Lectures 7 - 11 Flashcards
foreign currency transaction is one that
requires settlement in a currency other than the entity’s home currency
foreign operations classified into two types
self sustaining OR
integrated operations
self sustaining operations
financially independent of the parent
integrated operations
isn’t independent of the parent
functional currency
the currency of the environment in which the entity operates in
presentation/reporting currency
the currency in which the financial statements are prepared in
temporal method is used if
foreign operations are important to the operations of reporting entity
closing rate / current rate method is used if
foreign operations are considered to be foreign entities
Temporal Method
Current b/s rate - cash, receivables and liabilities
Historical rate - inventory, assets, cost of sales and depreciations
Average rate - revenues and expenses
Current (closing) Method
Current b/s rate - assets, liabilities and depreciation
Historical rate - stockholders equity
Average rate - revenues and expense
difficulty w/ foreign currency transactions
prudence vs accruals
undesirable effects due to weak currencies
hyper inflationary cases
A financial instrument is
any contract that gives rise to a financial asset of one entity and a financial liability of another entity
A financial asset is
cash, an equity instrument or a contractual right
A financial liability is
a contractual obligation, to deliver cash or another financial asset to another entity
compound instruments
may contain both debt and equity elements - should be split into its liability and equity parts
3 ways to classify financial assets
amortised costs, FVTP/L, FVTOCI
credit risk
the degree to which it’s likely that a borrower/debtor may not repay a loan or debt
hedging
a mechanism to mitigate risks by limiting the probability of loss from fluctuations
amortised costs
initial acquisition LESS
principal repayment PLUS/MINUS
amortisation of discount PLUS/MINUS
fx less impairment losses
FVTPL
asset measured at fair value and changes to it are recognised in profit/loss statement
FVTOCI
asset measured at fair value but changes are measured in other comprehensive income
2 types of pension plans
defined contribution plan
defined benefit plan
defined contribution plan is
employer pays a fixed contribution into a fund
contribution is noted as an expense
defined benefit plan is
what employees get at retirement is defined in advance
Present value of defined benefit obligation is
expected benefits.
DBO isnt shown in BS. instead worksheets are used.
measurement of pension asset on BS
if benefit plan is over funded then a pension asset is recorded on BS
measurement of pension liability on BS
if benefit plan is under funded then a pension liability is recorded on BS
measurement of pension liability
beginning of defined benefit obligation \+current service cost \+current interest cost \+past service cost - benefits paid out \+/- actuarial losses or gains Ending defined obligation
measurement of pension asset
Beginning FV of plans assets \+actual returns on plan assets \+expected returns on plan assets \+contributions from employers -benefits paid out Ending fair value of plans assets
measurement of pension expense
Pension expense -current service cost -current interest cost \+interest income \+returns on plans assets \+/- amortisation of actuarial loss/gain or past service cost/benefit
where to record?
service cost and net interest - Profit or Loss
Remeasurements - OCI
asset ceiling
defined as the present value of any economic benefits available
