FARI

Question 1

What are 2 fundamental qualitative characteristics of financial information?(2)

Answer 1

Relevance-capable of making a difference to users
Faithful representation-complete, neutral and free from error

Question 2

What are 4 enhancing characteristics of financial information?(4)

Answer 2

Comparability-eg keep changing valuation processes
Understandability-with reasonable knowledge of business
Timeliness
Verifiability

Question 3

Conceptual framework definition for an asset.(1)

Answer 3

A present economic resource controlled by the entity as a result of past events.

An economic resource is a right that has the potential to produce economic benefit.

Question 4

Conceptual framework definition for a Liability.(1)

Answer 4

A present obligation of an entity to transfer an economic resource as a result of past events.

Question 5

Conceptual framework definition for a Equity.(1)

Answer 5

The residual interest in assets of enterprise after deducting all of its liabilities.

Question 6

Conceptual framework definition for a Income.(1)

Answer 6

Increases in assets or decreases in liabilities that result in increase of equity, other than those relating to contributions from equity participants.

Question 7

Conceptual framework definition for a Expenses.(1)

Answer 7

Decreases in assets or increases in liabilities that result in decreases in equity, other than those relating to contributions from equity participants.

Question 8

Define recognition and the criteria.(3)

Answer 8

Recognition is when an element has been included in the financial statements.
Criteria include:
meeting definition of an element
provides useful information

Question 9

Two main measurement of financial statements?

Answer 9

Historical and current value.

Question 10

Give examples of different current value measurements.(4)

Answer 10

-Fair value-price received to sell an asset or paid to transfer a liability in an orderly transactions
-Value in use (for assets)-present value of the future cash inflows expected to be generated from an asset
-Fulfilment value (for liabilities)-present value of the future cash outflows expected to fulfil a liability
-current cost:
asset-value is based on the cost of buying an equivalent today-includes consideration amounts plus transaction costs incurred (however can be adjusted to reflect condition and age etc)
liability-for equivalent liability today minus transaction costs,

Question 11

Limitations of financial statements.(4)

Answer 11

Presentation-not streamline as diff businesses differ
Aggregation-eg opex many diff costs
Historic focus-doesnt eg account for inflation when considering costd
Non-financial information (required not present) ie not full picture

Question 12

Different exchange rates according to IAS- 21.(3)

Answer 12

Historic rate (HR): rate in place at the date the transaction takes place, sometimes referred to as the spot rate.

Closing rate (CR): rate at the reporting date.

Average rate (AR): average rate throughout the accounting period.

Question 13

Currency according to IAS 21.(2)

Answer 13

Functional currency

‘the currency of the primary economic environment in which the entity operates’ (IAS 21, para 8).

Presentation currency

‘the currency in which the financial statements are presented’ (IAS 21, para 8).

Question 14

Define monetary vs non-monetary items according to IAS 21.(2)

Answer 14

Monetary items

Assets and liabilities to be received or paid in a fixed amount of currency.

e.g. Receivables, Payables, Loans.

Non­-monetary items

Items that give no right to receive or deliver currency.

e.g. Inventory, Property, plant and equipment.

Question 15

What is a settled transaction?

Answer 15

The exchange rate is likely to change between the date of the initial transaction and the date it is settled (i.e. the date that cash is received or paid).

This will result in a foreign exchange gain or loss which must be recorded in the statement of profit or loss.

Question 16

Where are exchange rates recognised in the P+L?

Answer 16

For transactions you will encounter in FAR, exchange differences are recognised on the statement of profit or loss. Where they appear depends on the type of transaction.

If the exchange difference relates to trading transactions, it is included within operating income / operating expenses.
If the exchange difference relates to non-­trading transactions, it is included within interest income / finance costs.

Question 17

Define an intangible assets.(1)

Answer 17

An identifiable non-monetary asset without physical substance.
Must be able to be sold/identifiable separately.
4 criteria;
-it is identifiable – it was bought and can be sold
-it is controlled by the entity
-economic benefits are expected to flow –which it will sell to generate revenue
-the cost can be measured reliably

Question 18

IAS 38 guidance on brands, masteads, publishing titles, customer lists and similar items…

Answer 18

IAS 38 paragraphs 63 and 64 state that, internally generated brands, mastheads, publishing titles, customer lists and items similar in substance shall not be recognised as intangible assets. This is because they cannot be distinguished from the cost of developing the business as a whole.

The exception to this is R&D (research and development costs)

Question 19

Separate acquisition- (ie externally generated intangibles).(3)

Answer 19

We could simply purchase an intangible asset as a stand-alone transaction.

Examples of intangible assets that could be acquired externally are:

brands
publishing titles
airport landing slots
patents and copyrights
computer software.
When an entity purchases an intangible asset, you would:

initially measure at cost
include all directly attributable costs (such as testing, professional fees).

Question 20

Give an example of internally generated intangibles

Answer 20

Research and development costs (treat as asset over expense).

Question 21

How are research costs treat?

Answer 21

General research costs that are too far away from a specific product cannot conclusively show later economic benefit and therefore are treat as a revenue expense being debited in exp and credit cash.

Question 22

How are development costs treat?

Answer 22

Development costs is the application of research or other findings for a particular products and therefore must be capitalised where the project meets all of the following criteria:

completion is technically feasible
intention is to complete the project
asset can be used or sold
asset will generate economic benefits
adequate resources are available to complete the project
expenditure can be measured reliably.

BUT only from date ALL criteria are satisfied must cost must be capitalised (and cant capitalise retrospectively).

Question 23

Measurement of intangibles.(2)

Answer 23

Initially measured at cost plus any additionals

IAS 16 PPE method: Cost-accm amortisation
Revaluation model: is not always an option as an active market needs to exist: eg items are homogenous with buyers and prices readily available
problem-many intangibles are typically unique therefore cannot be an active market but therefore revaluation model is usually available

Question 24

AC treatment for assets with finite lives.(3)

Answer 24

An intangible asset has a finite useful life when there is a clear limit to the period over which the asset is expected to generate net cash inflows for the entity.

Amortisation should apply over the useful life of the asset (starting when it is available for use or generating benefit) and it should reflect the pattern of use of the asset.

Often the straight-line basis is appropriate, but you could use a method based on the units of production.

Question 25

AC treatment for assets with indefinite lives.(3)

Answer 25

An intangible asset has an indefinite useful life when there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the entity.

In this case the asset should not (indeed cannot) be amortised. Instead it should be tested for impairment annually, with any impairment reducing the asset value and being charged to the statement of profit or loss.

The useful life should also be reviewed annually to confirm that it is still indefinite.

Question 26

What are the 2 main differences between IFRS and UK GAAP.(2)

Answer 26

development costs-If the criteria are met, IAS 38 requires all eligible development costs to be capitalised.Under FRS 102, an entity gets the choice of whether or not to capitalise development costs.
Useful lives-Under IFRS Standards intangible assets can have an indefinite life.
FRS 102 treats all intangible assets as having a finite useful life with a rebuttable presumption that this should not exceed ten years.

Question 27

Which IAS relates to provisions, contingent liabilities and contingent assets?

Answer 27

IAS 37

This could relate to either:

an asset, such as when we have sued a supplier and are expecting to receive some compensation, or
a liability, for example, where we expect to spend money repairing goods sold with warranti

note provisions are unwound up until payment date eg if think it will be paid in two years at pretax 10% discount you would start with lessa nd essentially increase (almost interest) until at the end of 2 years you get the total 4m expected.

Question 28

Define a provision under IAS 37.(1)

Answer 28

A present obligation (legal or constructive eg. past)
probable economic outflow- liability of uncertain timing or amount

Question 29

A company who has a brand built around being green and has this in FS has used a mine but plans to ditch the plan in 8 years there is no legal obligation to clean the site and isnt likely to be in the next 8 years, should they provide for this?

Answer 29

need to establish obligation in this case YES- it is a constructive obligation based on past events of the companies reputation as a green company therefore a provision should be recognised for cleaning costs.

Question 30

Expected disposal of asset.(1)

Answer 30

Gains and losses from the expected future disposal of assets should not be considered when creating provisions, as there is no present obligation. They arise in the future.

Question 31

Future operating losses.(1)

Answer 31

A provision must never be made for future operating losses. This is because the losses can be avoided by changing or closing the business.

Question 32

Onerous contracts.(2)

Answer 32

IAS 37 Provisions, Contingent Liabilities and Contingent Assets defines an onerous contract as ‘a contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it’ (IAS 37, para 68).

A provision for the cost should be recognised as an expense in the statement of profit or loss in the period when the contract becomes onerous. In subsequent periods, this provision will be reduced by the payments made.

Do take the time to refer to IAS 37 within your Open Book Text. It’s important to become familiar with the definition of an onerous contract.

Remember that unavoidable costs are classed as the lower of the cost of fulfilling the contract and any compensation or penalties arising from failure to fulfil it.

Question 33

Provision for restructuring.(3)

Answer 33

IAS 37 Provisions, Contingent Liabilities and Contingent Assets defines restructuring as ‘a programme that is planned and controlled by management, and materially changes either:

the scope of a business undertaken by an entity or
the manner in which that business is conducted’ (IAS 37, para 10).
A provision for restructuring may only be made if:

a detailed, formal and approved plan exists and
the plan has been announced to those affected (generally employees).
The provision should:

include direct expenditure arising from restructuring
exclude costs associated with ongoing activities.
Do also learn how to navigate your way to the restructuring area of IAS 37 within your Open Book Text. Learning your way around the book can save you valuable time in the exam.

Question 34

Dismantling/decommissioning and restoration costs.(1)

Answer 34

Add provision to initial value of a PPE which ties into IAS 16 through depn but also recognise liability and unwinding of discount.

Question 35

3 criteria for recognising a provision.(3)

Answer 35

-a present obligation as a result of a past event
-probable outflow of economic benefits
-a reliable estimate can be made.

Question 36

Disclosure of provisions.(3)

Answer 36

For each class of provision, an entity should disclose:

-opening and closing balance and movements during the year
-a brief description of the nature of the obligation and the expected timing of any resulting outflows,
-including
an indication of the uncertainties about the amount and timing of outflows.

Question 37

Key points to remember for reimbursements.(3)

Answer 37

the asset and liability must be disclosed separately on the statement of financial position
SPL amounts may be netted off
the amount of the asset may not exceed the amount of the provision.

Question 38

4 types of probability for potential liability determination.

Answer 38

The correct treatment often depends on whether the probability of the economic outflow is:

virtually certain-
probable-
possible-
remote-

Question 39

Accounting treatment for uncertain liabilities depends on probability, detail how for each.(4)

Answer 39

For virtually certain and probable we provide
for possible we disclose (or if unreliable amount)
and remote we ignore.

Question 40

Red plc are involved with a lawsuit valued at 80k which is ongoing at YE, their legal team has said it is unlikely they will need you to pay.

Explain with reason how Red plc should treat the case in their financial statements.(1)

Answer 40

Red plc provision is still ongoing therefore it is possible the case could materialise into an obligation to provide economic outflow of the 80k fee. However, given expert legal team have informed it is unlikely this is not a probable outcome. Therefore the 80k should be disclosed in the statements but does not need provided for.

NO-clarification will need sought from legal team to determine if remote or possible.
Note if in exam assess possible options if not clear in info provided.

Question 41

Accounting treatment for uncertain assets depends on probability, detail how for each.(4)

Answer 41

recognise virtually certain liability, disclose probable and ignore for possible or remote

This is higher for assets to stop companies overstating assets.

Question 42

Basics ltd are suing a supplier for breaking a contract and their legal professionals are virtually certain they will win the case after a length court case.

How should Basics Ltd account for this?(1)

Answer 42

Basics Ltd are virtually certain and therefore this should be recognised in the financial statements.

Question 43

Define revenue under IFRS 15.(1)

Answer 43

Revenue is defined as ‘income arising in the course of an entity’s ordinary activities’. (IFRS 15, Appendix A)

‘The core principle of this Standard is that an entity shall recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services’

Question 44

5 Step revenue recognition process.(5)

Answer 44

1) Identify the contract
2) Identify the performance obligation/s
3) Determine transaction price
4) Allocate transaction price
5) Recognise revenue

Remember: Revenue is recognised ‘when (or as) the entity satisfies a performance obligation by transferring a promised good or service to a customer

Therefore if a customer buys a computer with tech support this creates 2 obligations with different treatments: Control over the computer has been passed to the customer so the full revenue of £300 should be recognised on 1 December 20X1.

The technical support is provided over time, so revenue from this should be recognised over time. In the year ended 31 December 20X1, revenue of £10 (1/12 × £120) should be recognised from the provision of technical support.

Question 45

An entity can only account for revenue from a contract if it meets the following criteria: (4)

Answer 45

-the parties have approved the contract and each party’s rights can be identified
-payment terms can be identified
-the contract has commercial substance
-it is probable that the selling entity will receive consideration.

Question 46

An entity must also decide if the nature of a performance obligation is: (2)

Answer 46

to provide the specified goods or services itself (ie: it is the principal), or
to arrange for another party to provide the goods or service (ie: it is an agent).
If an entity is an agent, then revenue is recognised based only on the fee or commission to which it is entitled rather than the full amount-this also applies to COS eg if 2m for 20% commission sale you would only recognise the 400k and no 1.6m should be placed in revneue or COS
Similarly avertised as free products still have revenue as typically a marketing ploy.

Question 47

How should warranties be treated?(2)

Answer 47

IAS 37 for those which guarantee an item will continue working as promised
However, treat as a seperate performance obligation under IFRS 15 if it is an extra additional service provided to the customer.
Extension warranty purchases also fall under IFRS 15

Question 48

When determining the transaction price, the effects of all of the following should be considered…(3)

Answer 48

-variable consideration
-the existence of a significant financing component in the contract-eg is it technically an unwound loan over years (in which case you recognise less revenue initally and then finance income each year for % discount)
-non-cash consideration.

Question 49

Variable consideration.(1)

Answer 49

Variable consideration within a contract can be for things such as a bonus or penalty amount. An entity must estimate the amount which it will expect to receive in accordance with IFRS 15.

The estimate can only be included in the transaction price if it is:

highly probable
that a significant reversal (in revenue amounts) will not occur.

Question 50

non-cash consideration.(1)

Answer 50

Always remember that any non-cash consideration (for example other assets, products or shares) is measured at fair value at the date of transfer. If fair value cannot be determined, the stand-alone selling price of the goods / services should be used.

Question 51

The main disclosure requirement of IFRS 15 Revenue from contracts with customers is:

Answer 51

revenue from contracts with customers disclosed separately from other sources of revenue.

Question 52

Which FSLI does IAS 2 relate to?

Answer 52

Inventory

Question 53

Main disclosure requirements of IAS 2.(5)

Answer 53

-the accounting policy which has been adopted (including the cost formula used)
-the total carrying amount included (classified appropriately)
-the amount of inventories that have been carried at NRV
-the amount of inventories that are recognised as an expense during the period
-the details of any circumstances that may have led to the write­down of inventories to their NRV.

Question 54

Net realisable value.(1)

Answer 54

the estimated selling price in the ordinary course of business, less costs required to complete and sell the item.

Question 55

When non-current assets are revalued the amount of the revaluation gain is taken to a revaluation reserve.

Which accounting concept is this an example of?

Answer 55

Feedback:
Option one is the correct answer because the gain, being unrealised, should not be recognised in the statement of profit or loss until the asset is sold or fully depreciated.

Available Answers
Prudence (1 Mark)

Question 56

An enterprise should not prepare its financial statements on a going concern basis if:

It has net current liabilities.

The company currently has no available cash to repay loans that fall due in six months.

The management determines after the reporting date that it has no realistic alternative to ceasing trading.

The company is forecasting making losses for the next three years.

Answer 56

Feedback:
As explained in IAS10 paragraph 14.

Available Answers
The management determines after the reporting date that it has no realistic alternative to ceasing trading. (1 Mark)

Question 57

The plant and machinery of Crawley Ltd were shown at a carrying amount of £350,000 at 31st March 20X4.

The comparative figure at 31st March 20X5 was £425,000. During the year to 31st March 20X5, property with a carrying amount of £45,000 was sold at a profit of £4,000. The depreciation charge for plant and machinery was £52,000. At 31st March 20X5 a £20,000 creditor existed in relation to the purchase of plant and equipment during the year.

What figure should be shown for the purchase of property, plant and equipment in Crawley Ltd’s statement of cash flow for the year ended 31st March 20X5?

Answer 57

Total additions = 172,000 less 20,000 creditor (cash not yet paid) = 152,000

Available Answers
£152,000 (1 Mark)

Question 58

Haggarty Ltd entered into a contract for the provision of services over a two year period. The total contract price was £250,000, and Haggarty Ltd expected to earn a profit of £40,000 on the contract itself. In the first year, costs of £77,700 were incurred, and 40% of the work was completed. The directors of Haggarty Ltd did not expect the progress of the contract to be so slow. At the year end they were unsure of the outcome of the contract, however, they strongly believed they would be able to recover the costs of the contract incurred so far.

What revenue should be recognised for the first year of the contract?

Answer 58

Feedback:
The correct answer is the second option.

If the outcome of a services transaction cannot be reliably estimated, then the only revenue that can be recognised is the extent that expenses incurred are recoverable from the customer.

Available Answers
£77,700 (1 Mark)

Question 59

On 1 October 20X8, Wakeham Ltd entered into a £15 million contract for the supply of computer software and five years of after-sales support. The cost of providing after-sales support is estimated at £1.5 million per annum, and the mark-up on similar after-sales only contracts is 30% on cost.

In accordance with IFRS 15, how much revenue should be included in Mansfield Ltd’s statement of profit or loss for the year ended 30 September 20X9 in respect of the above contract?

Answer 59

Feedback:
Per IFRS 15, when making sales that include a number of years’ servicing and a sale of goods, the revenue should be split between those elements. The sale of goods can be recognised immediately and the service revenue should be deferred over the service term. In this case, the service revenue would amount to £9,750,000 (£1,500,000 x 5 x 1.3) (note the x 1.3 is to ensure we include the 30% mark up) and would be released at £1,950,000 pa. The goods are therefore deemed to have been sold for £5,250,000 (£15million - 9,750,000). Overall the revenue recognised in the year is £7,200,000 (1,950,000 + 5,250,000).

Available Answers
£7.2 million (1 Mark)

Question 60

Difference between capital and revenue grants.(2)

Answer 60

Capital-‘Government grants whose primary condition is that an entity qualifying for them should purchase, construct or otherwise acquire long-term assets.’ (IAS 20, para 3), e.g. money towards a machine.
Revenue-‘Government grants other than those related to assets.’ (IAS 20, para 3), e.g. money towards wages.

May only be recognised if:
the entity will comply with the conditions of the grant and
the entity will receive the grant.

Question 61

Government assistance

Answer 61

ISA 120 says no reliable way to classify so no recognition but disclosure must be made in financial statements