Tricky Tutorials: Groups, Financial Instruments, Provisions, Warranties Flashcards
How does IAS 32 determine an obligation to repay in cash? Or through an issue of shares?
Cash: As a liability
Shares: Equity - split accounting part debt/part equity
What are the accounting entries for the issue of convertible debt?
Dr Cash (amount received) Cr Liability Cr Equity (balancing figure in SOFP)
How do you figure out the liability value component in the accounting entries for convertible debt?
Value liability component: Discount cash flows (interest and repayment that you could be obliged to pay) to present value using market rate of interest (that just applies to debt)
- Using the rate without the option to convert
How is a liability subsequently classified?
Classified as ‘other financial liability’
How is convertible debt subsequently measured?
Measured at amortised cost at an effective rate = market rate for normal debt (rate of interest without the conversion)
How do you build back up the debt from present value to what is owed?
Unwinding:
Balance b/f x rate of interest without the conversion - (cash which is the cash x interest on debt) = balance c/f
How is unwinding interest expense presented in the accounts?
Dr Finance Cost (interest)
Cr Liability
How is the coupon interest (the netted off balance) presented in the accounts?
Dr Liability
Cr Bank
How do you present convertible debt in the FS at y/e?
SOCI: Interest expense from the unwinding
SFP = Current liability; Convertible Debt: Balance C/F at the end of the year
Equity; Equity Option: Equity balancing figure from initial accounting entries
When is a provision recognised?
- There is a present obligation (legal or constructive) as a result of a past event that occurred before the year end
- It is probable that an outflow of economic benefits will result. Probable assumed as more than 50%
- A reliable estimate of the amount can be made
What is a constructive obligation?
Based on a company’s behaviour: If a company markets themselves as environmentally friendly, they might be responsible to pay for environmental damage even if it is not a legal obligation
Should you always provide a provision for damage?
The damage must be done rather than planned
How do you account for a dismantling provision on acquisition?
- On building, capitalise the provision as part of the non-current asset (as obligation present at acquisition date) = Provision x (1/1+interest rate to the power of the number of years of UL left)
- Then add this discounted PV to the initial NCA cost
How do you account for a dismantling provision at year-end?
Depreciate NCA:
Dr Depreciation Expense (SPL)*
Cr Acc Depreciation (SFP)
* assume straight-line if not specified
Unwind the liability: Depreciate the NCA Dr Finance Cost (SPL) (Provision PV x interest %) Cr Provision (SFP)
How do you present a dismantling provision in the FS extracts?
SOCI
Depreciation of NCA
Finance Costs (the unwound liability)
SFP:
PPE
Provisions (in the year of building put initial PV and the unwinding for one year)