ICT 2020 Flashcards
What criteria does IFRS 5 Non-Current Assets Held for Sale and Discontinued Operations state have to be met for a non-current asset to be presented as held for sale?
1) Asset must be available for immediate sale.
2) The sale must be highly probable
3) Management are committed to a plan to sell
4) There must be an active plan to locate a buyer
5) The marketed sale price must be reasonable in relation to its current fair value
6) The sale is expected to take place within one year
7) It is unlikely that significant changes will be made to the plan, or the plan will be withdrawn
IAS 38 Intangible assets states that assets development expenditure which meets the criteria to be recognised as an intangible asset must be capitalised.
List 4 of the criteria that have to be met for capitalisation to take place
1) Technically feasible to complete the asset so that it is available for use or sale
2) Intention to complete the asset and use or sell it
3) Ability to use or sell the asset
4) Probability that the asset will generate future economic benefits. Either the existence of a market for its outputs, or if used internally, its usefulness to the business
5) Resources are available (e.g. technical and financial) to complete and use or sell the asset.
6) The expenditure attributable to the asset can be measured reliably during the development stage.
How does the IASB Framework define the fundamental qualitative characteristic of ‘faithful presentation’?
To be a perfectly faithful representation a depiction would have 3 characteristics.
It would be complete, neutral and free from material error.
What are the criteria set out in the IASB Framework for the recognition of a liability?
A present obligation of the entity arising from past event where the settlement is expected to result in an outflow of economic of economic benefits from the entity
- Probable that there will be an outflow of economic resource
- From the settlement of a present obligation.
- Which can be measured reliably
Merengue plc has classified £10 million of Property, plant and equipment as non-currentassets held for sale, in accordance with IFRS 5 Non-Current Assets Held for Sale and Discontinued Operations.
Explain to the Managing Director where this should be presented in the Statement of financial position, and give reasons why this treatment would be correct.
- It should be presented within current assets.
- It should be sold within a year to meet the criteria of being a non-current asset held for sale, therefore is a current asset. The future economic benefit is from sale rather than from its use
Benefits of establishing the risk management and internal control systems:
1) Operate efficiently & effectively
2) Respond appropriately to risks
3) Safeguard assets from inappropriate use, loss or fraud
4) Ensure liabilities are identified & managed
5) Ensure the quality of internal and external reporting
6) Ensure compliance with applicable laws and regulations & internal policies
Principles addressed when determining executive director remuneration policy and practices
1) Clarity
2) Simplicity
3) Risk (e.g., reputational and behavioural risks are identified and mitigated)
4) Predictability
5) Proportionality (Outcomes should not reward poor performance)
6) Alignment to culture
Factors to consider for director’s independence
- Employee of the company with last 5 years
- Material business relationship in last 3 years
- Receives additional remuneration apart from a director fee
- Close family ties
- Holds cross directorships
- Represents a significant shareholders
- Has served on the board for more than 9 years
Good Practise in corporate governance
1) Risk Management and reduction
2) Ethical and sustainable behaviour with regard to business strategy
3) Transparency & Openness
4) Intergrity&Profitability
5) Accountability
6) Reducing the potential for conflict
7) Reconciling the interests of shareholders & directors as far as possible
Symptoms of poor corporate governance
1) Domination of the board by a single individual or group
2) No involvement by the board e.g meeting irregularly
3) Inadequate control function
4) Lack of supervision of employee
5) Lack of independent scrutiny by external or internal auditors
6) Lack of contact with shareholders
7) Emphasis on short term profitability
8) Misleading financial statements and information
Depreciating Property, Plant and Equipment separately
Example
Salsa plc prepares financial statements to 31 December 2019. On 1 January 2019 Salsa held Plant and Equipment of £800,000 with accumulated depreciation of £250,000.On 31 June 2019 Salsa plc sold an asset for £20,000 which had originally cost £100,000 on 1 January 2017. On 1 July 2019 a replacement asset was acquired at a cost of £200,000.
It is Salsa’s plc’s policy to depreciate plant and equipment at a rate of 20%. Depreciation is straight line and charged on a time apportioned basis.Calculate the carrying value for plant and equipment as at 31 December 2019 that would be reported in the financial statements
-Full year assets 800-100 = 700 X 20% = 140,000 -Disposed asset £100,000 X 20% X 6/12 = 10,000 -Additions 200,000 X 20% X 6/12 = 20,000 -Total Depn charge for the year = 170,000
Write off of disposed plant
Cost 100,000
Accumulated depn 2.50 years depn
50,000
Cost @ 1/1/19 800,000
Disposals @ cost(100,000)
Additions @ cost 200,000
Cost @ 31/12/19 900,000
Depn @ 1/1/19 250,000 Depn on disposed (50,000) Depn charge 170,000 Depn @ 31/12/19 370,000 NBV= £900,000- £370,000 = £530,000
Revenue from contracts with customers (Lecture 7)
Total Revenue (Contract Price) = £416,000 Costs incurred to date = £320,000 Costs to complete = £40,000 Work certified to date = £312,000 Payment received = £250,000
Determine amount due from/to customer
1) Determine Total contract revenue, costs and profit or loss
Revenue = £416,000
Total Costs = £40,000 + £320,000 = £360,000
Profit/(Loss) = £56,000
2)Determine the stage of completion to date
Work Certified/Total Contract Price
£312,000 / £416,000 = 75% ( Not applicable if Loss above)
3)Calculate the profit, sales revenue and costs of sales for the period
Profit = £56,000 x 75% = £42,000
Sales = £312,000
COS = £270,000
4) Calculate the amount due from/to customers
Costs incurred to date = £320,000
Plus profit to date = £42,000
Less Loss
Less Payment Recieved ( If not given use work certified) = (£250,000)
= £112,00 Asset, Amount due from customer
* If negative then liability, amount due to customer
Re draft the Statement of profit or loss to present the discontinued operation in compliance with the requirements of IFRS 5 Non-Current Assets Held for Sale and Discontinued Operations?
Minus Sales, Cost of Sales, Expenses accordingly. Keep taxation the same, in the following order
Revenue Cost of sales Gross Profit Selling and admin expenses Profit before taxation Taxation Profit for the year of continuing operations Loss on discontinued operations (Sales-COS-etc) Profit for the year
Impairment exists if/Recoverable amount
Example:
T Ltd owns a car that was involved in an accident at the year end. It is barely usable so its value in use is estimated about £2000. However the car is a classic and there is a market for its parts. This results in a net realisable value of £6000. The opening carrying value was £16,000 and the car was estimated to have a life of eight years from the start of the year.
Calculate the recoverable amount
Impairment exists when carrying value>recoverable amount. Basically a fall of an asset
-Recoverable amount is the HIGHER of an assets fair value minus costs to sell (NRV) and its value in use
-Except in relation to Goodwill (acquired in a business combination) & an intangible asset with an indefinite useful life which must be tested annually for impairme
Recoverable amount is the higher of fair value = £6000
and Value in use = £2000.
Therefore £6000
Carrying value at the start of year = £16,000
Depreciation = £16,000/8 = £2000
Carrying value at the end of year = £14,000
Recoverable amount = £6000
Impairment = £8000
Indications of Impairment
Internal and External
External:
- Market value declines
- Negative changes in technology, markets, economy
- Increase in market interest rates
- Company share price is below book value
Internal:
- Obsolescence or physical damage
- Asset is part of a restructuring or held for sale disposal
- Worse economic performance then expected
