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SBR ACCA > Part C1-4: Reporting The Financial Performance Of Entities > Flashcards

Part C1-4: Reporting The Financial Performance Of Entities Flashcards

1
Q

Criteria for IFRS 15 (Revenue)

A
  • Both parties have enforceable rights / obligations
  • contract approved (neither party can unilaterally terminate)
  • payment terms agreed
  • commercial substance to the contract
  • customer can (probably) and intends to pay
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2
Q

IFRS 15 applies to all contracts except for…

A
  • lease contracts
  • insurance contracts
  • financial instruments and other contractual rights/obligations within the scope of IAS 39/ IFRS 9, IFRS 10, IFRS 11, IAS 27, IAS 28
  • non monetary exchanges between entities within the same business to facilitate sales
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3
Q

Revenue recognition- 5 Steps

A

1- identify the contract with the customer

2- identify the performance obligations in the contract

3- determine the transaction price

4- allocate the transaction price to the performance obligations in the contract

5- recognise revenue when or as the obligations are satisfied

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4
Q

Revenue recognition- Step 1 - Identify the contract with a customer

A
  • must be approved by all
  • everyone’s rights can be identified
  • it must have commercial substance
  • consideration will probably be paid
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5
Q

Revenue recognition- Step 2 - Identify the separate performance obligations in the contract

A

These will be goods or services promised to the customer

They need to be distinct and create a separately identifiable obligation

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6
Q

Revenue recognition- Step 3 - Determine the transaction price

A

How much the entity expects, considering past customary business practices

Variable consideration

  • if the price may vary then estimated expected amount used
  • only used If probable
  • for royalties only recognised when usage occurs
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7
Q

Revenue recognition- Step 4 - allocate the transaction price to the separate performance obligations

A

If multiple performance objectives, split transaction price by using their standalone selling prices

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8
Q

Revenue recognition- Step 5 - recognise revenue when the entity satisfies obligation

A

Revenue is recognised as control is passed over time or at a point in time

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9
Q

How to estimate selling price?

A
  • Adjusted market assessment approach
  • expected cost plus a margin
  • residual approach
  • if paid in advance, discount down if it’s significant (> 12m)
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10
Q

What is control?

A

Ability to direct the use of and get almost all of the benefits from the asset

Includes the ability to prevent others from directing the use of and obtaining benefits from the asset

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11
Q

Benefits of Control could be…

A

Direct or indirect cash flows that may be obtained directly or indirectly

Using the asset to enhance the value of other assets

Pledging the asset to secure a loan

Holding the asset

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12
Q

Factors to consider of recognising revenue at a specific point in time (not exhaustive list)

A

The entity now has a present right to receive payment for the asset

The customer has legal title to the asset

The entity has transferred physical possession of the asset

The customer has the significant risks and rewards related to the ownership of the asset

Customer has accepted the asset

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13
Q

Contract liability - circumstances and presentation

A

Paid upfront but not yet performed

Dr cash
Cr contract liability

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14
Q

Contract receivable or contract asset - circumstances and presentation

A

Paid later but already performed

Dr receivable
Cr Revenue

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15
Q

Contract receivable or asset?!

A

Contract asset if payment is conditional (on something other than time)

Receivable if the payment is unconditional

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16
Q

Disclosures related to revenue

A

All qualitative and quantitative info about:

  • it’s contracts with customers
  • the significant judgements in applying the guidance to those contracts
  • any assets recognised from the costs to fulfil a contract with a customer
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17
Q

Costs to fulfil a contract - recognised as an asset when…

+ examples of asset and when to expense

A
  • relate directly to the contract
  • generate resources we are going to use when we sell
  • are expected to be recovered
Examples for asset:
Direct labour and materials
Allocations of depreciation or insurance
Anything explicitly chargeable to the customer
Subcontractor costs

Examples to expense:
General and administrative costs
Wasted materials, labour and other resources

Costs related to satisfied or partially satisfied performance obligations must be expenses also

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18
Q

Sale with right to return - accounting treatment

A

Reduce revenue by expected value of returns

Instead dr revenue cr refund liability

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19
Q

Assurance warranties treatment

A

Bundled into revenue for the product and a provision for the warranty costs is made using IAS37 as normal

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20
Q

Indicators of an Agent

+ accounting treatment of revenue for principle vs agent

A

Another party is primarily responsible for fulfilling the contract

You don’t take inventory risk before or after a customer order

You Don’t set prices

You Receive commission only

You take no credit risk for the amount receivable

Accounting Treatment
Principle - show gross revenue and cos
Agent - show commission only as revenue

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21
Q

3 Tests to determine whether we should bring PPE into the accounts

A
  1. When we control the asset
  2. When it’s probable that we will get future economic benefits
  3. When the assets cost can be measured reliably
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22
Q

What gets included in the cost of PPE?

A
  1. Directly attributable costs to get it to work and where it needs to be (delivery, installation etc)
  2. Estimated cost of dismantling and removing the asset and restoring the site (at PV)
  3. Borrowing costs
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23
Q

PPE cost model

A

Cost less accumulated depreciation and impairment

Depreciation should begin when ready for use not wait until actually used

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24
Q

PPE Revaluation model

A

Fair value at the date of revaluation less depreciation

Revals should be carried out regularly
I.e. for volatile annually, others between 3-5 years or less

If an item is revalued, it’s entire class should be

Revalued to market value usually
Specialised properties will be revalued to their depreciated replacement cost

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25
Q

Disposal of a revalued asset

A

Revaluation surplus in equity drops into retained earnings and therefore only shows up in the statement of changes in equity

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26
Q

Recoverable amount

A

Higher of:

  • FV - CTS
  • VIU
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27
Q

Value in use definition

A

The discounted present value of estimated future cash flows expected to arise from:

  • the continuing use of an asset, and from
  • it’s disposal are the end of its useful life
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28
Q

Fair value less costs to sell - determining value

A
  • if there is a binding sale agreement, use the price under that agreement less costs of disposal
  • if there is an active market for that type of asset, use market price (current bid price) less costs of disposal
  • if there is no active market, use the beat estimate of the assets selling price less costs of disposal
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29
Q

Value in use criteria

A
  • the future cash flows must be based on reasonable and supportable assumptions
  • budgets and forecasts should not go beyond 5 years
  • cash flows should relate to the assets current condition
  • cash flows should not include cash from financing activities or income tax
  • discount rate used should be the pretax rate that reflects current market assessments of the time value of money and the asset specific risks
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30
Q

Indicators of impairment

A
  1. Losses/ worse economic performance
  2. Market value declines
  3. Obsolescence or physical damage
  4. Changes in technology, markets, economy or laws
  5. Increases in market interest rates
  6. Loss of key employees
  7. Restructuring/ re-organisation
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31
Q

Which need annual checks for impairment regardless of indicators

A

An intangible asset with an indefinite useful life

An intangible asset not yet available for use

Goodwill acquired in a business combination

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32
Q

Assets held for sale - accounting treatment

A

1) calculate the carrying amount
- bring everything up to date when we decide to sell I.e catch up depreciation and revalue (if policy)
2) calculate FV-CTS
3) value the assets held for sale
- the lower of carrying amount in step 1 and FV-CTS in step 2
4) check for impairment

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33
Q

Held for sale - increase in FV?

A

At year end of asset still not sold

Gain is recognised in p&l up to amount of all previous impairment losses

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34
Q

When is an asset recognised as held for sale?

A
  • management is committed to a plan to sell
  • the asset is available for immediate sale
  • an active programme to locate buyer is initiated
  • sale is highly probable within 12 months
  • actively marketed for sale at a reasonable sales price
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35
Q

Rule for a disposal group with reversal of impairment losses

A

Can take advantage of some assets within the group using up the unused impairment losses on other assets

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36
Q

What if the asset or disposal group is not sold within 12 months?

A
  • normally returns to PPE at the amount it would have been at had it not gone to held for sale
  • check for impairment
  • or, keep in HfS if delay is caused by circumstances outside the entity’s control
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37
Q

Investment property is..

A

A building not used, just makes cash by either FV going up (capital appreciation) or from rental income

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38
Q

Accounting treatment for rental income

A

Add it to income statement

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39
Q

Investment property- Accounting treatment for FV increase

A

Difference in FV each year goes to IS

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40
Q

Examples of investment property

A

Land held for long term capital appreciation

Land held for a currently undetermined future use

Building owned but leased to a third party under an operating lease

Building which is vacant but is held to be leased under an operating lease

Property being constructed or developed for future use as an IP

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41
Q

Can it still be an IAS 40 investment property if we are involved in the building still by giving services to it ?

A

Yes, if the supply is small and insignificant

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42
Q

Investment property- what if used by sub?

A

IP in individual accounts but not in the group accounts

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43
Q

An investment property should be recognised when…

A

It is probable that the future economic benefits will flow

And

The cost of the IP can be measured reliably

(Initially at cost - purchase price + directly attributable costs)

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44
Q

Investment property- if held under a lease, amount recognised at is…

A

Lower of

Fair value

And

PV of the minimum lease payments

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45
Q

Intangible asset definition

A

According to IAS 38, it’s an identifiable non-monetary asset without physical substance, such as a licence, patent or trademark

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46
Q

Three critical attributes of an intangible asset are

A
  • identifiability
  • control
  • future economic benefits
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47
Q

When can you recognise an IA and for how much?

A
  • When it is probable that future economic benefits attributable to the asset will flow to the entity
  • the cost of the asset can be measured reliably
  • brought in at cost (purchase price + directly attributable costs)
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48
Q

How to treat IA acquired as part of a business combination?

A

The IA should be initially recognised at FV

If FV cannot be ascertained then it is not reliably measurable and so cannot be shown in the accounts

As a result (by not showing it), goodwill becomes higher

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49
Q

When are development costs capitalised?

A

Only after technical and commercial feasibility of the asset for sale or use have been established

Must be able to demonstrate how the asset will generate future economic benefits

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50
Q

How to treat research and development acquired in a business combination

A

Recognise as an asset at cost, even if a component is research

Subsequent expenditure on that project is accounted for as any other research and development cost

51
Q

How to treat internally generated brands, mastheads, titles, lists

A

Should not be recognised as assets and should be expensed

52
Q

How to treat computer software..

A

If purchased

  • capitalise as IA
  • operating system for hardware include in hardware cost

If internally developed
- charge to expense until technological feasibility, probably future benefits,
intent and ability to use or sell the software,
Resources to complete the software, and
Ability to measure cost

53
Q

Always expense the following (in relation to IA)

A

Internally generated goodwill

Startup, preopening, and preoperating costs

Training costs

Advertising and promotional costs

Relocation costs

54
Q

Intangible assets - future measurement

A

Can either use historic cost and amortise, or revaluation

55
Q

Intangible assets - historic cost

A

1 - if have a useful economic life

Amortise over UEL
Residual values should be assumed to be nil, except rare circumstances where an active market exists or commitment by a third party to purchase

2 - indefinite UEL

Check for impairment every year
Annual review to see if indefinite life assessment is still appropriate

56
Q

Intangible assets - revaluation (and amortise)

A

Can only be adopted if an active market exists for that type of asset

Must be an active market
Item must be unique

57
Q

Criteria an intangible asset must demonstrate under IAS38 in order to be deemed Development

A
  1. Probable future economic benefits
  2. Intention to complete and use or sell the asset
  3. Resources are adequate and available to complete and use the asset
  4. Ability to use or sell the asset
  5. Technical feasibility of completing the intangible asset
  6. Expenditure can be measured reliably
58
Q

Amortisation double entry

A

Dr amortisation expense (I/S)

Cr accumulated amortisation (SFP)

59
Q

Using current borrowings to finance an asset - steps

A

1 - calculate the total amount of borrowings
2 - calculate the interest payable on these in total
3 - weighted average of borrowing costs = divide interest by the borrowing
4 - then multiple borrowing costs by expenditure on asset

60
Q

Getting a specific loan to fund an asset - steps

A

Actual borrowing costs less investment income on any temporary investment of the funds

1 - calculate the interest paid on the specific loan
2 - calculate any interest received on loan proceeds not used
3 - add the net of these 2 to the cost of the asset

61
Q

You don’t have to add interest to the cost of the following assets..

A
  • assets measured at fair value
  • inventories that are manufactured or produced in large quantities on a repetitive basis even if they take a substantial period of time to get ready for use or sale
62
Q

When should we start adding interest to cost of an asset ?

A

When all three of the following conditions are met

  • expenditure begins for the asset
  • borrowing costs begin on the loan
  • activities begin on building the asset e.g plans drawn up, getting planning etc
63
Q

Borrowing costs for an asset include

A

Interest expense calculated using the effective interest method

Finance charges in respect of finance leases

64
Q

Financial instrument definition

A

Must be a contract

Must create a financial asset in one entity and a financial liability or equity instrument in another

65
Q

Contracts that state “will NOT be delivered” or “can be settled net” are almost always what?

A

Financial instruments

66
Q

Key features of a financial liability

A
  1. The issuer is obliged to deliver either cash or another financial asset to the holder
  2. An obligation may arise from a requirement to repay principal or interest or dividends
67
Q

Key features of an equity

A

Has a residual interest in the entity’s assets after deducting all of its liabilities.

  • an equity instrument includes no obligation to deliver cash or another financial asset to another entity
  • contract which will be settled by receiving or delivering a fixed number of its own equity instruments is an equity instrument
  • if there is any variability in the amount of cash or own equity instruments to be delivered or received, it is a financial asset or liability
68
Q

The two categories of financial liability

A
  1. FVTPL
    - this includes a financial liabilities incurred for trading purposes and also derivatives
  2. Amortised cost
69
Q

Accounting treatment for FVTPL financial liabilities (initially, at YE, any gain/loss)

A

Initially - at FV
At YE - at FV
Any gain/loss - to the income statement

70
Q

Accounting treatment for Amortised cost financial liabilities (initially, at YE, any gain/loss)

A

Initially - FV

At YE - at amortised cost

71
Q

How to measure the FV of a loan

A

1 - take all you actual future cash payments

2 - discount them down at the market rate

72
Q

IFRS 9 requires FVTPL gains and losses in financial liabilities to be split into:

A
  1. The gain/loss attributable to changes in the credit risk of the liability (to be placed in OCI)
  2. The remaining amount of change in the fair value of the liability which shall be presented in profit or loss
73
Q

Features of a convertible loan

A
  1. Better interest rate compared to normal loans
  2. Higher fair value of loan
  3. Lower loan figure in SFP
74
Q

How to calculate the FV of a convertible loan

A
  1. Take what is actually paid (cash flows) and discount them at the market rate for normal loans.
Dr cash (capital)
Cr loan (PV of cash flows from step 1)
Cr equity (the difference)
  1. Perform amortised cost on the loan
  2. at the end of the loan, bank decides whether to take the shares or cash.

Option 1: take shares

Dr loan (full capital)
Dr equity
Cr share capital
Cr share premium (balancing figure)

Option 2: take cash

Dr loan
Cr cash
Dr equity
Cr I/S

75
Q

Transaction costs with a convertible loan

A

Split the transaction costs pro-rata and reduce the balances by the amounts

76
Q

Financial assets - 3 categories measurement (initial, YE, gain/loss)

A

FVTPL

  • initial at FV
  • YE at FV
  • difference to P&L

FVTOCI

  • initial at FV
  • YE at FV
  • difference to OCI

Amortised cost

  • initial at FV
  • YE at amortised cost
77
Q

A financial asset that meets the following 2 conditions can be measured at amortised cost

A
  1. Business model test
    - do we normally keep our receivable loans until the end rather than sell them on?
  2. Cash flows test
    - are the only cash flows coming in from capital and interest?
78
Q

Financial assets FVTPL examples

A

Equity items held for trading purposes

Equity items not held for trading

Receivable Lon where capital and interest aren’t the only cash flows

79
Q

FVTPL accounting treatment

A
  • revalue you FV

- difference to I/S

80
Q

FVTOCI accounting treatment

A
  • revalue to FV

- difference to OCI

81
Q

Amortised cost accounting treatment

A
  • recalculate using the amortised cost table

- any expected credit losses and forex gains/losses all go to I/S

82
Q

Transaction costs effect on financial instruments

A

For FVTPL - go to income statement

For all else:
Asset - increase the opening balance

Liability - decrease the opening balance

83
Q

Accounting treatment for Treasury shares

A
  • deduct from equity
  • no gain or loss shown, even on subsequent sale
  • consideration paid or received goes to equity
84
Q

When to reclassify financial assets between FVTPL, FVTOCI and amortised cost

A
  1. Only if financial assets business objective changes
  2. Do not restate any previously recognised gains/losses

Reclassify prospectively from the reclassification date

Never reclassify FVTOCI equity investments

85
Q

When to reclassify FVTOCI equity investments?

A

Never!

86
Q

Equity FVTOCI de-recognised

A

No gain/ loss as FV will be up to date and gains/losses will already be in OCI

Not reclassified to I/S

87
Q

Debt FVTOCI de-recognised

A

No gain/ loss as FV will be up to date and gains/losses will already be in OCI

The cumulative revaluation gain or loss previously recognised in OCI is reclassified to profit or loss

88
Q

2 elements of embedded derivatives

A

1) a host contract

2) an embedded derivative

89
Q

Embedded derivative- accounting treatment (generally)

A

Take out the embedded derivative and treat it as a FVTPL

90
Q

When do we not separate out the embedded derivative

A
  • the embedded derivatives risks are closely related to those of the host contract
  • the combined instrument is measured at FVTPL anyway so no need to split
  • the host contract is a financial asset anyway so no need to split
  • the embedded derivative significantly modified the cash flows of the contract (whole instrument should then be measured at FVTPL)
91
Q

Embedded derivative definition

A

A seemingly normal contract that has terms which make the cash flows act like a derivative

92
Q

Hedging objective

A

To manage risk

Basic idea is to represent the effect of an entity’s risk management activities

93
Q

Changes to IFRS 9 (Financial instruments)

A
  • made hedge accounting more principles based to allow for effective risk management to be better shown in the accounts
  • allowed more to be hedged incl non-financial items
  • allowed more things to be hedging items (options and forwards)
  • no longer need to test for hedge effectiveness annually
94
Q

3 types of hedge

A

FV hedge I.e loan interest changes

Cash flow hedge

Hedges of a net investment in a foreign operation

95
Q

A hedged item can be…

A

A recognised asset or liability

An unrecognised commitment

A highly probable forecast transaction

A net investment in a foreign operation

And must all be separately identifiable, reliably measurable and the forecast transaction must be highly probable

96
Q

Hedge accounting criteria

A
  • economic relationship exists between the hedged time and the hedging instrument
  • credit risk doesn’t dominate the fair value changes
97
Q

Fair value hedged accounting treatment

A
  • Gains and losses of both the hedged and hedging item are recognised in the current period in the income statement
98
Q

Cashflow hedges accounting treatment

A

Effective changes in fair value of the hedging instrument are deferred in reserves.

Deferred gains/losses are then taken to the income statement when the hedged item eventually makes a gain or loss

99
Q

Hedges of a net investment in a foreign entity

A

Same as cash flow hedge. Changes in fair value of the hedging instrument are deferred in the OCI

100
Q

Special cases of hedging items which reduce p&l volatility

A
  1. Options - time value were meant when intrinsic value of option is the designated hedging item
  2. Forward points - when the spot element of a forward contract is the designated hedging item
  3. Currency basis risk - the spread can be eliminated from the hedge and either be valued as FVTPL or FVTOCI
101
Q

Impairment of financial instruments- expected credit loss model

A
  • Initially show 12m expected losses

Dr expense
Cr loss allowance (shown next to the financial asset - reduces it)

  • Then look to see if there’s significant increase in credit risk. If so, switch from 12m to lifetime expected credit losses
102
Q

How to calculate the expected credit loss

A

Use

  • a probability weighted outcome
  • time value of money
  • the best available forward-looking info
103
Q

Expected credit loss - assets with evidence of impairment

A

Lifetime expected credit losses recognised

Interest revenue is calculated on the net carrying amount (net of credit allowance)

104
Q

Expected credit loss- simplified approach

A

Just recognise a loss allowance based on lifetime expected credit losses at each reporting date

For trade receivables, contract assets with no significant financing component or contracts with a maturity of 12m or less

105
Q

Purchased or originated credit impaired financial assets

A

Credit impaired immediately
E.g.
- significant financial difficulty of the borrower
- A default
- probable that the borrower will enter bankruptcy
- disappearance of an active market for the financial asset

Show lifetime expected losses immediately

106
Q

Lease - definition

A

A contract that gives the right to use an asset for a period of time in exchange for consideration

107
Q

3 tests to see if the contract is a lease

A

Must be identifiable

Customer must be able to get substantially all the benefits while it uses it

Customer must be able to direct how and for what the asset is used

108
Q

How to value the lease liability

A

PV of the lease payments:

  • fixed payments
  • variable payments (if they depend on an index or rate)
  • residual value guarantees
  • probable purchase options
  • termination penalties
109
Q

How to value the lease right to use asset

A
  • the lease liability
  • any lease payments made before the lease started
  • any restoration costs (Dr asset Cr provision)
  • all initial direct costs
110
Q

How is the lease term calculated?

A

Period which can’t be cancelled

Any option to extend period if reasonably certain to take

Period covered by option to terminate if reasonably certain not to take up

111
Q

What does reasonably certain mean?

A
  • market conditions mean it’s favourable to do
  • significant leasehold improvements made
  • high costs to terminate the lease
  • asset is very important to the lessee
112
Q

Exemptions to leases treatment

A
  1. Short term leases
    - expense to IS on a straight line basis
    - same treatment for same class of asset
    - exemption only for lessees
  2. Low value assets
    - expense to IS
    - choose is made lease by lease
    - exemption only for lessees
113
Q

Indicators of a financial lease

A
  • majority of the risks and rewards are transferred to the lessee
  • ownership transferred at the end
  • option to buy at end at less than FV
  • lease term is for the majority of the assets UEL
  • PV of the future lease payments is close to the actual FV of the asset
  • asset is specialised and customised for the lessee
114
Q

Financial lease accounting treatment

A

Dr lease receivable

Cr asset

115
Q

What makes up the lease receivable for lessor?

A
  • PV of lease payments

- unguaranteed residual value

116
Q

Lessor accounting - opening lease receivable

A

Dr lease receivable

Cr PPE

117
Q

Lessor accounting - effective interest received

A

Dr lease receivable

Cr interest receivable

118
Q

Lessor accounting - amounts received

A

Dr cash

Cr lease receivable

119
Q

Lessor accounting- if operating lease

A

Keep the asset in SFP

Show lease receipts in the income statement on straight line basis

120
Q

Lessor accounting operating lease - negotiating costs

A

Any initial direct costs incurred by lessors should be added to the carrying amount of the asset on the SFP and expenses over the lease term

121
Q

Lessor accounting operating lease - incentives

A

Lessor should reduce the rental income over the lease term on a straight line basis

122
Q

Sale and leaseback

A

Option 1 - sold under IFRS 15

Step 1 - take the asset out
Dr cash
Cr asset
Cr initial gain in sale

Step 2 - bring in the right to use asset
Dr right to use asset
Cr finance lease/liability
Dr/Cr gain in sale

Option 2 - not a sale under IFRS 15

Seller/lessee leaves the asset in their accounts and accounts cash received as a financial liability

Buyer/lessor accounts for the cash paid as a financial asset (receivable)

123
Q

How much to show the right to use asset at?

A

The proportion of our old carrying amount

(PV of lease payments DIVIDE FV of the asset) MULTIPLY carrying amount before sale

124
Q

How much do we show the financial liability at?

A

PV of lease payments

SBR ACCA (8 decks)

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