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Accounting, Controlling, Auditing > Unit 2 : Accounting for Selected Asset and Liabilities > Flashcards

Unit 2 : Accounting for Selected Asset and Liabilities Flashcards

1
Q

Lease

A

is a contract, or part of a contract,
* that conveys the right to use an asset (the underlying asset)
* for a period of time
* in exchange for consideration

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2
Q

An underlying asset

A

is an asset that is the subject of a lease, for which the right to use that asset has been provided by a lessor to a lessee.

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3
Q

What are the two types of Lease?

A

operating leases and financial leases

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4
Q

Finance Lease

A

is a lease that transfers substantially all the risks and rewards incidental to ownership of an underlying asset.

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5
Q

Operating leases

A

correspond to the normal understanding of a lease –> a rental agreement that is also economically genuine.
- foreseeable period of time
-this period represent only a small part of the total value of the leased
asset.
-economic risk then remains with the lessor

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6
Q

What are the main differencies between a Finance Lease and operating Lease?

A
  • ownership
  • accounting treatement
    -duration
    -transfer of risk
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7
Q

How does IFRS 16 impact the accounting of leases?

A

IFRS 16 requires all relevant leases to appear on the balance sheet with the lessee reporting a right-of-use asset and a lease liability.
-For the Lessee, the classication in Finance or Operating Lease is eliminated
-For the Lessor there are no changes except for an enhancement of the dislosures
-The Lease expense (also for Operating Leases) is composed of a depreciation charge and an interest expense

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8
Q

Consequences of financial/ operating leases on the balance sheet (IAS 17)

A

-Finance Leases are reported on the Balance Sheet
-Operating Leases are only disclosed in the
Notes (”Off-Balance Sheet Leases”). In the income statement only the lease expense is recorded

Problem:
-The difference between Finance & Operating Leases made the comparison difficult
-Asset/Liability missing for lessee

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9
Q

In which industries is leasing particulary relevant?

A
  • Retailers
    -Manufacturing
    -Airlines
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10
Q

What are advantage of leasing in comparaison to purchasing?

A

-Temporary increase of capacity
-Lower financial burden
-More flexible
-liquidity

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11
Q

“susbstance over form”

A

typical example for leases

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12
Q

When is initially recognised a lease contract?

A

at the present value of the lease payments

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13
Q

With the introduction of IFRS 16 the debt report on balance sheet has mostly ?

A

-increased
–> more asset and more liabilities

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14
Q

Impairement

A

extraordinary depreciation of an asset –> is the recognition of an unexpected loss in value of an asset

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15
Q

When an impairment loss should be recognized?

A

Impairment is recognized when the recoverable amount of an asset is lower than its carrying amount

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16
Q

What triggers an impairment test under IAS 36?

A

Significant market value decline, adverse changes in the environment, market interest rate increases, or underperformance of an asset.

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17
Q

External sources of information (to do an impairement test)

A
  • Unusual significant decline in asset’s market value
  • Significant changes in the technological, market, economic or legal environment
  • Increase in market interest rates or other market rates of return on investments
  • Carrying amount of the net assets of the entity is more than its market capitalization
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18
Q

Internal source of information to recognize to do an impairement test

A
  • Evidence of obsolescence or physical damage of an asset
  • Plans to discontinue or restructure the operation to which an asset belongs
  • Evidence available from internal reporting that economic performance of an asset is/will be worse than expected
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19
Q

Do intangible asset need a impairement test ?

A

intangible assets with an indefinite useful life, goodwill in particular, must be subjected to a documented review at least once a year to determine whether an impairment loss needs to be recorded. (annual impairement test)

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20
Q

How does this so-called impairment test work?

A
  1. The starting position is the definition of assets as an expression of future inflows of benefits.
  2. To determine an impairment requirement –> The sum of the expected future inflows of benefits from an asset are, in simple terms, compared with the carrying amount of this asset.

–> If the sum of future cash flows is higher than the current carrying amount, there
is no need to recognize an impairment loss.

–> if the sum of future cash inflows is less than the current carrying amount of the asset, the asset must be impaired: Otherwise, asset values would be recognized which are not justified by future inflows of benefits and are therefore “useless”.

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21
Q

Challenges of the impairement test

A

-Estimating the expected future inflows of benefits is generally subject to considerable uncertainty.

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22
Q

Intangible assets developed internally (to avoid impairement)

A

Generally expensed when incurred, although capitalized in some situations. Under IFRS:
- Expenditures on research are expensed.
- Expenditures on development are capitalized.

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23
Q

Why can’t some assets be assigned direct, individual benefit flows?

A

Many assets, like individual machines or office equipment, do not produce direct, individual benefit flows.

These assets contribute to future benefits in combination with other assets.

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24
Q

What is the adjustment to the principle of individual asset valuation in impairment testing?

A

In impairment testing, the principle of individual asset valuation is relaxed.

Assets can be grouped into Cash-Generating Units (CGUs) for testing.

CGUs produce cash flows that are largely independent of other units.

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25
Q

What flexibility exists in forming Cash-Generating Units (CGUs)?

A

There is flexibility in how assets are grouped into CGUs.

The more assets included in a CGU, the more positive and negative developments can offset each other.

This may help prevent an impairment.

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26
Q

What are the advantages of grouping more assets in fewer Cash-Generating Units?

A

Grouping more assets in a CGU reduces the need for multiple impairment tests.

This simplifies the process and saves the accountant work.

However, CGUs should not be too large.

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27
Q

What happens if the reasons for an impairment no longer exist?

A

If the reasons for impairment cease, the impairment may need to be reversed.

Only the values that would have resulted under normal depreciation without the impairment should be revalued.

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28
Q

Example when an impairement happen

A
  • Asset physically breaks down or is destroyed
  • Asset is obsolete due to technological innovation
  • changes in the sales market may lead to fewer products being sold than planned, or sales prices may fall
  • New regulatory frameworks, such as new environmental guideline –> cause expected costs or revenues to change (Covid 19)
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29
Q

Objective of IAS 19

A

To prescribe the accounting and disclosure for employee benefits, requiring an entity to recognise a liability where an employee has provided service and an expense when the entity consumes the economic benefits of employee service.

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30
Q

What are the two types of post-employment benefit plans?

A

Defined contribution plans and defined benefit plans.

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31
Q

What is a defined contribution plan?

A

A plan where the entity pays fixed contributions with no obligation to make further payments, and the risk is on the employee.

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32
Q

What is a defined benefit plan?

A

Any contract that gives rise to a financial asset for one entity and a financial liability or equity instrument for another entity.

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33
Q

What is the accounting treatment for Defined Contribution Plans?

A
  • Pension expenses are regularly booked in the income statement, similar to a salary.
  • The corresponding amount is transferred to the pension fund.
  • Aside from disclosures in the notes, the matter is settled in the annual financial statements
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34
Q

What the accounting treatement for defined benefit Obligation?

A
  • The company guarantees a certain level of pension provision for the employee’s lifetime.
  • A provision must be made for future payments, depending on factors
  • The provision grows annually, reflecting personnel expenses.
35
Q

How is the provision for a Defined Benefit Plan estimated?

A
  1. Estimate total pension payments:
    - Life expectancy
    - Retirement age
    - Wage development =
    = Determines capital needed until retirement
  2. Estimate yearly provision:
    - Remaining worktime
    Interest development = Annual amount added to provision as personnel expense
    - interest development

= Annual amount is added to the provision as personnel expense

36
Q

What are the liabilities and assets in a Defined Benefit Plan?

A

Liability side: The provision for future pension obligations.

Asset side: Where the money for the pension will come from to ensure future liquidity.

37
Q

How are pension funds structured in Switzerland? (for defined benifit plan)

A
  • Employers establish pension funds, legally separate from the company.
  • Multiple companies can join together to form “collective or joint company” pension funds.
  • The fund’s governing bodies have equal representation from employer and employee sides.
  • The pension fund assumes employee obligations and receives regular company payments, held as financial assets.
38
Q

What are the advantage to establish pension fund?

A
  • Pension funds balance their assets and liabilities
  • Pension fund are at risk if companies have difficulties
39
Q

What is underfunding and overfunding in pension funds?

A

Underfunding: Pension fund obligations exceed its assets.

Overfunding: Pension fund assets exceed its obligations.

40
Q

What happens in countries where the pension capital stays within the company?

A
  • Capital earmarked for future pensions remains in the company as assets like machinery or buildings.
  • Pension commitments are at risk if the company faces financial difficulties.
  • Some companies join insurance solutions, where an external insurer takes over in case of financial trouble.
41
Q

What disclosures are required in financial statements regarding pension obligations?

A

The net effect of pension assets and liabilities may not be directly visible on the balance sheet.

Extensive disclosures in the notes are required, including assumptions used for calculations.

42
Q

Why are pension obligations complex for international companies?

A

nternational companies like Nestlé have diverse pension commitments in different countries.

Each type of pension plan must be measured and disclosed individually, often requiring extensive reporting.

43
Q

Which pension plan is the less risky for the employee ?

A

Defined Benefit plan is less risky for employees because it provides guaranteed income, shifts financial and longevity risks to the employer, and requires no investment management by the employee.

44
Q

Financial instrument

A

any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity
–> varies from one set to another
–> Two parties involved : two side of the balance sheet

45
Q

A financial asset

A
  • cash
  • an equity instrument of another entity
  • a contractual right to receive cash or another financial asset from another entity”
    —> measure at fair value
46
Q

A financial liability

A

any liability that is a contractual obligation to deliver cash or another financial asset to another entity
–> measure at amortised cost

47
Q

An equity instrument

A

any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities
–> Ordinary shares are the most common instance of an equity instrument.

48
Q

what are the two types of Measurement for financial Asset ?

A

Initial measurement and Subsequent measurement

49
Q

Initial measurement

A

Financial assets are recognised initially at their fair value = value of the consideration given when the asset was acquired

50
Q

Subsequent measurement

A

The amount at which a financial asset or liability is measured subsequently depends upon the type of that asset
or liability

51
Q

What factors can cause changes in the value of Financial Instruments?

A

The financial situation of the contracting party.

Changes in general interest rates.

Exchange rate fluctuations (for financial instruments in foreign currencies).

52
Q

What are the methods for Subsequent Measurement of Financial Instruments?

A

At acquisition cost: No changes in value considered.

At cost, less impairment: For cases like financial crises or unpaid receivables.

At current market prices: Changes in value are recognized in the income statement.

At current market prices with revaluation reserve: Gains or losses are not realized until the financial instrument is sold.

53
Q

Which Financial instruments are recognized in the income statement?

A

Permanent losses.

Fluctuations in value for instruments held for trading purposes.

Foreign currency effects.

Changes in value of derivatives (except in hedge accounting)

—> For Amortized Cost and Fair value profit & Loss

54
Q

What is Hedge Accounting?

A

A method where the fair value of a derivative and the value of its opposing hedge are accounted for together.

This prevents negative effects on earnings from fluctuations in derivative values.

55
Q

Which financial instruments are not recognized in the income statement ?

A

Temporary losses in value of financial instruments with a long holding period

56
Q

What is the difference between IFRS/US-GAAP and the Swiss Code of Obligations for measuring financial instruments?

A

IFRS/US-GAAP: Tend to show market values.

Swiss Code of Obligations: Follows the prudence principle, using historical acquisition costs.

57
Q

recycling

A

the company has not sold the shares yet and therefore has not yet realized the price gain. It is only when the shares are sold, that the revaluation reserve, accumulated up to the time of the sale, is transferred to the income statement.

58
Q

How changes in value of Financial instrument are dealt with in accounting

A
  1. The valuation can be conducted at the previous acquisition costs, without taking changes in value into account.
  2. Measurement at cost, less impairment losses where necessary.
    Example: this may be the case for an investment in another company, if the associated company runs into a financial crisis or in the case of trade receivables, if the customer can no longer pay.
    = If appropriate, the valuation can also be performed at amortized cost.
  3. The measurement at current market prices, whereby any changes in value flow directly into the income statement.
  4. The option of measurement at current market prices, whereby changes in value are initially not included in the income statement, but a revaluation reserve is formed in equity. –> recycling
59
Q

How does accounting affect taxes?

A

Accounting determines the actual tax burden based on financial statements.

Profit in the financial statements usually forms the basis for taxable profit and tax payable

60
Q

What is book-tax conformity?

A

meaning that the financial accounting profit aligns with the taxable income reported for tax purposes.

61
Q

What are the three components of determining taxable income?

A

Accordance with commercial law (Swiss Code of Obligations or other local laws).

Current Taxes: Taxes based on taxable income determined according to local tax law, paid immediately or as provisions.

Deferred Taxes: Recognized when there is a difference between accounting profit and taxable profit.

62
Q

When are commercial and tax balance sheets not identical?

A

They are not identical in consolidated financial statements or when different accounting standards (e.g., IFRS, Swiss GAAP) are used compared to local tax laws.

Differences arise due to varying assessments and valuations.

63
Q

What is the issue with only including current taxes in financial statements?

A

Current taxes alone may misrepresent the tax position as they do not account for future tax effects or differences in valuation between accounting and tax rules.

64
Q

How are deferred taxes accounted for?

A

Deferred tax liabilities arise when accounting profit exceeds taxable profit.

Deferred tax assets arise when taxable profit exceeds accounting profit.

They reflect future tax effects based on temporary differences between accounting and tax values.

65
Q

What are temporary differences and permanent differences?

A

Temporary Differences: Differences between tax and commercial accounting that will reverse in the future (e.g., unrealized gains).

Permanent Differences: Differences that will not reverse (e.g., expenses not recognized by tax authorities).

66
Q

What tax rate should be applied to deferred taxes?

A

Deferred taxes should be valued at the tax rate expected to apply when the temporary differences reverse.

67
Q

What happens under the Swiss Code of Obligations with respect to financial statements?

A

There may be differences between commercial and tax balance sheets, especially in consolidated statements.

Book-tax conformity may not always apply due to varying regulations between commercial and tax laws.

68
Q

What is the difference between current and deferred taxes?

A

Current taxes are based on taxable profit, while deferred taxes arise from temporary differences between accounting and tax bases.

69
Q

Tax accounting and financial accounting mainly differ with regard to ?

A
  • Inventories
    -Depreciation
  • Warranties (garantie)
70
Q

A right-of-use asset is..

A

an asset that represents a lessee’s right to use an underlying asset for the lease term.

71
Q

Acquisition of Intangible Assets

A

-Intangible assets purchased in situations other than business combinations.

-Intangible assets developed internally.

-Intangible assets acquired in a business combination.

72
Q

Frontloading Effect

A

influence how lease payments impact cash flows, interest expenses, and profit and loss statements.

73
Q

Right-of-use Asset

A

the lessee’s right to use an asset during the lease term.
(interest expense - Depreciation)

74
Q

What is riskier for a employer between a Defined Contribution Plan Commitmend and a Benfit Plan Commitmen ?

A

a Defined Benefit Plan is riskier for an employer compared to a Defined Contribution Plan due to the uncertainties and responsibilities associated with ensuring future benefit payments and managing investment performance

75
Q

What is riskier for a employer between a Defined Contribution Plan Commitmend and a Benfit Plan Commitmen ?

A

Overall, employees in a DB plan typically enjoy more security in retirement income, whereas employees in a DC plan have more control over their savings but face greater risk and uncertainty regarding their retirement income.

76
Q

Overfunded: A pension fund is considered…

A

overfunded when the value of the plan’s assets exceeds its pension liabilities. In other words, the fund has more than enough assets to cover the present value of the future pension benefits owed to retirees and employees.

77
Q

Underfunded: A pension fund is considered..

A

underfunded when the value of the plan’s assets is less than its pension liabilities. This means the plan does not have enough assets to meet its future pension obligations.

78
Q

Method for the classification of financial instruments (3 categorie)

A
  • Amortized Cost: Financial assets that meet these criteria are initially recognized at fair value plus transaction costs and subsequently measured at amortized cost using the effective interest method.

-FVOCI: These assets are initially recognized at fair value. Subsequently, they are measured at fair value, with changes in fair value recognized in other comprehensive income (OCI), not in profit or loss.

-FVTPL: Financial assets are measured at fair value, with changes in fair value recognized in profit or loss. This category includes assets held for trading and certain equity instruments that are not designated as FVOCI.

–> voir schema page 36 du cours

79
Q

The SPPI (Solely Payments of Principal and Interest) test assesses…

A

whether the cash flows from the financial asset are solely payments of principal and interest on the principal amount outstanding.

80
Q

Deferred Tax Asset

A

taxable income (OR) > financial (book) reporting income (IFRS)

–> only possible for Temporary differencies

81
Q

Deferred Tax Liability

A

taxable income (OR) < financial (book) reporting income (IFRS)

–> Only possible for temporary differencies

Calculation: TemporaryDifference × TaxRate

82
Q

How to recognize a Temporary Differences in Deferred taxes?

A
  • Depreciation
    -Revenue Recognition
83
Q

How to recognize a Permanent Differences in Deferred taxes?

A

-Non-Deductible Expenses: Certain expenses, such as fines or penalties, are not deductible for tax purposes

-Tax-Exempt Income: Income that is exempt from tax but included in financial income.

Accounting, Controlling, Auditing (3 decks)

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