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From tutorial Flashcards

1
Q

Describe the standard setting process of the IASB

A

The standard setting process of the IASB for issuing IFRSs has six stages.

  1. Setting the agenda.
  2. Planning the project.
  3. Developing and publishing the discussion paper.
  4. Developing and publishing the exposure draft (ED).
  5. Developing and publishing the standard.
  6. Procedures involving consultation and evaluation after an IFRS has been issued.
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2
Q

Identify the potential benefits of harmonized accounting standards

A

Potential benefits of a globally accepted set of accounting standards include:
 Using a principles based approach
 Greater comparability
 Reduction in the cost of financial statement preparation
 Greater mobility of staff

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3
Q

Explain going concern

A

The going concern assumption is important in that all measures of performance and financial position, and all classifications in a statement of financial position (current and non-current) implicitly assume that the entity is going to continue

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4
Q

Explain accrual basis

A

The accrual basis assumption is made in the preparation of general-purpose financial reports. Under this assumption, the effects of all transactions and other events are recognized in the accounting records when they occur, rather than when cash or its equivalent is received or paid.

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5
Q

Define ‘equity’, and explain why the Conceptual Framework does not prescribe any recognition criteria for equity.

A

The Framework defines equity as ‘the residual interest in the assets of the entity after deducting all its liabilities’.
There is no need for recognition criteria for equity as it is a residual, determined after recognition criteria are applied to the other elements.

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6
Q

What choices of measurement model exist subsequent to PPE being initially recognized?

A
  • Cost model

- Revaluation model

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7
Q

What is meant by ‘significant parts depreciation’?

A

Each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item shall be depreciated separately.

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8
Q

Explain how revaluation decreases are accounted for under the revaluation model.

A

Revaluation decrease:
 The decrease shall be recognized in profit or loss.
 But: revaluation decrease debited directly to equity under the heading of revaluation surplus to the extent of any credit balance existing in the revaluation surplus in respect of that asset

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9
Q

Explain how revaluation increases are accounted for under the revaluation model.

A

Revaluation increase:
 The increase shall be credited directly to equity under the heading of revaluation surplus.
 But: revaluation increase in P&L to the extent that it reverses a revaluation decrease of the same asset previously recognized in profit or loss

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10
Q

Discuss the importance of a theory of accounting and the link to the existing conceptual framework of the IASB.

A

Accounting theory should help in providing a frame/reference for accounting behavior
 Framework of the IASB as an attempt to provide an accounting theory
 Consistent basis
 “Universal”

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11
Q

Discuss the arguments in favor of the capitalization of borrowing costs as part of the cost of an asset.

A

Arguments in favor of capitalization are:
 No difference to other costs that do qualify for capitalization
 Accrual/matching concept
 More consistency: companies that construct their own assets vs companies that choose to buy their assets

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12
Q

Discuss the arguments against the capitalization of borrowing costs as part of the cost of an asset.

A

Arguments against capitalization are:
 Interest charging
 Inconsistency
 Difficult determination of the way an asset has been financed
 Capitalization ceases at completion of asset vs. lifetime financing cost of the asset
 More prudent

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13
Q

In what circumstances, if any, do you think that regulation should allow the non-depreciation of owned buildings?

A

If the buildings are current assets, which is quite possible, then depreciation is definitely not logical. For investment properties, we are into the general ‘fair value’ debate, about which strong, and different, views are likely to be found.

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14
Q

What is the difference between “research” and “development”?

A

Research is original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding.

Development is the application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials, devices, products, processes, systems or services before the start of commercial production or use.

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15
Q

Why is it easier to recognize intangibles that are acquired in a business combination than those that are internally generated?

A

 Reliable measurement
 Banned assets
 Research

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16
Q

What are some internal indicators of impairment?

A

 Evidence of obsolescence or physical damage
 Assets becoming idle, plans to discontinue operations, plans to dispose of assets
 Economic performance is worse than expected

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17
Q

What are some external and internal indicators of impairment?

A

 Significant decline in market value
 Significant changes in the technological, market, economic or legal environment in which the entity operates
 Increases in market interest rates
 The carrying amount of the entity’s assets exceeds the entity’s market capitalization

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18
Q

What is a cash generating unit?

A

A CGU is the smallest identifiable group of assets that generates cash inflows largely independent of the cash flows from other assets or groups of assets.

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19
Q

How are impairment losses accounted for in relation to cash generating units?

A

 Reduce the carrying amount of any goodwill allocated to the CGU
 Allocate any balance of loss to the other assets of the CGU pro rata on the basis of their carrying amounts

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20
Q

Leases are classified on the basis of ‘substance over form’. What does this criterion mean?

A

The IFRS Conceptual Framework in paragraph 35 states that ‘if information is to represent faithfully the transactions and other events that it purports to represent, it is necessary that they are accounted for and presented in accordance with their substance and economic reality and not merely their legal form. The substance of transactions or other events is not always consistent with that which is apparent from their legal or contrived form’.

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21
Q

Leases are classified on the basis of ‘substance over form’, how does it relate to the capitalization of finance leases?

A

if ‘in substance’ substantially all of the risks and rewards incident with ownership are transferred from the lessor to the lessee the arrangement is giving rise to a finance lease.

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22
Q

What are ‘minimum lease payments’?

A

Minimum lease payments = (i) Payments over the lease term
+ (ii) Guaranteed residual value
+ (iii) Bargain purchase option
- (iv) Contingent rent
- (v) Reimbursement of costs paid by the lessor

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23
Q

Explain the required classifications of cash flows under IAS 7

A

Cash flows must be classified into:

  • Cash flows from Operating activities
  • Cash flows from Investing activities
  • Cash flows from Financing activities
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24
Q

Operating activities

A

Are the principal revenue-producing activities of an entity and any other activities that do not fall within investing and financing activities.

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25
Q

Investing activities

A

Are the acquisition and disposal of long-term assets and other investments not included in cash equivalents.

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26
Q

Financing activities

A

Are activities that result in changes in the size and composition of the equity capital and borrowing of an entity.

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27
Q

What are the 6 criterion that has to be evaluated within R&D

A 
 Technical feasibility
 Intention to complete and sell
 Existence of a market
 Ability to use or sell
 Availability of resources
 Ability to measure costs reliably
(TIE-AAA)
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28
Q

What are the strong indicators for Finance lease

A

o Transfer of ownership to the lessee by the end of the lease term

o Lessee has the option to purchase the asset at a price that is expected to be sufficiently lower than the FV at the date of the option (i.e. a bargain purchase option exists)

o The lease term is for the major part of the economic life of the asset

o PV of MLPs amounts to at least substantially all of the FV of the asset

o Leased asset is of such a specialized nature that only the lessee can use it without major modifications

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29
Q

Discuss why capitalization of outlays may not provide relevant information about the intangible assets held by an entity.

A

 There is no necessary link between capitalized costs and expected future benefits
 Time gap
 Correlation gap

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30
Q

Discuss why managers may prefer to expense outlays on intangibles rather than capitalize them.

A

 Managers prefer to inflate future profits
 Investors generally consider write-offs as one-time items, of no consequence for valuation
 Immediate expensing obviates the need to provide explanations in case of failure
 Cost and benefit
 Lack of relevance of capitalized numbers
 Volatility

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31
Q

Discuss the main problem related to the current standard IAS 17 for leases

A

 Off-balance sheet accounting
 Asset/Liability missing for lessee
 Biased picture of company regarding solvency

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32
Q

Compare and contrast the impact on the reported profit and asset value for an accounting period of the first-in, first-out method and the weighted average method.

A

The key issue for discussion in this question is the relevance and reliability of financial information produced under each method.

  • FIFO values the asset at the latest price and includes the earliest purchases in inventory and thus in times of rising prices may defer losses to the next accounting period and may overstate assets.
  • Weighted average ‘smooths’ the impact of price rises across income and asset values but may mask problems with obsolescence.
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33
Q

Why is the lower of cost and net realizable value rule used in the accounting standard? Is it permissible to revalue inventory upwards? If so, when?

A

Rationale => ‘assets should not be carried in excess of amounts expected to be realized from their sale or use’.

Inventory cannot be revalued upwards unless there has been a previous write down. Under no circumstances can inventory be valued beyond its original cost.

34
Q

Revenue recognition criteria for the sale of goods

A

a) The entity has transferred to the buyer the significant risks and rewards of ownership of the goods;
b) The entity retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold;
c) The amount can be reliably estimated
d) It is probable that the economic benefits associated with the transaction will flow to the entity; and
e) The costs (to be) incurred in respect of the transaction can be measured reliably.

35
Q

Revenue recognition criteria for the rendering of services.

A

a) The amount of revenue can be measured reliably;
b) It is probable that the economic benefits associated with the transaction will flow to the entity;
c) The stage of completion of the transaction at the end of the reporting period can be measured reliably; and
d) The costs incurred for the transaction and the costs to complete the transaction can be measured reliably.

36
Q

Define a contingency

A

In plain English a contingency is an unforeseen event that may or may not happen

37
Q

contingent liability

A

=> “A possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity; or

=> A present obligation that arises from past events but is not recognised because:

i. it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation; or
ii. the amount of the obligation cannot be measured with sufficient reliability.”

38
Q

What are the characteristics of a provision?

A

The characteristics of a provision are that it is a liability where there is uncertainty as to either the timing of settlement or the amount to be settled.

39
Q

What are the recognition criteria for provisions?

A

a) an entity has a present obligation (legal or constructive) as a result of a past event;
b) it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and
c) a reliable estimate can be made of the amount of the obligation.

40
Q

At what point would a contingent liability become a provision?

A

If it becomes probable that an outflow of economic benefits will be required for an item previously dealt with as a contingent liability, a provision is recognized in the financial statements in the period in which the change in probability occurs.

41
Q

Identify three reasons why the net realizable value may be below their cost

A

 Inventories are damaged
 Inventories are wholly or partially obsolete
 Selling prices have declined below cost

42
Q

If the net realizable value is below cost, what journal entries should a company take?

A

The inventory value should be reduced by passing the following entry:
(DATE):
DR Inventory write-down
CR Inventory

43
Q

Illustrate and discuss the effects on the statement of comprehensive income and statement of financial position from using the different cost assumptions available to value closing inventory.

A

 FIFO: COGS based on lower prices, higher profit, higher inventory
 WAC: COGS based on higher prices, lower profit, lower inventory (Weighted average cost)

44
Q

The percentage-of-completion method for the valuation of construction contracts. Discuss the advantages and disadvantages of this method

A

 Smoothens the profit over the life of the contract rather than taking all profit at the end of the contract life
 Depends on reliable assessment by management of percentage complete
 Depends on a subjective judgement by management on the future outcome of the contract.

45
Q

The percentage-of-completion method for the valuation of construction contracts. Appraise whether it results in useful information for users.

A

Useful information will be provided if the percentage completion method provides relevant, reliable, understandable and comparable information to users. This is where the discussion should center.

46
Q

The IAS 18 method of revenue recognition proves that accountants are prudent. Discuss.

A

Prudence is now regarded as an overriding principle. Accountants are required to be free from bias, including any prudent bias. However, management has to take decisions on:
 What constitutes the ordinary activities of the enterprise
 Whether or not significant risks and rewards of ownership have been transferred to a buyer
 Whether the amount of revenue involved can be measured reliably, i.e. can its fair value be determined
 If it is probable that economic benefits associated with the transaction (sale) will flow to the enterprise
 Whether the costs in respect of the transaction can be reliably measured
 At what stage a particular service has reached in its delivery

47
Q

How is present value related to the concept of a liability?

A

The risks and uncertainties surrounding the events and circumstances should be taken into account in reaching the best estimate of a provision.

IAS 37 requires provisions to be discounted to present value where the effect of discounting is material (paragraph 45).

The discount rate used must be a pre-tax rate that reflects the time value of money and the risks specific to the liability.

(To avoid double-counting, where the estimates of future cash flows have been adjusted for risk then the discount rate should not also reflect the particular risk (paragraph 47). In practical terms it is often difficult to determine reliably a liability-specific discount rate.)

48
Q

What is the key characteristic of a present obligation?

A

The key characteristic of a present obligation is if the entity has no realistic alternative but to make the sacrifice of economic benefits to settle the obligation.

49
Q

What is a financial instrument?

A

A financial instrument is ‘any contract that gives rise to a financial asset of one enterprise and a financial liability or equity of another enterprise’ (IAS 32 and IAS 39).

50
Q

Describe the main risks that pertain to financial instruments.

A

The main risks include: market risk, credit risk and liquidity risk.

51
Q

What are the four categories for financial instruments and how are they accounted for?

A

 Hold-to-maturity (HTM): Amortized costs using effective interest rate
 Loans and receivables: Amortized costs using effective interest rate
 FVTPL: Changes in FV in P/L
 Available for sale: Changes in FV in OCI

52
Q

Describe the three categories of financial asset under IFRS 9. How is each category accounted for?

A

Debt instruments – measured at amortized cost if they meet the “business model” and “characteristics of the asset” tests. If they don’t meet these tests they must be measured at fair value through profit or loss (FVTPL).

Derivatives – FVTPL

Equity instruments – at FVTPL if held-for-trading. Otherwise the entity may elect to measure them at FVTPL or at fair value through equity. In the latter case all fair value movements must go to equity and no recycling to profit or loss is permitted.

53
Q

Categorize in one of the four categories specified in IAS 39: Loans receivable (holder)

A

Financial asset – Loans and receivables

54
Q

Categorize in one of the four categories specified in IAS 39: Loans payable (issuer)

A

Financial liability – Financial liability

55
Q

Categorize in one of the four categories specified in IAS 39: Ordinary shares of the issuer

A

Equity instrument of the issuer – Categorization not applicable (scoped out of IAS 39)

56
Q

Categorize in one of the four categories specified in IAS 39: Redeemable preference shares of the issuer, redeemable at any time at the option of the holder

A

Financial liability - financial liability

57
Q

Identify which of the four categories specified in IAS 39: Forward exchange contract

A

Fair value through profit or loss

58
Q

Identify which of the four categories specified in IAS 39: 5-year government bond paying interest of 5%

A

Held-to-maturity investment, measured at amortized cost.

59
Q

Identify which of the four categories specified in IAS 39: Trade accounts receivable

A

Loans and receivables, measured at amortized cost.

60
Q

Identify which of the four categories specified in IAS 39: Trade accounts payable

A

Financial liabilities, measured at amortized cost.

61
Q

Identify which of the four categories specified in IAS 39: Mandatory converting notes paying interest of 6% (the notes must convert to a variable number of ordinary shares at the expiration of their term)

A

Held-to-maturity investment, measured at amortized cost

62
Q

Identify which of the four categories specified in IAS 39: Investment in a portfolio of listed shares held for capital growth

A

Available-for-sale investment, measured at fair value with changes in fair value through equity

63
Q

Identify which of the four categories specified in IAS 39: Investment in a portfolio of listed shares held for short-term gains

A

Held-for-trading; at fair value through profit or loss

64
Q

Identify which of the four categories specified in IAS 39: Borrowings of $1 million, carrying a variable interest rate

A

Financial liability, measured at amortized cost.

65
Q

Discuss why the standard-setters first set rules on presentation and disclosure of financial instruments before tackling recognition and measurement. Do you think the earlier creation of IAS 32 assisted in the development of IAS 39?

A

Standard-setters first set rules on disclosure before tackling measurement in the hope of gaining useful information from the disclosures to assist in determining measurement rules. The disclosures would have helped to identify the types of financial instruments and associated risks in the market and so would have assisted the standard-setters in the development of IAS 39.

66
Q

Identify and discuss the main criticisms of accounting for financial instruments that emerged during the financial crisis

A

The main criticisms were:

  1. The complexity of the standards
  2. Difficulties in determining fair values in illiquid or inactive markets
  3. Delayed recognition of impairment losses
  4. Off-balance sheet entities
67
Q

Who bears the risk in a defined benefit plan?

A

The employer has an obligation to pay further contributions if the fund is unable to pay members’ benefits and hence, bears the risk.

68
Q

Who bears the risk in a defined contribution plan?

A

Employees bear the risk of low or negative returns and the employer is not directly affected by the poor performance of the fund.

69
Q

Explain what the ‘management approach’ used in IFRS 8 means.

A

The management approach means that the segment information is based on what is reported internally to the Chief Operating Decision-Maker (CODM). Whatever the CODM uses to measure and assess the operating segment is what is disclosed externally under IFRS 8. The only item that must be disclosed is “a measure” of segment result.

70
Q

What is the earnings per share ratio used for?

A

The earnings per share ratio is used to compare the after-tax profit available to ordinary shareholders of an entity on a per share basis, with that of other entities.

71
Q

Basic earnings per share

A

‘Basic’ earnings per share is a ratio of the profit (or loss) attributable to ordinary shareholders, and the weighted average number of ordinary shares outstanding during the relevant reporting period

72
Q

Diluted earnings per share

A

‘Diluted’ earnings per share is a ratio which recognizes the potential dilutive effect of the basic earnings per share ratio from the assumption that the entity’s convertible securities are converted, its warrants or options are exercised, or that its contingently issuable shares are issued.

73
Q

Where are the basic and diluted earnings per share ratios presented in a set of financial statements?

A

The basic and diluted earnings per share ratios must be presented in an entity’s statement of profit or loss and other comprehensive income (IAS 33, paragraph 66), even if the amounts are negative (IAS 33, paragraph 69).

74
Q

Classify the events below as adjusting events or non-adjusting events according to IAS 10: A lawsuit alleging damages suffered from an accident that occurred after the balance sheet date

A

Non-adjusting event

75
Q

Classify the events below as adjusting events or non-adjusting events according to IAS 10: A bankruptcy of a customer that occurs after the balance sheet date

A

Provision for bad debts

76
Q

Classify the events below as adjusting events or non-adjusting events according to IAS 10: At year-end, management has the intention to decide upon the implementation of a restructuring plan. After the balance sheet date but prior to the issuance date of the company’s financial statements, management approves and announces the plan.

A

Recognition and measurement criteria of IAS 37 were not met.

77
Q

Classify the events below as adjusting events or non-adjusting events according to IAS 10: Shortly after the balance sheet date a survey of an item of property, plant and equipment revealed significant structural problems with the asset

A

Adjusting event

78
Q

Segment disclosures are widely regarded as some of the most useful disclosures in financial statements because of the extent to which they disaggregate financial information into meaningful and often revealing groupings. Discuss this assertion by reference to the objectives of financial reporting by segments.

A

Many entities operate in different geographical areas or provide products or services that are subject to differing rates of profitability, opportunities for growth, future prospects and risks.

Disaggregation into meaningful and often revealing groupings assists users to better understand the entity’s past performance, to better assess the entity’s risks and returns, and make more informed judgements about the entity as a whole.

79
Q

Discuss the concerns raised about IFRS 8 from users when it was first introduced (instead of IAS 14)

A

Users were concerned with:

  • Lack of prescription (i.e. comparability) compared to IAS 14
  • Information disclosed externally might be reduced because of the lack of prescription as to what has to be disclosed under IFRS 8.
  • Management might manipulate the disclosed information by reporting “non-GAAP” measures that could cause the segment results to appear more favorable than if the IFRS profit were reported for each segment.
80
Q

Discuss the concerns raised about IFRS 8 from preparers when it was first introduced (instead of IAS 14)

A
  • Preparers felt that the management approach would better help them reflect to users the way they (preparers) manage the business and thus that the IFRS 8 approach would be a better reflection of the business’s performance as seen through the eyes of management.

Financial Reporting (6 decks)

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