Financial Standards Flashcards
What are the statements required by IAS 1?
IAS 1 Presentation of Financial Statements
IAS 1 requires a full set of fin st to compromise:
SOFP
SOPL and other comprehensive income
SOCIE
SOCF
Notes to the accounts - accounting policies and explanatory notes.
What is the objective of IAS 1?
IAS 1 Presentation of Financial Statements
- to prescribe the basis for presentation of general purpose financial statements.
- to ensure comparability both with the entity’s financial statements of previous periods, and with other entities.
What is the objective of financial statements as prescribed by IAS 1?
IAS 1 Presentation of Financial Statements
- to provide information about the financial position, performance and cash flows of an entity that is useful to a wide range of users in making economic decisions, particularly investors and shareholders.
IAS 1
Presentation of financial statements
Sets out the overall requirements for financial statements including how they should be structured, minimum requirements of their content and overriding concepts such as going concern, accruals and the current/non current distinction.
What are the overall considerations that IAS 1 prescribes for the presentation and preparation of financial statements?
IAS 1 - Presentation of financial statements
Fair presentation Going concern Accruals Consistency Comparability Materiality Compliance with IFRS Offsetting
Define exceptional items in terms of financial statements.
Exceptional items are items of income and expense that are of size, nature or incidence that disclosure is necessary to explain the performance of an entity.
For example: discontinued operations
Gains or losses on disposal of NCA
IAS 1 - presentation of financial statements prescribes that exceptional items should be included in the SOPL, and the nature and amount disclosed in the notes.
What is the current/non-current distinction?
IAS 1 requires an asset or liability to be classified as current if:
It will be settled within 12 months of the reporting date
It is part of an entity’s normal reporting cycle
What does IAS 1 prescribe for disclosures?
IAS 1 - presentation of financial statements specifies the disclosure of certain items in certain ways.
Some items must appear on the face of the SOFP/SOPL and others must appear in the notes.
Recommended formats are given, which an entity may or may not follow.
IAS 16
IAS 16 - Property, plant and equipment
“Outlines the accounting treatment for most types of PPE.
PPE is initially measured at cost, subsequently using a cost or revaluation model, and depreciated so that its depreciable amount is allocated on a systematic basis over its useful life”
What is PPE?
IAS 16 - PPE
PPE are tangible assets held by an entity for more than one accounting period, for the use in the supply/production of goods and services, for rental to others, or admin purposes.
What does IAS 16 cover?
IAS 16 - PPE
IAS 16 prescribes the accounting treatment of PPE. The principal issues are recognition of the assets, determining their carrying amounts, depreciation charges and impairment losses.
The standard covers:
- mechanics of deprecation
- revaluation of NCAs
- disposals of NCAs
When should PPE be recognised as an asset?
IAS 16 - PPE
When it is probable that:
- future economic benefit associated with the asset are likely to flow to the entity
- the cost of the asset can be measured reliably
What costs should be included in the initial cost of PPE?
IAS 16 - PPE
The recognition principle (future economic benefits and measure cost reliably) is applied to all PPE costs at the time they are incurred:
- initially construct or acquire PPE
- subsequent to add, replace or service
- bringing the asset to working condition
- initial capital costs - site prep, delivery, borrowing costs, installation
Examples include:
Purchase price, import duties, stamp duty, professional fees, legislation
BUT cannot include abnormal costs such as waste!
What is the accounting entry for a purchase of a NCA?
Dr Non current assets (Cost)
Cr Bank/payable (Cost)
How should subsequent expenditure on PPE be treated?
IAS 16 - PPE
Subsequent expenditure on PPE should only be capitalised if:
It enhances the economic benefit from the asset
It relates to overhaul or major inspection
Replaces a component in a complex asset
The cost is unavoidable and asset cannot be used otherwise.
E.g. Painting a building = EXPENSED
putting in a new roof = CAPITALISED
All other expenditure that cannot be capitalised should be recognised as an expense on the SOPL, including general repairs, which should be written off immediately as revenue expenditure.
How should PPE be subsequently measured?
IAS 16 - PPE
IAS 16 permits the use of two accounting model:
Cost model - asset carried at cost less accumulated depreciation and impairment losses
Revaluation model - asset is carried at revalued amount being its fair value less accumulated depreciation and impairment losses.
What are the rules for the revaluation model?
IAS 16 - PPE permits (but doesn’t require) the use of either the cost model or revaluation model for the subsequent measurement of PPE.
Revaluation model should only be used if the entity can obtain a fair value figure.
Revaluations should be carried out regularly to ensure that the CV doesn’t differ materially from its fair/market value. Although 16 doesn’t specify timescales - it should be dependent on how volatile the market is.
If an asset is revalued, the entire class of assets should be revalued in the same way.
Once switched to revaluation model, cannot switch back.
What is the accounting entry for revaluing an asset?
If the revaluation results in a:
INCREASE - it should be credited to other comp income and accumulated in equity under the revaluation surplus.
Dr Accumulated dep. (clear out)
Dr Asset cost account (Adj to new value)
Cr Revaluation surplus. (Difference = gain!)
DECREASE - it should be recognised as an expense provided that it exceeds any amount previously credited to the revaluation surplus.
Dr. Accumulated dep. (clear out)
Dr. Expense. (Difference = loss!)
Cr. asset cost account. (Adj to new value)
Define depreciation.
Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. It is essentially spreading the cost of the asset across its useful life, during which economic benefit is expected to flow to the entity.
Depreciable amount = cost of asset - residual value
Residual value and useful life should be reviewed regularly - ie each period end - and if expectations change it should be accounted for as a change in estimate under IAS 8.
Depreciation begins when the asset is available for use and continues until the asset is de recognised, even when asset is idle.
A complex asset is made up of separate components which should be depreciated separately.
How should depreciation be accounted for?
Depreciation should be charged to the P/L as an expense.
Whichever method is chosen - straight line, reducing balance, machine hours - the accounting entries are the same:
Dr. Depreciation expense (P/L)
Cr. accumulated depreciation
What are the depreciation methods and what does IAS 16 prescribe?
The depreciation method chosen should reflect the pattern in which the asset’s economic benefits are consumed. Methods include:
- straight line - usually used for buildings
- reducing balance - used for cars, more heavily at start
- machine hours - naturally for machines.
Depreciation methods should be reviewed regularly and if the pattern of consumption changes, the method should be changed to suit as under IAS 8.
A change in method is permissible only on the grounds that the new method will give a fairer view. It does not constitute as a change in policy, rather a change in estimate.
How should revalued assets be depreciated?
Even if the asset has been revalued, still must depreciate through its useful life.
An increase in revaluation will increase the depreciation charge. Therefore the amount transferred to revaluation surplus during revaluation is used as the increase when the asset is depreciated.
Historical depreciation charge - revised depreciation charge = set off against revaluation surplus.
How are impairments treated under IAS 16?
IAS 16 - PPE
Impairments should be treated the same as a revaluation decrease and recognised as an expense.
What is ‘derecognition of a NCA’?
An asset should be removed from the SOFP when it is disposed or withdrawn from use and no further economic benefits are expected to flow from it.
A gain or loss may arise from the disposal, which is the difference between the proceeds from disposal and CV
What is the accounting treatment to dispose an asset?
To dispose of an asset, must remove the asset and associated accumulated depreciation and record the gain or loss.
- Remove the original cost from the NCA account
Dr. Disposals account (Cost)
Cr. non current asset cost account (Cost) - Remove the accumulated depreciation
Dr. Accumulated depreciation (In full)
Cr. disposals account - Record the proceeds
Dr. Cash account
Cr. disposals
The balance on the disposals account is the loss/gain on disposals, which equals:
Proceeds - CV = loss/gain
What disclosures are needed by IAS 16?
IAS 16 - PPE
Contains a number of disclosures: Measurement bases for arriving at cv Depreciation methods used Any commitments to acquisition of future PPE Methods and assumptions for revaluation
IAS 20
Accounting for government grants and disclosure of government assistance
What is the aim of IAS 20?
IAS 20 -Accounting for government grants and disclosure of government assistance
“Outline how to account for government grants and other government assistance. Government grants are recognised in profit or loss on a systematic basis over the period in which the entity recognised expenses for the related costs, for which the grants were intended to cover”
What are government grants?
IAS 20 -Accounting for government grants and disclosure of government assistance
Governments often provide money or incentives (such as premiums or subsidies) to help companies export their goods/support local employment for example. Often found in agriculture and enterprise zones.
IAS 20 applies to all government grants and assistance.
How do you account for government grants and assistance?
IAS 20 -Accounting for government grants and disclosure of government assistance
IAS 20 follows two accounting principles when accounting for government grants:
1st PRUDENCE
Where a government grant is only recognised where there is reasonable assurance that the entity will be able to comply with the grant’s conditions and that the grant is likely to be received.
2nd ACCRUALS
Where the grant is recognised over the period necessary to match costs for which the grant is intended to compensate on a systematic basis.
