Revision Pack Flashcards
(i) What is the core principle behind IFRS 8: Segmental reporting?
- issued to set out disclosure requirements regarding an entity’s operating segments, products and services, geographical areas of operation and major customers.
- part of the programme to achieve worldwide convergence of standards including US GAAP
- help users to evaluate the nature of a company’s business activities and the financial effects of those business activities
- helps users to evaluate the economic environments in which a company operates.
(i) Which entities lie within the scope of IFRS 8?
IFRS 8 applies to entities with equity or debt which is publicly traded, or about to be issued.
Financial Instrument
A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.
Financial Asset
- cash
- a contractual right to receive cash or another financial asset from another entity
- a contractual right to exchange financial assets/liabilities with another entity under conditions that are potentially favourable
- an equity instrument of another entity.
Financial Liability
- to deliver cash or another financial asset to another entity, or
- to exchange financial instruments with another entity under conditions that are potentially unfavourable
Equity
any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities
objective of IAS 19: Employee benefits
- prescribe accounting treatment for employee benefits
- employee benefits = consideration in return for service
- cost of providing benefit should be recognised when benefit earned, not when paid
- costs matched to benefit derived from service
- the liability to pay a future pension and the pension commitment liability can be the largest liability in an entity’s balance sheet
For a defined benefit scheme, discuss the types of uncertainties and risks surrounding the calculation of plan assets and defined benefit obligations.
Uncertainties for plan assets: returns from investments, movements in asset valuation
Uncertainties for plan liabilities: life expectancy, pension rate, rate of leavers, probability of death in service
IFRS 2: Share Options
- fair value of employees’ services is measured as the fair value of the share options in the company
- transaction is first recognised on the day the share options are granted to the employees
- issuing shares to employees with i.e. a three-year vesting period is considered to relate to services over the vesting period
- The fair value of the share-based payment, determined at the grant date, should be expensed over the vesting period
Why does IAS 24 require the disclosure of related party transactions?
- may be at FV of harmful or beneficial to company if not at FV which is useful to know for SHs
Explain the concept of substance over form with reference to IFRS 16: Leases.
- should be applied to all accounting areas
- when recognising transaction pay attention to economic reality rather than just legal form
- IFRS 16 looks at economic reality of lease rather than legal ownership
- effect of lease is similar to borrowing money and buying asset outright so need to recognise asset and liability component
functional currency
- currency of the primary economic environment where the entity primarily generates and spends cash
Indicators of functional currency:
- currency that mainly influences sales prices and that mainly influences labour and material costs
- currency in which a company raises funds
- currency in which operating receipts are retained
Presentation currency
currency in which the financial statements are presented and this can be any currency which the entity chooses
BEPS
- for more reliable trend than profits
- accounts for extra investments in shares which may lead to higher earnings, so more reliable
- not useful for comparing different companies because doesn’t account for nominal value of shares
- use P/E ratio instead
Diluted EPS
- warning to SHs as events happening in which finance providers and holders of share options may become ordinary SHs in future
- earnings would be spread over larger amount of shares
- forwards thinking, BEPS is backwards thinking
- anti-dilusive measures can be ignored under IAS 33
- no forecast just current EPS adjusted for possible future changes
Limitations of EPS
- past trend may not be good prediction for future as managers may have focused on current earnings rather than investing in future growth
- doesn’t account for inflation so doesn’t show real growth
- can’t compare with other entities as different accounting policies used and EPS doesn’t account for nominal share value
Operating segment
- component of an entity that creates revenue and incurs expenses through normal business activity
- has resources allocated and performance reviewed by CODM
- can be start-up operation
- not normally corporate function
- has separate financial information available
Reportable Segment
- passes at least one of the 10% rules:
1. segments revenue from internal and external operations is at least 10% of total combined internal and external revenue
2. segments asset are at least 10% of total assets
3. segments absolut profit or loss is at least 10% of the higher of total absolut profit or loss
Segment aggregation - when?
- segments share similar economic characteristics and have similar - product/ service - production process - distribution method - regulatory environment - customer base
Why do managers want to aggregate segments?
- reduce commercially sensitive information available to competitors
- hide information about poor segments from investors so directors don’t look bad
