Knowledge Flashcards
What is the objective of financial reporting?
To provide information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity.
2 fundamental characteristics
Relevance
Faithful representation
4 Enhancing characteristics
Comparability
Verifiability
Timeliness
Understandability
2 bases of accounting
Accruals basis
Going concern basis
5 Elements of financial statements
Assets
Liabilities
Equity
Income
Expenses
Recognition criteria
The item meets the definition of an element
Recognition would provide relevant and faithful representation information to the users
What are the two types of measurement basis?
Historical cost
Current value
What are the three types of current value measurement?
Fair value
Value in use
Current cost
5 ethical principles
Integrity
Objectivity
Confidentiality
Professional competence and due care
Professional behaviour
What are the two cash flow methods?
Direct and indirect
What are accounting policies?
Specific principles, rules, practices in preparing financial statements.
When is there allowed to be a changed in accounting policy?
1) It is required by IFRS
2) It results in more relevant and reliable information
How should changes in accounting policy be applied?
In accordance with the transitional arrangements of the standard, or retrospectively if there are no provisions or the change is voluntary.
What are accounting estimates?
Approximations, usually using management judgements of the carrying amount of items in the accounts given the chosen accounting policy.
How should a change in accounting estimate be accounted?
Should be applied prospectively.
What are prior period errors?
Omissions from and misstatements in the financial statements arising from information that was available at the time and could reasonably have been expected be taken into account.
How should prior period errors be accounted for?
Retrospectively
What is a discontinued operation?
It is a component of an entity that has either been disposed of is classified as “held for sale” and meets the following criterial:
Represents a separate major line of business operations
OR
It is part of a single co-ordinated plan to dispose of a sperate major line
OR
It is a subsidiary acquired exclusively with a view to resale.
Are discontinued operations required to be disclosed separately?
Yes a single amount should be disclosed in the profit or loss.
What does the single amount in the P&L for discontinued operations need to comprise of?
The profit or loss after tax
The gain or loss recognised on the measurement to fair value less costs to sell or on the disposal of the assets of the discontinued operation
What is initial recognition pf foreign exchange?
Translated at the spot rate at the date of the transaction
What are accounting policies?
Specific principles, bases, conventions, rules and practices applied in preparing financial statements
When is a change in accounting policy allowed?
Only when it:
Is required by an IFRS
Or
Results in more relevant and reliable information
Are changes in accounting policy retrospective or prospective?
Retrospective
Change the comparative
Are changes in accounting estimates retrospective or prospective?
Prospective
Only this year and future years
Are prior period errors retrospective or prospective?
Retrospective
What is an accounting estimate?
Approximations, usually using management judgements of the carrying amount of items
What is a prior period error?
Omission from or misstatements in the financial statements arising from information that was available at the time and could reasonably have been expected to be taken into account
At subsequent year ends how are monetary items treated in relation to exchange rates?
Retranslated at the closing rate
Gain and losses moved to the profit and loss
At subsequent year ends how are non-monetary items treated in relation to exchange rates?
Held at historical cost
What is the effect of foreign exchange rates at the point of receipt/payment?
Conversion exchange gains and losses recognised in the profit and loss.
A person is a related party if that person…
Has control, joint control or significant influence over the reporting entity
Is a member of key management personnel of the reporting entity (or its parent)
An entity is related if…
The entity and reporting entity are members of the same group
One entity is an associate or joint venture of the other entity
Both are joint ventures of the same third party
The entity is controlled by a related party (person)
Are two entities that only have a director in common considered a related party?
No
Are two people who are joint owners of a joint venture considered related?
No
Are any providers of finance, trade unions, government agencies etc considered related parties?
No
Is a customer or supplier that the entity is reliant on considered a related party?
No
Where there have been related party transactions what three disclosures are required?
The nature of the relationship
The amount of the transaction including any outstanding balances
Any amounts written off or provided for including the related expense
Define PPE
Tangible items held for use in the production or supply of goods or services or for administrative purposes and are expected to be used for more than one period.
Wat 2 things are required for recognition of PPE?
Probable that future economic benefits will flow to the entity
AND
Cost can be measured reliably
What are the two types of subsequent measurement of PPE?
Cost model
Revaluation model
What is covered in the initial measurement of PPE?
The costs directly attributable to bringing the asset to its present location and condition
Can staff training costs be capitalised for PPE?
NO!!
Do all assets in the same class have to use the revaluation model if it is chosen for one asset?
Yes
What rate of interest do you use for the interest on preference shares?
The effective interest rate
Definition of an asset
An asset is a present economic resource controlled by an entity as a result of past events. An economic resource is a right that has the potential to produce economic benefits.
Definition of a liability
A liability is a present obligation to transfer an economic resource as a result of past events.
Define equity
Equity is the residual interest in the assets of the entity after deducting all of its liabilities.
Define income
Increases in assets, or decreases in liabilities, that result in increases in equity other than contributions from equity holders.
Define expenses
Decreases in assets, or increases in liabilities, that result in decreases in equity
other than distributions to equity holders.
Assets are depreciated over…
Useful lives
Assets should be depreciated when…
The assets become available for use
Impairments occur when carrying amount is
Higher than the recoverable amount
In revaluations recoverable amount is higher of
Value in use and fair value less costs of disposals
What criteria must be met to count as an asset held for sale?
1) Available for immediate sale in its current condition
2) The sale should be highly probable
3) The sale is expected within a year
When reclassified as held for sale, the asset will be
1) shown separately under current assets
2) valued at the lower of its carrying amount and fair value
3) no longer depreciated
What two things are needed to recognise a government grant?
Reasonable assurance that
The entity to comply with the conditions of the grant
The entity will receive the grant
Subsequent treatment of grants relating to assets
Received for depreciating assets, then the grant should be released over the useful life of the asset
What is the subsequent treatment of grants relating to income?
Will be released to the profit or loss over the periods in which the costs of meeting any grant conditions are incurred.
Where can grants related to assets be presented?
Deferred income
Deduction in carrying amount of the asset (netting off)
Grants relating to income can be presented as
A credit in the profit or loss
A deduction from the related expense
When does capitalisation of borrowing costs occour?
Once the entity incurs expenditure
Ceases when substantially all the activities to complete are done
If funds are borrowed for construction, costs less what should be capitalised?
Any investment income
If construction is financed out of general borrowings, the amount capitalised should be…
The weighted average cost of general borrowings
Define intangible assets
Identifiable non-monetary asset without physical substance
An asset is identifiable if it meets at least one of two criteria?
Separable
Arises from contractual or other legal rights
An intangible asset can be recognised if
It is probable that economic benefits will flow to the entity
And
Cost can be measured reliably
How should an intangible asset be initially recognised?
Cost
Purchase price and any directly attributable costs
Subsequent measurement of intangible assets is either
Cost or revaluation
Impairment of intangible assets is usually dealt with how?
Transferred to the profit and loss
Can internally generated intangibles be capitalised?
No
What are the criteria for development to be capitalised?
P probable future economic benefits will be generated
I intention to complete and use/sell asset
R resources adequate and available to complete and use/sell asset
A ability to use/sell the asset
T technical feasibility of completing asset for use/sale
E expenditure can be measured reliably
What is the 5 step model for recognition of revenue?
1) identify the contract with customer
2) identify the performance obligations in the contract
3) determine the transaction price
4) allocate the transaction price to the performance obligations
5) recognise revenue when a performance obligation is satisfied
If the outcome of a contract cannot be estimated reliably, revenue should be recognised only to…
The extent that costs are recoverable
Where outcomes of revenue cannot be estimated reliably, then calculate by:
Costs incurred to date
Add Profit to date
Less amounts invoices to date
= contract asset/(contract liability)
Inventories must be valued at the lower of
Cost and net realisable value
What must you remember when there is leases in the question?
Is there a right of use assets?
What is considered a short lease?
Less than 12 months
Sales and leaseback. What is the 2 step calcs?
1) calculate the proportion of the original asset retained
2) calculate the carrying amount of the right of use asset (original carrying x % retained) and then the gain in disposal for the part transferred
What is the process for loan receivable financial instruments?
Bf + effective interest - less cash received = cf
What is the process for loan payable in financial instruments?
Bf + effective interest - less cash paid = cf
Where do redeemable preference shares go in the SOFP??
Non current liability
Where do irredeemable preference shares go in SOFP?
Equity
Where do dividends go for irredeemable preference shares?
Reduction in equity (go to retained earnings)
Where do dividends go for redeemable preference shares?
Finance charge expenses to P + L
What changes when irredeemable preference shares are cumulative?
They are treated like redeemable shares and are a liability
What is convertible debt?
Loans that can be settled in shares
What are treasury shares?
Shares brought back by the entity
Kept as negative in equity section
When there are compound instruments how do you deal with them?
Split the liability from equity
A provision is what?
A liability of uncertain timing or amount
When there are transfers between the revaluation surplus and retained earnings, what gets transferred?
The additional depreciation.
Depre at reval level pa - historical depre pa
Only possible when there is amounts in reval relevant to that asset
When there is a convertible bond what are the steps?
1) Discount the cash flows to get the liability figure
2) Use the liability figure in the financial instruments table
BF + Effective Interest - Cash Paid = CF
Do you include this year’s impairment of goodwill in the consolidation schedule?
Yes, it goes in the parent column
What must you always remember when doing investment in associate NCI calc?
Make sure you’re only taking your share. If there is a PURP adjustment you still need to only take your portion of it.
When there is an investment in associate, does the nonparent part go to NCI?
No because you are the NCI, so therefore there’s nothing to add 
When working out the share of post acquisition, what do you have to remember about the revaluation surplus?
It cannot be distributed, so don’t include the movement 
When there has been a bonus issue, what changes in the earnings per share calculation? 
You have to multiply the period prior to the bonus issue by the new share over the old share number.
So if it was 10 million shares and then a bonus issue of one for 2
You would multiply 10 million shares by 3/2 and use this in the weighted calculation 
If you are reinstating the comparative of eps, what do you multiply the prior-year EPS by if there’s been a bonus share?
You take the eps and Time is it by the old share number over the new share number.
So if the eps last year was £.50 and there had been a one for two bonus issue, you would do
50p multiplied by 2/3
