Part 5: Accounting quality and financial statement items Flashcards
How is an asset defined?
A present economic resource controlled by the entity as a result of past events, where an economic resource is a right that has the potential to produce economic benefits
How is a liability defined?
Present obligation of the entity to transfer an economic resource as a result of past events
What two components does the definition of an asset and a liability contain?
Control (or lack thereof) as a result of past events
Expected future economic benefits (or outflow)
How is equity defined?
The difference between assets and liabilities (residual)
In theory it is clearly defined. In practise, however, the distinction between liabilities and equity are not always clear
How is income and expenses defined?
Income – increases in assets or decreases in liabilities that result in increases in equity, other than those relating to contributions from holders of equity claims
Expense – decreases in assets or increases in liabilities that result in decreases in equity, other than those relating to distributions to holders of equity claims
What are the two bases of measurement?
Historical cost Current value (fair value, value in use, current cost)
Explain the three different current value valuations
Fair value – represents the market price of an item, and it can be measured through current market price or through discounted cash flows
Value in use – is based on the discounted cash flows
Current cost – is the price in a hypothetical current transaction
Which measurement is the default according to IFRS?
Historical cost
In what situations are fair value primarily used?
When historical cost is not relevant, i.e., firm performance is evaluated based on changes in fair value
When historical cost must be estimated because there is no transaction for the individual asset
What is the main problem when accounting for assets?
Whether an asset meets the definition and thus should be recognised or not
Typically, this is not a problem with tangible and financial, however, it is often a problem with intangible assets
What are the three types of assets?
Tangible (PP&E)
Intangible
Financial
What are the three possible measurement models for tangible assets?
Cost model – value equal to cost minus accumulated depreciation and impairment losses
Revaluation model – systematic and periodic revaluations to fair value when there is a material difference between fair value and book value
Fair value model – assets are measured at fair value at balance sheet date
What is an intangible asset defined as?
Identifiable non-monetary asset lacking physical substance
How can intangible assets be acquired?
Separate external acquisition
External acquisition as part of business combination
Generated internally
What are the three measurement models used for financial assets?
Fair value through profit and loss (FVPL)
Fair value through other comprehensive income (FVOCI)
Historic (amortized) cost
When is fair value relevant to use when valuing financial assets?
Changes in fair value is likely to be realized in the firm’s cash flows
Changes in value are used internally to assess performance
(Fair value should only be used when faithful representation is obtainable)
What is a provision?
A subset of liabilities that are uncertain in terms of timing or amount of future cash outflow and where substantial judgement is often required in recognition and measurement
How are liabilities and provisions measured
Liabilities – fair value
Provisions – current value (estimated fair value)
What is a contingent liability?
A possible obligation due to past events but whose existence will only be confirmed by further events taking place. This means that it is not possible to make a reliable estimate of amount or the probability. These are only disclosed in the notes.
What is the accounting problem with provisions and incentives?
There is substantial managerial judgement involved in accounting for provisions. While such judgement can help management provide important private information to investors, it can potentially also be used to manage earnings
What are the two accounting issues related to equity?
The distinction between equity and liabilities
Classification of equity into different items
What is the five-step approach to revenue recognition?
Identify the contract
Identify performance obligations
Determine transaction price
Allocate transaction price to performance obligations
Recognize revenue when performance obligation is satisfied
What are the two main perspectives of group accounting?
The owner perspective
The entity perspective
What are the four levels of control and influence?
Control – over 50% of voting power
Significant influence – 20-49% of voting power
Joint control/joint arrangement
Holding with no real influence – under 20% of voting power
What are the four stages of recognising business combinations?
Determine acquirer
Determine transaction price
Allocate transaction price to assets and liabilities
Determine subsequent measurement of assets and liabilities in the acquiree
How is goodwill measured?
Historical cost, with no amortization but annual impairment testing
