Lectures 1 - 5 Flashcards
Fundamental Qualitative Characteristics
Relevance, Faithful Representation, and Neutrality
Enhancing Qualitative Characteristics
Comparability, Verifiability, Timeliness, Understandability
Accounting Theories help us
explain, understand, evaluate and predict accounting practices
Mainstream
ER is objective, measurable, unique, and independent
Alternative
ER is subjective and socially constructed
Normative (classical) theory
ER is objective and measurable. approach guides accounting regulations
Market Based approach
ER is objective, unique and measurable. Markets reflect ER. Accounting info is only useful if it helps markets.
Positive Accounting theory
ER cant be defined by markets or unique methods. ER defined by written/unwritten contracts.
Behavioural research and Decision Making
different methods influence decisions of users. Seeks to explain behaviour of others.
Efficient Market Hypothesis
prices rapidly incorporate all relevant info
Stewardship
the role of management is stewardship (acting in the best interest of the resources of the owners)
Decision usefulness
accounting info should be relevant and material
agency theory paradigm
principal hires agent
shareholder hires manager
agency cost
when the agent chooses methods suiting his/her interests
Historical cost accounting
the cost of assets at their acquisitions which is relevant for decision making
Fair value accounting
uses market value of an asset
Group (IFRS 10)
a group exists where a parent controls a subsidiary
control exists when
Investor has power over investee
Rights to variable returns
Ability to use its power to affect returns and dividends
<20%
investment
influence : passive
reporting method : fair value
20% - 50%
Assosciate
influence: significant
Reporting method : fair value
> 50%
Subsidiary
influence : controlling
Reporting method : consolidation
Goodwill
purchase price - fair value of net assets
Goodwill is recognised as
an asset
fair value of net assets
net assets +/- fair value changes
Non controlling interest represents
the amount not owned by the parent and is recognised in the equity.
Consolidation is
combining two or more entities into one (with adjustments)
shares belonging to others shown as
non controlling interest in consolidation
subsequent goodwill measurement
carry as an asset and amortize OR
retain in the accounts indefinitely
Goodwill at acquisition
purchase price * %
MINUS
fair value of net assets * %
NCI at acquisition
fair value of net assets * %
MINUS
market value * %
losing control of an asset
derecognise the asset and
recognise any investment retained
impairment
impairment loss will reduce the profit in the consolidated income statement
internal impairment indicators
evidence of physical damage
significant changes
external impairment indicators
significant changes in the environment
decline in market value of an asset
intra group transactions are when
firms sell/buy from each other resulting in mutual balances
intra group transactions are recognised
in assets or liabilities are adjusted in full. Only external transactions remain in financial statements
joint operations
the parties have joint control and share rights of the assets and obligations for the liabilities
joint venture
the parties have joint control of the arrangements and rights to net assets of the arrangement.
accounting for joint operations
show share of assets, liabilities incurred and any income and expenses in financial statements
accounting for joint ventures EQUITY METHOD
adjust investment amount
adjust equity
adjust profit / loss
adjust dividends
Consolidated retained earnings
retained earnings + % * (retained earnings - previous retained earnings - profit adj + tax)
consolidated general reserve
general reserve + % * (general reserve - current account )
fair value of net assets
common shares + general reserves prev + retained earnings prev
current rate (closing method) +/-
+ gain/loss on translation doesnt pass through the income statement
+relative proportion of BS accounts remain unchanged
-violates accounting principle of carrying BS at historical cost
temporal method +/-
+numbers have consistent internal meaning
-volatility in financial statements
