Sbr Flashcards
1
Q
Definition of control
A
Power over the investee - >50%
Exposure or rights to variable returns -dividend, SP
Ability to use power over the investee -voting rights
Will need to disclose how they approached judgment of whether sub is sub or not to remove self interest of loss making subs in the notes for accounting policies
2
Q
3 ways of accounting for the investment in parents separate financial statements
A
At cost
At FV (Under IFRS 9 - Financial Instruments)
Using equity method (IAS 28 investments in Associates and JV)
3
Q
CSFP For Parent and Sub
A
GW - intangible - represents assets of the acquired sub that are not separetly identified/recognised e.g reputation
A+L = P + 100% S - P controls all of S A+L (as if they are a single entity)
Share capital and Share premium - only P - Group accounts prepared for Ps shareholders
Consolidated reserves - P + Group % of S post acq reserves
NCI - include in equity section of CSFP
4
Q
Goodwill working at acqn
A
Consideration transferred
NCI At Acqn
Less:
NA at Acqn:
Share capital
RE
FV Adj
Impairment
5
Q
NCI working at disposal or specific date after acqn
A
Choose between FV or proportionate NCI At Acqn
+NCI Share of post Acqn reserves
-NCI Share of GW impairment
6
Q
Description of how GW is calculated
A
The FV of consideration transferred + NCI - FV of NA acq
7
Q
Consideration treatment in GW
A
Consideration is measured at FV at Acqn
Deferred Consideration - Discount to PV to measure its FV - Dr inv Cr Liab
Contingent consideration - measure at FV at acqn and account for any changes in estimates such as : - changes from additional information (eg numerical error) at acqn date then adj GW if within 12 months
- if there is any other reason for change (meeting profit targets) :
- Cash - remeasure to FV with gains/losses through P/L
-shares - do not remeasure
8
Q
FV definition
A
The price that would be received to sell and asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (IFRS 3 & IFRS 13)
9
Q
Sub identifiable Assets, Liabilities and contingent liabilities are recognised when they meet the following criteria?
A
1.in the case of an asset or liability (other than an intangible asset), when it is probable that future economic benefits will flow to/ from the acquirer, and its FV can be measured reliably.
2. In the case of an intangible asset or contingent liability (CCL), its FV can be measured reliably
This means that CCL should be included as an actual liability when calculating the net asset of the sub at Acqn in the GW working and include it in group accounts.
10
Q
Changes to provisional initial measurement figures
A
Adj to provisional figures for the cost of the combination and FV of assets, liabilities, CCL acq and contingent consideration may only be made within the measurement period so cannot exceed 12 months from acq date for GW calc.
After the measurement period, GW can only be adj to correct errors (IAS 8)
11
Q
Gain on a bargain purchase
A
Possible to pay less for the company than the NA of the company are worth
Eg purchase 100% of company B for $1m, NA of B are $1.2m (negative GW) of $200k, gain recognised in SPL and therefore in Consolidated RE: but should review calc before recognising gain- have all sub NA been recognised and is it correctly measured?
12
Q
Exemptions from preparing group accounts
A
1.It’s itself a wholly owned sub or partially owned with the consent of the NCI
2.its debt or equity instruments are not publicly traded
3.the ultimate or any intermediate parent produces group acccounts that comply with IFRS standards
13
Q
Can subs be excluded from group accounts and why?
A
Directors may want to remove loss making subs from group accounts but IFRS 10 does not allow entities which meet the definition of a sub to be excluded from the consolidated FS
14
Q
Definition of Associate IAS 28
A
IAS 28 Investments in Associate - an associate is an entity over which the investor has significant influence
15
Q
Definition of significant influence
A
It is the power to participate in the financial and operating policy decisions of the associate but is not control or joint control over those policies
16
Q
What is the criteria for an entity having significant influence?
A
Significant influence is normally presumed where an investor holds more than 20% of the voting power over the investee. According to IAS 28 significant influence can also be shown by:
- representation on the board of directors
- participation in policy making processes
- material transactions between investor and investee
- provision of essential technical information
17
Q
How are associates accounted for in the consolidated FS method wise?
A
Associates are included in the consolidated FS using the equity method. This involves including the group share of the associate in two lines in each of the CSFP AND CSPLOCI.
18
Q
Associate accounting treatment in CSFP?
A
In NCA, investments in associates should be included, calculated as follows:
$
1.Cost of Associate - investment X
2.Share of post acqn RE (and other reserves) X
3.Share of unrealised profits if the parent is the seller (Asso holds inv) (X)
4.Less impairment losses on associate to date (cumulative). (X)
Total X
Group share of Post acqn reserves will be included in the RE of consolidated RE and other reserves, separate working for consolidated RE, would be a CR,
Impairment loss (DR) would also be deducted from the consolidated RE working in parents column
19
Q
Associate accounting treatment working for CSPLOCI
A
Two lines to include are:
Group share of associates profit for the year (shown above profit before tax)
Group share of associates other comprehensive income
Group share of the associates profit for the year is calculated below:
$
Group share of associates PFY (Pro rata if mid year) X
Less:
CY impairment loss (X)
Group share of unrealised profit if associate is the seller (X)
Total. X
20
Q
Unrealised profit for associate and parent and how to eliminate?
A
If the parent makes the sale:
Dr (increase) cost of sales/ (decrease) RE
CR (decrease) investment in associate
If the associate is the seller:
Dr (decrease) share of associates profit/ (decrease) RE
CR (decrease) inventory
Always make adj to RE in the parents column otherwise end up multiplying by the group share twice
21
Q
Joint arrangement (IFRS 11) definition
A
An arrangement over which two or more parties have joint control, ie where the unanimous consent of those parties sharing control is required to make decisions about the relevant activities.
After determining that joint control exists, joint arrangements are divided into two types, each with different accounting.
22
Q
2 types of joint arrangement ?
A
Joint operation and joint venture
23
Q
What is joint operation
A
Where the jointly controlling parties (“joint operators” have rights to the assets and obligations for the liabilities relating to the arrangement,
So will recognise its own A+L and any shared A+L will be split accordingly in the separate FS
24
Q
What is joint venture
A
Where the jointly controlling parties have rights to the net assets of the arrangements ,
Treated as a separate entity and separate accounting recording will need to be kept and accounted for under the equity method in the consolidated FS same way as an associate,
CSFP:
-investment in JV (cost + share of post Acqn reserves - impairment)
-include group share of JV post acq RE in consolidated RE
CSPLOCI:
- group share of JV PFY
-group share of other comprehensive income
And with IFRS 11 any unrealised profit to or from JV will need to be eliminated on consolidation
25
What does IFRS 12 disclosure of interests in other entities require companies to disclose
Requires to disclose:
1.The nature and extent of any interest held in other entities
2.any assumptions and judgements used in determining that nature
3.any risks associated with the interest
4.the effects of the interest on their financial position, performance (spl) and cashflows
26
How we account for acq a business and acq a group of assets (that are not a business)
If a entity acq a business then IFRS 3 applies, entity measures the identifiable NA at FV and recognise GW but if entity acq a group of assets it’s treated as asset acqn
acq business:
Measure identifiable A+L at FV
Recognise GW
ACQ GROUP OF ASSETS:
Dr Assets
Cr cash/payable
27
Business definition
An integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing goods or services to customers, generating investment income (dividend or interest) or generating other income from ordinary activities
28
Business 3 activities in inputs and outputs
Inputs: are economic resources, eg NCA, intellectual property, the ability to obtain access to necessary materials, rights and employees
Processes: are systems, standards, protocols and rules eg strategic management processes, operations processes and resource managements processes
Outputs: are results of inputs and the processes applied to the inputs eg goods or services to customers, investment income
29
How to assess whether a transaction is the acq of a business is essentially a two stage process?
Stage 1:
Is substantially all of the FV of the gross assets acq in a single identifiable asset or group of similar identifiable assets?
1.Yes:
Acq of assets (not a business)
2.No:
Stage 2:
Does the acq set of activities and assets include an input and a substantive process that together contribute to the ability to create outputs
2.1 No:
Acq of assets
2.1 Yes:
Acq of a business
30
Group statements of cashflow
Indirect method: for operating activities 7 initial 3 aAIM LIP AND 2 at end
Cashflows from operating activities:
Profit before taxation X
Adj for:
Add Depreciation X
Add impairment X
Less:profit on disposal of PPE. (X)
Less:profit on disposal of sub (if sub is continuing operations). (X)
Less: share of associate profit. (X)
Less: investment income. (X)
add interest expense. X
Total
Less: Increase in receivables. (X)
Add: decrease in inventories. X
Less: decrease in payables. (X)
AIM LIP
Cash generated from operations (total). X
Less: Interest paid (X)
Less: income taxes paid. (X)
Net cash from operating activities. X
31
Cashflows from investing activities format 6 lines 4+ 2-
Less acq of sub x net of cash acq (W).
(X)
Add: Disposal of sub y net of cash disposed of (W) X
Less: purchase of PPE. (X)
Add: dividends received from associate/JV (Working required). X
Add: interest received. X
Add: Dividends received X
Net cash used in investing activities X
32
Cashflows from financing activities format (4 lines 2+ 2-)
add:proceeds from issue of share capital X
Add:proceeds from long-term borrowings. X
Less: dividends paid to NCI (W) (X)
Less: dividends paid by parent company. (X)
Net cash used in financing activities X
33
Definition of cash and cash equivalents
Cash - comprises cash on hand and demand deposits (overdrafts are considered to be “negative cash” and should be netted off against any cash balances)
Cash equivalents - these are short term highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value
34
Definition of cash and cash equivalents
Cash - comprises cash on hand and demand deposits (overdrafts are considered to be “negative cash” and should be netted off against any cash balances)
Cash equivalents - these are short term highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value
35
Direct method of cashflows for operating activities
Cashflows from operating activities:
Add: Cash receipts from customers X
Less:cash paid to suppliers and employees (X)
Cash generated from operations _ (total). X
Interest paid (X)
Income taxes paid. (X)
Net cash from operating activities. X
36
Definition of a liability per conceptual framework
Present obligation to transfer economic benefits as a result of past events
37
Difference between FV (Full) and proportionate method for subsidiary
Full;
100% of sub - group + nci
Gw is based on 100% control
Impairment- Dr group share RE, Dr Nci share RE, cr Gw
Prop:
Group % of sub
Gw is based on % on acq
Impairment: Dr RE CR GW
38
Cashflows - dividend paid to NCI 4 lines 2+ 2-
Bal bf. X
TCI X
On acq of new sub X
On disposal of sub (X)
Dividend paid to NCI (balancing) “financing” (X)
Bal cf. X
39
Cashflows - dividend from associates 3 lines 2+ 1-
Bal bf X
Share of associates profit and OCI X
Acq of new associate X
Dividend received (balancing) from “investing” (X)
Bal cf
40
Cashflows - PPE working proforma 6 lines 3+ 3-
Bal bf X
On acq of new sub X
On disposal of sub (X)
Revaluation X
Depreciation charge (X)
Disposal (CA) (X)
Payment to acq PPE (investing) X
Bal Cf. X
41
cashflow tax pro forma 5 lines 3+ 2-
Bal bf current tax + DT X
Tax expense SPL X
Tax expense OCI. X
On acq of new sub. X
On disposal of sub. (X)
Tax paid (balancing) (operating) (X)
Bal cf current tax + DT
42
Cashflows - SC and SP pro forma 4 lines 1+-
Share capital
Bal bf X
Shares issued to buy sub X
Bonus issue X
Issue for cash (B)(financing) X
Bal cf X
Share premium
Bal bf X
Shares issued to buy sub X
Bonus issue (X)
Issue for cash (B)(financing) X
Bal cf X
43
Cashflows - movements in working capital pro forma 3 lines 1+ 1- 1+-
Inventories
Bal bf. X
Acq of new sub X
Disposal of sub (X)
Increase/(decrease)(B)(operating) x/(x)
Bal cf X
Receivables
Bal bf. X
Acq of new sub X
Disposal of sub (X)
Increase/(decrease)(B)(operating) x/(x)
Bal cf X
Payables
Bal bf. X
Acq of new sub X
Disposal of sub (X)
Increase/(decrease)(B)(operating) x/(x)
Bal cf X
AIM LIP
44
Step acquisition where control is retained for sub of “gaining” more control treatment in FS and working
This is treated as a transaction between shareholders as P is gaining more shares from NCI through RE
Requires adj to equity working
Consideration paid for extra % (X)
Cr cash
Decrease in NCI* X Dr NCI
adj to P equity. (X)/X Dr/Cr RE
*depends on how NCI was measured at acq
NCI at FV - NCI % of NA + NCI % of GW
NCI at Prop - NCI % of NA
SPL
NO PROFIT OR LOSS ON DISPOSAL IS RECOGNISED
consolidate income and expenses as usual for whole period
Time apportion NCI
SFP
Don’t adjust GW
Decrease NCI
time apportion post acq profits in NCI and RE
Adj parents equity with working above
45
Step acq of retaining control when disposing shares of sub treatment
This is treated as a transaction between shareholders as P is losing shares from NCI through RE
Requires adj to equity working
Consideration paid for extra % X
Dr cash
Increase in NCI* (X) Cr NCI
adj to P equity. X/(X) Cr/Dr RE
*depends on how NCI was measured at acq
NCI at FV - NCI % of NA + NCI % of GW
NCI at Prop - NCI % of NA
SPL
NO PROFIT OR LOSS ON DISPOSAL IS RECOGNISED
consolidate income and expenses as usual for whole period
Time apportion NCI
SFP
Don’t adjust GW
Increase NCI
time apportion post acq profits in NCI and RE
Adj parents equity with working above
46
Step acq disposal where control is lost treatment from sub to associate/FA
CSPLOCI
-time apportion and consolidate the subs income exp and NCI upto date of disposal
-include group profit or loss on disposal (working below)
-SUB TO ASSO:include a line for the group share of associates profit for remaining of the year
-sub to FA: include post disposal dividend income earned and any remeasurement gains/losses IFRS9
Profit or loss on disposal working
Sale proceeds X
FV of any investment retained X
Less: CA of sub disposed of:
NA at disposal date (X)
GW at disposal date (X)
NCI at disposal date X
Group profit/loss
CSFP
-Do not consolidate sub A+L at YE, derecognise GW and NCI
-sub to asso:revalue remaining shareholding to FV at disposal date then equity account
-sub to FA: revalue remaining shareholding to FV At disposal date then treat as FA (at FV) under IFRS 9
Group RE include:
-group share of sub to date of disposal
-if sub to asso: group share of asso from date of disposal
47
Step acq where control is gained
CSPLOCI
-Treat associate/FA upto date control is gained and consolidate from the date control is gained (time apportion income n expenses)
-the existing equity investment is remastered to FB at the date control is gained. Any gain or loss is taken to the SPLOCI
CSFP
-consolidate A+L at YE
-calculate and recognise GW
GW calc
Consideration transferred
FV of previously held investment
NCI (at FV or at NCI % of NA)
Less:FV OF NA at acq
GW
48
Step acq where control is gained asso to sub example
Gw calc:
Consideration transferred
Previously held investment at FV
NCI
Less:FV OF NA
Profit on derecognition of investment (“selling an asso”):
FV at date control is gained of previous shares
CA of original investment (working below)
Gain to go through profit n loss and RE
CA of investment at disposal date (working)
Original cost of investment
Plus:share of post acqn reserves
49
Two types of currency concepts
Functional currency and presentation currency
50
What is functional currency
It is the currency of the primary economic environment in which the entity operates in.
To determine what the functional currency is use the SOFA method
S-the currency in which it sales price for its goods and services are settled in
O-the currency it pays it operating costs in
F-the currency its finances are in (loan)
A- the autonomy of a foreign operation from the reporting entity
51
How to translate foreign currency transactions into the functional currency
Initial recognition - transaction translated at the spot exchange rate at the date of transaction
At subsequent YE
a) monetary assets and liabilities (eg receivables and payables = restated at CR therefore exchange gain or loss is recognised in SPL
B) non monetary assets (NCA, inventories) kept at HR
C)except if non monetary asset is revalued or impaired = retranslate at date of exchange
52
Single company accounting for translating FS into different presentational currency?
All A+L are translated at CR at YE
ALL items in SPL at translated at avg rate
Resulting exchange differences recognised in OCI
53
Group accounting treatment for translation of foreign operations CSFP AND CSPLOCI
CSFP
-All A+L are translated at YE CR
-GW calc in local currency then at CR every YE, gain/loss taken to reserves
-SC,SP and pre acq reserves are at HR at acq date
-post acqn reserves comprise profits less dividends for all years the sub has been owned, profit at avg rate and dividend at actual rate
-exchange differences on NA to date can be found as balancing figure( post the group share to translation reserve working and the NCI share to NCI working)
CSPL
All items at avg rate
54
Key working for GW for translating currency
Considerations transferred
NCI
LESS:FV of NA at acq
Goodwill at acq at HR
Less impairment (CR OR AR)
Exchange diff bal
GW at YE at CR
55
Exchange difference in the year in OCI
exchange differences in the year ;
On translation of NA
Closing NA at CR
LESS OPENING NA AT OPENING RATE
TOTAL
LESS RETAINED PROFIT AT AVG RATE
TOTAL
ON TRANSLATION OF GW
ESCHNAGE DIFF FOR THE YEAR
56
Exchange difference in the year in OCI
exchange differences in the year ;
On translation of NA
Closing NA at CR
LESS OPENING NA AT OPENING RATE
TOTAL
LESS RETAINED PROFIT AT AVG RATE
TOTAL
ON TRANSLATION OF GW
ESCHNAGE DIFF FOR THE YEAR
57
Translation reserve if required working
Exchange diff on NA (group % only, NCI % taken to NCI) X
Exchange diff on GW (group % only if FB METHOD, 100% if prop) X
Total
58
Ethical principles and threats (OPPIC & FAISS)
Threat
Familiarity
Self interest
Self review
Advocacy
Intimidation
Principle
Objectivity
Professional behaviour
Professional competence and due care
Integrity
Confidentiality
59
Related party relationships and transaction definition
A related party transaction is a transfer of resources, services or obligations between a reporting entity and a related party, regardless of whether a price is charged.
Disclosing the existence of related party relationships and information helps users understand the potential effect of these relationships on FS
60
Presumed related parties of a reporting entity
Persons:
Directors/KMP of the entity or of its parent
Persons that have control or joint control or significant influence over the reporting entity
Close family memebers of any of the above
Other entities if:
They are members of the same group
They are post employment benefit plans for the benefit of the employees
They are controlled or jointly controlled by any of the persons identified above
A person with control or joint control of the reporting entity has significant influence over the entity or is KMP
61
What does the disclosure for related parties require
-the name of the entity parent and if different, the ultimate controlling party irrespective of whether there have been any transactions
-where there have been transactions between related parties:
1.nature of the related party
2.information about the transactions and outstanding balances as a minimum, this includes:
2.1 amount of the transaction
2.2 amount of outstanding balances
2.3 provisions for doubtful debts and bad debt expenses
-key management compensatjon
62
Purpose of conceptual framework
Objective of general purpose financial reporting: to provide financial information about the reporting entity t that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity.
63
Purpose of conceptual framework
Objective of general purpose financial reporting: to provide financial information about the reporting entity t that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity.
64
The qualitative characteristics of financial information and enhancing characteristics (VCUT)(RF)
Qualitative;
Relevant
Faithful representation
Enhancing
Verifiability
Compatibility
Understandability
Timeliness
65
Definition of asset
A present economic resource controlled by the entity as a result of past events and is a right that that has the potential to produce economics benefits.
66
Conceptual framework definition of liability
A present obligation of the entity to transfer economic resource as a result of past events
67
Definition of equity
The residual interest in the assets of the entity after deducting all its liabilities
Equity = NA = share capital + reserves
68
conceptual framework definition of income and expenses
Income : increase in assets or decreases in liabilities, that result in increases in equity other than those relating to contributions from holders of equity claims eg share issue
Expenses: decreases in assets or increases in liabilities, that results in decreases in equity other than those relating to distribution to holder of equity claims eg div
69
Conceptual framework criteria for recognition and derecognition
Recognition:
Meets the definition of the element and provides useful information (relevance and faithful representation)
Derecognition:
Entity loses control (asset) or no longer has a present obligation (liability)
70
Definition of materiality
Information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions of primary users based on the FS.
Further points:
- Requirements in IFRS Standards must be applied if their effect is material
- Management must use judgement in deciding whether an item is material
71
Types of materiality
Quantitative - material by amount profit/revenue/assets
Qualitative - by nature - related party involvement,
72
What is a Sustainability report
Report published by a company or organisation about the economic, environmental and social impacts caused by its everyday activities
Investors and other stakeholders are becoming increasingly interested in sustainability issues and this provides useful information that is relevant to investment decisions
73
International sustainability standards board (ISSB) 2 standards
- general reuqirments for disclosure of sustainability related financial information
-climate related disclosures
Both standards require companies to disclose information about their sustainability or climate related risks and opportunities that could reasonably be expected to affect the entity cash flows, its access to finance of cost of capital over the short, medium or long term
Core content relates to governance, strategy, risk management and metrics and targets
74
IFRS 8 operating segments objective
Ensure an entity discloses information to enable users to evaluate the nature and finance effects of the types of business activities in which it engages and the economic environments in which it operates
75
Reportable segments in IFRS operating segments
Segment information needs to be disclosed about any operating segment that meets any of the following thresholds:
Its revenue (intercompany and external) is 10% more of the combined revenue of all operating segments
Its assets are 10% or more of the combined assets of all segments
Its profit or loss is 10% or more of the greater of ;
The combined profit of all segments that did not report a loss, and the combined reported loss of all loss making segments
If the total external revenue reported by segments is <75% of the entity’s revenue additional operating segments must be identified as reportable segments till it is <75%
76
Management commentary principle
Commentary should:
Provide management view of entity performance position and progress using info that is important to management
Include forward looking info
77
Management commentary presentation
Should be :
Clear and straightforward
Focused on matters that are most important to the entity, avoiding immaterial, and generic disclosures
Consistent with the disclosures in the FS
78
Management commentary elements
Should include ;
Nature of business - products services market it operates in
Management objectives and strategies
CSF AND KPI
79
IAS 37 provisions how it applies to natural disasters in decommissioning, restructuring, onerous contracts, contingent asset and future operating losses
Decommissioning/environmental provisions (constructive)
Where an entity is required to dismantle or remove an asset at the end of its useful life and to restore the site, recognise when obligation arises (usually when operation commences)
If provision already recognised then timing and amount may need to be adjusted and therefore provision need to be revised
Restructuring provision
Where an entity decides to sell or abandon assets or restructure as a result of a natural disaster, recognise if;
Has a detailed formal plan
Has raised a valid expectation in affected parties that it will carry out the restructuring
Future operating losses
Natural disaster may impact future losses eg revenue repair costs but ias 37 prohibits recognition of a provision for future operating losses
Onerous contracts
May arise if entity can’t fulfil contract, recognise lower of;
Penalty of terminating contract
PV of net cost of fulfilling contract
Contingent asset
Damage to assets, repairs, maint work, lost revenue as a result of disaster could result in insurance claims
80
Accounting for natural disaster for NCA held for sale and discontinued operations
Where an entity has to close down and sell a division/sub, if IFRS 5 criteria are met, treat as held for sale in the SOFP and a discontinued operation in SPL
81
Accounting for natural disaster for impairment of assets IAS 36
Possible impairment of NCA, if RA < CA, the asset must be written down for impairment, if completely destroyed then must be derecognised
82
Accounting for IAS 1 presentation of FS in natural disaster
Material uncertainties causing significant doubt over the entity ability to continue as a going concern - disclose or
The going concern basis may no longer be appropriate - accounts must be prepared on a breakup basis
IAS 1 also requires the nature and amount of material items of income and expense to be disclosed seperately on the face of the SPL or notes
83
Accounting for IAS 10 events after the reporting period for natural disaster
May need to disclose non adjusting events, however if there is doubt about the entity’s ability to continue as a going concern, may need to prepare accounts on a break up basis
84
Accounting for IAS 10 events after the reporting period for natural disaster
May need to disclose non adjusting events but if there is doubt about the going concern of the entity then a break up basis may need to be applied for the accounts
85
Types of markets in FV
Principle market - market with the greatest volume of activity for the asset
Most advantageous market - In the absence of principle market
86
What is NCA highest and best use in FV?
For NCA, management must consider the highest and best use of the asset by market participants even if used differently,
Highest and best use of an asset is the use that a market participant would adopt in order to maximise its value
IFRS requires the entity to consider uses which are physically possible, legally permissible and financial feasible
An entity current use of NCA is presumed to be at its highest and best use unless there is evidence to the contrary
87
FV hierarchy what is it and the 3 levels
Valuation technique to maximise observable inputs
Level 1: inputs are unadjusted quoted prices in active markets for items identical to the asset or liability measured
Level 2: inputs are inputs other than quoted prices in level 1 that are observable for that asset or liability (similar assets and liabilities)
Level 3: inputs are unobservable inputs, based on the best info available eg estimated PV of future cashflows based on internal data
88
What is IFRS for SME and its purpose
IFRS standard were originally designed with quoted entities in mind which SME say it causes a burden on them so IFRS for SME may be used by entities that have no public accountability.
The aim is to provide simplified shorter and self contained accounting principles that are appropriate for smaller non listed entities that are based on full IFRS.
89
Key differences between IFRS for SME and full IFRS
Intangible assets:
All intangible assets are measured at cost model (no revaluation)
Development costs must be expensed - no capitalisation
Useful life cannot exceed 10 years
Purchased GW:amortised over its useful life (presumed to be 10 years) rather than being subject to annual impairment tests
Borrowing costs: all borrowing costs are expensed
Financial instruments: ‘basic’ FI (other than those that are publicly traded or whose FV can be measured reliably) are measured at amortised cost
Defined benefit pension scheme: simplified reporting, an entity may choose to recognise all its actuarial (remeasuement) gains/losses in profit or loss, rather than OCI
CFS : only the partial/proportionate method may be used to calculate GW and NCI
Foreign operations: exchange differences in retranslating of a foreign operation are recognised in OCI and are not subsequently reclassified to profit or loss when the operation is sold
Investments in associates and JV: in the CFS and entity may choose whether to measure these at cost/FV or to use the equity method, in full IFRS it does not give u a choice
90
When should a company recognise a government grant?
Should only recognise a grant where there is reasonable assurance that:
1.it will comply with the conditions attaching to the grant; and that
2. The grant will be received
91
Two types of government grants?
1. Those relating to income (eg grant towards training costs): recognise as “other income” in the same periods as the related costs or deduct from the related expense
2. Those relating to assets (eg grant towards the purchase of a NCA), Either:
i. Recognise as “deferred income” on the SFP and amortise over the assets life, or
ii. Deduct the grant from the cost of the asset acquired and report the net amount in the SFP
Any government grant that becomes repayable should be accounted for as a revision to an accounting estimate (IAS 8)
92
How are biological assets measured? (Cows, apple trees etc)
Biological assets are measured on initial recognition and at each YE at their fair value less costs to sell. The movement in FV is showing in SPL.
93
How are agricultural produce treated? (Milk, wheat, apples etc)
Measured at the point of harvest at FV less costs to sell. It then becomes inventory and is subsequently valued in according with IAS 2 at the lower of cost/initial FV less costs to sell and NRV.
Sale of agricultural produce is dealt with per revenue IFRS 15
94
How are bearer plants treated in agricultural produce?
IAS 41 does not apply to bearer plants (living plants that are: used in the production or supply of agricultural produce). Bearer plants are treated as tangible NCA in accordance with IAS 16 eg apple tree is a bearer plant but the apples are the produce
95
What does IAS 8 Accounting policies mean
Where IFRS standards do not specifically apply to a transaction, management should use judgement to develop an accounting policy
Sources of guidance
- IFRS standards that deal with similar issues; then
- definitions and criteria in the conceptual framework
Entities should select and apply their accounting policies consistently for similar transactions
96
When is a change in accounting policy allowed?
It is required by an IFRS Standard; or
It results in the financial statements providing reliable and more relevant information about the effects of transactions on the entity’s financial position, financial performance or cash flows.
If the change is required by an IFRS standard, the entity follows any transitional rules
Other (ie voluntary) changes in accounting policy are applied retrospectively (as if the new policy had always been in place)
(This contrasts with changes in accounting estimates which are simply adjusted in the financial statements of the period in which they arise)
97
How is revenue recognised (5 step model)
1. Identify the contract with the customer
2. Identify the separate performance obligations
3. Determine the transaction price
4. Allocate the transaction price to the performance obligations in proportion to the stand-alone selling price of the good or service
5. Recognise revenue as each performance obligation is satisfied
98
How would you account for a performance obligation
A company would account for a performance obligation seperately only if the promised good or service is “distinct”:
- The customer can benefit from the good or service on its own; (if it could be sold seperately); and
- the entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract
99
How much revenue would you recognise? Either full or probable amount?
Recognise the probable amount that the entity will collect the consideration to which it will be entitled
100
When do you recognise revenue when each performance obligation is satisfied?
When control is passed to the customer either at a point in time or over a period,
If over time, recognise revenue by using a method that reflects the entity’s performance in transferring control of goods or services eg porportion of total costs incurred to date
If at point in time, determine when control passes, ie when the customer has the ability to direct the use of the asset and obtain substantially all the benefits from the asset
101
How would you accountant for standard warranty (no option to purchase separately)
Recognise a provision based on estimated repair costs under IAS 37
102
How would you account for extended warranty under revenue (option to buy seperately)
Treat as a separate performance obligation under IFRS 15
103
How would you account for warranty that provides customer with service (in addition to assurance that produce complies with agreed upon specifications)
Treat as a separate performance obligation under revenue IFRS 15
104
What is a principal and what is an agent (revenue)
Principal supplies its own goods and services whereas an agent receives a fee or commission for arranging the provision of goods or services by the principal
105
How to determine if the transaction party is a principal
The performance obligation is to provide the specified good or service itself
Entity controls the good or service before it is transferred to the customer
Recognises revenue as the gross amount fo consideration to which it expects to be entitled in exchange for those goods or services
106
How to recognise if transaction party is an agent
Performance obligation is to arrange for the provision of goods or services by another party
The entity does not control the goods or services
Entity cannot determine the price to be charged for the other party’s goods or services
Recognises revenue as the amount of any fee or commission to which it expected to be entitled
107
What are consignment inventories
These arise when a seller delivers a product to another party eg dealer or distributor for sale to end customers but retains control of that product (usually until a specified event occurs)
Other indicators of a consignment arrangement:
- seller can require the return of the product; and
- the dealer does not have an unconditional obligation to pay for the product (other than deposit)
Original seller does not recognise revenue UNTIL CONTROL PASSES to the dealer or distribution
108
What is a. Sale and repurchase agreement
In a sale and repurchase agreement, an entity sells an asset but retains the right to repurchase the asset at some point in the future
109
Accounting treatment for seller has right or obligation to repurchase
The seller does not recognise revenue (control has not passed). Instead the seller treats the arrangement as either:
- A loan - if exercise price >= than original SP or
- a lease - if exercise price is < original SP
110
If the seller does not have obligation to repurchase what’s the accounting treatment
Eg seller must repurchase asset if customer requests it but no financial incentive to do this for customer
Seller treats the arrangement as a sale with right of return
111
Treatment in contract modification
A contract modification is a change in the scope of the price of a contract (or both)
Treat as a separate contract if:
- additional goods and services are distinct and
- price is based on stand alone SP of additional goods and services
Treat as termination of the existing contract and the creation of a new contract if:
- additional goods and services are distinct from those sold before the modification; but
- price is not based on stand alone price
Otherwise treat as part of the original contract
112
Measurement of PPE at recognition?
All items of PPE are recognises at cost where cost includes purchase price, directly attributable costs of bringing asset to its current location and condition. also capitalisation of finance costs required for any qualifying asset
113
How to measure PPE after recognition (2 methods)
Entity must choose cost or revaluation model (FV)
Where an items of PPE is revalued, all other assets in same class must be revalued aswell
Upwards revaluation: recognise gain in OCI and in equity revaluation surplus
Downwards reval:
If asset had not previously been revalued, recognise loss in SPL
if asset has been revalued, recognise loss in OCI and Reval surplus to bring it down to nil then excess to SPL
114
Definition of intangible asset and research and development
Is an asset without physical substance and is similar definition to asset (control, benefits etc)
An internally generated intangible can’t be recognised due to inability to determine cost
Research and development costs
Research costs : expense to SPL
Development costs : PIRATE
Probable future economic benefits
Intention to complete the asset and use or sell it
Resources available to complete the development and to use or sell the asset
Ability to use or sell the asset
Technical feasibility of completing the asset
Expenditure can be measured reliably
Assets that have indefinite life are not amortised but have annual impairment tests
115
Impairment treatment and indicators
Impairment of CA>RA Where RA is the higher of;
- FV less costs of disposal
- Value in use - PV of future cashflows
Entity should carry out imp test where there is evidence of impairment
Indicators include:
External;
Significant fall in the market value of the asset
Adverse effect on the business
Internal
Evidence of damage
Asset not used as much in business
116
Dr and ace entries for recognition of impairment losses
Assets carried at historical cost
DR profit or loss
CR NCA
for a CGU
Cr (1) Goodwill
(2) PPE and intangible on a pro rate basis
Revalued assets
Dr reval surplus/OCI re: the asset (down to nil)
Dr SPL
CR as above
Previous impairments to goodwill cannot be reverse
117
When is a asset held for sale under IFRS 5 and treatment
An asset is held for sale if the entity plans to recover its value by selling it rather than using it in the business, to be classed as held for sale must meet criteria: SALE
entity must be SEEKING a buyer
The asset must be AVAILABLE for immediate sale in its present condition
Sale must be LIKELY HIGHLY PROBABLE
sale is EXPECTED to be completed within a year
Once classified as held for sale asset should be:
-Depreciated upto the date of classification and revalued (if appropriate)
- Valued at the lower of CA and FV less cost to sell
-Transferred from NCA to CA
- depreciation should cease from the date of classification
Also check to see if asset is impaired
118
Treatment for discontinued operations under IFRS 5
an operation considered discontinue if it is closed or sold during the year or held for sale at ye and represent a separate major line of business
Results are presented as a single amount on SPL
The post tax profit/loss of the operation+post tax gain/loss on the remeasurement to FV less cost to sell or on disposal
119
Key words for FA, FL and equity instrument
FA - “acquired” “purchased” “invested”
FL- “issued + obligation”
Equity - “issued”
120
When are FA and FL recognised and derecognised (financial instruments)
Recognises where the entity becomes a party to the contractual provisions of the instrument
Derecognised:
FA - when the contractual rights to the cashflows expire or the asset is sold
(Has entity transferred the risk and rewards of ownership)
FL - occurs when obligation is paid off, cancelled or expires
121
What are derivatives characteristics
1. Requires little or no investment
2. Derives value from some underlying item eg stock market for item
3. Settled at some future date
Not considered a contract of purpose is to take physical delivery of a product
122
Measurement of FA : investments in debt instruments one held for cash and one for selling
If held to collect contractual cashflows and cashflows are solely principal and interest then should be measured at FV + transaction costs then subsequently measured at amortised cost
If held to collect contractual cashflows and TO SELL and solely for principal and interest then measure at FV + transaction costs then subsequently at FV TROUGH OCI with reclassification to SPL on derecognition - interest on amortised cost taken to SPL
123
Treatment of FA - equity instruments one for hold one for sell
Purchase of ordinary shares unless election taken is measured: FV , transaction costs are expensed then subsequently FV through SPL
If not held for trading “not to sell” , entity can make irrecoverable election on initial recognition to measure at FV + transaction costs and subsequently measure FV through OCI no reclassification to SPL on derecognition
124
How to treat derivative standing at a gain
FV (expenses through SPL) subsequently FV through SPL
125
Three stages for impairment to FA (credit losses) when, credit loss recognised and interest calculated?
Stage 1
When: initial recognition
Credit loss recognised: 12 month expected credit losses
Interest calculated: gross CA
Stage 2:
When: credit risk significantly increases >30 days
Credit loss recognised: lifetime expected credit losses
Interest calculated: gross CA
Stage 3:
When: objective eveidence of impairment exists at the reporting date
Credit loss recognised: lifetime expected credit losses
Interest calculated: net CA
126
What is hedge accounting
Companies enter into hedges as a means to manage the risks they face
127
Three main types of sale and repurchase agreement (call forward put)
Call option - seller has the right to repurchase the asset
Forward - seller has obligation to repurchase the asset
Put option - seller has obligation to repurchase asset if customer requests it
128
Two types of hedges
FV hedges and cashflow hedges
129
Definition of a lease
A contract that converts the right to use an asset for a period of time in exchange for consideration
130
How to identify if there is a lease criteria
A contract is a lease if it conveys the right to control the use of an identified asset for a period of time in exchange for considerations
Identified asset= specific asset
Control of an asset exists where the customer has the right to obtain substantially all of the economic benefits from its use and the right to direct its use
A customer doesn’t haven the right to use an identified asset if the supplier has the practical ability to substitute an alternative asset and would benefit economically from doing so
131
Accounting treatment of lease at commencement
Dr right of use asset
Cr lease liability
Cr cash - if any payments made at start eg deposit or first instalment paid in advance
132
How to measure the lease liability
Lease effectively a loan to buy a asset
Initially measured at PV of future lease payments
Future lease payments exclude deposit and first instalment if instalments paid in advance
Subsequent measurement
CA of lease at commencement + interest on lease liability - lease payments made
133
In leases how is right of use depreciated over its useful life
Shorter of the:
Lease term or
the assets useful life (if there is reasonable certainty that lessee will obtain ownership at end of lease term asset should be depreciated over useful life)
134
How to measure the right of use asset at commencement (different types of costs) and double entry
Initial measurement of lease liability (PV of future lease payments). X
Payments made at/before commencement date (deposit, advance first instalment) less any incentives received X
Initial direct costs eg legal costs X
Estimated costs of removing/dismantling at end of lease X
Then if all present double entry
Dr right of use asset
Cr lease liability
Cr cash
Cr provision
135
What would you do for separating lease and non lease components
The lessee either:
Allocates the consideration to each component of the contract based on the stand alone price of each or
Elects to account for the contract as a single lease (election is made for each class of underlying asset)
136
How to remeasure a lease liability
If there are changes to the leases, lessee must remeasure lease liability , both the CA of the lease and CA of the right of use asset are adjusted
Lease liability is remeasured by discounting the revised lease payments using a revise discount rate if:
Lease term changes or
Entity changes its assessment of an option to purchase the underlying asset
137
Short life and low value assets on leases
If the lease is for a period of 12 months or less or asset is low value when new then lessee chan choose to recognise the lease payments as an expense in the SPL on a straight line basis
No right of use asset or lease liability is recognise in SFP
annual lease expense = total cost/ life of lease
138
Two types of lessor classification
Operating lease and finance lease
139
What is a finance lease
A lease that transfers substantially all the risks and rewards of owning an asset (to lessee)
Five criteria
1.lease transfers ownership of the asset at the end of the lease term
2. Lessee has the option to purchase the asset at a price below FV
3. Lease term is for a major part of the assets economic life
4.PV of lease payments is substantially all of the assets FV
5. Asset so specialised it can only be used by lessee
140
What is operating lease
A lease that does not transfer substantially all of the risks and rewards of owning an asset (to the lessee)
141
Treatment of operating lease
Lessor recognises payments as income on straight line basis over lease term
Lessor continues to recognise asset and depreciate it as has control
142
Accounting treatment for finance lease
Lessor recognises finance income over lease term
Lessor has interest receivable
Should recognise a receivable at an amount equal to the net investment in the lease
143
How is intermediate lessor lease type determined
If the head lease is a short term lease and the entity as a lessee has applied the short term recognition exemption - sublease classed as operating
Otherwise sunless classified as ROU asset arising from head lease
144
What is a sale and leaseback
Whether a transaction should be accounted for as a sale under IFRS 15 or a loan
145
Under sale and leaseback treatment if not a sale
If control of asset has not passed and no sale taken place, sale proceeds treated as a loan
Dr cash
Cr FL
146
Under sale and leaseback treatment of transfer is a sale
If control of asset has passed, the seller/ lessee must measure the ROU in relation to the rights retained and recognise a profit or loss based on the rights transferred
Dr Cash
Dr ROU (see below)
Cr PPE (CA)
Cr FL (pv of future lease payments)
Cr gain on rights transferred to buyer (bal)
ROU= CA of sold asset x PV OF future lease payments/FV of asset sold
Sale proceeds cannot = Fv of asset
147
Under sale and leaseback treatment of sale proceeds < FV
seller-lessee treats the difference as a prepayment of lease payments (by adding it to the ROU in the same way as any other payment on the lease commencement date)
148
Under sale and leaseback treatment of sale proceeds > FV
Seller lessee treats the difference as additional financing (within the lease liability)
149
Two types of post employment benefits
Defined benefit and defined contribution
150
What is defined contribution and accounting entry
Where a company promises to put x amount per year into a separate pension fund for the benefit of each relevant employee. Employee bears the risk of the fund
Dr contribution expense
Cr cash
151
What is defined benefit scheme
Company sets up a pension fund into which it agrees to make regular payments, however in a defined benefit plan, the employer GUARANTEES THE FINAL PENSION OF THE EMPLOYEE, if the fund performs poorly the company will need to put more money into the fund.
Employer bears the risk of the fund relating to defined benefit plan
The amount is recognised in SFP
152
Defined benefit double entry for contributions
Dr plan assets
Cr cash
153
Defined benefit double entry for interest for plan assets and plan liabilities
Estimate made on day 1 of the year
Interest on plan assets
Dr plan assets (% x bf asset)
Cr interest on plan assets
Interest on plan liabilities
Dr interest cost (SPL)(% x bf liabilities)
Cr pension liability
154
Defined benefit double entry for benefits paid to former employees
Dr pension liability
Cr plan assets
155
Defined benefit double entry for current service cost
Dr current service expense
Cr pension liability
156
Defined benefit double entry for past service cost and what is it
Normally arise when the rules of the pension scheme change in some way such that an additional obligation now exists for the company
Dr past service cost
Cr pension liability
157
Defined benefit double entry for curtailment and what is it
Occurs when the entity makes a material reduction in the number of employees covered by a plan (redundancies)
If the scheme is curtailed, then there will be a reduction in the obligation (and income)
Dr pension liability
Cr profit or loss
158
Defined benefit what is settlement and double entry
Occurs if the entity enters into a transaction that eliminates all or part of its further obligations in relation to the defined benefit plan eg company stops the pension plan and pays the employee a lump sum now eliminating any future rights to a pension
Gain or loss on a settlement is the difference between:
PV of defined benefit obligation settled and
Settlement price
Hence company has reduced pension liability so
Dr pension liability (as advised by actuary)
Cr cash (paid directly by entity)
Cr plan assets (any assets transferred)
Cr/dr profit or loss (gain or loss on settlement) (bal)
159
What is asset ceiling test
Amounts recognised as a net pension asset in the SFP must not be stated more than their RA
ias 19 requires any net pension asset to be measured at the lower of;
Net pension plan asset and
The PV of any refunds/reduction of future contributions available from the pension plan (asset ceiling)
Difference recognised in OCI
160
Pro forma for defined pension plan 7 lines
PA. PL
Bal bf X. X
Contributions. X
Interest X. X
Pension paid. (X). (X)
Current service cost. X
Past service cost. X
Remeaurment X
Remeasurement. X
(Remeasurment diff to OCI)
Bal cf. X. X
161
Deferred tax liability or asset > <
FOR ASSET
CA> tax base = DTL
CA tax base = DTA
CA
