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
Profit Margin
Profit/Revenue x 100
Return on Asset
Profit/Asset x 100
Asset Turnover
Revenue/Asset
Major customer
if one customer accounts for 10% or more of total sales.
Disclosures requiered:
1. There is a major customer
2. Segment it relates to
Don’t have to disclose customer name or amount
IFRS 8 Operating Segments - Strenghts
- information useful to investors as same information directors use and make available
- reduced reporting cost and burden as same information for internal and external use
- ratio analyses possible
- compliant with US GAAP
IFRS 8 Operating Segments - Weaknesses
- information may be manipulated by directors
- reporting divergencies
- difficult to reconcile
- no country by country reporting requiered
- narrative may differ from financila analysis
IFRS 8 Operating Segments - Disclosures
- General Information:
How do segments create revenue, how have they been allocated, what factors were considered - Information about reportable segments:
Profit/Loss and any other information provided to CODM - Reconciliation:
E.g. reconcile total revenue - Entity-wide information:
External Revenue and NCA analysed between home:foreign
Major customer disclosures
What is a related party transaction under IFRS 24?
Transaction between entity and related party for products/ services or obligations no matter if price paid or not
What is a related party?
- entity has control or significant influence
- key management personnel and family
Related party transactions - disclosures required
- nature of transaction including T&Cs
- amount
- nature of relationship
Definition: Intangible Asset
Identifiable, non-monetary asset without physical presence
Meets recognition criteria
IAS 38 - Recognition Criteria
Identifiable
Controllable
Possible economic benefit
Cost measured reliably
IAS 38: When can revaluation model be used?
If active market:
- homogenous items
- buyers and sellers available at all times
- Prices available
IAS 38: Treatment for assets with indefinite UEL
review for impairment annually
review for UEL, if available start amortising
IAS 38: When can development cost be capitalised?
Possible future economic benefit Intention to finish and sell Resources available and adequate Ability to use and sell Technically feasable Expenditure measured reliably
IFRS 16: Lease of low value assets
Simplified treatment for low value items, e.g. office furniture, small computers, phones
Don’t recognise Asset or Liability but only expenditure on straight line basis
Why revise basic earnings per share figure for previous years?
- enable investors to see a trend
- removes effect of just increasing number of shares
- important because no new resources or cash have come into the entity
Journals for share options
- over vesting period: DR P&L CR Equity (use FV or price employees will pay) - at grand date: DR Cash (use actual market price) CR Ordinary Share Capital CR Share Premium
Research cost definition and treatment
- original and planned investigation undertaken with aim of gaining new scientific knowledge and understanding
- does not lead to guaranteed future economic benefits
- written off to P&L as expense when they occur
Development cost definition and treatment
- application of research findings or knowledge to a plan or design for the production of new/ substantially improved materials etc. before the process of commercial production
- can be capitalised if meet PIRATE criteria
Additional factors to consider for overseas subsidiary when determining functional currency
- are sub’s activities carried out as an extension of parents activities rather than with significant degree of autonomy
- are transactions with parent a high or low proportion of sub’s activities
- are cashflows readily available to send to parent
What does the P/E Ratio say?
- the higher the better
- the lower the lower the trust from the market for future profitability
- the lower the riskier
- price stated on the day so could reflect temporary increase/decrease in share price
Monetary item
- gives rise to cash movements
- fixed amount of currency
- e.g. receivables/ payables, foreign bank account
Non-monetary item
- absense of right to receive money or obligation to pay money
- e.g. PPE, Prepayment, Intangible
Presentation Requirements for EPS
in SOCI include:
- ) Basic and diluted EPS for company as a whole and continued operations
- ) optionally include basic and diluted EPS for discontinued operations (if it’s not here must be in disclosure notes)
Disclosure requirements EPS
- earnings figure for basic and diluted EPS and reconciliation to SoCI
- weighted average number of shares used in basic and diluted EPS and reconciliation to each other
Explain defined contribution scheme
- entity pays fixed contribution into scheme at % of wages
- risk s with the employee because employer contributions are fixed but employee’s future pension can vary depending on returns from pension fund
- treatment: expense in P&L
Explain defined benefit scheme
- employees future pension is fixed
- risk is with employer because they have to meet future liability no matter how well the investment is going
- an actuary estimates the pension asset and liability
- treatment: recognise movements in pension scheme in P&L and remeasure differences in SoCI
How do you treat a rights issue for BEPS?
treated like it has two components:
- issue of shares at full market price which are included in WNAS calculation
- bonus issue of shares which is treated like it existed on first day of accounting period (will reduce comparative periods BEPS figure)
Objective of IAS33 and limitations
Sets out how to calculate and present EPS to improve comparison between entities and periods
Limitations: different policies to determine earnings but consistently calculating number of shares enhances comparability
Confusing because: amount of disclosure required (multiple EPS figures)
