AC205 Flashcards
(185 cards)
1
Q
rules based standards
A
filled with specific details to meet as many potential contingencies as possible
2
Q
principles based standards
A
based on a conceptual framework that provides a broad basis for accountants to follow instead of a list of rules. Principles based standards focus on the economic substance of a transaction, engaging the professional judgement and expertise of those preparing financial statements.
3
Q
historical cost
A
relatively reliable since the cost of an asset or liability to a firm is usually a verifiable number that is less subject to errors of estimation and bias than are present value calculations
however, historical costs may be low in relevance. While cost may equal current value at date of acquisition, this equality will soon be lost as current values change over time.
4
Q
statement of comprehensive income info
A
income statement + a new section of “other comprehensive income”
comprehensive income recognises the gains and losses, both realised and unrealised, that have increase or decreased the owners’ equity in the business. such gains and losses arise, e.g. from the revaluation of non-current assets. These are referred to as other comprehensive income.
profit/loss + OCI = comprehensive income from the period
5
Q
displaying comprehensive income in 2 ways
A
companies must display the compoenets of comprehensive income in two ways:
- a single continuous statement
(+) doesn’t require the creation of a new financial statement
(-) net income buried as a subtotal on the statement - two separate, but consecutive statements of net income and other comprehensive income
(+) reporting in a separate statement indicates that the gains and losses identified as OCI have the same status as traditional gains and losses
regardless of the display format used, companies report “accumulated OCI” in the equity section of the SoFP
6
Q
statement of changes in equity
A
(downwards)
balance at X date
shares repurchased and retired during the year
profit for the period
OCI, revaluation gain
dividend paid
balance at X date
(sideways)
equity shares
sh.prem
RE
accumulated OCI
total
7
Q
SoFP
A
Assets
NCA
Land
Buildings
P&E
CA
Inventory
Trade recieveables
cash & cash equivalent
total assets
liabilities
CL
trade payables
tax payable
interest payable
NCL
5% loan notes
equity
ordinary shares of X
sh. premium
accumulated OCI/ Revaluation reserve
RE
total E&L
8
Q
statement of comprehensive income
A
Revenue
COGS
Gross Profit
Expenses
Admin
Distribution
Bad debt
Operating profit
(Interest expense)
Gain on disposal of assets
profit before tax
tax
profit for the year
OCI
revaluation gain
Total comprehensive income
9
Q
what are the 4 main aspects to be addressed in accounting for long-lived assets?
A
- initial recognition
- subsequent measurement
- related depreciation expenses
- recording of asset disposals
10
Q
initial recognition definition
A
- it is probable that the economic benefit will flow to the entity
- costs can be measured reliably
11
Q
initial recognition - IAS16
A
- to recogise, must include: purchase price, directly attributable costs, other costs
- decommissioning costs would qualify as a present obligation resulting from a past event (the construction of a plant), which will probably result in a future outflow of resources. the PV of the cost of such future activities should be recognised as an additional cost of acquiring the asset
12
Q
initial recognition - IAS 23
A
- borrowing costs that are directly attributable to the acquisition, construction/production of quantifying assets may be eligible for capitalisation as part of the cost of the asset
- quantifying asset: requires a substantial period of time to get ready for its intended use/sale
- capitalisation of borrowing costs commences when:
-> expenditures for the assets are being incurred
-> interest costs are being incurred
-> activities to bring the assets into use are in progress
-> ceases when the asset is substantially complete and ready for use - capitalisation is suspended for any unplanned interruption
13
Q
subsequent measurement - cost model
A
- assets recorded at historic cost
- subsequently, the asset is depreciating over its useful academic life
cost (historic)
less AD
= carrying amount
14
Q
subsequent measurement - revaluation model
A
- assets initially recorded at historic cost
- periodically, the asset is revalued to its FV
cost (most recent FV)
less AD
= carrying amount
MORE COMMON
15
Q
initial revaluation
A
- increases are credited directly to a revaluation surplus in the OCI component of equity
- decreases are charged to the income statement as an expense, as this is deemed to be loss on revaluation
16
Q
subsequent revaluation
A
- upward revaluation should be recognised as income in profit/loss to the extent of the amount of any previous impairment loss recognised, and any excess should be credited to equity through OCI
- downward revaluation should be charged to OCI to the extent of any previous revaluation surplus, and any excess should be debited to profit/loss as a loss on revaluation
17
Q
increases in fair value adjustment
A
credit to OCI - revaluation surplus
exception: if reverses previous decrease, then recognise as income
18
Q
decreases in fair value adjustments
A
debit to expenses (IS)
exception: to the extent of any revauation surplus, for some asset - charge to revaluation surplus
19
Q
impairment of assets (IAS 36)
A
- used to reduce the value of an asset in the SoFP - this occurs when the asset is deemed to be overstated. It’s like a one-off depreciation charge to bring the asset back down in value
- IAS36 requires that an impairment review is performed annually for certain assets
20
Q
internal impairment
A
obsolescence/ damage
reorganisation
21
Q
external impairment
A
fall in mkt value
technological advances
regulatory changes
22
Q
Impairment review
A
an impairment review requires the company to compare the assets:
- carrying amount
Cost - AD - recoverable amount
HIGHER OF
- FV - COS (what the business could sell the asset for externally)
- Value in use (what the business can use the asset for internally to generate revenue)
If CA>RA then an impairment is required
impairment = CA - RA
23
Q
can impairment losses be reversed?
A
- if subsequent to recognising the an impairment loss, the recoverable amount of an asset is determined to exceed its CA, the impairment loss should be reversed (In IS)
- US GAAP doesn’t allow this
24
Q
costs subsequent to acquisition
A
- after the purchase/construction of a long lived asset
MAJOR TYPES OF EXPENDITURES
1. additions: increase or extension of existing assets -> capitalise cost of addition to asset account
2. improvements and replacements: capitalise cost of improvement/replacement
3. rearragement and reorganisation: movement of assets from one location to another -> expense costs of rearrangement + reorganisation as expense
4. repairs: expenditures that maintain assets in condition for operation -> ordinary and major
25
what are government grants (IAS 20)
Government assistance is provided by means of a transfer of resources (monetary/non-monetary) to companies in return for past or future compliance with certain conditions relating to the company's operating activities.
26
when can government grants be recognised?
grants can ONLY be recognised when there is reasonable assurance that:
1) the entity will comply with the conditions of the grant(s)
2) the grant will be received
27
grants related to assets
the primary condition is that the entity must use the grant to purchase, construct/otherwise acquire LT assets
The grant shall be recognised as income over the periods in which the related costs are occurred
28
presenting grants related to assets
there is a CHOICE of how this is presented in the financial statements:
1. the netting off method: write the grant off against the cost of the NCA and depreciate the reduced cost
2. deferred income method: treat the grant as deferred income and release a portion every year, thus offsetting the higher depr charge.
29
grants related to income
government grants OTHER than those related to assets.
this grant shall be recognised as income over the periods in which the related costs are incurred
30
presenting grants related to income
there is a choice of how this is presented in the financial statements:
1. credit in the IS
2. deducted from related expense
31
classifying investment property
1. rennovate home, sell once complete -> inventory
2. bought to sell in 5-10 years time depending on the performance of the market -> investment property
3. manufacture their product -> PPE
32
dual-use property
it is possible to split a building up for accounting purposes if those different parts can be separated
the top two floors are used as office space, then account for 2/5 of the building using IAS16 (PPE). If the bottom 3 floors are rented out and held for investment purposes, account for 3/5 using IAS 40 (investment property).
33
measuring IAS 40 (Investment Property)
initially, investment properties are measred at cost (purchase price + directly attributable costs)
Dr Investment Property X
Cr Cash X
34
IAS 40 - the cost model
identical to the cost model for IAS 16 PPE
Cost
(AD)
= carrying amount -> presented in the SoFP each year as NCA
35
IAS 40 - the FV model
NOT THE SAME AS IAS 16 PPE
1. the investment property should be restated to fair value every year end
2. any gain/loss is recorded in the income statement
3. no depreciation is charged on the asset
36
assets held for sale and discontinued operations - conditions
if an asset's carrying amount will be recovered principally through a sale transaction rather than through continuing use, the NCA should be identified as "assets held for sale" (IFRS 5)
1. the asset must be available for immediate sale in its present condition
2. the sale must be highly probable
3. must be presented separately from other assets in the SoFP
4. the entity intends to recover its carrying amount principally through sale rather than continuing use
37
assets held for sale - step one
at the point that the asset meets the criteria "held for sale" the asset is tested for impairment
it is measured as the LOWER of the CA and FV-CTS
any impairment is recognised in the IS
Dr impairment expense (IS)
Cr NCA
38
AHFS - step 2
reclassifying the assets from NCA to "held for sale"
Dr AHFS
Cr NCA
39
AHFS - step 3
stop depreciation - we no longer have an NCA
when the asset is sold, recognise a profit/loss on disp as normal
proceeds X
less NBV
= profit/loss
Dr cash
Cr AHFS
Dr/Cr profit or loss on disposal (IS)
40
AHFS - cost model
test for impairment
reclassify the asset
stop depreciation
calculate P/L on disposal
41
AHFS - revaluation model (which can ONLY be used if fair value of assets can be measured reliably)
revalue the asset immediately before reclassification as HFS in accordance with IAS 16
test for impairment (lower of CA and FV-CTS)
reclassify the asset as HFS
stop depreciation
42
Provisions (IAS 37)
a provision is a liability with uncertain timing or amount
- reported as either a current/non current liability
- obligations, warantees, business restructurings...
- accrual basis of accounting: recognise the transaction in the period when the event occurred
43
conditions for provisions (IAS 37)
Companies accrue an expense and related liability for a provision if the following 3 conditions are met:
1. the entity has a present obligation (legal/constructive) as a result of a past event
2. it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation
3. a reliable estimate can be made of the amount of the obligation
if criteria NOT met, recognise as a contingent liability
44
legal obligation
something that the LAW requires you to do, such as to pay your bills/rectify environmental damage
45
constructive obligation
an obligation that dervies from a companys actions where:
by an established pattern of past practice, published policies, or a sufficiently specific current statement, the company has indicated to other parties that it will accept certain responsibilities; and as a result, the company has created a valid expectation on the part of those other parties that it will discharge those responsibilities
46
measuring a provison - two ways
1. a single one-off event: make a provision for the most likely outcome
2. large population of homogenous items: use expected value
47
common types of provisions
lawsuits, warranties, decommissioning costs, onerous contracts, restructuring
48
litigation provisions
with respect to unfiled suits, unasserted claims, and assessments, a company must determine:
- the degree of probability that a suit may be filed or a claim or an assessment may be asserted and
- the probability of an unfavourable outcome
if both are probable, if the loss is reasonably estimate, and if the cause for action is dated on/before the date of financial statements, then the company should accrue the liability
Dr lawsuit loss (IS)
Cr lawsuit liability (soFP)
49
reimbursement provisions
in some circumstances, when a company settles a claim, it is reimbursed for this cost
-> if reimbursement is certain and the settlement of the corresponding liability is probable, then the company should record BOTH a provision and a corresponding asset
- shown separately on the SoFP
- the corresponding income and expense in the IS can be offset
- asset amount is not greater than provision amount
Dr Expense (IS)
Cr Provision (SoFP)
Dr Recieveable
Cr Other income (IS)
ON SETTLEMENT:
Dr Provision
Cr Cash
Dr Cash
Cr Receivable
Cr other income (cash - recieveable)
50
warranty provisions
to recognise the sales of machine:
Dr Cash
Cr Sales Revenue
to record estimated warranty expense and liability (2022)
Dr warranty expense
Cr warranty provisions
to record payment of warranty expenditure (2023)
Dr warranty provision
Cr cash, inventory, accrued payout
to record payment for warranty expenditure incurred in 2022:
Dr warranty provision (2023-2022)
Cr cash, accrued payout (2023-2022)
51
Decommissioning costs provision
if a company has to perform rectification work at the end of the useful life of an asset, either through legal/constructive obligation
1. initially capitalise
Dr Cost of construction (X)
Cr Present value of dismantling costs (X)
2. find depr and carrying amount (2X - depr)
3. unwind the discount on the provision
4. Carrying amount at year end = PV of dismantling + unwinded discount
5. repeat steps 2-4 for PPE
JE:
Dr provision X
Cr Cash X
P/L X
52
onerous contract provisions
the unavoidable cost of meeting the obligations exceed the economic benefits expected to be received
lower of:
- cost of fulfilling the contract
- the compensation/penalties arising from failure to fulfill the contract
Dr loss on lease contract
Cr lease contract liability
53
restructuring provisions
a programme that is planned and controlled by management and materially changes the scope of a business undertaken by an entity/the manner in which the business is conducted
- make a provision IF a detailed approved plan exists that has been announced to those affected (+ publicly announced)
- include direct expenditures, exclude ongoing costs (employee termination, contract termination)
54
contingent liabilities VS contingent assets
contingent liabilities (<50% provision)
contingent asset (50% < X < 95%), asset if >95%
55
IAS38: Intangible Assets
Intangible Assets are initially measured at cost. What constitutes cost, however, depends on whether the intangible was acquired separately, as part of a business combination, or was internally generated.
56
intangible assets - separate acquisition
purchase price + costs directly attributable to preparing the asset for its intended use
57
intangible assets - acquisition as part of a business combination
fair value at acquisition date reflects market participants' expectations at the acquisition date about future economic benefits embodied in the asset that will flow to the entity.
58
internally generated
sum of expenditure incurred from date when intangible asset first meets criteria for recognition.
Includes all directly attributable costs necessary to create, produce and prepare the asset for operating in the manner intended by management.
59
intangible assets: valuation for purchased intangibles
recorded at cost
includes all acquisition costs + expenditures to make the intangible asset ready for its intended use.
typical costs include:
purchase price
legal fees
other incidental expenses
60
internally created intangibles
might include patents, computer software, copyrights, and trademarks
companies expense all research phase costs and some development phase costs
certain development costs are capitalised once economic viability criteria are met
IFRS identifies several specific criteria that must be met before development costs are capitalised.
R&D AREN'T INTANGIBLE ASSETS, MUST BE EXPENSED ONCE OCCURRED!
61
amoritization
the accounting practice of spreading the cost of an intangible asset over its useful life.
62
amortization of intangibles - limited life intangibles
costs - residual value
should reflect the pattern in which the company consumes/ uses up the asset
63
amortization of intangibles - indefinite life intangibles
test for impairment annually, no amortization
64
types of intangible assets - marketing related
- trademarks/trade names
- capitalise purchase price
64
types of intangible assets - customer related
- customer lists, order/production backlogs, contractual and NC customer relationships
- amortized expense over useful life
at the time of acuiqiring
Dr customer list
Cr cash
atht the end of the year
Dr amoritzation expene
Cr AD, Customer list
65
types of intangible assets - artistic related
- plays, literature, photographs etc.
- copyright granted for the life of the creator + 70 years
- amortized to expense over useful life if less than the legal life
66
types of intangible assets - contract related
- franchise, construction permits, etc
- amortized as an operating expense over the life of the franchise
- indefinite life? carried at cost, not amoritsed!
67
types of intangible assets - tech related
- patented technology, trade secrets
- capitalise costs of purchasing a patent
- expense all R&D costs and any development costs incurred before achieving economic viability
- amortize over legal/useful life, whichever is shorter
to record legal fees related to the patent
Dr Patents
Cr Cash
to record amoritzation of patent
Dr patent amortization expense (X/yrs)
Cr Patent
68
Goodwill
- represents the future economic benefits arising from other assets acquired in a business combination that aren't individually identified and separately recognised.
- excess of cost/FV of identifiable net assets
- internally generated GW shouldn't be capitalised
- if indefinite life, then DONT AMORITIZE
69
carrying amount and NBV calc
COST - AD
70
impairment of intangible assets
- an intangible asset is impaired when a company isn't able to recover the asset's carrying amount either by selling or using it
the specific procedures for recording impairments depend on the type of intangible asset
1. limited life
2. indefinite life
71
impairment of limited life intangibles
Carrying Amount
(recoverable amount)
= loss on impairment
JE:
Dr loss on impairment
Cr Patents
REVERSAL OF IMPAIRMENT LOSS
CA/no. of years = X
carrying amount - X = Y
patents = recoverable amount - Y
JE:
Dr Patents Y
Cr recovery of the impairment loss Y
recoverable amount/yrs = recorded amortization expense
72
IAS 38: an asset must be capitalised if:
(R&D)
1.completion of the asset is technically feasible
2. the intention is to complete and sell the asset
3. the asset can be used or sold
4. the asset will generate future economic benefits
5. adequate resources are available to complete the asset
6. expenditure on the asset can be measured reliably
... OTHERWISE expenditure must be written of as incurred.
73
IAS 38: US GAAP DIFFERENCES
doesn't permit revaluation basis of accounting
- companies may capitalise legal costs
- impairment losses cannot be reversed
- development costs are expensed as incurred
74
IAS 12 covers two types of taxes
1. current tax: payable to the tax authorities from this years' profits
2. deferred tax: not payable to tax authorities, arises as a result of applying the accruals (or matching concept)
75
current tax calculation
current year's tax estimate
(-)/+ prior year's (under) or over provision
= current year's tax expense
76
current tax underprovision
2022: tax bill was 22k
Dr Tax Expense (IS) 22k
Cr Tax Payable (SoFP) 22k
2023: The final tax bill was actually 24k for 2022
Dr Tax Payable (SoFP) 22k
Dr Tax Expense (IS) 2k
Cr Cash 24k
2023: tax payable was 36k
Dr Tax expense 36k
Cr tax payable 36k
therefore, tax expense = 36+2 = 38k
77
current tax overprovision
2022: Tax bill was 24k
Dr Tax expense 24k
Cr Tax payable 24k
2023: the final tax bill was actually 22k for 2022
Dr Tax Payable (SoFP) 24k
Cr Tax expense (IS) 2k
Cr Cash 22k
2023: tax bill was 36k
tax expense = 36 - 2 = 34k
78
deferred tax: taxable profit vs accounting profit
the tax charge is calculated on a company's taxable profits, not its accounting profits
these two figures are rarely the same, as there will be some expenses included in arriving at the accounting profit that aren't allowed as a deduction from taxable profit (e.g. entertaining customers)
79
recognition of deferred taxes
carrying amount (SOFP) for deferred taxes = (tax purposes - accounting depr) x tax rate
80
deferred tax
Permanent differences are items that are never allowed for tax purposes (e.g. fines, entertainment expenses).
→ These do not create deferred tax because they will never affect taxable income.
Temporary differences arise when an item is deducted in one period for accounting purposes, but in a different period for tax purposes.
→ These do give rise to deferred tax because the difference will reverse in the future.
81
when does Deferred Tax arise and what is its purpose?
- DT arises purely as a result of accruals accounting and the matching concept
- Its purpose is to recognise the tax effect of a transaction in the same period as the income/tax expense that gave rise to it
- the main reason DT is an issue is because accounting profit is not equal to taxable profit
82
the three step process to calculate a deferred tax/liablility
1. calculate the temporary difference as the difference between the carrying amount and tax base
2, multiply the temporary difference by the applicable tax rate to calculate the deferred tax asset/liability
3. account for the movement in the DTA/DTL
83
the three step process to calculate a deferred tax/liablility - FIRST STEP
1. calculate the temporary difference as the difference between the carrying amount and tax base
FOR NCA -> CA = COST - AD
FOR TAX BASE -> CA = COST - ACC TAX DEPR
if carrying value > tax base, we have a DTL
if carrying value < tax base, we have a DTA
84
the three step process to calculate a deferred tax/liablility - SECOND STEP
2, multiply the temporary difference by the applicable tax rate to calculate the deferred tax asset/liability
temporary difference (from step one) x tax rate = DTA/DTL
85
the three step process to calculate a deferred tax/liablility - THIRD STEP
3. account for the movement in the DTA/DTL
in AC205, it is the movement on deferred tax that will be accounted for
-> increase in deferred tax provision
Dr income tax expense/OCI
Cr deferred tax provision/SoFP
-> reduction in deferred tax provision:
Dr deferred tax provision
Cr income tax expense
86
why do we need to make sure we follow financial statements' principles?
to ensure comparability
users must be informed whether to adopt cost/revaluation model, cost vs fair value accounting etc.
a summary of accounting policy is not necessary but should be included in the disclosure section of financial statements
87
a change in policy is allowed when
- required by the IFRS/USGAAP
- results in the financial statements providing reliable and more relevant info
88
a change in accounting policy can be a change in
1. recognition - now recognised as an expense rather than an asset
2. presentation e.g. expense is classified under admin instead of CoS
3. measurement basis (e.g. asset measured at revaluation rather than historic cost)
if a company does decide to change its accounting policy, it must so do RETROSPECTIVELY (as though the policy had always been in place)
89
control
- power over the investee
- exposure/rights to variable returns
- ability to use its power over the investee
- even if <50$ is acquired, control can exist:
1. power of more than 50% of voting right of S through an agreemnt
2. power to govern the financial & operating policies of S
3. power to appoint/remove the majority of S' board of directors
subsidiary: >50% control
associaties: 20-50% control (significant influence)
investment: <20% control
90
if retrospective application cannot be achieved
if retrospective application cannot be achieved, then apply the new accounting policy to the carrying amounts of A&L as at the beginning of the earliest period for which the retrospective application is practible (this may be the current period)
91
POC: SoFP
all P's and S's assets and liabilities are added line-by-line even though S might not be 100% owned by P
92
POC: share capital of the group
that of the parents' only. avoids double counting
93
POC: group reserves
those of the parent company's plus the shares of the subsidiary's post acquisition profits
94
partial GW
only recognises the parent's share of GW
cost of investment
less: parents' % of subs net assets at acq
= GW on acq
less: impairment loss since acq
= GW on reporting date
95
full GW: recognises the whole of the GW attributable to an acquired subsidiary
cost of investment
+ FV of NCI at acq
- 100% of subs NA at acq
= Full GW at acq
- impairment loss at acq
= GW at reportinf date
96
NCI at fair value (full GW method)
- this method calculated the GW attributable to the group as a whole
- GW impairment loss is split between the parent and NCI
97
NCI as proportionate share in the sub's NA
- This method calculates the proportion of GW attributable to the parent only
- GW impairment loss is to the parent only
98
POC: Fair Value adjustments
- assets and liabilities are measured at fair value
- identifiable assets of the subsidiary are recognised separately from GW
- reasoning: if a parent company was to buy an individual asset from the subsidiary, say an item of property, this would be done at whatever the market price of the asset is, irrespective of its carrying amount
- if an asset subject to the FV adjustment is subject to depreciation (e.g. plant), then in addition to increasing both the net assets at acquisition and at reporting date, by the FV adjustment, the additional depr will be deducted from NCA at reporting date
99
PURP
arise when the parent/subsidiary sells goods at above cost prices AND these goods are still held in inventory at year end
- if sale is P->S
1. deduct PURP from group's inventory
2. deduct P% from group RE
- if sale is S->P
1. deduct PURP from group's inventory
2. deduct P% from group RE and NCI% from NCI
100
markup/margin PURP
unsold inventory x (markup)/(100+markup)
unsold inventory x (margin)/(100)
101
converting between markup and margin
markup = margin/1-margin
margin = markup/1+markup
102
NCI calculation
NCI at acq
+ NCI% of post acq earnings
- Depr of FV adj
- NCI% of impairment
= NCI at reporting date
103
RE calculation
P's RE
+ P's % of subs post acq earnings
- Depr on FV adj
- PURP
- Parents share of GW impairment
104
what is different in cons statement of P&L from cons SOFP
- after calculating the profit for the year, show the split of profit between amounts attributable to the parent's shareholders and NCI
- intercompany sales and intercompany interest will be excluded
- impairment loss will be an additional expense
- income from associate included in the cons SPL
PURP:
cancel intercompany revenue
reduce COS by the amount of intercompany revenue - PURP
105
PURP on cons P&L
revenue = parent + associate - markup or margin
COS = -parent -associate - (-markup or margin + PURP amount)
106
RE in cons P&L
P's RE
groups share of post acq profits
associate's share of post acq profits
(depr)
(PURP)
107
share of profit of associates (P&L)
cost of investment
+ parents % share of post acq profits
- impairment loss on investment
= impairment in associate at reporting date
-> goes into NCA (SOFP)
-> share of profit of associates = % profit from year - impairment loss
108
cons spl summary
revenue
COS
= gross profit
operating expense
income from associate
interest income
finance cost
profit before tax
tax
profit for the year
attributable to parent
attributable to NCI
109
summary of cons SOFP
assets
NCA
PPE
investment in associate
GW
current assets
inventory
trade recieveables
cash & cash equivalent
total assets
equity and liabilities
equity shares (parent)
RE
CL
trade payables
total E&L
110
accounting estimate
- a method adopted by an entity to arrive at amounts for items which cannot be measured precisely. judgement is required!
- may need to be updated to make them more realistic if circumstances have changes/new info has come to light
- changes are applied prospectively -> change is reflected in the current and future periods but past figures remain unchanged
111
prior period errors
- e.g. mathematical mistakes, mistakes in applying accounting policies, oversight, fraud
- must be corrected retrospectively in the first set of financial statement authorised for issue after the discovery:
1. present all the necessary adjustments in the opening balance of retained earnings in the SOCE
2. restate all the comparative figures presented (e.g. income statement, balance sheet) as if the error had never occured
112
disclosure relating to prior periods include
- the nature of the prior period error
- the amount of the correction to each financial statement line item presented for prior periods
- the amount of correction at the beginning of earliest prior period presented
113
events after the reporting event (between company's year end and financial statements being approved and published)
1. adjusted event
2. non adjusted event
114
adjusted event
- an evet that bought to light evidence of conditions that existed at the reporting date
e.g. the settlement after the reporting date of a court case that shows a year end obligation
the reciept of info after the period end that indicates that an asset was impaired at the period end
115
non adjusting events
- concerns conditions that didn't exist at the reporting date
- e.g. announcing a plan to discontinue an operation; destruction of assets by fire/flood; major purchase of assets
- treatment
1. if the event is important to users' understanding of financial statements: disclosure should be made to show impact
2. if impacts going concern: accounts should be re-prepared using the break up basis
3. if doesn't impact going concern: FS remain unchanged
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going concern
an accounting principle that assumes a company will continue to operate for the forseeable future and NOT go bankrupt/liquidate/cease trading
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IFRS5: discontinued operations
- a component of an entity that has either been disposed of, or classified as held for sale, and:
1. represents a separate major line of business/geographical area of operations
2. is part of a single coordinated plan to dispose of a separate major line of business/geographical area of operations, or a subsidiary acquired exclusively with a view to resale
- required to be shown separately in order to help users predict future performance, i.e. based upon continuing operations
- the entity must disclose a single amount on the face of the statement of profit/loss, comprising the total of:
1. the post tax profit or loss of discontinued operations and
2. the post tax gain/loss recognised on the measurement of FV-CTS, or on the disposal, of the assets consituting the discontinued operations.
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what is a conceptual framework
acts as a foundation for the development of IFRS, it doesn't have the status of an accounting standard, instead it sets out the underlying principles and objectives that guide the board in developing new standards and reviewing existing ones.
- a tool for the IASB to create consistent and logical standards, and it helps preparers of financial statements in applying IFRS and dealing with any that have yet to be subject ot any standard.
- addresses the objective of financial reporting, which is to provide information that is useful to all parties involved
- addresses the qualitative characteristics of useful financial information, guiding how it should be presented in financial statements
- the definition, recognition, and measurement of the elements from which financial statements are constructured (assets, liabilities, expenses, income...)
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the different costs
1. historical cost: NCAs measured at the amount of consideration paid. subsequently updated to reflect the use of the asset, through depr charge and any amount that gives rise to the impairment of the asset
2. fair value: amount that would be reciebed if the asset was sold today and in an orderly transaction , based on assumptions that a mkt participant would use to price the asset
3. VIU: the present value of cash flows, and other benefits that an entity expects to derive from the use of an asset and its ultimate disposal
4. current cost: the amount that it would currently cost to acquire an equivalent asset today (at its current age in its current condition)
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Relevance:
The item can potentially make a difference in the decisions made by users.
121
Faithful Representation:
The items are presented in a manner that is complete, neutral,
and free from error. This means that users are provided with a faithful representation of
an asset or a liability.
122
Control:
: In the case of an asset, the entity must have control over the resource, which
means having the power to direct its use and gain the economic benefits from it. For a
liability, the entity has an obligation to transfer an economic resource.
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Future Economic Benefits
An asset must be capable of generating future economic
benefits, while a liability represents an outflow of resources embodying economic
benefits.
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intangible assets criteria
1. identifiable
2. control
3. future economic benefits
to be capitalised in development:
1. successfully completed
2. it had the intention to be used or sold
3. existence of mkt
4. ability to measure costs
5. availability of resources
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conceptual framework criteria
1. relevance
2. faithful representation
3. control
4. future economic benefits
126
interest income, cheques, subsidiary's loan notes, and dividends points for cons SOFP & SPL
add interest income to parents RE in cons soFP, subtract it from finance cost in SPL
cheques should be added onto cash in SOFP, not relevant for SPL
don't include loan notes under ncl in sofp
for dividends, minus it from goodwill cost in SPL and SOFP
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valuation - dates, depr, and where to put
check the dates: if its on the date of the TB then no loss on valuation
if its on the date of the construction of the trial balance then yes, loss on valuation
if given a FV and then depr, work out the depr on the FV and then minus it from the Cost(TB) and AD
if there's a loss on valuation then it should go under operating expenses, if there is a gain then go under OCI (revaluation reserve)
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loss/gain on valuation
loss on valuation is when FV is < than trial balance amt
gain on valuation is when FV> trial balance amt
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deferred revenue and deferred tax presentation on SOFP
NCL
deferred revenue
deferred tax
CL
tax payable
deferred revenue
IF THERE IS A NOTE ABT TAX, THEN IT WILL GO UNDER TAX PAYABLE!!
130
RE presentation
RE under SOFP must be RE on trial balance + yearly profit calculated via income statement
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R&D costs presentation on income statement and sofp
include expensed r&d costs in income statement with CoS
include capitalised r&d costs in sofp under non current assets
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IFRS 15 - discounting for revenue recognition vs discounting for finance component
IFRS 15 says: If a bundle is sold with a discount, and there’s no observable evidence that the discount applies specifically to one item, then allocate it proportionally to the stand-alone selling prices.
The total discount is 15% compared to the standalone prices (£225,000 → £191,250).
So, both performance obligations get 85% of their standalone prices:
Equipment: £175,000 × 85% = £148,750
Support: £50,000 × 85% = £42,500
✅ This is a proportional allocation approach.
IFRS 15 says don’t recognize revenue until variable consideration can be reliably estimated.
Once the uncertainty resolves (30 June 2023), the present value of the consideration is recognized as revenue — in this case, £100,000, which is the discounted value of £121,000 due in 2 years.
The discounting is done explicitly due to the time value of money, not because of a sales package discount.
The £100,000 × 10% × 3/12 = £2,500 finance income accrues separately in later periods.
✅ This is a discounting for time value, not a package discount.
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where does investment property, R&D and intangibles go on SOFP?
under NCA!
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principles of IAS 16 (PPE)
borrowing ias 23, intangible ias 38 ,
1. an item should only be recognised as PPE only when it is probable that future economic benefits will flow to the entity and costs can be measured reliably
2.initially measured at purchase price + directly attributable costs
3. costs not directly attributable to preparing the asset for its intended use (e.g. allocation overheads) MUSN'T be capitalised -> they are expensed
4. if the asset has parts or components then this must be depreciated separately
5. depr starts when the asset is ready for use
6. after recognition, the entity can use either cost model or revaluation model
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principles of IAS 23 (borrowing costs)
1. borrowing costs that are directly attributable to the acquisition, construction, or production of a qualifying asset must be capitalised as part of the cost for that asset
2. capitalisation starts when expenditures and borrowing costs are incurred and activities to prepare the asset for use are underway
3. any borrowing costs not eligible for capitalisation aren't expensed
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principles for intangibles (IAS 38)
1. identification
2. controlled by entity
3. costs can be estimated
4. economic benefits
137
finance cost
loan NCA amount, unwinding the provision amount
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why is Investment property under the fair value model is not tested for impairment under IAS 36
Since fair value is remeasured at each reporting date, any decrease in value is
automatically reflected in the income statement, making impairment testing unnecessary
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if there is an impairment then what happens to the carrying amount?
the carrying amount reduces by the cost of that impairment
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accounting for provision succeeding vs not succeeding
PROVISION SUCCEEDING (YOU GET CHARGED IN COURT)
Dr IS
Cr Provision
NOT SUCCEEDING (YOU WON THE CASE YOURE NOT GETTING CHARGED)
Dr Trade Payable
Cr Admin Expense
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disclosure of provisions
b/f
utilised
charge (B)
c/f
142
provisions conditions with restructuring costs
1. present obligation as a result of a past event
2. outflow
3. cost can be measured
4. THOSE AFFECTED SHOULD HAVE BEEN INFORMED
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research definition
original and planned investigation with the prospect of new knowledge
144
development definition
the application of research findings
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Discuss any differences between accounting for internally generated intangible assets and acquired intangible assets in IAS 38.
It is easier to recognise intangibles when they are acquired in comparison to when they are internally generated. For acquired intangibles there is a market transaction and the acquired assets are measured at cost – measured at fair value for business combinations. With acquired assets, the assets prohibited for recognition as internally generated intangibles,
may be recognised. Once recognised, all intangible assets are subsequently treated the same
146
Why Managers May Prefer to Expense R&D Investments Immediately
Future Profitability Appearance:
Writing off R&D costs upfront eliminates future amortization expenses. This makes future earnings look stronger, improving reported profits and key financial ratios like return on assets and equity.
Investor Perception:
Investors usually treat large write-offs as one-time, non-recurring events. They tend to ignore them when valuing a company, focusing instead on the improved profitability in future periods. As a result, a large immediate expense can be more favorable than ongoing amortization charges.
Risk Management:
If a project fails, already having written off the costs means there's no need to explain further losses. Managers can avoid scrutiny, lawsuits, or reputational damage. A one-time hit attracts less attention than continued poor performance.
Cost of Compliance:
Capitalizing intangible assets can be costly. It requires complex valuations, analytical models, and additional audit work. Immediate expensing avoids these burdens.
Relevance of Capitalized Values:
For knowledge-based or R&D-intensive industries, establishing a clear connection between the costs incurred and future economic benefits is often difficult. In such cases, capitalized values may lack relevance or reliability.
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To what extent might the rules or restrictions in IAS 38 reduce the comparability of financial statements?
IAS 38 assumes future economic benefits are too uncertain during the research phase, so all related costs must be expensed. This reduces comparability, especially since the shift from research to development is not always clear-cut and requires judgment. For instance, deciding when technical feasibility is achieved can vary. As a result, two companies working on similar projects might treat costs differently—one expensing them as research, the other capitalising them as development. This inconsistency affects comparability with both peers and purchased intangible assets, which are fully capitalised.
148
why the internally generated intangible asset should not be revalued at fair value?
for the purposes of revaluation under IAS 38, must be made with reference to an active market. An active market does not exist for this asset because there is only one potential buyer.
149
when to take away impairment from NCI and when not to - CONS SOFP
do it when you have a number for the NCI
don't do it when you don't have a number for NCI
150
when is impairment a % in RE and when is it not
impairment is a % in RE when impairment is given as a percentage e.g. impairment is 25% of GW at acq
not when its given as a number e.g. impairment is 10000
151
how to calculate NCI for comprehensive income
NCI % of profit of the year
+ revaluation surplus
= total
0.4 x total
= NCI portion
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where to add depr for statement of P&L
look at what the depr is for:
- PPE: CoS
- buildings: operating expenses and add fair value onto goodwill
153
bad debt adjustment on sofp and income statement
subtract from operating expenses on income statement
subtract from trade recieveables from sofp
154
Explain how an IFRS 5 Discontinued Operations presentation can make information more useful to the users of financial statements
When a business segment or geographical area has been classified as a discontinued
operation, IFRS 5 requires a separate presentation be made on the face of the statement of profit or loss.
This separate presentation enables users to immediately identify that the performance
relating to the discontinued segment or area will not continue in the future, hence making the information more relevant to users decision making
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cost model vs fair value model
COST MODEL
+ Predictable.
+ Easy to account for.
+ Involves fewer estimates.
– Do not get the benefit of any gains on
property in the IS.
– Losses on property value may be an
indicator of impairment and need to be
recognised.
FAIR VALUE MODEL
+ May get benefit of gains in the IS
(increases profits), but
– Results in volatility in the IS.
– Difficult and costly to determine the FV.
– Involves lots of estimates (less reliable).
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ahfs and depr
even if carrying amount is given , you have to do depr in the beginning, before calculating impairment.
you can't do depr at the end.
for everything else, if you haven't done depr to begin with then calculate carrying amount (new) AND THEN depr - but even then make sure you're only depreciating ONCE and the number of years have been adjusted at the denominator after revaluation
157
carrying amount
if carrying amount AND cost is given then just go with carrying amount, find new value after impairment and depr (don't depr ahfs, depr otherwise)
if carrying amount is given but cost isn't then treat carrying amount as cost and depr before impairment
158
how is VIU calculated?
based on the existing use to which the asset is being put, with no account taken of potential changes in use due to possible future (eg, restructurings).
159
inventories were overvalued...
subtract from RE
subtract from opening inventory in CoS
160
should i put bank under CA?
yes if debit, no if credit on TB
if credit on TB then it should be presented as "overdraft" under CL
161
IAS 37 states that contingent
asset
should not be recognised until their realisation is virtually certain, but should be
disclosed where their realisation is probable.
162
IFRS 5 states that the results of discontinued operations should be separately disclosed in
the income statement comprising a total of:
* The post-tax profit or loss of the discontinued operation and
* The post-tax gain or loss recognised on the measurement to fair value less costs to
sell of the assets of the discontinued operation.
163
when should i add depr difference to retained earnings?
You know to do it because the company applies the revaluation model and the question says:
“TechTrend plc policy is to make an annual transfer between the revaluation surplus and retained earnings.”
164
deferred revenue treatment on income statement and sofp
income statement: total revenue - total deferred revenue
sofp
deferred revenue for one year under NCL and CL
165
where does impairment go? CoS or operating expenses?
impairment goes wherever depr goes, it will SAY in the q. if it doesn't say then assume CoS.
166
when do i recognise revenue only for one component and when do I recognise it for both? (discount wise)
when the question doesn't say:
do (1-discount) and allocate it to both components
when the question says what the deferred revenue is for, e.g. "As part of the sales agreement,
Athens agreed to provide annual servicing of the machine for four years from 1
October 2021 for no additional payment." - HIGHLIGHTING one of the components, recognise revenue only for that component by doing:
(1-discount) x component revenue x no of DEFERRED years
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contingent liabilitie & assets
Contingent Liabilities:
A contingent liability is a possible obligation from past events, confirmed only by uncertain future events beyond the entity’s control. Under IAS 37, Delta plc should not recognize it as a provision but should disclose it, unless the chance of outflow is remote.
Contingent Assets:
A contingent asset is a possible asset from past events, confirmed by future uncertain events outside the entity’s control. IAS 37 prohibits recognition but requires disclosure when an inflow is probable. If the inflow becomes virtually certain, the asset should be recognized.
168
how do determine cost for GW?
use INVESTMENT COLUMN, NOT how much CASH you paid, they are not equal, if not given amount of investment then calculate it using cash x share x price per share
169
recieveable due on cons sofp
subtract from trade receiveables AND trade payables
170
if recognised, internally generated intangibles
must be amortized unless they have indefinite lives
171
patent recognition in IAS38
if acquired separately/as part of a business combination
dr patent
cr cash
research expense
dr research expense
cr cash
development expense
dr patent in progress
cr cash
172
what if there is a financing component in IFRS 15?
in such cases, IFRS 15 requires the consideration to be adjusted to reflect the time value of money and revenue to be recognised at an amount equal to if the payment were made at the point of delivery
find the PV of payment
add the deposit
= revenue recognised
unwind the PV of payment by one year
= finance cost
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Pacifico Plc’s individual company Statement of Financial Position does not yet
include Pacifico’s share of the dividend declared by Sunstone Ltd for the year
ended 31 March 2022.
multiply (NCI share x subs dividend payable)+parents dividend payable when adding dividend payables on trial balance
and do (parent % x subs dividend payable) and add it to RE
174
what should be added to FV of NA on CONS SOFP
anything that goes under NCA. e.g. intangibles ppe.. etc.
175
does depr by years matter?
not in spl, just do depr for one year regardless of how many years it has been, if its a difference in MONTHS then yes adjust
in cons sofp yes, do the depr by years multiplication
176
what do to with an 8% note payable..
find the finance cost/interest expense (is)
minus interest paid to find interest payable (sofp)
the original figure for 8% loan note is always included under NCL
177
accounting policy vs accounting estimate
An accounting policy is a principle that guides how transactions and other events are reported in the financial statements.
Accounting estimates are monetary amounts in financial statements that are subject to measurement uncertainty.
178
when should i include investment income on SPL?
include investment income if the income isn't fully from the subsidiary.
dont include it if investment income is fully from acquisition profits divs
179
to add tax or subtract
whenever you're given your tax payable/provision, that goes into the SOFP, so you add to find the tax expense
UNLESS it says "value on TB represents under/overprovision" in that case definitely subtract TB amount
whenevr you're given tax expense, which goes into the IS, then subtract whats on the TB to find your tax payable
180
the machinery wasn't in use in the month of...
if during borrowing period, take into account
if during depr period, then don't take into account
181
onerous contract
An onerous contract is a contract where the costs to meet the obligations are higher than the benefits the company expects to get from it.
In other words, the company is going to lose money by staying in the contract.
182
differences between IAS 40 IS and IAS 16 PPE
for IAS 16, PPE is revalued with sufficient frequency that the FV is up to date
with IAS 40, IP is revalued each year end
IAS 16 is presented in the SOFP at carrying amount, IAS 40 is presented at fair value
IAS 16 PPE is depreciated in between revaluations. IAS 40 is not depreciated.
183
principal vs agent considerations
- if it is a principal it controls the promised good or service before it is transferred to the customer -> recognises gross revenue from the transaction because it controls the good or service before it is transferred to the customer
- if it is an agent then its performance obligation is to arrange for the provision of goods or services by another party -> recognises revenue based on the fee or commission it is entitled to
184
dividend has been paid by subsidiary out of POST acquisition profits, what are the adjustments?
no adjustments
(if paid out of pre acq profits, then would have been subtracted from goodwill)
