Other Accounting Standards Flashcards
How is the carrying amount of PPE calculated?
Cost - Accumulated depreciation - accumulatede impairement
What is meant by impairement?
If an asset’s carying amount is greater than its recoverable amount
What is recoverable amount?
The higher of the asset’s fair value - costs of disposal and its value in use
What is fair value less cost of disposal
Net sale proceedings recieved after asset is sold - taking away any disposal, transaction fees
What is value in use?
Present value of Future cash flows- dervied from asset
How to calculate impairement loss?
Carrying value- Recoverable value
What needs to be done to be aware of the risk of impairement?
- Formal assesstment for impairement indicators
- By board of entity
- At end of each reporting period
What are the two types of impairment indicators?
External sources - within entity
Internal Sources - ouside entity
What are 3 internal sources of impairment indicators?
- Physical damage to the asset
-Plans of Changes to useful life of asset - Other internal evidence which suggest asset’s performance is worse than expected
What are 4 external sources
- Significant decrease in market value
- Changes in technological, legal, market environments which affect asset value
- Increase in interest rate: reduce asset value in use
- Carryign amount of entity’s net assets being more than its market capitalisation
What is market capitalisation?
Number of shares of entity x share price
How can an impairement loss be recognised in financial statements?
- As an expense in SPL
- In its equity
How is impairement value accounted for assets held at historic cost
Charging impairement loss as an expense in SPL -Debit
Credit: Non current Asset Value
How is impairment value recognised for a revalued asset
Original revaluation surplus should be reversed for that asset
- any extra expense taken from SPL
How is impairement value accounted for for a revalued asset
Debit:revaluation surplus
Debit: Extra expense
Credit: Non current asset value
What happens to depreciation for an asset which has suffered imapirement
New carryign amount (recoverable amount) should be dpreciated oiver the remaining useful life
- useful life might need to be evaluated as well
What disclosures are needed regarding impairement
- Impairment losses should be recognised
-Any recovery of impairment losses - For each class for assets
- for significant imapirement for a specific asset : nature of loss, basis of recoverable amount
What is meant by a non current asset held for sale
- Entity plans to sell asset rather than continuing to use it
- To recover the value of the asset
What is a disposal group
- Group of assets (or liabilities) to be disposed of together as a group in a signle transaction
What are the two criteria to determine asset/disposable group to be held for sale
- Available for sale in it’s present condition
- Sale must be highly probably
What is meant by available for sale in present condition
- Not being used in busineess
-No adjustments needed for sale
What is meant by highly probable criteria
- Management are committed to plan to sell
- Actively seeking a buyer
- Asset is marketed at a reasonable price relation to fair value
- Sale expected to be completed in one year of classification
- Unlikely for significant changes to the plan or withdrawal of sale
Can an asset/disposal group still be classified as held for sale after one year
- Can be
- IF entity can demonstrate the delay was caused by events beyond control
At what value should an asset identified as held for sale be accounted for
The lower of
- Carrying amount
- Fair Value - Cost of disposal
What are the adjustements made for assets classsfied as held for sale?
- Any loss shown on SPL
- No further depreciation should be charged
-Any gain or loss on sale recorded in SPL like a normal disposal
Why is no further depreciation charged for an asset classified as held for sale?
It’s value will be recoverable through its sale rather than its use
Where are assets held for sale listed on the Statement of financial position?
Disclosed separately
In it’s own line
Below current assets
What is the definition of discontinued operation?
Component of an entity that has been discontinued or classified as held for sale and
- represents a separate major line of business
- is part of a single plan to dispose of major line
- is a subsidiary acquired with a view to resale
What is meant by component of an entity
Has operations and cash flows that can be clearly distinguished from the rest of the entity
- operationally and financial reporting purposes
What are the disclosures needed for NCA held for sale and discontinued operations?
- Single amount in the statement of Profit or loss comprising of
- Post-tax profit or loss of discontinued operations
- Post-tax gain or loss recognised on measurement to fair value - costs of disposal
How should the analysis of disclosure of NCA held for sale and discontinued operations be broken down?
- Revenue, expenses and pre-tax profit or loss
- Related income tax expense
- Post-tax gain or loss on disposal of asset or measurement to fair value - cost of disposal
Define Inventories
Assets that are:
- Held for sale in the ordinary course of business (finished goods)
- In the process of production for sales (work in progress)
- Raw materials or supplies for the production process
How is inventory measured?
At the lower of
- cost
or
- net realisable value (NRV)
What are the components of the cost of inventories?
- Cost of purchase (Purchase price - discounts, import duties or taxes, directly attributable costs of delivery and installation)
- Cost of Conversion (costs directly related to units of production of material, labour, overheads)
- Other costs (bringing inventory to current location and condition)
What are fixed production overheads??
Indirect costs such as the cost of factory management and administration remain relatively constant - based on normal level of production
What are variable production overheads?
Include indirect materials and labour costs and vary with production
What are the estimation methods of finding the approximate value of stock?
Standard cost: normal levels of materials and supplies, labour - should be regularly reviewed and revised
Retail Method: cost is determined by reducing the value of inventory by the percentage of gross margin
What are the estimation techniques used to approximate the cost for interchangeable items?
First in, First out
Weighted average cost
What is the FIFO method of approximating inventory cost?
Calculation of cost is on the basis that the quantities in hand represent the most recent purchases/production
-older items are used first
What is the weighted average cost approximation method for the cost of inventories?
Cost calculated by the weighted average price = total cost of items/total number of items
Price is recalculated on periodic basis as each shipment is received, and as items are removed
Which cost approximation method is not permitted by IAS2 and why
Last in, First out (LIFO) - does not bear a good approximation of to actual cost
Define Net realisable Value
Estimated selling price in the ordinary cost of business
less
- estimated costs of completion
- estimated costs necessary to make sale (marketing, selling, distribution)
Why might the NRV be less than the cost of inventories?
- Increase in cost of manufacturing items
- Physical determination of inventories
- Errors in production
What disclosures are needed in financial statements for inventories>?
- Accounting policies to measure inventories (cost formula)
- Total carrying amount of inventories
- Carrying amount at Net Realisable value
Define events after the reporting period
Events favourable and unfavourable occur between end of the reporting period and when financial statements are authorised for issue
What are the two types of events after the reporting period?
- Adjusting events after the reporting period - evidence of conditions that existed
- Non-adjusting events after the reporting period indicative of conditions that arose after the reporting period
What are ways in which assets can be impaired as an adjusting event?
- Credit customer has gone bankrupt
- The recoverable amount of PPE has fallen below the carrying amount
- Evidence that the Net realisable value of inventories is less than the carrying amount
What are other examples of adjusting events?
- Resolution of court case
- determination of Cost of assets purchased or proceeds from assets sold
- Evidence that going concern basis may no longer be appropriate
- Discovery of fraud or error
What are examples of non-adjusting events
- Acquisition or disposal or subsidiary after the reporting date
- Announcement of a plan to discontinue operation after the end of the reporting date
- Major transaction in shares, PPE after reporting date
- Litigation due to events after the reporting date
- Destruction of PPE (fire, flood) after end of reporting date
What is the accounting treatment for adjusting events?
The amounts in financial statements are changed to incorporate new information
What is the accounting treatment for non-adjusting events?
- no changes made to amounts in the financial statements
- A disclosure note is included: nature of event + financial effect if quantifiable
How are proposed equity dividends recognised on financial statements?
As a liability on the SPL - IF they were declared before the end of the reporting period
-if after, then as a note in the disclosure
