Week 7: Assets, Laibilities, Equity Flashcards
Net asset method
based on the carrying value of assets and liabilities
Value of business = Total assets - Total liabilities
= NAV = Total equity
Current Assets
Non-Current Assets
Current:
- Inventory
- Accounts receivable
- Cash
- Financial assets
- Non current assets held for sale
Non-current assets:
- PPE
- Investment property
- Intangible assets
- Financial assets
- Leased assets
- Agricultural assets
Life cycle of an asset
- Initial recognition:
First time an asset is recognized on the SOFP - Measurement at initial recognition:
Always at cost! (Including directly related transaction costs) - Subsequent Measurement:
Amount spent on asset after recognition (repairs) - De-recognition:
When the asset comes off the SOFP
Asset Definition and recognition
To be recognized an asset must meet:
Definition of an asset:
- Present economic resource
- Right
- Potential to produce economic benefits
- Controlled by the entity
- Ability to direct the use of and obtain economic benefits
- As a result of a past event
Recognition Criteria [To be on the SOFP]
Provides relevant information about the item:
- No existence uncertainty
- Probability of a flow of economic benefits is not low
- Faithful representation : Level of measurement uncertainty is not high
Inventory control
- Budgets and forecasts:
Estimate future sales and hence, inventory needs - Economic Order Quantity (EOQ)
Looking for cheapest (economic) price and good quality - Just in time (JIT)
Order inventory when you need it - Physical control: Protect from damage/ theft
Regular inventory counts:
detect theft/error
Deters employees from stealing
Slow moving items can be identified
Identify items that sell well (planning)
PPE
Tangible assets held by the enterprise for use in production, supply of goods, rental or administration.
- Expected to be used for more than one period
- Initially measured at cost
Acquisition cost
Made up of the purchase pice and directly attributable costs in bringing the asset to the location and working condition necessary for it to be capable of operating in the manner intended by management
Subsequent measurement
Cost model:
- Would only depreciate or impair original cost, over the useful line of the PPE
Revaluation Model:
- Can only be chosen for land, Will be reported of SOFP at fair value. Regularly
We we revalue PPE
- To bring Net asset value of company per statement of SOFP closer to market value (Relevant info)
- Part of defense strategy in takeover situation
- Improve debt/equity ratio
- Strengthen SOFP when applying for loan finance or facing debt covenant constraints
- Entity under pressure to report lower profits (Trade union demanding higher pay or regulators looking for monopoly control)
Why continue using the cost model?
- To avoid cost associated with revaluation model
- To report a higher profit figure (lower depreciation and higher profit on disposal of asset)
- Harmonize with US-GAAP which does not allow revaluation model(Listed in JSE and US stock exchanges)
- To avoid cumbersome disclosure
What is depreciation?
Systematic basis over the useful lives, reflects pattern of economic benefits, recognized as an expense unless included in another asset
Investment property
Property held to earn rentals and or capital appreciation.
Fair value
IFRS: Price received to sell an asset between market participants
Replacement cost at reporting date
Market value
Revaluation vs fair value model
RM FV
- Revaluation gains - Fair value gains
- Through OCI - Through P/L
- Cannot depreciate - Cannot depreciate
- Revalue on regular basis - Fair value annually at Year E
What are intangible assets?
Identifiable, non monetary assets without physical substance
Brands, Customer lists, Patents, Software, Intellectual capital, copyrights
Some IA have indefinite useful life
