Key Flashcards
Environmental liabilities or decommissioning costs (2 and effect)
- Environmental liability: If entity is obliged, legally or constructively to carry out restorative work or rectify environmental damage then a provision is recognised
-
Decommissioning cost: often relate to non-current assets e.g. power stations.
Added to cost of non-current asset as follows:
Construction contracts – question approach to calculate financial statement figures
4 steps?
- Calculate expected contract outcome = contract price - total costs
- Calculate profit or loss = percentage completion = (costs incurred to date/total costs) x Revenue - Costs to date = profit
- Calculate work in progress (contract asset = costs to date + profit/ - loss recognised - amounts invoiced)
- Calculate amount receivable = amounts billed to date - amounts receivable
Contingent liabilities (7)
Should be disclosed when one or more requirements for a provision are not met (3)
Treatment (3)
A contingent liability should be disclosed when one or more of the requirements for a provision are not met:
- A possible obligation exists, and/or
- An outflow of economic benefits is not probable, and/or
- The amount cannot be measured with sufficient reliability
- Not to be recognised in Statement of Financial Position - Only to be disclosed unless possibility of transfer is remote - Disclosure to include nature of contingency uncertainties expected to affect final outcome estimate of (potential) financial effect
Revaluation model (3)
What is fair value?
Why do revaluations need to be performed regularly? (2)
If an asset is revalued…?
3 steps
Revalued amount: fair value
- The amount for which an asset could be exchanged between knowledgeable and willing parties in an arm’s length transaction.
Revaluations need to be performed regularly:
- To ensure validity
- Depends on movement in fair values
If an asset is revalued, the entire related class of assets must be revalued
- Restate asset at revalued amount
- Remove accumulated depreciation on the asset
- Credit the revaluation reserve
Asset cost
What are directly attributable costs according to IAS16 (5)
Directly attributable costs (IAS 16):
- Site preparation
- Delivery and handling costs
- Installation costs
- Professional fees
- Commissioning costs
Extra
- Self-constructed assets
- Subsequent expenditure
In any given scenario, work through the list of costs to determine which can be capitalised
Recognition test
A liability is recognised in the SOFP when:(2)
What if it doesn’t
- It is probable that an outflow of resources embodying economic benefits will result from the settlement of a present obligation; and
- The amount at which the settlement will take place can be measured reliably
Non-recognition: Liabilities that pass definition test but fail recognition test
Recognition of PPE
The cost of an item of property, plant and equipment shall be recognised as an asset if, and only if: (2)
a. It is probable that future economic benefits associated with the item will flow to the entity;
and
b. The cost of the item can be measured reliably
Distribution costs (6)
Includes:
- salaries etc. of marketing/distribution staff
- Sales commission
- (Distribution) vehicle running costs & carriage outwards
- Depreciation of Non-current assets (NCA) used by distribution operations
- Losses on the disposal of NCA used by distribution operations
- Advertising & selling activities
Investment ratio’s - their formulas and use? (5)
Capital Gearing
Divident Cover
Interest Cover
Earnings per Share
Price Earnings Ratio
Capital Gearing
- (𝑳𝒐𝒏𝒈 𝒕𝒆𝒓𝒎 𝒍𝒐𝒂𝒏𝒔)/(𝑪𝒂𝒑𝒊𝒕𝒂𝒍 𝒆𝒎𝒑𝒍𝒐𝒚𝒆𝒅)
- Gearing or leverage is relationship between fixed interest capital (debt) and total capital (debt and equity).
- Measure of financial risk
Dividend Cover
- (𝑷𝒓𝒐𝒇𝒊𝒕 𝒂𝒇𝒕𝒆𝒓 𝒕𝒂𝒙)/(𝑬𝒒𝒖𝒊𝒕𝒚 𝒅𝒊𝒗𝒊𝒅𝒆𝒏𝒅)
- Measure of ability of company to pay current dividend
Interest Cover
- (𝑶𝒑𝒆𝒓𝒂𝒕𝒊𝒏𝒈 𝑷𝒓𝒐𝒇𝒊𝒕)/(𝑰𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝒄𝒐𝒔𝒕)
- Measure of ability of company to pay current interest
Earnings per share
- (𝑷𝒓𝒐𝒇𝒊𝒕 𝒂𝒇𝒕𝒆𝒓 𝒕𝒂𝒙)/(𝑵𝒐. 𝒐𝒇 𝒆𝒒𝒖𝒊𝒕𝒚 𝒔𝒉𝒂𝒓𝒆𝒔)
- Useful for shareholders to evaluate performance over time
Price Earnings Ratio
- (𝑴𝒂𝒓𝒌𝒆𝒕 𝒑𝒓𝒊𝒄𝒆 𝒐𝒇 𝒔𝒉𝒂𝒓𝒆)/𝑬𝑷𝑺
- Reflects risk – effectively number of years taken to cover the cost of buying a share
Performance ratios - their formulas and use? (5)
Gross Profit
Operating profit margin
Return on Capital Employed
Asset turnover
Non current asset turnover
Gross profit
- (𝑮𝒓𝒐𝒔𝒔 𝒑𝒓𝒐𝒇𝒊𝒕)/𝑹𝒆𝒗𝒆𝒏𝒖𝒆 x 100%
- Effectively shows the percentage of revenue that’s generated from the main trade of the organisation.
Very industry specific.
Operating profit margin
- (𝑶𝒑𝒆𝒓𝒂𝒕𝒊𝒏𝒈 𝒑𝒓𝒐𝒇𝒊𝒕)/𝑹𝒆𝒗𝒆𝒏𝒖𝒆 x 100%
- Shows a measure of profit that is generated per £1 of revenue that can contribute towards tax and finance costs. Very industry specific.
Return on capital employed (‘ROCE’)
- (𝑷𝒓𝒐𝒇𝒊𝒕 𝒃𝒆𝒇𝒐𝒓𝒆 𝒕𝒂𝒙 𝒂𝒏𝒅 𝒊𝒏𝒕𝒆𝒓𝒆𝒔𝒕)/(𝑻𝒐𝒕𝒂𝒍 𝒂𝒔𝒔𝒆𝒕𝒔 𝒍𝒆𝒔𝒔 𝒄𝒖𝒓𝒓𝒆𝒏𝒕 𝒍𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔)
=
- (𝑶𝒑𝒆𝒓𝒂𝒕𝒊𝒏𝒈 𝒑𝒓𝒐𝒇𝒊𝒕)/(𝑪𝒂𝒑𝒊𝒕𝒂𝒍 𝒆𝒎𝒑𝒍𝒐𝒚𝒆𝒅) x 100%
- Indicates how efficiently and effectively a company has utilised its assets during a period in generating profit
Asset turnover
- 𝑹𝒆𝒗𝒆𝒏𝒖𝒆/(𝑪𝒂𝒑𝒊𝒕𝒂𝒍 𝒆𝒎𝒑𝒍𝒐𝒚𝒆𝒅)
- Expressed as a number of times per annum
- Effectively shows the sales revenue generated for every £1 of capital employed.
- Measure of the level of activity and productivity.
Non current asset turnover
- 𝑹𝒆𝒗𝒆𝒏𝒖𝒆/(𝑵𝒐𝒏 𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑨𝒔𝒔𝒆𝒕𝒔)
- Expressed as a number of times per annum
- Effectively shows the sales revenue generated for every £1 of non current asset.
- Measure of the level of activity and productivity.
Recognition of a provision – three criteria approach
“A provision shall be recognised when:
1. an entity has a present obligation (legal or constructive) as a result of a past event; (Obligating event – no alternative to settling the obligation)
2. it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation;(More likely than not (> 50%))
and
3. a reliable estimate can be made of the amount of the obligation.” (Best estimate – amount that would be rationally paid to a 3rd party)
Restructuring Provisions (3)
- A constructive obligation arises only when an entity has a detailed formal plan for the restructuring
- Has raised a valid expectation that it will carry it out by starting to implement it or announcing its main features to those affected by it
- Should only include costs directly arising from the restructuring
expenses
What happens if a previously impaired asset’s market value increases
- If a previously impaired asset’s market value increases
- Previous impairment reversed, up to values previously written-off, to SOPL
- Balance (if any) to revaluation reserve
What happens with a downwards revaluation? (3 things)
- Decrease in market value
- Written-off against revaluation reserve up to the value of its balance
- Remainder to the SOPL as an impairment
Contingent assets (5)
When to recognise an asset?
When not to, and what to do? (2)
Disclosed if?
What should the disclosure include (3)
A contingent asset is a possible asset that arises from past events whose existence will be confirmed only by the occurrence of one or more uncertain future events not wholly within the control of the entity
- Recognise only if virtually certain (no longer contingent)
- If economic benefits are probable – disclose in a note
- If less than probable – no disclosure
- Not to be recognised in Statement of Financial Position
- Only to be disclosed where inflow of economic benefits is probable
Disclosure to include:
- nature of contingency
- uncertainties expected to affect final outcome
- estimate of (potential) financial effect
Administrative expenses (6)
Includes:
- Salaries etc. of admin staff
- Depreciation of NCA used by non-production operations
- Losses on the disposal of NCA used by non-production operations
- Amortisation of intangible assets
- Cash discounts to customers
- Irrecoverable debts
Financial position/ liquidity - their formulas and use? (6)
Inventory turnover
Inventory days
Receivables days
Payables days
Current Ratio
Quick Ratio
Inventory turnover
- (𝑪𝒐𝒔𝒕 𝒐𝒇 𝒔𝒂𝒍𝒆𝒔)/(𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝒊𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒚)
- How many times inventory is turned over in a year
Inventory days
- (𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝒊𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒚)/(𝑪𝒐𝒔𝒕 𝒐𝒇 𝒔𝒂𝒍𝒆𝒔) 𝑿 𝟑𝟔𝟓
- How long on average inventory is stored before it is sold
Receivables’ days
- (𝑻𝒓𝒂𝒅𝒆 𝒓𝒆𝒄𝒆𝒊𝒗𝒂𝒃𝒍𝒆𝒔)/(𝑪𝒓𝒆𝒅𝒊𝒕 𝒔𝒂𝒍𝒆𝒔) 𝒙 𝟑𝟔𝟓
- How long it takes on average to collect receivables
Payables’ days
- (𝑻𝒓𝒂𝒅𝒆 𝒑𝒂𝒚𝒂𝒃𝒍𝒆𝒔)/(𝑪𝒓𝒆𝒅𝒊𝒕 𝒑𝒖𝒓𝒄𝒉𝒂𝒔𝒆𝒔) 𝒙 𝟑𝟔𝟓
- How long it takes on average to pay payables
Current ratio
- (𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝒂𝒔𝒔𝒆𝒕𝒔)/(𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝒍𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔)
- Measure of extent current liabilities are covered by current assets
Quick ratio
- (𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝒂𝒔𝒔𝒆𝒕𝒔 𝒍𝒆𝒔𝒔 𝒊𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒚)/(𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝒍𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔)
- Measure of ability to cover liabilities with most liquid current assets
Recognition – general
Recognise only if: (2)
What does IAS 38 specifically exclude? (5)
Recognise only if:
- It is probable future economic benefits are expected to flow AND
- Cost can be measured reliably (like a trademark, can be very subjective in auditing)
IAS 38 specifically excludes internally generated brands, mastheads, publishing titles, customer lists
Cost of sales
Equation?
Includes (3 +3)
Opening inventory + purchases - closing inventory (O+P-C)
- Salaries of production staff
- Substantial inventory losses
- Charges relating to production of non-current assets
- Maintenance - Depreciation - Loss on disposal
Transfer of excess depreciation (3)
- A revaluation gain will lead to a higher depreciation charge in the IS
- IAS 16 allows for the ‘excess depreciation’ to be transferred between reserves.
- So it doesn’t affect profit
Note: it does not change the depreciation charge in the SOCI
Dr Revaluation Reserve
Cr Retained Earnings
Required disclosures
- Disclose information to _________ _________ to assess the _________ _____ __________ likely to be _______________ with __________ ___________
- Includes ____________ relating to ___________, _______________ __________, _________ of _____________ __________ and _____________ and ___________ ______________
- _______________ ______________ must also be explained
Required disclosures
- Disclose information to allow users to assess the risks and rewards likely to be associated with ongoing contracts
- Includes amounts relating to revenue, impairment losses, value of contract assets and liabilities and descriptive information
- Significant judgements must also be explained
Construction contracts – question approach to calculate financial statement figures
4 steps?
- Calculate expected contract outcome = contract price - total costs
- Calculate profit or loss = percentage completion = (costs incurred to date/total costs) x Revenue - Costs to date = profit
- Calculate work in progress (contract asset = costs to date + profit/ - loss recognised - amounts invoiced)
- Calculate amount receivable = amounts billed to date - amounts receivable
Issue costs example
An example of an onerous contract
