Question Bank PB's Flashcards
Describe any differences between UK GAAP and IFRS in respect of financial reporting treatment on the disposal of a subsidiary (2 marks)
IFRS 102: Discontinued results are presented in full in separate column (Discontinued operations) in CP&L. The amounts are re-stated in comparative figures.
IFRS 5: Presented as one line in statement of P or L. Th amount comprises of post-tax profit or loss of discontinued operation and post-tax profit or loss on disposal.
Describe any diffs between IFRS and UK GAAP in respect of calc of goodwill on acq of a subsidiary and the measurement of its NCI. (3 marks)
IFRS: Goodwill and NCI can be calculating using the proportionate method or the FV method. Choice available.
UK GAAP: More restrictive than IFRS when calculating, doesn’t permit a choice. NCI, which is known as minority interest, is always calculating using the share of NA (i.e. proportionate basis)
IFRS: Goodwill not amortised, annual impairment reviews.
UK GAAP: Goodwill amortised over UEL. In exceptional cases where reliable estimate can’t be made, assumed not to exceed 10 years (but rebuttable). Annual impairment isn’t required, if impairment was identified this would be recognised.
IFRS: FV method for measuring the NCI means impairment is split between parent and NCI
UK GAAP: As proportionate method is applied, none of the impairment is allocated to NCI.
Explain substance over form and explain how it should be applied to Finance leases and Convertible bonds
SOF is the idea that a commercial transaction should have the same effect as its economic substance. Not always the case in more complex transactions where the true substance may be different to the legal form, with 1 party haing the risks and rewards of ownership, but another party having legal ownership. Therefore, those with the risks and rewards have the economic substance of ownership
In these situations, the legal form of the transation doesn’t sufficiently show a fair presentation in te FS. FS are required to meet the qualitative charactiersitc of subtsance over form.
Substance over form is principle that transactions and other events are accounted for and presented in accordance with their econ substance rather than their leal title. Should be applied to all acc areas in acc with FRS 102 Section 2 Concepts and Pervasive Principles.
Both finance leases and convertible bonds are examples of substance over form.
Under finance lease, lessor retains legal ownership, but lessee is transferred the risks and rewards, and has the asset over majority of its UEL. During the period, the lessee is controlling the asset and has the econ benefits generated by th sse.
In addtiion the PV of minimum lease payment amounts to at least substantilly all of FV of the leased asset, thereby suggesting that the lessee is actually paying th current market price for the asset under financing arrangement. The cost of the aset is therefore known. the legal title may or may not pass ato the lessee at the end of the lease term.
In essense, the lessee has all the risks and rewards of ownership and therefore the leased item should be recognised in the balance sheet of the lessee, along with a liability for the lease payments, event though they may not have legal title to the asset.
What is the principle of legal substance over form, and show how this should be applied to convertible bonds
SOF is the idea that a commercial transaction should have the same effect as its economic substance. Not always the case in more complex transactions where the true substance may be different to the legal form, with 1 party haing the risks and rewards of ownership, but another party having legal ownership. Therefore, those with the risks and rewards have the economic substance of ownership
In these situations, the legal form of the transation doesn’t sufficiently show a fair presentation in te FS. FS are required to meet the qualitative charactiersitc of subtsance over form.
Substance over form is principle that transactions and other events are accounted for and presented in accordance with their econ substance rather than their leal title. Should be applied to all acc areas in acc with FRS 102 Section 2 Concepts and Pervasive Principles
The convertible bonds are hybrid financial instruments that contain both a liability and equity component. THe substance of this is the same as issuing a non-coonvertible bond and an option to purchase shares. The substance of te instument is followed, and therefore a separate liability and quity component are accounted for, rather than following its legal form of a financial liability.
Explain the impacts of revaluation on distributable profit
Revaluation of building upwards reval which leads to a surplus. Reval gains are unrealised unless they reverse a loss previously treated as realised. Therefore, there is no impact on distributable profits from reval gain.
Reval downwards leads to loss. Reversal of previous upwards revals are also unrealised, and therefore have no impact on distributable profits.
But any further loss that isn’t reversing a previous upwards reval is realised immediately, and directly reduces distributable profits.
Additional dep’n on upward revals reduces profit, but it can be added back when calculating distributable profits. This can be reflected in reserves transfer between P&L acc reserve and reval reserve.
How do you calc EPS when there has been a bonus issue?
Earnings per share
Earnings = PAT
Shares = weighted average number of shares
if there has been a bonus issue, would need to calc TERP (theoretical ex rights price)
E.g. 1 for 5, market price = £1.95 at issue, bonus issue at £1.35
5 at £1.95 = 9.75
1 at £1.35 = £1.35
Total for 6 = £11.10
£11.10/6 = £1.85
TERP = 1.95/1.85, to be multiplied to x months of shares before bonus issue
Explain diff acc treatments for gvmt grants
Accruals method - split between revenue/assets
- Put grant to deferred income and release over UEL/ period the amount is used for
- Recog as deferred income and not deducted from NBV of asset
- Comes off expense code
- If for prev expense/loss then recog immediately
- If not for specific purpose, recog when becomes receivable
Performance model
- If there are criteria to meet, then should recog when criteria has been met
- If not criteria, recog when it becomes receivable
- Grants received before revenue recog criteria are set must be shown as a liability
How does info re tangible assets help users understand the financial position?
- Financial position of an entity is affected by econ resources it controls, its financial structure, its liquidity, its solvency and its capability to adapt to changes
- Info re NBV of TFA on BS gives indication of resources available for LT use in bus. Revalued figures are more relevant than cost
- Broken down figure in notes helps with further understanding. Shows change in financial position in year
E.g. some land might be used for investment rather than to build offices etc. Plant will generate future benefit. Equipment may generate benefit or be used for admin etc.
Leased assets are disclosed to give info about future cost relating to assets. This affects liquidity and solvency. ‘capital commitment’ note shows future purchases of FA which the entity is committed to suggests future finance.
Acc policy note shows valuation model used and dep’n methods, which allows comparisons to others
What affects a firms financial structure?
affected by econ resources it controls, its financial structure, its liquidity, its solvency and its capability to adapt to changes
How does info re TFA help users understand financial performance?
Info re financial perf, especially profitability is needed to assess potential changes in econ resources that the entity is likely to control in the future
Disclosure of annual dean charge shows the cost of using the assets
Disclosure of significant gains/losses may indicate problems with depn method or where market value is less the NBV
Impairment losses may indicate underlying issues, such as an under provision of depn or a downturn in a particular market sector which might affect performance in future
How does info on TFA meet the needs of financial users re cash flows?
An analysis of cash flows is shown in SCF
Allows users to assess the ability of the entity to generate cash and its need to use what is generated
Users will see tangible fixed assets purchased during the year and cash inflows from tangible assets disposed of
If few are purchased but many are disposed of, users may be concerned about the future of the entity
