WB 2 Flashcards
What requirements does IAS 1 state for fair presentation?
Requirements are:
- selection and application of accounting policies
- presentation of information in a manner which provides relevant RELIABLE, COMPARABLE and UNDERSTANDABLE information
- additional disclosures required
Explain and provide examples of Cost of sales (I&E)?
These relate directly to the costs attributable to the production of goods and services.
Inventory Purchases Production costs Overheads Depreciation
Explain and provide examples of Distribution costs (I&E).
These are costs incurred after the production of the finished goods up to and including transfer of the goods to the customer.
Transport costs (carriage)
Selling and advertising costs
Warehouse costs
Depreciation
Explain and provides examples of Administrative costs (I&E).
These are operating costs that have not been classified as either cost of sales or distribution costs.
Bad debts
Head of office expenses
Depreciation
Changes in allowances for trade receivables
Explain and provide examples of Other Operating Income (I&E).
These are items within the ordinary activities which are of such size, nature or incidence that their separate disclosure is required in the FS.
Government grant amortisation
Negative goodwill
Revaluation surplus of investment properties
Explain and provide examples of Other operating expenses (I&E).
These are items within the ordinary activities of the entity which are of such size, nature or incidence that their separate disclosure is required in the FS.
Write-down of assets (impairment loss)
Revaluation deficits of investment properties
Explain and provides examples of Investment Income (I&E).
Income from current and non-current investments.
Bank interest receivable
Dividends received
Explain and provide examples of Finance Cost (I&E).
Costs incurred in financing the entity.
Interest payable
Debenture interest payable
Finance charges on leases
Dividends on redeemable preference shares
Explain and provide examples of Tax expense (I&E).
This will be the tax payable on the profit for the period.
Current tax payable
(Over)/Under provision from previous year’s
Deferred tax movement
The second part of the Statement of Comprehensive Income is made up of Other Comprehensive Income. Explain and provide examples of Other Comprehensive Income.
This is income and expenses that have been recognised but not yet realised.
Revaluation gain/loss.
What is the Statement of Changes in equity made of?
Balance at beginning of the year Retrospective adjustment Restated opening balance i) Share issues ii) Dividends payable iv) Total comprehensive income for the year (I&E) Balance at end of year
The balance at year end in the Statement of Changes in Equity is also shown in the Statement of Financial Position. How is it shown in the SoFP?
Equity:
- share capital
- share premium account
- revaluation reserve
- other reserves
- retained earnings
What does IAS 8 define ‘accounting policies’ as?
“Principles, bases, conventions, rules and practises adopted by an organisation in preparing its FS.”
Where a specifically applicable Standard or Interpretation is absent, what should management do?
IAS 8
They must use judgement in developing and applying an accounting policy that results in information that is relevant and reliable. Must consider following sources:
- requirements and guidance in IASB standards and interpretations dealing with similar and related issues
- the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses in the Conceptual Framework.
When is an entity permitted to change an accounting policy?
IAS 8
Only if the change
- is required by a standard or interpretation
- results in the FS providing reliable and more relevant information about the effects of transactions, other events or conditions on the entity’s financial position, financial performance, or cash flows
It must be applied retrospectively. Must
- adjust opening balance of retained earnings
- restate comparatives
- outline reasons for the change in a note
What disclosure are required when a change in accounting policy has a material effect on the current period or any prior period presented, or when it may have a material effect in subsequent periods?
IAS 8
- title of the standard or interpretation causing the change
- nature of the change in accounting policy
- the amount of the adjustment for each FS line item affected
- amount of adjustment relating to periods before those presented
- if retrospective application is impractical, an explanation and description of how change was applied
What are companies to disclose in accordance with IAS 8 when there is a change in accounting estimates?
- nature and amount of a change in an accounting estimate that has an effect in the current period or is expected to have an effect in future periods
- if the amount of the effect in future periods is not disclosed because estimating it is impractible, the entity should disclose that fact
In accordance with IAS 16 (PPE), what is the criteria for recognition and how is an asset initially measured?
Recognition:
- probably that future economic benefits associated to the asset will flow to the entity
- cost can be measured reliably
Cost is historic cost and is made up of:
- purchase price
- non-refundable purchase tax and import duties
- directly attributable costs of bringing asset to location and condition necessary for its operation, e.g. site prep, installation costs, testing, professional fees
- estimated cost of dismantling and removing asset & restoring site
Define depreciation.
IAS 16
The measure of the amount of the economic benefits of the non-current asset that have been consumed in the period.
Straightline method & reducing balance method.
Define Borrowing Costs (IAS 23 Borrowing Costs).
Interest and other costs that an organisation incurs in connection with the borrowing of funds. E.g. loan interest, lease charges, and amortization of discounts of premiums relating to borrowing.
When can you capitalize borrowing costs?
And define a qualifying asset.
When they are DIRECTLY ATTRIBUTABLE to the acquisition, construction or production of a qualifying asset.
A qualifying asset is an asset that takes a substantial period of time to get ready of its intended use or sale, e.g. PPE or investment property during construction; intangible assets during development; ‘made to order’ inventories.
What is the difference between specific borrowing costs and general borrowing costs?
Specific borrowing costs: organisation borrows funds SPECIFICALLY for the purpose of obtaining a qualifying asset. The amount eligible for capitalization will be the actual borrowing costs incurred on that borrowing during the period, less any investment income earned on the temporary investment of these funds (e.g. interest).
General borrowing costs: funds are borrowed generally and applied in part to a qualifying asset. The weighted average cost of borrowing must be calculated to determine how much can be capitalized (e.g. borrowed £10,000 with 5% interest, but only £5,000 was used for a qualifying asset.
What events must take place for capitalization of borrowing costs to commence?
- Expenditure for the asset is being incurred
- Borrowing costs are being incurred
- Activities that are necessary to prepare the asset for its intended use or sale are in progress
Name some pros and cons of capitalising borrowing costs.
Pros:
-borrowing costs are part of the total cost of bringing an asset into use
-capitalisation gives greater comparability between companies
Cons:
-finance costs are not the most direct of costs and may relate to the business as a whole
-there will be a lack of comparability due to different financing policies: businesses with loan financing will have higher values for assets than equity-backed businesses.
Define Fair Value (IFRS 13).
the price that would be received to sell an asset or paid to transfer a liability in an orderly transactions between market participants at the measurement date.
Based on exit price (price to sell) rather than a buying price (price to buy).
Based on market conditions, not entity conditions.
Prices based on asset or liability’s “principle market”; principle market is that which is the best use for the asset.
What are the 3 valuation approaches?
Market approach: looks at market transactions for similar assets/liabilities to establish value.
Income approach: looks at future cash flows to establish value
Cost approach: looks at cost to replace an asset
What are the 3 levels of inputs that should be used to measure fair value?
Level 1 inputs: quoted prices for identical assets & liabilities
Level 2 inputs: inputs other than quoted prices that are observable for the asset or liability
Level 3: unobservable inputs for the asset or liability.
(Only use level 3 when 1 & 2 are not available).
