Financial Reporting Flashcards
Asset Held for Sale criteria
- The asset must be available for immediate sale in its present condition
- The terms of the sale must be usual and customary
- The sale must be highly probable
Asset Held for Sale measurement
lower of the fair value less costs to sell and the carrying value.
Convertible Bonds presentation IFRS
IAS 32
An entity recognizes separately the components of a financial instrument that:
(a) creates a financial liability of the entity and
(b) grants an option to the holder of the instrument to convert it into an equity instrument of the entity.
Liability = PV using the discount rate and PMT is using the market rate
Equity contributed surplus = difference between FV and PV
Revenue Recognition steps IFRS
- Identify the contract
- Identify performance obligations
- Determine transaction price
- Allocate transaction price to performance obligations
- Recognize revenue when each obligation is satisfied
Liability definition
Liabilities are obligations of an entity arising from past transactions or events, the settlement of which may result in the transfer or use of assets, provision of services or other yielding of economic benefits in the future
Liabilities do not have to be legally enforceable provided that they otherwise meet the definition of liabilities; they can be based on equitable or constructive obligations
IAS 36 Impairment of assets
An entity shall assess at the end of each reporting period whether there is any indication that an asset may be impaired.
If any such indication exists, the entity shall estimate the recoverable amount of the asset.
Recoverable amount: the higher of an asset’s or cash-generating unit’s fair value less costs of disposal and its value in use.
Classification of a liability to equity
Define Liability:
liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow of resources embodying economic benefits.
Define equity presentation
IAS 32 Financial Instruments: Presentation
one of the conditions a financial instrument needs to meet in order to be considered an equity instrument is that the instrument includes no contractual obligation to deliver cash or another financial asset to an entity.
Conclude
How to classify financial instruments IFRS 9
There are three possible classifications available:
•amortized cost if both are met:
a)the financial asset is held within a business model whose objective is to hold financial assets in order to collect contractual cash flows
(b)the terms of the financial asset give rise on specified dates to cash flows that are payments of principal and interest on the principal amount outstanding.
•fair value through other comprehensive income(FVTOCI) if both are met:
(a)the financial asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets
(b)the terms of the financial asset give rise on specified dates to cash flows that are payments of principal and interest on the principal amount outstanding
However, an entity may make an irrevocable election ti classify as FVTOCI at initial recognition if neither held for trading nor contingent consideration recognised by an acquirer in a business combination.
•fair value through profit or loss(FVTPL)
If the other two classifications do not apply.
Bond retirement IFRS 9
derecognizing financial liabilities:
The difference between the carrying amount of a financial liability extinguished or transferred to another party and the consideration paid, including any non-cash assets transferred or liabilities assumed, shall be recognised in profit or loss.
Diluted EPS
Considers earning on a per share basis that were outstanding + had the potential to be outstanding.
EPS calculation
net earnings less preferred dividends / weighted average common shares outstanding (WACSO).
Weighted average common shares outstanding
Treasury shares, which are issued but not outstanding, are not included in the calculation.
Stock splits and stock dividends are assumed to have happened at the beginning of the period.
Shares outstanding * stock split factor * fraction of the year outstanding.
if a stock dividend of 20% happens in July, shares outstanding from January to June would have an adjustment factor of 1.2, while those from July to December would have an adjustment factor of 1
Diluted EPS calculation
net earnings less preferred dividends + income effect of potential shares / weighted average common shares outstanding (WACSO) + share effect of potential shares.
Step 1: Calculate basic EPS
Step 2: Identify all potential shares
Step 3: Calculate incremental EPS for each class of potential shares
Step 4: Order the incremental EPS
Step 5: Recompute provisional EPS until diluted EPS is determined
Calculate incremental EPS for each class of potential shares
Income impact of potential shares / Share impact of potential shares
Watch for dilutive options
Income impact of potential shares: The change in after-tax net income if bonds/preferred shares were converted.
Bond Income impact = Bond carrying value × effective interest rate × (1 – tax rate)
Preferred share income impact:
- Dividends on cumulative convertible preferred shares are considered whether declared in the year or not.
- Dividends on non-cumulative convertible preferred shares are only considered if declared in the year.
Stock option and warrant income impact:
Only shares that are in the money are considered for diluted EPS and income effect is $0.
Share impact of potential shares: Number of additional shares that would be outstanding if converted.
Stock option and warrant income impact:
Difference between the number of options and the number of shares the company could buy back at market price with the proceeds.
Discussion points for EPS if the calculation is incorrect
- The financial statement disclosure will need to be updated. (accuracy and valuation of the disclosures)
- Based on the revisions, will the bonus be paid or not paid? How will this affect the financial statements?
