Financial Statements Flashcards
What does IAS 10 cover?
- Events after the reporting period - (favourable or unfavourable),
- which happen between the end of the reporting period and the date that the financial reports get authorised for issue.
2 type of events according to IAS 10:
- Adjusting events
- Non-adjusting events
What is an adjusting event:
- There is evidence of conditions that existed at the end of the reporting period.
- the amounts reflecting the event are processed in the financial statements
- so that the fin reports are relevant and up to date.
What is a non-adjusting event:
These are indicative of conditions that arose after the reporting period.
The amounts on the financial statements are not adjusted to reflect this event.
However disclosure may be required.
When should a non-adjusting event be disclosed in the financial statements:
- if the event has happened between the end of the financial period, but before the financial reports were authorised for issue.
AND: - is of a material size, which could influence the understanding that stakeholders will have of the business
What should be included in the disclosure of a non-adjusted event:
- nature of the event
- estimate of the impact
- the financial statements need to show the end of the reporting period and the date of authorisation for issue. (Because financial reports do not include events that happened after the date of authorisation for issue.)
- who gave the authorisation
How are dividends treated under IAS10, if declared after the end of the reporting period:
- as a non-adjusting event
- no liability exists at the end of the reporting period
- must be declared in the notes
- How to account for:
IAS 10 - Adjusting event:
Settlement court case after reporting period end
DR Profit and Loss
CR Liability
Users of Financial Statements:
10x Stakeholders:
1) Shareholders
2) Suppliers
3) Customers
4) Tax authorities/government
5) Lenders
6) Competitors
7) Inventors
8) Employees
9) The public
10) Management
11) Consultants
12) Auditors
What’s included under Noncurrent Assets:
- Property, Plant and Equipment
- Intangible Assets
- Right of use Assets
- Investments
What is included under Current Assets:
- Inventories
- Trade Receivables
- Cash at Bank
- Assets held for Sale
What included on Statement of Financial Position, under Equity:
- Share Capital
- Share Premium
- Retained Earnings
What does a statement of Profit and Loss look like;
Revenue
-/- Cost of sales
= Gross Profit
+ Other Income
-/- Distribution Costs
-/- Admin expenses
= Profit from Operations
+ Investment income
-/- finance cost
= Profit before taxation
-/- Tax expense
= Profit for the year
+/- Total Comprehensive Income
= Total Comprehensive Income
Which IAS sets out what a Statements of Cashflow should look like:
IAS7: direct method is preferred (indirect method is allowed)
Summary of a Statement of Cashflow:
Cashflow from operating activities:
+ cash receipts from customers
-/- cash paid to suppliers
-/- cash paid to employees
-/- cash paid for other operating expenses
= Net cash from ops activities
Cashflow from investing act:
-/- Purchase of PPE
+ proceeds from sale PPE
-/- purchase of intangibles
-/- purchase of noncurrent asset investments
+ interest received
+ dividend received
Cashflow from financing act:
+ Proceeds from share issue
-/- payment of lease liabilities
-/- of long term debt
+ proceeds from issue of long term debt
-/- dividends paid
= Net cash used in financing act
-/+ Net increase or decrease in cash
+ cash at the beginning of the period
= cash at the end of the period
What accounting standard cover PPE
IAS16:
- costs related to the purchase and installation need to be capitalised
- costs for the day to day services are an expense
Costs to be capitalised add to the value of the asset.
What does IAS16 cover:
PPE:
- cost model OR
- Revaluation model
Cost model for PPE, under IAS16:
- the same type of noncurrent assets need to be depreciated in the same way.
2 types of depreciation:
- Straight-line depreciation:
= Percentage x carrying value - Reducing balance depreciation
= (carrying value -/- residual value) / remaining useful economic life
Fair value:
IAS16 PPE: allows assets in the same class to be revalued to their fair value
According to IFRS 13: fair value is the amount you would get for the asset if you were to sell it.
Revaluation:
The revalued asset will be depreciated over its remaining useful life.
- The asset will be showing on the SOFP at the revalued amount. (Debit difference between fair value and cost)
- Accumulated depreciation to date is removed (its a change in accounting policy) (Debit Accumulated Depreciatiln
- An increase in carrying value is recognised as a ‘revaluation surplus’ in other ‘comprehensive income’. (Credit Revaluation Surplus)
How to record a disposal of a noncurrent asset:
- Debit: Accumulated Depreciation
- Debit: Cash (to recognise proceeds from the sale
- Credit: Profit and Loss (to balance the loss or profit
- Credit Machine Loss (to remove the cost of the machine)
What accounting standard covers Impairment of Assets
IAS36
An asset is impaired when its carrying amount exceeds its recoverable amount.
This usually due to a reason why the asset can no longer be used:
- broken
- better technology available
- legal reason why you’re no longer allowed to use it etc.
How to assess if an asset is impaired:
- Compare Carrying Amount to its Recoverable Amount.
If carrying amount is higher, than we need to impair to the value of the Recoverable Amount.
What is the Recoverable Amount of an asset:
The greater of:
- Fair value less costs of disposal
OR
- Value in use
How to account for Impairment, when an asset has lost value:
- Debit Profit or Loss
- Credit Machinery/Asset
What accounting standard covers Accounting Policies, Changes in Accounting Estimates and Errors:
IAS 8
- Changes in depreciation method are mad prospectively, not retrospectively.
- Often a full year of depreciation is calculated in the year of purchase and none in the year of disposal.
Keywords around depreciation:
- straight line depreciation
- reducing balance depreciation
- Carrying value
- Residual value (only to be deducted in straight line depreciation)
IAS2:
How to record and measure inventories in the financial statements.
What are inventories, according to IAS2- 3 characteristics
They are assets:
- held for sale in the ordinary course of business
- in the process of production for such sale (WIP)
- in the form of material or supplies to be consumed in the production process or rendering of services (raw materials)
How to calculate the current inventory:
Open inventory
+ Purchases of new inventory
-/- Sales (cost of sales) of inventory
= Closing inventory
How do we measure Inventory?(IAS2)
Either:
- Total cost incurred against the product to its current location and condition (Cost)
OR
- Price at which a product is sold minus the cost of selling the item (Net Realisable Value)
Inventories are always recorded at the LOWER OF cost or NRV.
How do we measure Inventory?(IAS2)
Either:
- Total cost incurred against the product to its current location and condition (Cost)
OR
- Price at which a product is sold minus the cost of selling the item (Net Realisable Value)
Inventories are always recorded at the LOWER OF cost or NRV.
What is the Net Realisable Value of an inventory?
= Price at which a product is sold -/- the cost of selling the item (including the packaging the item)
How does the age of inventories affect how it’s valued:
Newer inventory is often more expensive.
FIFO =
First in First out.
Assuming the oldest items are first sold, which are valued at their lower cost of sales.
Assumed to be used always, under IAS2.
LIFO =
Last in First Out:
NOT allowed to be used under IAS2.
What is IFRS16 about:
Leases and their:
- recognition
- measurement
- presentation and disclosure
Lessees need to provide Relevant Information about leases in their financial statements, so transactions are Faithfully Represented.
When you have a lease, you have an Asset and a Liability.
IFRS16 is not used for all types of Leases.
When is IFRS16 NOT used:
1) Short term leases that are fewer than 12 months
2) Leases where the asset is of low value.
How to expense a lease on a straight-line basis over the ‘life of a lease’, if 1st year nonpayment, followed by 2yrs of £3000.
Spread lease of 3 years = £2000
Yr1:
DR Income statement £2000
Cr Accruals
Yr2 &3:
Dr Income statement £2000
Dr Accrual £1000
Cr Bank £3000
What is a lease contract:
The right to control the use of an asset for a period of time in exchange for consideration.
(Time could be expressed in number of uses, like mileage).
- there has to be an asset
- the lessee must have the right to obtain substantially all of the economic benefits
- the lessee must have the right to control the asset, how and what it’s used for.
What does Right to Control mean in terms of Leasing (IFRS16)
- Right to Obtain substantially all of the economic benefits from the use of asset
- Right to direct the use of the asset
Mileage for example is a limitation, but it limits the Scope of the Lease, not the Right to Control the asset.
What if a Substantive Substitution Right exists in the Lease Contract:
- In this case the Lessor has the right to Replace the Asset, because it’s economically beneficial for them.
If that’s the case the Lessee, does NOT have the right to direct the use of the asset.
In that case there is NO Lease.
Separating lease payments into components:
The lessee is allowed to separate the payment into a lease payment and the maintenance payment for example.
It is NOT mandatory thought, it’s a choice to separate the components out.
Work out the Stand Alone Selling Price, to work out what the lease amount is.
How to work out the Stand Alone Selling Price:
If:
A - Combined total = £30k
B - Contract w/out maintenance = £25k
C - Separate Maintenance contract = £10k
SASP = (B / (B+C)) x A
Non-Lease Component =
(C / (B+C)) x A
Recognising a lease under IFRS16:
A lessee recognises:
- the Right of Use Asset
- the Lease Liability
At the Commencement Date
What is the Commencement Date of a Lease:
The date the asset becomes available.
NOT the date of the contract.
How is the Right of Use Asset recognised on the SOFP:
- As an asset, and it’s depreciated over its useful life.
What is the Useful Life of a Leased Asset:
The shorter of:
- Actual useful life
Or
- Length of the Lease
How is the Rightnof Use Asset measured:
- At cost.
Cost = Lease liability + Associated direct costs
What is a Lease Liability?
A Present Obligation
Arising from Past events
Which results in a an Outflow of Economic benefits (cash)
How to measure the Lease Liability:
Present Value of future lease payments Discounted using implied interest
How to calculate the Present Value of a Lease:
(Calculating Present Value is not part of this exam.)
Use table.
Because £7000 per year is worth more in year 1, then in year 2 and 3.
Direct Costs to include in the Cost of a Lease Asset on the SOFP.
- Costs of getting asset in place
- dismantling cost
- early payment incentives
Direct Costs to include in the Cost of a Lease Asset on the SOFP.
- Costs of getting asset in place
- dismantling cost
- early payment incentives
Recognise Lease in FS:
- Credit the Lease liability - PV
- Debit the Right of Use Asset at Cost
- Set up Cost: Debit Asset; Credit Bank
- Dismantling: Debit Asset, Credit Bank
- Early Payment: Debit asset, credit bank acc.
- Incentive payment: Debit bank, Credit asset
How to treat subsequent measurement of a lease:
- Remeasure lease liability based on payments made and interest charged (amortised cost).
- Calculate depreciation to find the carrying value of the asset.
Lease liability =
(Useful life x lease payment), adjusted to Present Value based on an implied interest rate.
Value of the Right of Use Asset =
Lease Liability
+ Initial Cost
+ Dismantling Cost
+ Early payment
- Incentive payment
Depreciation =
Cost of the asset / useful life
Carrying value = Value of the current asset -/- depreciation
(NOT taking into account interest)
Lease liability =
Lease liability
Interest charge is shown as an expense in the income statement.
Lease liability is restated in SOFP at amortised cost. (This is the amount + interest and -/- Lease Payment.
How to process this:
Debit liability with the Lease payment.
Credit bank
Credit Liability to reflect the Interest
Debit Expense to the Income Statement
Initial measurement of a Lease in the SOFP:
Asset = lease liability (discounted to present value) + direct costs
Lease Liability = PV of lease payments
Subsequent measurement of Lease in SOFP:
Cost of the Right of Use asset -/- depreciation
(Using the useful life)
Lease liability = Amortised cost of LL (LL minus lease payment + interest (or vice versa - depending on payment in advance or in arrears.)
Depreciation cost is an expense on the income statement.
Right of use can be included with other non-current assets. If we do this, we have to include a note/disclosure that the lease is included there
Disclosure requirements for Leases (IFRS 16):
- Show depreciation charge
- Show interest expense
- Show cash outflow for lease payments
- asset additions
- Asset carrying value
- Maturity analysis of lease liability. (Show full schedule of lease over the useful life)
- short-term leases and leases of low-value
What is a Tangible asset according to IAS16:
Assets that are held by an entity in the production or supply of goods or services, for rental to others, or for administrative purposes and…
Are expected to be used during more than one period.
When is an asset recognised in the financial statements: (IAS16)
It is probable that any future Economic Benefits associated with the asset will flow to or from the entity; and
The asset has a cost or value that can be measured reliably.
If an entity fully assumes the Risks and Rewards of the asset, then it’s an asset on the financial statements. If not, it may be a lease for example.
If the entity Control’s the asset it needs recognition on the financial statements.
When is an asset recognised in the financial statements: (IAS16)
It is probable that any future Economic Benefits associated with the asset will flow to or from the entity; and
The asset has a cost or value that can be measured reliably.
If an entity fully assumes the Risks and Rewards of the asset, then it’s an asset on the financial statements. If not, it may be a lease for example.
If the entity Control’s the asset it needs recognition on the financial statements.
(IAS16): if you
- increase the future economic benefit or
-if you Replace a component:
- if you carry out a Significant Inspection on an asset.
You Capitalise the cost (you don’t expense it.)
IAS16: Recognition cost of an asset includes:
+ Original cost
+ Delivery costs of the machine
(Freight charges, brokerage, import duties)
+ Preparation charges incurred
(Excavation charges, installation and machinery assembly, initial set-up)
For example training costs cannot be Capitalised. (Because staff can leave.)
IAS16: How to recognise an asset produced by the entity itself.
Then it’s accounted for at cost, not the value it would be sold for.
IAS36: what to assess annually
- Tangible: only assess if there is an Indication of impairment
- Intangible assets with an indefinite life: asses annually (regardless of whether there is an impairment.)
How to identify impairment (IAS36)
External sources:
- market value has decreased
- changed to technology or to the law
- interest rates may have risen
Internal sources:
- evidence of obsolescence or damage
- changes in the way we use the asset
- poorer performance of an asset
What is the carrying value - impairment (IAS36)
The value of the asset currently shown on the statement of financial position
What is the Value in Use (IAS36):
The estimated discounted value of the future cash inflows to be derived from using the asset and its disposal.
How much is the asset worth to us?
It’s worth what we will generate with it in terms of cash in the future + disposal value.
Then discount the total.
What is the Value in Use (IAS36):
The estimated discounted value of the future cash inflows to be derived from using the asset and its disposal.
How much is the asset worth to us?
It’s worth what we will generate with it in terms of cash in the future + disposal value.
Then discount the total.
Net realisable value of an asset =
The value the asset can be sold for minus costs made to sell it or to dispose of it.
CGU =
A cash generating unit.
It’s a group of assets that together generate a separate cashflow.
For example, for Premier Inn, each hotel in itself is a CGU.
CGU =
A cash generating unit.
It’s a group of assets that together generate a separate cashflow.
For example, for Premier Inn, each hotel in itself is a CGU.
How is a CGU related to Impairment:
If it’s difficult to separate the assets, you can apply Impairment to the CGU.
How is a CGU related to Impairment:
If it’s difficult to separate the assets, you can apply Impairment to the CGU.
How to apply impairment rules to a CGU:
- Deal with impairment of any specific assets within the CGU first.
- then apply write down on Goodwill
- Followed by other assets on a pro-rata basis.
How to do a journal to reflect impairment:
PPE: Credit
Statement of P/L: Debit
Or for CGU:
Goodwill: Credit (if there is Goodwill
PPE and other assets: each Credit (pro rata)
Statement of P/L: Debit
How to do a journal to reflect impairment:
PPE: Credit
Statement of P/L: Debit
Or for CGU:
Goodwill: Credit (if there is Goodwill
PPE and other assets: each Credit (pro rata)
Statement of P/L: Debit
How to recognise impairment in the financial statements (journals) when there has been a revaluation surplus of the asset in the past:
Revaluation Surplus often shows as Other Comprehensive Income.
This needs to be debited firdt
Then debit Statement of P/L.
Credit PPE
