Tenta frågor IFRS

Question 1

What is Fair Value?

Answer 1

Fair value is an exit price (e.g. the price to sell an asset rather than the price to buy that asset). An exit price embodies expectations about the future cash inflows and cash outflows associated with an asset or liability from the perspective of a market participant (i.e. based on buyers and sellers who have certain characteristics, such as being independent and knowledgable about the asset or liability).

Fair value is a market-based measurement, rather than an entity-specific measurement, and is measured using assumptions that market participants would use in pricing the asset or liability, including assumptions about risk. As a result, an entity’s intention to hold an asset or to settle or otherwise fulfil a liability is not relevant in measuring fair value.

Question 2

What is the definition of fair value? (After may 2011)

Answer 2

The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Question 3

What are the objectives of IFRS 13 Fair value Measurement?

Answer 3

Stated in paragraph 1:

• to define fair value
• to set out in a single standard a framework for measuring fair value
• to require disclosures about fair value measurement

Question 4

Describe the IASB standard setting process

Answer 4

Setting the agenda

• Planning the project
• Developing and publishing the discussion paper (incl public consultation)
• Developing and publishing the exposure draft (incl. public consultation)
• Developing and publishing the standard
• Procedures after an IFRS is issued

Question 5

What is the purpose of financial reporting and what are the fundamental issues with it?

Answer 5

Purpose of financial reporting:
Financial statements are prepared for the purpose of providing information that is useful in making economic decisions.

Fundamental issues

• Who are the users of the accounting statements?
• What is the purpose for which each particular type of user requires the information?
• How can we provide the user with the information best suited to their needs?

Question 6

What is the objective of general purpose financial reporting and what type of information do they need?

Answer 6

• To provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity. (CF 2010 OB2)
• They need Information to help them assess the prospects for future net cash inflows to an entity (CF 2010 OB3)

Question 7

Describe the different types of measurement bases?

Answer 7

• Historical cost
• An asset is recorded at the amount of cash paid to acquire it at the acquisition date.
• Liabilities are recorded at the amount of proceeds received in exchange for the obligation
• Mostly used and a reliable way to measure but not relevant. A inventory can be thought to be useful for five years even though it will produce relevance to the corporate. This even though it does not give any further costs.
• Current cost
• Assets are carried at the amount of that would have to be paid if the same or an equivalent asset was acquired currently
• Liabilities are carried at the undiscounted amount of cash that would be required to settle the obligation currently
• Often referred to as replacement cost
• How much does it cost to rebut the inventory?
• Realizable (settlement) value
• Assets are carried at the amount of cash that could currently be obtained by selling the asset in an orderly disposal
• Liabilities are carried at their settlement values; that is, the undiscounted amounts of cash expected to be paid to satisfy the liabilities
• Can be the same as the current cost but it is how much will we get, exit value. What will we get if we sell it?
• Present value
• Assets are carried at the present discounted value of the future net cash inflows that the item is expected to generate
• Liabilities are carried at the present discounted value of the future net cash outflows that are expected to be required to settle the liabilities
• If we have this inventory what is the present value?
• Fair value
• Is not part of the CF. It is therefore not a measurement bases, not consider costs to sell.
• The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (IFRS 13 § 9)

Question 8

What is the definition of deprival value?

Answer 8

Deprival value has been defined in Basis for Conclusions (BC) as a value that represents the loss that an entity would suffer if it were deprived of the asset being measured. Deprival value is the lower of the replacement cost of an asset and its recoverable amount. The asset’s recoverable amount is the higher of its net realizable value and its value in use (Macve, 2010).

The lower of:

• Replacement cost
• Recoverable amount

The higher of:

• Fair value less costs to sell (disposal value)
• Value in use (value obtainable from use)

Question 9

What is measurement and how is it described in the conceptual framework?

Answer 9

• Measurement is the process of determining the monetary amounts at which the elements of the financial statements are to be recognised and carried in the balance sheet and income statement. However, there is not much guidance on measurement in the conceptual frameworks of any of the leading standard-setters, such as FASB, IASB or ASB (Barth, 2007; Van Zilj and Wittington, 2006).

Question 10

Which are two of the main competitors of how current value should be defined and measured?

Answer 10

Two of the main competitors within this area are fair value measurement and deprival value (Van Zilj and Wittington, 2006).

Question 11

when is deprival value used?

Answer 11

Deprival value is usually used when the fair value of an asset cannot be reliably estimated.

Question 12

Why is Macve not a supporter of deprival value?

Answer 12

Macve (2010), however, disagrees with BC and says that even though its initial definition of deprival value is correct, it gives only ‘kindergarten’ version of deprival value that does not address generally more complex versions applicable to long-lived assets and liabilities.

Question 13

What are the criticism of Fair value?

Answer 13

• The criticism of using fair value measurement is directed towards reliability issues, it is stated that market actors use different concepts of reliability which in turn may threaten the relevance for accounting (Power, 2010; Barth, 2007).
• concerns regarding the lack of a clear definition of fair value (Barth, 2007).
• Van Zilj and Wittington (2006) state that two problems with fair value exist in the way that it does not address transaction costs and the choice of market which could suggest a need for extension of the fair value concept.

Question 14

Measurement of fair values

What is the four step process?

Answer 14

1. Determine the asset or liability that is to be measured
2. Determine the valuation premise that is appropriate
3. Determine the principal or most advantageous market
4. Determine the appropriate valuation technique

Question 15

Describe Step 1: determine the asset or liability

Answer 15

• Involves considering characteristics that market participants would take into account when pricing an asset or liability
• Relevant questions to consider include:
• What is the location of the asset?
• transport costs?
• What is the condition of the asset?
• remaining useful life etc
• Are there any restrictions on sale or use of the asset?
• patents etc
• Is the asset a stand-alone asset or used in a group of assets?
• cash generating unit

Note: assets are measured on a “per unit basis”
blockage factors are not relevant!

Question 16

Describe Step 2: determine the appropriate valuation premise

Answer 16

Fair value is measured by considering the highest and best use of an asset:
* “…the use of a non-financial asset by market participants that would maximize the value of the asset or the group of assets … within which the asset would be used.”

• These uses must be:
  
  • physically possible
  • legally permissible and
  • financially feasible
• The highest and best use is from the perspective of the market participant, not the holder
• Two different valuation premises:
• In combination valuation premise:
• This premise is used for determining FV where market participants would obtain maximum benefit principally through using the asset in combination with other assets and liabilities as a group
• The asset will be sold as an individual asset, not as a group, but the asset will be used by the market participant in conjunction with other assets
• Stand-alone valuation premise:
• FV is determined under this premise where market participants would obtain maximum benefit principally through using the asset on a stand-alone basis

Question 17

Describe Step 3: determine the principal or most advantageous market

Answer 17

FV measurement assumes that the transaction takes place in:

* the principal market, or
* the most advantageous market

• Principal market:
  
  • The market with the greatest volume
  • The market with the highest level of activity
• Most advantageous market:
  
  • The market that would maximize the amount received/paid
    
    • after deducting transaction and transport costs

Question 18

Describe Step 4: Determine the appropriate valuation technique

Answer 18

• The objective of the valuation technique selected:
• To estimate the price at which orderly transactions would take place between market participants under current market conditions
• Three possible valuation techniques:
• The market approach
• The cost approach
• The income approach

It requires judgment to select the most appropriate technique for the situation

Question 19

Describe the market approach within step 4 - Determine the appropriate valuation technique

Answer 19

The market approach:

• Uses prices and other relevant information generated by market transactions involving identical or similar assets or liabilities
• Prices are obtained directly from information gathered by activities in markets

Question 20

Describe the cost approach within step 4 - Determine the appropriate valuation technique

Answer 20

The cost approach

• This valuation technique reflects the amount that would be required currently to replace the service capacity of the asset
• Current replacement cost

Question 21

Describe the income approach within step 4 - Determine the appropriate valuation technique

Answer 21

The income approach

• This valuation technique convert future amounts to a single current amount
• Discounted cash flows (or income and expenses)
• Current expectations by market participant of these future amounts

Question 22

IFRS 13 provides a fair value hierarchy of inputs to achieve consistency and comparability, which are the inputs?

Answer 22

• Level 1
• quoted prices in active markets for identical assets or liabilities
• Level 2
• inputs other than quoted prices observable for the asset or liability (directly or indirectly)
• Level 3
• unobservable inputs for the asset or liability

Question 23

Describe Level 1 inputs:

Answer 23

Level 1 inputs:
- “…quoted prices in active markets for identical assets or liabilities that the entity can access at the measurement date.”

• A market is not active if:
• there are few recent transactions, or
• price quotes vary substantially over time
• Level 1 inputs must be for identical items
• Classical example: marketable securities
• For buildings, items may be similar, but will not be identical

Question 24

Describe Level 2 inputs:

Answer 24

Level 2 inputs:
- “…inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.”

• Included within this definition are:
• Quoted prices for similar assets or liabilities in active markets
• Quoted prices for identical items in inactive markets
• Inputs other than quoted prices observable for the asset or liability, ex:
  - Interest rates & yield curves, volatilities, prepayment speeds, credit risks
• Inputs that are derived from or corroborated by observable market data

Question 25

Describe Level 3 inputs:

Answer 25

Level 3 inputs:
- “unobservable inputs for the asset or liability”

• Data may come from the entity itself
• adjust for factors that market participants may build into the valuation
• Eliminate effects specific to the entity but not relevant to other market participants
• Example:
• Cash-generating units
• financial forecast of cash flow or earnings based on the entity’s own data

Question 26

Describe and elaborate six of the qualitative characteristics in the conceptual framework (1989 or 2010).

Answer 26

IASB Conceptual Framework 2010 (New approach):

• Fundamental qualitative characteristics:
  
  • Relevance
  • Faithful representation
  • Comparability
  • Verifiability
  • Timeliness
  • Understandability
• Relevance
• Financial statement should be relevant by providing information that users of financial statements need at the the time being. The information is capable of making a difference to users decisions. Information can be relevant but unreliable if provided to early. However, information can be reliable but not relevant if provided too late. There is therefore a conflict with reliability and and relevance in regards to timeliness.
• Important qualitative characteristic to relevance: materiality –> Only information that can make a difference to users decisions should be recognized.
• Faithful representation
• Useful information “must also faithfully represent the phenomena that it purports to represent” (IASB CF QC12)
• Three characteristics of a faithful representation
  * complete, neutral and free from bias
• Comparability:
  Financial statements should be prepared on a consistent basis to facilitate comparability. Users must be able to compare financial statements of the same entity through time and of different entities. Changes in accounting policies should be disclosed according to IAS 8 to facilitate comparability.
• Verifiability:
• Knowledgeable and independent observers could reach consensus, but not necessarily complete agreement, that a depiction is a faithful representation
• Timeliness:
• Information to be available to decision-makers in time to be capable of influencing their decisions
• Understandability:
• The information should be understandable by users
• Users are assumed to have a reasonable knowledge of business and economic activities and accounting and a willingness to study the information with reasonable diligence
• Information should be classified, characterized and presented clearly and consistently

Question 27

When can we recognize revenue?

Answer 27

• Revenue is not defined in the CF
• Consists of sales, fees, interest, dividends, royalties, rent
• A definition of revenue is found in IAS 18 Revenue §7 – consistent with the CF definition of income
  
  • But it further describes revenue as the gross inflow of economic benefits…
• Revenue to be recognized when (CF § 4.47 on income):
• An increase in FEB’s related to an increase in an asset (=accounts receivable) has arisen that can be measured reliably (=goods have been delivered)

Question 28

What Is a Lease?

Answer 28

“an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time”

(IAS 17 paragraph 4)

Question 29

What is a finance lease?

Answer 29

A finance lease is a lease whicht ransfers substantially all ownership risk and rewards, with or without eventual title transfer

• Risks of ownership include – obsolescence, loss on sale
• Rewards of ownership include – use of asset, gains on sale

Question 30

What are the effects of measurement?

Answer 30

• Measurement can have important effects on the economic decisions made by users
  
  • A number of different measurement bases may be used for assets, liabilities, income and expenses in varying degrees and in varying combinations in financial statements (IASB CF para 4.55)

Question 31

Describe different measurement bases and their pros and cons.

Answer 31

Historical cost

• An asset is recorded at the amount of cash paid to acquire it at the acquisition date .
• Liabilities are recorded at the amount of proceeds received in exchange for the obligation
• Current cost
• Assets are carried at the amount of that would have to be paid if the same or an equivalent asset was
• Liabilities are carried at the undiscounted amount of cash that would be required to settle the obligation currently
• Often referred to as replacement cost
• Realizable (settlement) value
• Assets are carried at the amount of cash that could currently be obtained by selling the asset in an orderly disposal
• Liabilities are carried at their settlement values; that is, the undiscounted amounts of cash expected to be paid to satisfy the liabilities
• Present value
• Assets are carried at the present discounted value of the future net cash inflows that the item is expected
  to generate
• Liabilities are carried at the present discounted value of the future net cash outflows that are expected to be required to settle the liabilities

Question 32

What is the purpose of the IASB CF?

How can preparers/stanard setters/users benefit from a CF?

Answer 32

• To assist the Board (IASB CF 2010 page 6):
  * in the development of future IFRSs and in its review of existing IFRSs;
  * in promoting harmonization of regulations, accounting standards and procedures relating to the presentation of financial statements by providing a basis for reducing the number of alternative accounting treatments permitted by IFRSs;
• To assist national standard-setting bodies:
  * in developing national standards;
• To assist preparers of financial statements:
  * in applying IFRSs and in dealing with topics that have yet to form the subject of an IFRS;
• To assist auditors:
  * in forming an opinion on whether financial statements comply with IFRSs;
• To assist users of financial statements:
  * in interpreting the information contained in financial statements prepared in compliance with
  IFRSs;
• To provide those who are interested in the work of the IASB with information about its approach to the formulation of IFRSs.

Question 33

Describe the accruals basis and elaborate on its importance to IFRS:s

Answer 33

• Accrual basis
  
  • Effects of transactions and other events are recognized when they occur (and not as cash or its equivalent is received or paid)
  • They are recorded in the accounting periods and reported in the financial statements of the periods to which they relate
    • Recognise an element when it satisfies the definition and recognition criteria
• Compare with matching concept:
  * The matching of revenues with the expenses incurred in earning that revenue
• Difficult to keep apart. Example:
  * The revenue of $100 from selling an item of inventory of $70 is recognised 28 December. Accounts prepared 31 december will include profit of $30 and an asset of $100 (cash)
  
  • Instead the revenue $100 is recognised on 2 January. So is the expense of $70. The accounts for 31 December will include an asset of $70 (inventory), no revenue and no expense

Question 34

Describe the traditional accounting conventions:

Answer 34

Traditional accounting conventions

• Continuity (is when the company is going concern, not quitting – depreciation)
• Unless evidence to the contrary, the busines will continue into the indefinite future
• Conservatism (prudence)
• Recognize all possible losses but not anticipate possible gains
• Prudence – Not recognize all gains, be careful and safe. Losses are important but gains must be valued carefully. Not giving numbers that are too optimistic. IASB are however saying to corporates to be neutral, not to recognize too many risks.
• Consistency
• Apply the same accounting rules, methods or procedures in each similar case, year by year → important for comparability
• Avoid manipulation of reported results

*Materiality - Auditors set the level of the audit.

• Objectivity
• Qualified individuals working independently should arrive at the same conclusions from the same evidence. → If all users can think that the information is giving a true picture.
• Matching
• The matching of revenues with the expenses incurred in earning that revenue. Is not done in Sweden.

Question 35

Describe the differences regarding the concept of prudence in national GAAP that is credit oriented versus national GAAP that is shareholder oriented.

Answer 35

Prudence in national GAAP that is creditor oriented is of greater importance than in national GAAP that is shareholder oriented. This is due to the fact that the financing from creditors usually involves banks and financial institutes. The main concern for these shareholders is whether or not the company will be able to repay their debt and therefore prefers a more prudent presentation of the company’s assets (e.g. historical cost).
The shareholder oriented perspective receive most of their financing from external investors and are more concerned about the return on investment and whether to buy/hold/sell their shares. They therefore prefer a market-value of the company and prefer the assets being recognized at fair value instead of historical cost which could be seen as less prudent.

Question 36

Elaborate on conventions that are or may be contradictory to prudence, and illustrate the conflicts between such other conventions and prudence. Make sure to include at least three such contrary conventions in relation to prudence.

Answer 36

Matching - The matching of revenues with the expenses related to earning that revenue can be in conflict with the prudence concept. For example, how to account for advertising cost. According to the IFRS, the prudence concept requires companies to expense advertising immediately as the occur while the matching concept would prefer to spread the cost over the time in proportion as revenues from the advertising occurs.

Relevance - Information is relevant if it makes a difference in making economic decisions. Shareholders prefer assets showed at their market value (fair value) when making their investment decisions. The prudence concept may be in favor of historical cost values rather than fair value which creates a conflict between relevance and prudence.

True and fair view - Prudence recognize all possible losses but do not anticipate possible gains. True and fair view requires all information to be complete, neutral and free from bias. There might be a conflict here as being prudent and intentionally recognize a possible loss but not a gain could be seen as not being complete, neutral and free from bias.

Question 37

It is argued that the “reducing balance method” of calculating depreciation charges is more prudent than the “straight line method”. Provide an explanation of this argument, and also include in your answer an explanation of the meaning of each if these two depreciation methods.

Answer 37

The “reducing balance method” could bee seen as more prudent than the “straight line method” since it depreciates larger amounts in the beginning of the economic life of the assets and smaller in the end as opposed to the straight line method which depreciates the same amount each year of the economic life. This makes the reducing balance method more prudent than the straight line method.
Example: An asset has an estimated economic life of five years, but after 3 years it breaks down and cannot be used anymore. This makes the reducing balance method to have recognized more depreciation and shows the asset at a lower amount than according to the “straight line method”.

Question 38

Describe the benefits (the positive factors) as well as the drawback (the negative factors) to implementing a uniform set of accounting standards for all global markets to use. In your reply, make sure to draw from the articles in the reading list of this course.

Answer 38

Benefits - A uniform set of accounting standards would facilitate international investing because it would be less costly for firms since they only would be required to prepare one set of financial statements in compliance with IFRS. It would also enhance comparability among firms in different countries. A higher convergence will make it easier for shareholders and investors to compare companies all over the world. Moreover they will make better and more informed decisions on where to invest their money, this in turn will will lead to a lower cost of capital. Previous studies have shown that one set of high quality accounting standards decreases information asymmetry and increases transparency. A higher convergence would increase comparability between firms and between industries.

Drawbacks - Changing one of the elements of the institutional framework in a country can have a negative effect on the economy as a whole. It might require more resources for comparing in accordance to IFRS which creates costs.

The reporting incentives of firm are also important to consider. A set of high quality accounting standards will not provide any benefits if firms don’t implement them correctly and have questionable reporting incentives. There is also a possibility that, when IFRS, is translated into another language the intended message might be interpreted in a different way depending on which language it is being translated into. It is therefore important that the legal structures of countries protect shareholders and implement stringent rules to avoid violation. Having more than one set of global standards increases the quality of the standards because it facilitates competition. One set of accounting standards can therefore decrease competition, and stifle innovation and creativity. Moreover, countries that already have a high quality accounting standards would not benefit with a switch to a uniform set of accounting standards in regards to quality. It would also be costly in the short-term for a country to switch to a different set of accounting standards as preparers would have to be retrained and accounting systems overhauled. Political lobbying is another drawback that is likely to occur when there only is one accounting standard setter. One coherent framework would might also be difficult to reach due to different tax-laws, cultures, and other national differences that prevents convergence.

Countries that will benefit the most from a switch to a uniform set of accounting standards such as iFRS are the ones with lower quality accounting standards, stringent legal structures that protect shareholders, and smaller economies with fewer firms.

Question 39

WHAT IS THE DEFINITION OF ‘PROPERTY, PLANT AND EQUIPMENT - PP&E

Answer 39

A company asset that is vital to business operations but cannot be easily liquidated. The value of property, plant and equipment is typically depreciated over the estimated life of the asset, because even the longest-term assets become obsolete or useless after a period of time.

Depending on the nature of a company’s business, the total value of PP&E can range from very low to extremely high compared to total assets. International accounting standard 16 deals with the accounting treatment of PP&E.

An example of a business with a high amounts of PP&E would be a shipping company, because most of its assets would be tied into its fleet of ships and administrative buildings. On the other hand, a management consulting firm would have less PP&E, because a consultant would only need a computer and an office in a building to run its operations.

This item is listed separately in most financial statements because PP&E is treated differently in accounting statements. This is because improvements, replacements and betterments can pose accounting issues depending on how the costs are recorded.

Question 40

How to Calculate Net Plant Property & Equipment:

Answer 40

When you put together your balance sheet, you need to start with your gross property, plant and equipment and then wind down to your net property, plant and equipment. Your gross property, plant and equipment is the amount that you paid for any property, buildings or other assets that you own. You then need to depreciate these assets each year. Depreciation reduces the value of the asset as you use it. The net property, plant and equipment is your cost for the equipment less your accumulated depreciation.

Step 1
Add your assets that can be classified as property, plant and equipment from your general ledger. These should be your costs for purchasing each asset. For example, assume you have been in business for five years. During the five years you purchased land for $100,000, a building for $20,000 and a machine for $5,000. So your gross property, plant and equipment is $100,000 plus $20,000 plus $5,000 for a total of $125,000.

Step 2
Add the current year’s depreciation to your accumulated depreciation. Accumulated depreciation is the amount of depreciation from prior years. In the example, assume your accumulated depreciation is $40,000 and this year’s depreciation is $6,000, so your total accumulated depreciation is $46,000.

Related Reading: Definition of Operating Income and Net Sales

Step 3
Subtract your total accumulated depreciation from your gross property, plant and equipment. In the example, $125,000 minus $46,000 equals $79,000 for your net property, plant and equipment.

Question 41

DEFINITION OF ‘IMPAIRMENT’

Answer 41

1. A reduction in a company’s stated capital.
2. The total capital that is less than the par value of the company’s capital stock.

Explanation
- This is usually reduced because of poorly estimated losses or gains.

• Impairment can be used in many contexts. Whatever the situation, impairment is bad for the company.

Question 42

DEFINITION OF ‘IMPAIRED ASSET’

Answer 42

A company’s asset that is worth less on the market than the value listed on the company’s balance sheet. This will result in a write-down of that same asset account to the stated market price.

Accounts that are likely to be written down are the company’s goodwill, accounts receivable and long-term assets.

If the sum of all estimated future cash flows is less than the carrying value of the asset, then the asset would be considered impaired and would have to be written down to its fair value. Once an asset is written down, it may only be written back up under very few circumstances.

Firm’s carrying goodwill on their books are required to make tests of impairment annually. Any impairments found will then be expensed on the company’s income statement.