 102 vs IAS 38?
FRS 102 -
capitalisation is optional
No UEL should be > 10 years
No disclosure of CAs required
IAS 38 -
Requires capitalisation where criteria are met.
Annual impairments reviews for assets with indefinite UEL.
How to measure the cost of an ROUA?
Initial measurement of cost:
PVFLP
+ payments made at commencement date
- incentives received
+ initial direct costs
+ costs of dismantling, removing and restoring site
= cost of ROUA
Double entry for depreciating ROUA?
Dr Depreciation (SPL)
Cr ROUA accum deprec (SOFP)
What must an ROUA be depreciated over?
Useful life of the asset IF ownership transfers at the end of the lease term or purchase options are available
IF THERE US NO TRANSFER OF OWNERSHIP or purchase option - the shorter of the lease term and useful life of the asset should be used
What leases are exempt from recognition?
Short term leases - 12m or less
Low value leases - tablets, phones, office furniture
Accounting treatment for leases?
Lease payments are recognised as an expense to the PL on a straight line basis over the leases life
Formula to measure ROUA?
Carrying amount of PPE x (PVFLP / FV)
How to calculate the gain or loss that relates to the rights transferred to the buyer on a sale and leaseback agreement?
- Calculate gain = fair value (proceeds) less carrying amount
- Calculate the gain that relates to the rights retained:
Gain x (PVFLP / Fair value) - Gain relating to rights transferred is the balancing figure expensed in the PL
How to account for sale and leaseback if the sale does not meet the conditions to apply IFRS 15?
Seller must continue to recognise the transferred asset.
The transfer proceeds are treated as a financial liability accounted for in accordance with IFRS 9.
This transaction is more in the nature of a secured loan.
FRS 102 vs IFRS 16 - Leases?
FRS 102 makes a distinction between finance leases and operating leases - not required in IFRS 16.
When can a government grant be recognised?
The entity will comply with any conditions attached to the grant
Entity will actually receive the grant
What is the netting off method in regards to accounting for gov grants?
The grant is netted off against the carrying amount of the asset to which it relates.
Grant is recognised in profit and loss over the life of the depreciable asset in the form of a reduced depreciation charge.
Which method of accounting for grants related to assets is banned in the UK?
The netting off method
How can grants related to income be presented?
This can be presented in 2 ways:
A credit in the PL
A deduction from the related expense.
What are the 5 steps for recognising revenue in line with IFRS 15?
Identify a Contract
Identify performance obligations
Determine transaction price
Allocate transaction price to performance obligations
Recognise revenue when the performance obligation is satisfied.
How to allocate performance obligations?
Identify the components of the package which could be sold separately.
Measure and recognise each component as if it had been sold separately
What are indicators of satisfactions of performance obligations at a point in time?
Entity has a present right to payment for the asset.
Customer has legal title to the asset
Entity has transferred physical possession of the asset.
Customer has significant risks and rewards of ownership
Customer has accepted the asset.
When is an entity classed as an agent?
Entity is an agent if its performance obligation is to arrange for the provision of goods or services by another entity
- can only recognise revenue for the fee or commission to which it is entitled.
What criteria must be met for the satisfaction of a performance obligation over time?
Customer simultaneously received and consumes the benefits as the entity performs
or
Entity performance creates or enhances an asset which is controlled by the customer
or
Entity’s performance does not create an asset with an alternative use and the entity has an enforceable right to payment
What outputs can be used to determine % completion for revenue recognition?
Surveys of performance completed to date.
Appraisals of results achieved
Time elapsed
Units produced
Units delivered
What inputs can be measured and used as an indicator of completion?
Resources consumed
Labour hours expended
Costs incurred
Time elapsed
Machine hours used
What are the 2 elements of revenue receivable when an extended period of interest free credit is offered?
Fair value of the goods on date of sale (cash selling price)
Financing income
What are the 3 forms available when there is sale and repurchase?
1) an obligation to repurchase (a forward contract)
2) a right to repurchase (a call option)
3) an obligation to repurchase at customers request (a put option)
What are the 3 forms available when there is sale and repurchase?
1) an obligation to repurchase (a forward contract)
2) a right to repurchase (a call option)
3) an obligation to repurchase at customers request (a put option)
What should an entity recognise with a sale with a right of return?
The entity should recognise:
Revenue for the transferred products (that are not expected to be returned)
A refund liability
An asset in respect of the right to the products to be returned
Under consignment sales, when can the original seller recognise the sale?
When the owners buyer sells the assets onto the third party
What amounts should be disclosed in relation to revenue?
Revenue recognised from contracts with customers, disclosed separately from other sources of revenue.
Any impairment losses recognised on any receivables or contracts arising disclosed separately.
Opening and closing balances of receivables, contract assets, and contract liabilities
Revenue recognised in the period relating to performance obligations satisfied in the previous period
What should inventories be recognised at?
Lower of cost and NRV
What are the methods for accounting for the cost of inventory?
FIFO
Weighted Average Cost
Examples of fixed overheads which should be allocated to inventory units based on normal levels of production?
Abnormal losses
Storage costs
Admin overheads
Selling costs
What is the retail method for the measurement of cost?
Total selling price of inventories, deduct overall profit margin
Differences between FRS 102 and IFRS 15?
FRS 102 does not apply the 5 step approach of transfer of control like in IFRS 15
FRS 102 includes a definition for turnover as well as one for revenue
Differences between FRS 102 and IAS 2?
FRS 102 required inventories held for distribution at no or nominal consideration to be measured at adjusted cost. IAS 2 does not require this.
Under FRS 102 impairment losses on inventory can be reversed if circumstances which led to the impairment no longer exist or if economic circumstances change - no guidance on this in IAS 2.
What is a financial asset?
Cash
An equity instrument of another entity
A contractual right to cash or the exchange of financial assets
What is a financial liability?
A contractual obligation:
To deliver cash or another financial asset
To exchange financial assets or financial liabilities with another entity
What is an equity instrument?
A contract that evidences a residual interest in assets of an entity after deducting all liabilities
What is a derivative?
Value changes in response to an underlying variable
Requires little or no initial investment
Is settled at a future date.
How should a financial instrument be recognised and measured?
Recognise when the entity becomes party to the contractual provisions of the instrument
Measure at fair value, transaction costs are added for assets and deducted for liabilities
How to calculate amortised cost?
Amortised cost is:
Initial amount recognised for financial asset
+ amortisation
- less repayments of principle sun
What factors should taken into account in determining fair value under IFRS 15?
Asset or liability being measured
Principal or most advantageous market
Highest and best use of item
Assumptions that market participants would use in valuing the item
What are the 3 levels of inputs under IFRS 13?
Level 1 - quoted prices in active markets for identical items.
Level 2 - inputs other than quoted prices that are directly observable.
Level 3 - unobservable inputs
How should financial instruments be classified?
According to their substance rather than their legal form
What is a compound financial instrument?
A financial instrument which has characteristics of both debt and equity.
What are the most common example of compound financial instruments?
Convertible bonds
What happens if the compound financial instrument is converted?
If converted at end of the term. The carrying amount of financial liability should be reclassified as part of equity with the original equity remaining as part of equity.
What happens if the compound financial instrument is redeemed?
Redeemed (paid out in cash): the original equity remains in equity and is not transferred out.
What are treasury shares?
Treasury shares at equity instruments reacquired and held by the entity which issued them
Eg. Company buying back their own shares.
Treasury shares should be shown as a deduction from equity at an amount equal to the consideration paid to reacquire them.
What are the requirements of IFRS 7 : financial instruments?
Entity should disclose categories of financial instruments of the entity
Disclosures should indicate the nature and extent of risks arising from financial instruments
How the entity manages those risks
What is credit risk?
The risk that one party to a financial instrument will causes a financial loss for the other party by failing to discharge an obligation
What is liquidity risk?
Risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities
What is market risk?
The risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market places
What does the conceptual framework identify a liability as?
A present obligation to transfer an economic resource
A result of past events
An economic resource is a right that has the potential to produce economic benefits
What is a provision?
A liability of uncertain timing or amount.
What are the 3 criteria which must be met in order to recognise a provision?
Existence of a present obligation
Probable outflows
Reliable measure
What are the 2 types of present obligations?
Legal obligation
Constructive obligation
What is a legal obligation?
Derives from a contract, legislation or operation of law
What is a constructive obligation?
Derives from an entity’s actions where past practice, published policies or specific statements have created expectations that they will discharge the responsibilities
What is an onerous contract?
A contract in which the unavoidable costs of meeting the obligations s made under the contract exceed the economic benefits expected to be received under it.
When would a constructive obligation exist with restructuring within a business?
A detailed formal plan
Raised a valid expectation in those affected that it will carry out the restructuring by starting to implement it or announcing its main features.
What expenditures should be included in a provision?
Direct expenditures which are necessarily entailed by the restructuring
Not associated with ongoing activities
What does IAS 37 require disclosures of relating to provisions?
Carrying amounts at the beginning and end of the period
Movements during the period
What is a contingent liability?
A possible obligation that arises from past events that is uncertain
Do not recognise but do disclose.
What is a contingent asset?
Is a possible asset that arises from past events and whose existence will be confirmed only by the occurrence of one or more uncertain future events
How to calculate basic earnings per share?
Profit / Loss attributable to ordinary equity holders of parent / weighted average number of shares
How to calculate weighted average number of shares?
1) the number of shares in issue at the start of the year, time apportioned for the period before the new share issue,
PLUS
2) the number of shares in issue after the new share issue, time apportioned for the period after the date of issue
How to calculate the EPS using the alternative method (wording)?
1) no of shares in issue at start of the year
PLUS
2) number of shares issues in new market issue time apportioned for period after date of issue
How to calculate EPS alternative method (numerical formula)?
Profit/loss attributable to ordinary shareholders / number of shares issued at start of year + (x/12 * no of shares issued)
When can the alternative method for calculating EPS be used?
Can only be used if the only shares issued in the year are issued at full market value.
How to calculate EPS where there has only been an issue of bonus shares in the year?
Profit/loss attributable to ordinary shareholders / number of shares at start of year + number of bonus shares issued
What is the calculation for EPS where there is both a market issue and a bonus issue of shares?
Profit attributable to ordinary shares /
no. shares at start of year + (x/12 number of MV shares issued) + number of bonus shares issued
What is a rights issue?
An issue of shares for cash to the existing shareholders in proportion to their current shareholdings
At a discount to the current market price
How to calculate the rights fraction?
Pre rights issue price of shares / theoretical ex rights price (TERP)
How to calculate the TERP?
Total value of shares after rights issue / total number of shares after rights issue
When is complains with IAS 33 mandatory?
Separate financial statements for entities whose ordinary shares are publicly traded
Consolidated financial statements for groups whose parent has shares similarly traded / being issued
What are distributable profits?
The amount that can be distributed to shareholders of a private company as the dividend is calculated
How to calculate distributable profits?
Accumulated realised profits less accumulated realised losses
What are distributable profits reduced by in public companies?
Reduced by the excess of the unrealised losses over unrealised profits
What are undistributable reserves?
Share premium
Net realised profits
Any other reserve specified by law
What are examples of relates parties of an entity?
A person of control, group control, significant influence or is key management personnel (including close family members of above)
Members of same group of companies
An associate or joint venture of the entity
Two entities that are joint ventures of a third party
Entity that is a joint venture of a third party
What are examples of relates parties of an entity?
A person of control, group control, significant influence or is key management personnel (including close family members of above)
Members of same group of companies
An associate or joint venture of the entity
Two entities that are joint ventures of a third party
Entity that is a joint venture of a third party
What are NOT examples of related parties?
Two entities that have a common director
Joint ventures
Providers of finance
Public utilities
Government
Large customers / suppliers
What are NOT examples of related parties?
Two entities that have a common director
Joint ventures
Providers of finance
Public utilities
Government
Large customers / suppliers
What does IAS 24 require disclosures of for related parties?
Name of the entities parent and the ultimate controlling party
Any transactions disclosed in nature, amount, provisions, any bad and doubtful debts amounts.
Key management personnel compensation
What are examples of adjusting events?
Events that provide extra evidence of conditions that already exist at the end of the reporting period.
Eg: settlement of a court case, customer bankruptcy, entity no longer going concern
What are examples of non adjusting events?
Events that are indicative of conditions arising after the end of the reporting period
Examples: MV of investments falls, catastrophes, discontinuance after p/e, dividends
How to calculate goodwill?
Consideration transferred (investment in sub at cost in parents SOFP)
+
Non controlling interest at acquisition
-
Net assets of subsidiary at acquisition
What is non controlling interest?
The equity in a subsidiary not attributable to the patent
How to calculate the non controlling interest?
NCI at acquisition date (NCI % * net assets at acquisition)
+
Share of post acquisition reserves. NCI % * S post acq reserve)
What is partial goodwill method?
Proportionate share:
NCI @ acquisition at the proportionate share of the fair value of the net assets
Goodwill calculated and allocated to the parent only
All impairment losses allocated to the RE of the parent
What is the full goodwill method?
NCI at acquisition at the fair value (Joe much it would cost parent to buy remaining share)
Goodwill allocated to parent and the NCI
Impairment losses to be shared between parents and NCI
What are examples of intra group balances?
One Group company’s loans, debentures, or redeemable preference shares
Intra-group trading
Dividends from subsidiary to parent
What are examples of intra group balances?
One Group company’s loans, debentures, or redeemable preference shares
Intra-group trading
Dividends from subsidiary to parent
How to deal with goods still sorted in inventory at year end after purchase from another group company?
The profit will be overstated due to unrealised profits.
These must be eliminated on consolidation. This is achieved by creating a provision for unrealised profit (PURP)
How must assets be shown on consolidation?
Consolidated SOFP must show assets at their cost to the group, and any depreciation charges must be based on that cost.
What are the 3 fair value adjustments to net assets?
Adjustments to carrying amounts of assets and liabilities recognised by the subsidiary
Adjustments to eliminate goodwill in the subsidiary financial statements
Adjustments to recognise items that the subsidiary has not recognised it’s its separate financial statements
How should consideration be measured?
Measured at fair value at the date of exchange (date of acquisition)
What are the forms of consideration?
Cash
Quoted equity instruments
Deferred consideration ie deferred cash and shares
Contingent consideration ie contingent cash and contingent shares
How to account for associate losses?
Deduct the group share of the loss to arrive at the investment in associate until the carrying amount of the investment in the associate has been reduced to zero.
No further losses should be recognised by the group beyond this point
How to account for mid year acquisitions?
Only the profits since the acquisition dates should be shown in the statement of profit and loss.
The entity statement of profit and loss for the subsidiary should be time apportioned
What disclosures are required for cash flows?
The components of cash and cash equivalents
Reconciliation showing the amounts in the statement of cash flows
