Part C5-11: Reporting The Financial Performance Of Entities Flashcards
Types of post employment benefit plans
Defined contribution
- company promises to pay fixed contributions into a pension fund for the employee and has no further obligations
Defined benefit
- obligation to pay a defined pension
Past service cost - definition and treatment
This is the change in the pension plan resulting in a higher pension obligation for employee service in prior periods
Should be recognised immediately
Dr income statement
Cr pension liability
Current service cost - definition and treatment
Increase in pension liability due to benefits earned by employee service in the period
Dr income statement
Cr pension liability
Interest cost on pension - definition and treatment
The unwinding on the discount of the pension liability
Dr interest
Cr pension liability
Contributions to pension fund accounting treatment
Dr pension asset
Cr cash
Benefits paid accounting treatment
Dr pension liability
Cr pension asset
Termination benefits - when to recognise
Amount payable only recognised when committed to either
- terminating the employment of employees before the normal retirement date; or
- providing benefits in order to encourage voluntary redundancy
Discount down if payable in future
Any pension asset recognised should be valued at..
The lower of
- the net total calculated
AND
- the net total of
i) past service costs not recognised as an expense
And
ii) the PV of any economy benefits available in the form of refunds from the plan or reductions in future contributions to the plan
Defined contribution plan
The enterprise pays fixed contributions into a fund and has no further obligations
Contribution payable is recognised in the income statement for that period
If contributions are not payable until after a year they must be discounted
Curtailments - definition and treatment
An amendment made to the plan which improves benefits for plan members
An increase to the obligation (and expense) is recognised when the amendment occurs
Dr P&L
Cr PV of defined benefit obligation
Settlements - definition and treatment
A settlement eliminates all further obligations
The gain or loss on a settlement is recognised in P&L when the settlement occurs
Dr PV of obligation (as advised by actuary)
Cr FV plan assets transferred
Cr cash (paid directly by entity)
Cr/Dr profit or loss
The Asset ceiling test
The net pension amount can’t be shown at more than its recoverable amount
So any net pension asset gets measured at lower of:
- net reported asset
Or
- PV of any refunds/reduction of future contributions available from the pension plan
Impairment loss charged immediately to OCI
What tax rate to use for unrealised profit adjustments?
IAS12 says to use the tax rate of the buyer
When to recognise a provision and at how much?
- there is an obligation (constructive or legal)
- there is a probable outflow
- it is reliably measurable
For a large population of items use expected values
For a single item the most likely outcome may be the best estimate
Contingent liabilities definition
A disclosure in the accounts
They occur when a potential liability is not probable but only possible
Or when not reliably measurable
Contingent assets definition
Prudence is important here!!
Must be virtually certain rather than just probable
Contingent liabilities probability test
Remote chance of paying - do nothing
Possible chance - disclosure
Probable chance - create a provision
Contingent assets probability test
Remote chance - do nothing
Possible chance - do nothing
Probably chance - disclosure
Virtually certain- create an asset in the accounts
Specific types of provisions
Future operating losses
Onerous contracts
Restructuring
Should we provide for future operating losses?!
No as there is no obligation
When to create a provision for restructuring
When there is a detailed formal plan
AND
There is a valid expectation in those affected that it will carry out restructuring by starting to implement a plan or announcing it
Provide only for costs that are
- necessarily entailed by the restructuring
- not associated with the ongoing activities of the entity
Should there be a provision?
1 Warranties
2 Major repairs
3 Self insurance
4 Environmental contamination clearance
5 Decommissioning costs
6 Restructuring
7 Reimbursements
1 Yes as legal obligation. Expected values
2 No. treated as replacement NCAs
3 No. no obligation
4 Yes if legally required or if other parties would expect it as known policy
5 Yes as a debit to asset
6 Yes if formal plan in place (don’t provide for training/marketing etc)
7 only when virtually certain
When is the after the reporting date period?
Anytime between the period end and the date that the accounts are authorised for issue
The types of share based payments
1 Equity-settled share-based payment
2 Cash-settled share-based payment
3 Transactions with a choice of settlement
Equity settled share based payments treatment
Dr expense
Cr equity
Cash settled share based payments treatment
Cash is paid based on share price
Dr expense
Cr liability
Vesting period definition
Often share based payments are not immediately payable. The expense is spread over the period. This period is the vesting period
How much to recognise for share based payments
Option 1: Direct method
- use the FV of the goods or services received
Option 2: Indirect method
- use the FV of the shares issued by the company
For equity settled - use FV of shares @ grant date
For cash settled - update FV of shares each year
IFRS 2 suggest using option 1 unless FV cannot be reliably measured
Modifying equity instruments - accounting treatment
- Continue to recognise the original FV of the instrument in the normal way
- Recognise any increase in FV at the modification date (or any increase in number of instruments granted) spread over the period between modification date and vesting date
- If modification occurs after vesting date, additional FV must be recognised immediately, unless there is an addition service period
Equity instruments cancellations and settlements - accounting treatment
Charge any remaining FV immediately in P&L
Any amount paid to the employees by the entity on settlement should be treated as a buyback of shares and should be recognised as a deduction from equity
If the amount of the payment is in excess of the FV of the equity instrument granted, it should be recognised immediately
Cash settlement made to an employee on cancellation- accounting treatment
Dr equity
Dr IS
Cr cash
Share-based payments - which do you apply to IFRS 2?
Applies to all entity’s (incl private or small)
Only when shares are issued in return for goods and services only
Share appreciation rates Employee share purchase plans Employee share ownership plans Share option pans Plans where share issues depend on certain conditions
The FV hierarchy
Level 1 inputs
- quoted prices in accessible active markets for identical assets
- the most reliable and used without adjustment
Level 2 inputs
- observable inputs (other than quoted market prices)
- include quoted prices for similar assets in active markets, inputs corroborated by observable market data (I.e. correlation)
Level 3 inputs
- unobservable inputs for the asset
Most advantageous market definition
The market that maximises the amount received (after transaction costs and transport costs)
Principle market definition
The market with the greatest volume and level of activity
The three valuation techniques
Market approach
- uses prices generated by market transactions of identical or comparable assets
Income approach
- converts future cash flows to a sing current (discounted) amount
Cost approach
- the amount needed to replace the device capacity of an asset (current replacement cost)
Examples of simplifications for IFRS for SMEs
- Goodwill and other indefinite life intangibles are amortised over their useful lives, but if it cannot be reliably estimated then 10 years
- simplified calculation is allowed if measurement of a defined benefit pension plan obligations in old undue cost or effort
- cost mode is permitted for investments in associates and JVs
IFRS for SMEs
More user friendly
Easier transition to full IFRS
Cost benefit improvement by relaxation of some measurement and recognition criteria
Stewardship not so important
May improve access to capital
IFRS for SMEs- research and development and borrowing cost treatment
All research and development costs and all borrowing costs are recognised as an expense
IFRS for SMEs- NCAs and goodwill treatment
Cost model only
All intangible assets including goodwill are assumed to have finite lives and are amortised
When can you recognise a government grant?
When there is reasonable assurance that:
- entity will comply with any conditions attached
- the grant will be received
IAS 20 (government grants) does not apply to the following conditions
- tax breaks from the government
- government acting as part owner of the entity
- free technical or marketing advice
Accounting for government grants approaches
Capital grant approach
Income grant approach
Capital grant approach - accounting for cr cost of asset
Dr cash
Cr cost of asset
Will reduce depreciation to the income statement and the asset on the SFP
Capital grant approach- accounting for cr deferred income
Dr cash
Cr deferred income
Will keep full depreciation and full asset and liability on the income statement and SFP respectively
Then
Dr deferred income
Cr income statement (over life of asset)
Non-monetary government grants
Use FV to put a value on asset gifted
Accounting treatment for capital grant repayment
Dr any deferred income balance or cost of asset
Dr income statement with balancing figure
Cr cash amount repaid
Any extra depreciation to date should be recognised immediately as an expense
Accounting treatment for income grant repayment
Dr income statement
Cr cash
Income grant approach - accounting treatment
Dr cash
Cr other income (or expense)
Minimum content of an interim financial report
Condensed balance sheet Condensed income statement Condensed statement of changes in equity Condensed cash flow statement Selected explanatory notes
Accounting policy definition
Specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting the financial statements
When to makes changes to accounting policy
If it is required by a standard or interpretation
If it would give more relevant and reliable information
What to change for changes in accounting policy
Adjust the comparative amounts for the affected item
Adjust the opening retained earnings
Accounting estimates definition
An adjustment of the carrying amount of an asset or liability, or related expense, resulting from reassessing the expected future benefits and obligations associated with that asset or liability
Examples of accounts estimates
Allowance for doubtful debt
Inventory obsolescence
A change in the estimate of the useful economic life of PPE
Examples of accounting policies
Valuation of fixed assets
Depreciation methods
Recognition of goodwill
Inventory valuation
Accounting treatment for post period errors
Adjust the comparative amounts for the affected item
Adjust opening retained earnings
