Summary Notes Flashcards
What are the qualitative characteristics?
- Relevance
- Faithful representation
What are the 4 enhancing characteristics?
- Comparability
- Understandability
- Faithfulness
- Verifiability
What is an asset?
‘a present economic resource controlled by the entity as a result of past events’
What is a liability?
‘a present obligation of the entity to transfer an economic resource as a result of past events’
What is equity?
‘the residual interest in the assets of the entity after deducting all its liabilities’
What is 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’
What are expenses?
‘decreases in assets or increases in liabilities, that result in decreases in equity other than those relating to distributions to holders of equity claims’
When do you allow recognition?
- ‘the item meets the element definition’
- it provides useful information to users (i.e relevant and faithful representation’
Derecognition normally occurs when the item no longer meets the definition of an asset or liability
What are the two main bases of measurement?
- Historical cost (often obtained from the original transaction or event price)
- Current value (aims to correct some disadvantages seen with historical cost and uses more recent information. It provides a few alternative measurement basis: fair value, value in use, current cost)
What should you capitalise at initial measurement?
Directly attributable (incremental) costs in getting asset into working condition for its intended use:
- purchase price
- improvement costs
- commissioning and testing (less proceeds from by-products)
- dismantling costs at their present value
Assets under construction:
- Labour costs
- Material costs
- Directly attributable borrowing costs under IAS 23 Borrowing Costs
What should you exclude at initial measurement?
- Non-incremental costs
- Costs incurred after asset is ready for use but not yet being used
- Repair/maintenance costs
- Abnormal costs
- Incidental income
When should you start depreciation?
- Start depreciation when asset available for use
- Stop depreciation when asset is sold or held for sale
- Check UL, RV and method annually and revise if necessary
How do you deal with a change to the useful life?
(CA @ change - Residual value)/Remaining UL
How do you deal with a change to the depreciation method?
CA @ date of change and apply new method
How do you revalue an asset upwards?
- DR Cost (by increasing to fair value)
- DR Accumulated depreciation (remove all accumulated depreciation to date)
- CR Revaluation Surplus (with the difference between carrying amount and fair value)
The gain will also be shown in the statement of comprehensive income
Subsequent depreciation charge:
(Revalued amount - Residual value)/Remaining UL
What are the double entries for the reserves transfer?
Any increase in the depreciation charge due to a revaluation can be transferred each year between reserves:
DR Revaluation surplus
CR Retained earnings
This transfer is shown in the SOCE
How do you calculate profit/loss on disposal of asset?
Proceeds - CA = Profit/(Loss)
This is recognised in the SPL
What happens when a disposed asset is held under the revaluation model?
The revaluation surplus is transferred to retained earnings upon disposal:
DR Revaluation Surplus
CR Retained Earnings
In order to capitalise an intangible asset it must be what?
ICE
Identifiable: separable or contractual/legal right
Controlled by the entity = power to obtain future economic benefits
Economic benefits (future revenue or future cost savings)
How do you measure intangible assets separately acquired?
Capitalise at cost plus directly attributable costs
How do you measure internally generated intangible assets ?
Research:
- Write off to the SPL as incurred
Development:
- Capitalise if criteria met
- Capitalise the direct costs incurred
How do you measure intangible assets from a business combination?
- Capitalise at fair value
Can you amortise intangible assets?
- Indefinite UL - no amortisation, annual impairment and UL review
- Finite UL - annual amortisation, impairment if indication
- Assumed residual value is nil
Can you revalue intangible assets?
- May revalue to FV but only if an active market exists
- An active market is where:
the items are homogenous, buyers and sellers can be found at any time, prices are available to the public - Revaluations are treated the same as in IAS 16 PPE
When should an impairment review be carried out?
- Annually for intangibles with an indefinite UL and goodwill
- When there is indication of impairment
What are some indications of impairment?
- Operating losses
- Net cash outflows
- Decline in market value
- Obsolescence/Physical damage
- Significant changes to the business or market
- Commitment by management to undertake a significant reorganisation
How do you perform an impairment review?
Compare carrying amount against recoverable amount (this is the higher of value in use (PV of future cash flows) and FV less costs to sell)
Impairment expense = Carrying amount - Recoverable amount
What is the accounting treatment for an impairment review?
Cost model:
DR SPL
CR NCA
Revaluation Model:
DR Revaluation Surplus
DR SPL (excess)
CR NCA
How do you classify an asset as held for sale?
- Asset must be available for sale in its present condition
- Sale must be highly probable (within 12 months) and
- It must be actively marketed at a reasonable price
How do you make an asset ‘held for sale’?
Cost:
- Compare CA to FV-CTS, and impair if necessary
- The impairment must go through the SPL - Remove the PPE from NCA and stop depreciating and recognised NCA HFS in current assets
Revaluation:
- Revalue PPE to fair value per IAS 16
- Compare CA to FV-CTS, and impair if necessary (The CTS will be equal to the impairment charge)
- The impairment must go through the SPL - Remove the PPE from NCA and stop depreciating and recognise NCA HFS in current assets
How do you treat abandoned assets?
Abandoned assets can never be classified as held for sale as the carrying amount is not being recovered principally through a sale transaction
Where do NCA fall in the SOFP?
NCA:
PPE
Intangibles
CA:
NCA held for sale
Equity:
Revaluation Surplus
Where do NCA fall in the statement of comprehensive income?
(Less) Depreciation Expense (Less) Impairment Expense (Less) Amortisation Expense Profit/(Loss) on disposal (Less) Non-directly attributable costs/recurring costs Gains on property revaluation
What is the first step in approaching right-of-use assets?
Per substance over form the lessee should recognise a right-of-use asset on the SFP
Cost
(Less) Depreciation
————
Carrying amount on SFP
What is the second step in approaching right-of-use assets?
Set up a lease liability table
Payments in arrears:
b/f Interest Cash paid c/f
Payments in advance
b/f Cash paid Balance Interest C/f
* no payment is shown in year 1 within the table above as payments are made in advance
What is step 3 in the approach to right-of-use assets?
Split the year end liability:
NCL = number directly to the right of next year’s payment
CL = year end liability - NCL
When payments are in advance, CL = lease payment
How do you treat short term leases (less than a year) and low value assets?
- The lessee can choose to recognise the lease payments in profit or loss on a straight line basis. No lease liability or right-of-use asset would therefore be recognised
The election to use the exemption:
- must be made by asset class for short-term leases
- can be made on a lease-by-lease basis for low-value assets
How do you deal with lease payments in arrears in cash flow?
The statement of cash flow records:
- the payment of interest under cash from operating activities
- the repayment of the loan under cash from financing activities
What do you do with an asset in a sale and leaseback transaction if the transfer is NOT a sale?
- Continue to recognise asset
- Recognise a financial liability equal to proceeds received
What do you do with an asset in a sale and leaseback transaction if the transfer is a sale?
- Derecognise the asset
- Recognise a right-of-use asset as the proportion of the previous carrying amount that relates to the rights retained
- Recognise a lease liability
- A profit or loss on disposal will arise
What are the double entries for a sale and leaseback transaction that is a sale?
Proceeds = FV
DR Cash (Proceeds) CR PPE (CA)
DR Right-of-use asset (CA x Lease liability/FV)
CR Lease Liability (PV of lease payments)
DR/CR Loss/Profit on disposal (balancing figure)
What is the 5 step revenue process?
- Identify the contract
- Parties have approved the contract and rights can be identified
- Payment terms can be identified
- Contract has commercial substance
- Probable the selling entry will receive consideration - Identify the separate performance obligations
- A good or service is distinct if it can be sold separately and has a distinct function - Determine the transaction price
- Variable consideration should only be recognised if highly probable
- If payment terms are more than a year the proceeds should be discounted - Allocate the transaction price to the performance obligations
- In proportion to stand-alone selling price - Recognise revenue as or when a performance obligation is satisfied
- Recognise over time if satisfy one of the following criteria:
Customer simultaneously receives and consumes the benefit
Creating an asset controlled by the customer
The asset does not have an alternative use to the seller, and the seller can demand payment for performance to date
- Otherwise: recognise at the point control is transferred to the customer
In the consolidated statement of profit or loss, how do you account for intra-group trading?
- In the adjustments column of the consolidation schedule cancel all intra-group sales/interest charges/management charges
- Increase cost of sales of the selling company by the amount of the PURP
In the consolidated statement of profit or loss, how do you account for non-current asset transfers (PPE PURP)?
CA at year end after transfer - CA if transfer never occurred = PPE PURP
- Adjust seller’s column (usually in operating expenses unless the question tells you specifically where to adjust)
In the consolidated statement of profit or loss, how do you account for fair value adjustments?
- If the FV of PPE is greater than CA, increase the expenses of S by the current year’s depreciation
In the consolidated statement of profit or loss, how do you account for dividends received?
Remove P% of dividends paid by S (Investment income in W2)
In the consolidated statement of profit or loss, how do you account for acquisitions part-way through a reporting period?
Pro-rate S’s results on a line-by-line basis (W2)
In the consolidated statement of profit or loss, how do you account for adjustments between the parent and associate?
(Inventory PURPS)
Inventory PURPS:
The adjustment is always made for P% of the unrealised profits
- If P is the seller, increase P’s cost of sales in W2
- If A is the seller, reduce share of profit of associate in W4
Dividends:
- Remove P% of dividend paid by A (Investment Income in W2)
What are the trigger words to suggest there is a joint arrangement?
- ‘contract of joint control over financial and operating activities’
- ‘unanimous decision making’
What are the two different types of joint arrangement? How do you treat them?
- Joint operations (no new entity exists)
- The company will show its share of the jointly run operation in its financial statements (awareness needed only) - Joint ventures (where a new entity exists)
- Use equity accounting as for an associate
How do you treat the disposal of a subsidiary in the Parent’s FS?
Gain/Loss on disposal: Sale proceeds Less: Cost of investment ------------ Gain/(loss) to P
Exceptional item should be disclosed on the face of the parent company SPL after operating profit
How do you treat the disposal of a subsidiary in the group accounts?
- CSFP: Ignore Sub that is being disposed of
- CSPL: Present in accordance with IFRS 5
This line will include: - Profit of S pro-rated up to the date of disposal; plus
- Consolidated profit/(loss) on disposal:
Sale proceeds
Less:
(CA of GW at disposal)
(CA of NAs at disposal)
Add: NCI at date of disposal
————–
Profit/(Loss) on disposal - CSOCE:
Remove NCI of subsidiary disposed of
How do you treat the fair value of consideration under goodwill calculation in the group accounts?
Fair value of consideration:
Cash: now, deferred, contingent
Shares: Now, deferred, contingent
Acquisition expenses to be charged to CSPL
How do you treat the fair value of identifiable assets and liabilities existing at the acquisition date under goodwill calculation in the group accounts?
Fair value of identifiable assets and liabilities existing at the acquisition date:
- Remove internal GW
- Add internally generated intangibles
- Fair value uplifts on PPE/Inventory
- Contingent liabilities
