Revision Flashcards
How to know if something is equity or financial liability
If obligated to pay cash then it is a liability if option to pay cash then usually equity
What is the definition for financial assets
Equity investments in another company or contractual rights to receive cash
What is the definition for financial liability as in financial instruments
Contractual obligation to deliver cash
What is the definition for equity as in financial instruments
Residual interest in assets after deducting the liabilities
What does it mean when question say issue
It means that they are issuing either liability e.g. debt or equity e.g. shares for something in return usually cash
Steps for impairments
Must be an impairment indicator or annually if goodwill or intangible has infinite life
Impair the cash generating unit which is an independent stream of income
Compare carrying amounts versus recoverable amount
Loss goes into profit and loss
Types of rights when considering control
Protective rights
New control e.g. managing articles of association
Substantive rights
Right to the have power over investees
How is FRS 102 difference to IFRS
PPE
Rather than annual reviews for impairments it’s only when indicators for change are present
Borrowing costs
Can be expense rather than capitalised
Subsidiaries
Can be excluded from consolidation when either long-term restrictions hinder parents over subsidiaries assets or the subsidiary was acquired solely for resale and hasn’t been used in the consolidated accounts
Intangibles
Can choose not to capitalise and Does not have indefinite life. Must be less than 10 years
Goodwill
Use proportionate share method and amortised over life not exceeding 10 years
What is a cash generating units
It is the smallest identifiable group of assets which is an independent stream of income
How to account for subsidised loan on adjusted present value
Firstly calculate the tax shield and then calculate the subsidiary benefits
Points to consider with debt versus equity
Debt is cheaper due to tax shield since interest is paid before a company pays its corporation tax
More debt equals more risk so cost of capital is higher
The cost of capital is higher weighted average cost of capital is lower
Static trade of theory looks to find a balance
Pecking order theory. First retained earnings second debt third equity
What are the two types of applications within provisions
Legal and constructive (past practice aka if paid for similar issues in past they should continue to do so)
What are the conditions for something to be capitalise as development
Sell or use
Expense e.g. measure costs reliably
Commercially viable
Technically feasible
Overall future economic benefits
Resources to complete
What is the concentration test
If the fair value of gross assets is concentrated within one assets that it is not a business
How should a contingent liability be valued at
The percentage amounts multiplied by the contingent liability amount and then discounted to present value
What are operating segments
It is disclosing segments of the business which is material so users of accounts can see which areas are influential
To qualify
More than 10% of total revenue. If not then
More than 10% of total profits. If not then
10% of total assets
Overriding rule is 75% of revenue must be separated out if not then more segments need to be disclosed
What is a provision
Present obligation as a result of past events
Probable transfer
Measure outcome reliably
Credit provisions debit profit and loss
How to recognise a lease
Initially
Debit right to use assess at amount Of lease liability plus costs
Credit lease liability which is the present value of lease payments over term
Subsequently
Right to use assets at cost less accumulated depreciation
Lease liability at financial liability at amortised cost
How to identify a lease
The right to control the use of an identified asset For a period of time in exchange for consideration.
Control is defined as the right to direct use of asset and to obtain substantially all of the economic benefits.
How to record lease through P&L rather than statement of financial position
Either less than 12 months lease
Or low value leases e.g. under £5000
How to account for equity based options
We take the star value at the grants dates and don’t change as movements in share price of benefits for the employee. We spread it out over the vesting period. For example if we had 10,000 share options for five of its directors and they have to stay in the position for three years(three-year vesting period) and after one year to directors will leave and after two years one director will leave and the grant date price is $30 then
Year one
SFP 300,000 (10,000 x 30 x 5-2 x 1/3)
P&L 300,000
Year 2
SFP 800,000 (10,000 x 30 x 5-1 x 2/3)
P&L 500,000 (b)
How to account for cash base share based options
The same as equity base options however we credit liability and not equity and the fair value is calculated at each reporting date rather than just the grant date
What are the dates to remember with ShareBase payment
Grant date - today
Vesting date - number of years from grant date and when employees are entitled to share option/cash
Vesting period - difference between grant and vesting date
Exercise date - when employees receive payment
What we impairment indicators
External
Decline in market value
Advancement in technology
Internal
Physical damage
Use of item (idle)
Operating losses from item
Loss of key personal
How to record investment property
Valued at cost then revaluation. Gain and losses go through P&L as like rental income and don’t depreciate.
How to recognise government grants
Recognise when received or comply with conditions
Recognised as deferred income E.g. bought PPE for £10 million over 10 years and given a government grant of £2 million. Each year 1/10 of 10, million and 2 million goes into profit and loss
Disposing of a foreign subsidiary
Gains and losses are stripped out of OCI and go through PL
How to record foreign transactions (group)
Before consolidating record both monetary and nonmonetary transactions at closing rate gains and losses are not recorded in PL But OCI instead
How to record foreign transactions (individual accounts)
Record transaction at rate when transaction occurred
At reporting date
If monetary re-translate at closing rate with difference going through PL
Non-monetary don’t re-translate
What is the retained earnings pro forma
100% of parents
Parents share of subsidiary post acquisition retained earnings
Parents share of associates post acquisition retained earnings
Less impairments
What must be stripped out of consolidated accounts
Unrealised profits
Intracompany group sales and cost of sales
How to account for bond with anticipated credit loss
As it’s a financial asset initially at fair value plus cost. Let’s say a $10,000 credit loss is expected but it is low risk we credit allowance for impairments accounts to offset as it’s the amount for one year. For next year recognise bond as normal at amortised cost and if risk increases increase allowance account further.
How to accounts for impairments of financial assets
It would credit allowance for impairments (bad debt provision) and debit PL. The amounts depends on the risk factor.
Stage one
Initial recognition when no subsequent significant deterioration in credit quality. Present value of expected credit losses 12 months after reporting date.
Stage two
Significant deterioration in credit quality (30 days arrears). Impairment recognise at present value of expected credit shortfalls (lifetime expected credit losses)
Stage three
Objective evidence of an impairments. Again lifetime expected credit losses
Went to classifies something as discontinued operation
When it is disposed of
Or if house for sale and:
Separate major line of business or geographical area
Single coordinated plan
Subsidiary acquired exclusively with plan to resell
What is meant by the discontinued operation
Within the numbers of revenue cost of sales profit et cetera will be discontinued operation and to ensure use a spotted this we had a line in PL
How to account for non-current asset held for sale
Must be available for immediate sale and sell highly probable (less than one year)
It is valued at lower of carrying value and fair value less cost of sale
Once classified as non-current asset health for sale if there is no longer depreciated
Sale goes through PL
How to account for a foreign currency assets owned by a subsidiary
Imagine subsidiary deals in euros when we first acquire subsidiary with value assets at fair value and also convert to pounds on date of acquisition. We then depreciates/amortised over life of assets then we we calculate exchange rate reporting date using the closing rate and foreign exchange differences go through OCI.
Income and expenses are translated as exchange rate at date of transaction
What is the definition of functional currency
Currency of the primary economic environment in which the entity operates. Factors to consider –
Currency that dominates determination of sale price
Currency that most influences operating costs
What is an intangible assets
An identifiable non-monetary assets without physical substance. Identifiable means it is either separable or has legal/contractual rights
How is control defined within a subsidiary
Power over the investee
Exposure to all rights to variable returns from its involvement with investee
Ability to use its power over investment to affect amount of investors return
What is the definition of fair value
The price that would be received to sell an asset or paid to transfer liability in an orderly transaction between market participants at the measurement date
How to identify performance obligations
If the goods and services are distinct (could be sold separately) if not must be bundled
This means they are separately identifiable
Also customers can gain benefits from the performance application. E.g. if you buy a license and the license comes with updates then it would be considered as a bundle because without the updates the customer would not receive the correct level of benefit
What is pro forma for no control into control
Do you recognise currents 40% back to Nil
Recognise 40% at fair value and difference goes through PL
Usual pro forma from there
What is the pro forma for equity accounting
Cost + percentage of post acquisition reserves - dividends received
What is the pro forma from going from control to control
All that changes is NCI either increases or decreases so debit/credit bank and debit/credit NCI movements and difference goes through SOCIE
How are subsidiaries included in the statement of financial position
Net assets plus Goodwill
When can deferred tax assets be utilised
Deferred tax asset is when the tax base is higher than the carrying value I can only be recognised when profits are realistically expected in the future
How to work out deferred tax
What is the difference between carrying value and tax base
Multiplied by tax rate
Is it asset or liability (if carrying value is greater than tax base it’s a liability and vice versa)
Movements goes through PL (income tax expense and deferred tax provisions)
How to deal with convertible loans
Let’s say we issue $1 million loan with a nominal value of $100 Similar debt is 6% effective rate is 6.34%. Firstly debits cash $99 million and split out of credit to equity (balancing figure) and liability. To get liability work out the net present value so let’s say three years at 6% plus $100 nominal With discount factor of 6% is $94.7 million we take the 99,000,000×94.7% to give liability and difference to equity. No equity doesn’t change but we do usual table to get carrying forward position of $100 million after three years and the end of period either credit cash or equity as well as debit liability
How to account for financial liabilities
Initial measurement is fair value less transaction costs
Subsequently via amortise costs (use table)
How to accounts for a debt instruments within financial assets
Use the amortisation table
How to account for financial assets within financial instruments
Initially recognised at fair value plus transaction costs.
Then subsequently Each year we value of fair value and the gain or loss expense movement PL unless IRREVOCABLE elect to put through OCIas less volatile.
This is for equity instruments like shares and amortised cost if debt instrument like lending money
What is the pro forma from control to no control
Add sale proceeds and fair value of remaining shares
Less net assets plus goodwill less noncontrolling interest
What is the recoverable amount
Higher of fair value less cost to sell and value in use
What are examples of revenue recognition at a single point in time
Present right to payments for the assets
Transfer legal title of the assets
Transferred physical possession of the assets
Transferred the risks and rewards of ownership to the customer
Customer has accepted the asset
Requirements for identifying a contract
The contract is approved by all parties
The Rights and payment terms can be identified
The contract has commercial substance
It is probable that revenue will be collected
How to workout revenue when there is free interest (usual interest 5%)
Let’s see a car then we discount the value of the car by the number of years of free interest and the usual interest rate. This amount and then goes into revenue and then each year we unwind the amount and put it in finance income
How to accounts for revenue that has a bundle price
Set up two columns. First column call individual and second column called bundle. In the rose put the difference items within the performance application and sports in the individual prices with a total at the bottom. The total of the bundle amounts put in what the bundle amount is and then divide the individual amounts by the total individual amount multiplied by the bundle total. You will notice that if you add all the bundles up they should come to the total bundle amount
How to define over A period of time within revenue recognition
If the customer simultaneously consumes the benefit of the performance
What are the areas of sustainability
Environmental conduct
Social conduct
What are the asset recognition rules
If virtually certain recognise the asset
If probable disclose
If possible ignore
What are the liability recognition rules
If probable create a provision
If possible disclose in the notes
What are the levels within fair value
Level one input
Quoted prices in active markets for identical assets and liabilities
Level two input
Inputs of the quoted market prices:
Quoted prices for similar assets or liabilities in active markets
Quoted prices for identical assets in markets that are not active
Inputs other than quoted prices that are observable e.g. interest rates
Level three input
Unobservable imports where there is little if any active market
What are the liquidity ratios
Current ratio
Quick ratio
What are the efficiency ratios
Receivables collection
Inventory holding
Payable days
What are the gearing ratios
Debt to equity
Debt to debt and equity
Operational gearing
What are the investor ratios
Dividend cover
David and yield
Interest cover
Interest yield
Earnings per share
Price earnings ratio
What are the profitability ratios
Return on capital employed
Operating profit margin
Gross profit margin
Asset turnover
What is return on capital employed
PBIT / capital employed
What is asset turnover
Revenue / capital employed
What is debt to equity ratio
Non current liabilities / ordinary shareholder funds
What is operational gearing
Contribution / PBIT
What is the dividend cover
Profit after tax / total dividend
What is dividend yield
Dividend per share / share price
What is interest cover
PBIT / interest
What is interest yield
Coupon rate / share price
What is earnings per share
Profit after tax - preference shares / number of shares
What is price earnings ratio
Share price / EPS
What are the two types of leases for the lessor
 Finance lease
If risks and rewards of ownership transfer to Lessee
Operating lease
Any other lease other than finance lease. Risks and rewards have not been transferred. Continue to recognise asset and depreciate etc and money receive is just rental income which is expensed
What are the two types of leases for the lessor
Finance lease
Risks and rewards of ownership transfer to Lessee. As no longer control asset, derecognise asset and recognise a receivable
Operating lease
Examples of finance lease
Ownership passes at the end of lease term
Option to purchase assets below fair value at end of lease
Lease term represents the major part of the assets economic life
Present value of minimum lease payments represent substantially all of the assets fair value
Lease assets is specialised in nature
Difference between principal and agent
An agent is like an intermediary so we should only book the commission as revenue. For example if a third-party buys goods and we are invoiced for those goods however we then also invoice the third-party with a management fee on top for those goods sent as agents which the only recognise the management fee in the PL
What is an onerous contract
Where costs exceed revenues
Provision would be the lower of costs of performing contact and costs of cancelling contact
What information do investors expect from financial statements (framework) (characteristics of financial information)
Fred ran under the Chelsea viaduct
Faithful representation, relevance, understandability, timeliness, comparability, verifiability
What are the types of hedge accounting
Fair value hedge
Relevant to a business who is concerned about fair value of recognised asset. Gains or losses go to pl
Cash flow hedge
Concerned about cash flows from highly probably future transactions. Gains or losses on derivative go to OCI
