B Financial Reporting Standards Flashcards
What is a financial instrument
any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity (IAS 32, para 11)
A financial asset is any asset that is:
cash
an equity instrument or another entity
a contractual right to receive cash or another financial asset form another entity
a contractual right to exchange financial instruments with another entity under conditions that are potentially favourable
a financial liability is any liability that is a contractual obligation:
to deliver cash to another financial asset to another entity
to exchange financial instruments with another entity under conditions that are potentially unfavourable
what is an equity instrument?
any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities
What does IAS 32 Financial instruments:presentation deal with?
classification of financial instruments and their presentation
What does IFRS 7 deal with?
disclosure of financial instruments in financial statements
What does IFRS 9 Financial instruments deal with?
how financial instruments are measures and when they should be recognised in financial statements
Why was a new accounting standard issued?
- financial instruments more complex
- accounting scandals: financial instruments at the heart of them
- concerns about growth, consistency, overstated gains, profit recognition
How must the issuer classify a financial instrument?
if it is a financial liability or equity instrument on initial recognition according to its substance
When will an instrument be classified as a financial liability?
if the issuer has a contractual obligation to:
- deliver cash to the holder
- exchange financial instruments on potentially unfavourable terms
When is a financial instrument an equity instrument?
if there is no such contractual obligation to deliver cash
Why are preference shares classified as debt instruments even though they are ‘shares’?
- entity receives cash inflow
- annual payments % of nominal value
- cash repaid in future if redeemable
- if non redeemable, and cumulative, still liabilities as there is still an obligation to pay later
-only irredeemable aren’t considered
When can you offset a financial asset and liability according to IAS 32?
a financial asset and a financial liability may only be offset in very limited circumstances. the net amount may only be reported when the entity:
- has legally enforceable right to set off the amounts
- intends either to settle on a net basis or to realise the asset and settle the liability simultaneously
What is the initial measurement of financial instruments according to IFRS 9?
initially recognised at fair value
How are issued equity instruments remeasured after initial recognition?
issued shares are not remeasured
What is the par value?
headline/nominal value
what is the coupon rate?
minimum interest repayment per annum based on par value
what is the premium?
amount repayable at redemption date based on par
what is the effective interest rate?
rate of interest that spreads the finance costs across the life of the loan at a constant rate
what is the initial measurement of financial liabilities?
fair value
-transaction costs are capitalised (P/L)
what is subsequent measure of financial liabilities?
depends if held for trading/derivatives or other liabilities other than FVPL
What liabilities are FVPL?
instruments held for trading
derivatives
what is the subsequent measure of FVPL liabilities?
FV
-expense transaction cost
restate FV at each reporting date
-gain and loss to P/L
what is subsequent measure of non FVPL liabilities?
FV less costs
measure at amortised cost
what is amortised cost?
grow the value of the liability via a finance charge (effective interest) over its life up to its redemption amount
what is the amortised cost in the first year of the liability?
amount initially recorded + interest - repayments
what is a compound instrument?
a financial instrument that has characteristics of both equity and liabilities
why are convertible bonds compound instruments?
they are currently debt but can be converted into equity shares at certain points in the future
upon initial recognition, how does the IAS 32 require compound financial instruments to be split?
- financial liability (the debt)-PV of future CF
- equity instrument (option to convert)-balancing figure
Liability will always be larger
why issue a convertible bond?
potential for share appreciation is an incentive to invest
why do convertible bondholders have to accept below-market rates of interest and wait for some time before shares make a large return?
for the benefit of convertible shares
-shares could also underperform in which case they might choose cash option
how are convertible bonds split between bank, financial liability and equity at initial recognition?
dr bank cash amount
cr financial liability PV of cash flow
cr equity balancing figure (cash - PV)
what is the accounting treatment for compound instruments at subsequent measure?
equity not remeasured
liability is amortised until closing balance = initial payment
How is the share premium calculated?
carrying amount (bond + equity) - nominal value
How can an entity provide finance to another?
acquire shares (equity) acquire bonds/debentures/loan stock (debt)
According to IFRS 9, how should financial assets be initially recognised?
at fair value i.e cost of asset
- transaction costs capitalised (P/L)
- capitalised transaction costs are added to the asset
How are equity financial assets subsequently measured?
depends on classification:
FVPL is held for short term trading
FVOCI if not held for trading or irrecoverably designated
How are transaction costs and gains treated in FVPL vs FVOCI?
transactions costs
- P/L for FVPL
- added onto FV for FVOCI
gains
- P/L for FVPL
- OCI for FVOCI
What are the 3 classifications for debt financial assets ?
amortised cost
FVOCI
FVPL
At initial recognition, when can debt financial assets be classified as amortised cost or FVOCI?
business model test
contractual cash flow test
what is the business model test?
- determines debt financial asset category
- considers entity’s strategies regarding investments in debt
- keep asset, sell asset or hold some and sell some?
what is the contractual cash flow test?
states that the contractual terms of the asset give rise to cash flow receipts that are solely repayments of:
- principal
- interest on the principal amount outstanding
do convertible bonds comply with the contractual cash flow test?
no as payment is received for something other than capital and interest
-issues at lower that MV interest rate
when is an investment in a debt asset classified and measured at amortised cost?
- entity’s business model is to hold an collect all of the asset’s contractual cash flows
- the terms of the financial asset create the receipt of cash flow
BM: hold
CCF:passed
When is an investment in debt asset classified as FVOCI?
- model is to hold some until maturity and sell some
- asset creates receipt of cash flows that are solely repayments of interest and principal amounts
BM: hold and sell
CCF:passed
what happens if an asset is sold due to unforeseen circumstances despite not being firm’s intention?
use amortised cost
-model was not to sell some initially
When is an investment in debt asset classified as FVPL?
if it is not amortised or FVOCI
BM: sell short term
CCF:failed
what is the accounting treatment for amortised cost of debt investment?
initial recognition
- FV
- transaction costs added
subsequent treatment
-at amortised cost
what is the accounting treatment for FVOCI of debt investment?
initial recognition
- FV
- transaction costs added
subsequent treatment
- revalue to FV
- gains/losses to OCI
- on disposal, gain reclassified to P/L
what is the accounting treatment for FVPL of debt investment?
initial recognition
- FV
- transaction costs expensed to P/L
subsequent treatment
- revalue to FV
- gains or losses to P/L
what is the definition of a derivative?
financial instrument that derives its value from the value of an underlying asset, price, rate or index
what are the characteristics of a derivative?
- value changes according to underlying item
- requires little to no initial investment
- settled at a future date
what are typical underlying items of a derivative?
equities, bonds, commodities, interest rates, exchange rates, stock market
what are some examples of derivative financial instruments?
futures, options, forward contracts, interest rate and currency swaps
what are the risks of derivatives?
- originally designed to hedge against fluctuations in agricultural commodity prices on Chicago Stock Exchange
- -losses could be far greater than carrying amount so shareholders should be given additional information about derivatives
- low barrier to entry
- must be recognised in financial statements as it is exposure to significant gains and losses
how are derivatives accounted for?
FVPL
initial rec: nil
reporting date:restated at FV as asset/liab on SFP, gains and losses to P/L
what is a forward?
obligation to buy or sell a defined amount of a specific asset at a specified price at a specified future date
what is a forward rate contract?
a contract to fix the interest charge on a floating rate loan
what is a futures contract?
obligation to buy or sell a standard quantity of a specific underlying item at a specified future date
what is a swap?
an agreement to exchange periodic payments at specified intervals over a specified time period
what is are options?
the right, but not obligation, to buy/sell a specific underlying asset at a specified price on or before a specified future date
when would forward currency contracts be used?
to minimise the risk on amount received/payable in foreign currencies (hedge arrangements)
what is the difference between a futures contract and a forward contract?
futures: standard terms and traded on financial exchange
forward: bespoke and not traded on financial exchange
why do options carry less risk than forward or future contracts?
not an obligation, but a right to exercise
- can forego if loss making
- have higher initial outlay as lower risk
as bonus shares have no real benefit to shareholders and don’t provide new funds to company, why are they issued?
- way out of paying dividend: no cash distribution, knowledgable shareholders know this is of no real value
- reduce share price: reduced EPS might attract new shareholders
what is a lease?
contract that conveys the right to use an asset for a period of time in exchange for consideration
who is the lessor?
entity that provides the right to use an underlying asset in exchange for consideration
who is the lessee?
entity that obtains the right to use an underlying asset in exchange for consideration
what is a right of use asset?
represents the lessee’s rights to use an underlying asset for the lease term
what is a financial lease?
a lease that transfers all the risks and rewards of ownership
-title may or may not be transferred
what is an operating lease?
any lease that doesn’t meet the requirements for financial lease
what are the indications of a finance lease according to IFRS 16 Leases?
- OWNERSHIP transferred to the lessee at the end of the lease
- lessee has the option to purchase the asset for a price substantially BELOW the fair value of the asset and its is reasonable certain the option will be exercised
- lease term is for the MAJOR part of the asset’s useful life
- PV of the minimum lease payments amount to substantially all of the FAIR VALUE of the asset
- the leased assets are of such a specialised nature that only the lessee can use them without major modification
- the lessee bears LOSSES arising from cancelling the lease
- lessee has ability to CONTINUE the lease for a secondary period at a rate below market rate
what is the accounting treatment for operating leases?
- lease receipts:income on SPL on straight line basis
- difference in amounts:accrued/deferred income in SFP
what is the initial recognition of financial leases?
- derecognise leased asset (Cr PPE CV)
- record receivable for future receipts at PV of future payments (Dr lease receivable)
- P/L gain/loss
what is the net investment of the lease?
equals the finance lease receivable
PV of:
- fixed rental payments
- variable rental payments
- residual value guarantees
- unguaranteed residuals (residual - guarantee)
- termination penalties
what is the subsequent treatment of financial leases?
carrying amount of lease receivable is :
- increased by the finance income
- decreased by cash receipts
What does the IFRS 15 define revenue as?
income arising in the course of an entity’s ordinary activities
What does revenue exclude? (IRS 15)
-proceeds from sale of NCAs
-sales tax and other similar taxes
other amounts collected on behalf of others e.g an agent only recognising commission
What is the 5 step process of revenue recognition?
C: identify the CONTRACT
O: identify the separate performance OBLIGATIONS within the contract
P: determine the transaction PRICE
A: ALLOCATE the transaction price to the performance obligations in the contract
R: RECOGNISE revenue when (or as) a performance obligation is satisfied
what is a contract?
an agreement between two or more parties that creates rights and obligations
what is the criteria for a contract for revenue?
- parties to the contract have approved and are committed to fulfilling the contract
- each party’s rights can be identified
- the payment terms can be identified
- the contract has commercial substance
- it is probable that the entity will be paid
what are performance obligations?
promises to transfer distinct goods or services to a customer
-some contracts contain multiple
what is the nature of a performance obligation as a principal and as an agent?
principal: provide the specified goods or services itself
agent: arrange for another party to provide the goods or service
how is revenue recognised if the entity is an agent?
based on the fee or commission
what is the transaction price of a contract according to IFRS 15?
amount of consideration an entity expects in exchange for satisfying a performance obligation
what must be considered when determining a transaction price?
- variable consideration
- significant finance components
- non-cash consideration
- consideration payable to a customer
when should variable consideration (eg a bonus based on performance) be included in the transaction price?
if it is highly probable that a significant reversal in the amount of cumulative revenue will not occur when the uncertainty is resolved i.e estimate likelihood of return/bonus
what is variable consideration?
- if a product is sold with a right to return it e.g return policy and record refund liability=consideration received
- performance based consideration e.g a bonus
what characteristics indicate a financing element in the transaction price of a contract?
- difference between the amount paid and the cash selling price
- an extended time period between the transfer of the goods or service and the payment date
how to we account for a financing element in the transaction price?
consideration receivable needs to be discounted to present value using the rate at which the customer would borrow
sometimes a customer may pay using non cash items such as shares, share options or using other assets. how are these non-cash considerations valued?
at fair value
why is consideration payable to a customer as part of a contract?
incentive to encourage completion of the sale
-eg supplier receiving pay for goods but paying supermarket for shelf space
how should consideration payable to a customer be accounted for?
account for it as a reduction of the transaction price
according to IFRS 15, when is revenue recognised?
when the entity satisfies a performance obligation by transferring a promised good or service to a customer
when is a performance obligation satisfied at a point in time?
when a customer obtains control of a promised asset
-prevent other entities from use
what are the indicators of the transfer of control?
- entity has a present right to payment for the asset
- the customer has legal title to the asset
- the entity has transferred physical possession of the asset
- the customer has the significant risks and rewards of ownership of the asset
- the customer has accepted the asset
why is determining control transfer important?
directors have been known to take advantage of the uncertainty and manipulate accounts in their favour, leading to inappropriate revenue recognition
what is consignment inventory?
inventory which:
- is legally owned by one party
- held by another party, on terms which give the holder the right to sell the inventory in the normal course of business or, at the holder’s option, to return it to the legal owner
in what trade are consignment inventories common?
in the motor trade
- manufacturer sells inventory to the dealer which the dealer can then sell on to a 3rd party customer
- sale comes with the option to return the items to the manufacturer if not sold by the dealer
when does the manufacturer legally hold the consignment inventory until?
- the dealer sells inventory onto a third party
- the dealer’s right to return expires and the inventory is still not sold
who physically hols the consignment inventory?
the dealer
when is revenue recorded for consignment inventory?
only if control of the asset sold transfers to the third party customer
-meets criteria for ‘point in time’-need to make sure customer holds ‘risks and rewards’
how are consignment inventories accounted for if risk and rewards are transferred to customer and if they are not?
if transferred: the sale is recorded
if not transferred: no sale is recorded
what is a sale and repurchase agreement?
where an entity sells an asset but retains a right to repurchase the asset at some point in the future
in what industry are sale and repurchase agreements common?
property developments and in maturing inventories such as whiskey and cheese
what are the factors to consider when determining who has control of the asset?
- has the entity transferred all of the risks and benefits of the asset?
- was the asset ‘sold’ at a price different to market value?
- is the entity obliged to repurchase the asset?
- if the entity has the option to repurchase the asset are they likely to exercise this option?
- if the sale is to a bank or financing company?
- is repurchase at a fixed price or market value?
what is the accounting treatment if the asset has been sold?
Dr bank
Cr asset
Dr/Cr P/L-loss/gain
what is the accounting treatment if the entity received a loan?
Dr bank
Cr loan
then
Dr finance costs
Cr loan
to increase loan to repurchase price
an entity recognise revenue over time, if one of the following criteria is met:
- customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs
- entity’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced
- the entity’s performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to payment for performance completed to date
what is the accounting treatment for revenue recorded over time?
for each performance obligation satisfied over time, an entity shall recognise revenue over time by measuring the progress towards complete satisfaction of that performance obligation
what are the methods of measuring progress of completion?
input method: cost incurred/cost or time incurred/total time
output method: performance elapsed/total contract price
what is the 4 step approach to calculating revenue over time?
- calculate overall profit or loss
- determine progress towards completion
- determine gross profit for SPL
- determine contract asset for SFP
are contract asset/liability figures annual or cumulative?
cumulative
what does IFRS 15 use as alternative terms for ‘contract asset’?
receivable (if revenue>cash)
work in progress (costs > cost of sales)
contract liability (cash>receivable)
as per IAS 37, if a contract is loss making, there will a provision be recorded to recognise the full loss. What is this termed as?
contract liability or a provision
what does IAS 37 introduce?
set of criteria that must be satisfied before a provision can be recognised
what is a provision?
a liability of uncertain timing or amount
what is a liability?
a present obligation of the entity arising from past events the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits
what conditions have to be met for a provision to be recognised?
- an entity has a present OBLIGATION (legal or constructive) as a result of a past event
- it is probable that an OUTFLOW of resources embodying economic benefits will be required to settle the obligation
- a reliable ESTIMATE can be made of the amount of the obligation
what are the types of obligation according to IAS 37 Provisions, Contingent Liabilities and Assets?
legal, i.e arising from
- a contract
- a legislation
- other operation of law
constructive i.e the entity has created a valid expectation via
- established pattern of past practice
- published policy or statement
what is a probable outlfow?
- must be considered more than likely
- if there are a number of similar obligations, probability is assessed across entire class not individually
what is the criteria for a reliable estimate?
- the best estimate of likely outflow
- a prudent estimate
- discounted when time value of money is material
can provisions be made for future operating losses?
no
as they do not meet the definition of a liability: they are expected rather than an obligation
what is a onerous contract?
a contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it
what is the cheapest option of exiting an onerous contract the lower of?
-cost of fulfilling the contract
vs
-any compensation/penalties payable for failing to fulfil it
what is a restructuring?
a programme planned and controlled by management that materially changes the scope of business undertaken or the manner in which that business is conducted
during restructuring, a provision can only be made if?
- the entity has a detailed formal plan
- has raised a valid expectation in those affected that it will carry out the restructuring by
- -starting to implement it
- -announcing it
a restructuring provision can only be made for costs that follow which criteria?
- necessarily entailed by the restructuring
- not associated with the ongoing activities of the entity
which costs does IAS 37 specifically not allow to be included in restructuring provisions?
- retraining
- relocation of existing staff
- marketing
- investment in new systems
what does IAS 37 require of decommissioning costs?
- provision to be recognised (decommissioning usually includes a legal obligation)
- decommissioning costs form part of the cost of the asset and are capitalised and expensed over the life of the asset (like dep charge)
when is the provision for dismantling/decommissioning recorded?
once the damage has been incurred to the land upon which the oil/mine will be located
-obligation to incur the decommission costs is only created at the point damage/changed to the land occurs
what is a contingent liability?
- a present obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity
- a present obligation that arises from past events but is not recognised because:
- -it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation
- -the amount of the obligation cannot be measured with sufficient reliability
POSSIBLE LIABILITY
according to IAS 37 how is a contingent liability recognised?
- not recognised
- disclosed in a note, unless the possibility of outflow is remote
what is a contingent asset?
POSSIBLE ASSET that arises from past events and whose existence will be confirmed only by the occurrence or non-occurence of one or more uncertain future events not wholly within the control of the entity
how are contingent assets accounted for?
- not recognised
- disclosed in a note, if an inflow is considered probable
what disclosures are required for contingent liabilities and assets?
- description of nature of contingent liability/asset
- an estimate of its financial effect
- an indication of uncertainties relating to amount or timing of outflow/inflow
- for contingent liabilities, the possibility of any reimbursement
what is the accounting treatment of virtually certain liabilities/assets?
recognise both if >80%
what is the accounting treatment of probable liabilities/assets?
if >50%
liab: make provision
asset: disclose by note
what is the accounting treatment of possible liabilities/assets?
<50%
liab: disclose by note
asset: ignore
what is the accounting treatment of remote liabilities/assets?
ignore
as per IAS 38, what is an intangible asset?
an identifiable non-monetary asset without physical substance
e.g licenses, quotas, IPs, brand names, trademarks
what 2 qualities make an asset identifiable?
- separable
- arises from contractual or other legal rights
why is goodwill arising from acquisition not an intangible asset?
it is not separable i.e cannot be sold individually from the rest of the entity
-falls under IFRS 3 Business combinations
to be recognised in FS, an intangible asset must meet:
- the definition of an intangible asset
- the recognition criteria
which internally generated intangibles can never be recognised/capitalised?
goodwill, brands, publishing titles, customer lists, IP
- not separable
- don’t meet recognition criteria
- not capable of reliable measurement
how are recognisable internally generated intangible assets accounted for?
record at cost if recognition criteria is met
why is accounting treatment of internally generate intangibles controversial?
- significant benefits thorough IP/investments in staff development left out
- SFP undervalued
how is expenditure on internally generated brands accounted for?
cannot be distinguished from cost of developing the business
-written off as incurred
how is a brand name that is separately acquired and can be reliably measuredaccounted for?
- separately recognised as an intangible non-current asset
- accounted for in accordance with the general rules of IAS 38
how is a purchased intangible asset accounted for?
separately: record a cost if recognition criteria met
as part of business:record at FV assuming asset is identifiable and reliable measure otw included in goodwill
how should purchased intangibles be recognised?
recognised at cost
- cash or FV
- cost should include purchase price + any directly attributable costs of preparing the asset for its intended use
what does the cost of an intangible asset comprise of?
- its price to purchase, including import duties and non-refundable taxes on acquisition after deducting trade discounts and rebates
- any directly attributable cost of preparing the asset for its intended use
what are examples of directly attributable costs?
- costs of employee pay arising directly from bringing the asset to its working condition
- professional fees
what are examples of costs that are not a cost of an intangible asset?
- costs of introducing a new product or service
- costs of conducting a business in a new location or with a new class of customer
- administration and other general overhead costs
what are the 2 methods of accounting for intangible assets at the reporting date and which is more popular?
the cost model (more popular)
the revaluation model
how is the intangible asset carried in the cost model?
cost - amortisation -any impairment losses
-annual amortisation expense shown in SPL annually
how should an intangible asset with a finite useful life be amortised?
over that life, using straight line method with zero residual value
how should an intangible asset with an indefinite useful life be amortised?
- should not be amortised
- should be tested for impairment annually and more often if there is an actual indication of possible impairment similar to land
when does amortisation for an asset start?
when the asset is available for use
how often should the useful life and method of amortisation be reviewed?
at least at each financial year-end
-changed should be effective as soon as they are identified for current and future periods
what conditions must be met for an active market to exist?
- items traded in the market are homogenous
- willing buyers and sellers can be found at any time
- prices are available to the public
how is the fair value of an intangible asset determined?
by an active market
what does IAS 38 state about active markets for intangible assets?
- they are rare
- specifically prohibits the revaluation of patents, brand names, trademarks and publishing rights
- most of them have value for their uniqueness which makes them non-homogenous
when are intangible assets derecognised?
- on disposal
- when no future economic benefits are expected from it
are gains or losses from disposing intangible assets included within revenue?
no, only SPL
what is research in IAS 38? how is it recognised?
- investigation undertaken to gain new knowledge and understanding
- expenditure to be recognised as an expense when incurred
what is development in IAS 38? how is it recognised?
- application of research findings or other knowledge to produce new or substantially improved products
- recognise based on criteria, otw write off as an expense
what is the criteria to capitalise development as an intangible asset
PIRATE
- probable future benefits
- intend to complete
- resources available
- able to use/sell
- technically feasible
- expenses reliably measurable
if an item of plant is used in the development process, how is the depreciation accounted for?
depreciation is added to the development costs in intangible assets during the period that the project meets the development criteria
- this is as economic benefit is gained from the plant
- gain is only realised when the development project is complete and production is underway
- depreciation will eventually be taken to the SPL as part of the amortisation of the development costs once the project is underway
how is development amortised?
development expenditure should be amortised over its useful life as soon as commercial production begins
what does the income tax expense in the SPL consist of?
- current tax expense for the year
- under or over provisions in relation to the tax expense of the previous period
- deferred tax
what is the definition of current tax?
estimated amount of tax payable on the taxable profits of the enterprise for the period
what are taxable profits?
profits on which tax is payable
what is an under-provision?
when the amount settled < amount previously recognised
-created an additional tax expense (debit)
what is an overprovision?
when the amount settled > amount previously recognised
-created a reduction in tax expense (credit)
what is deferred tax?
estimated future tax consequences of transactions and events recognised in the financial statements of the current and previous periods
-does not represent what is payable to tax authorities
what deferred tax is the application of the accruals concept and aims to eliminate the mismatch between:
- accounting profit:PBT in SPL
- taxable profit:tax base
what causes the differences in accounting profit and taxable profit?
- permanent differences e.g expenses disallowed
- temporary differences e.g allowable in a different period
does deferred tax take permanent or temporary differences into account?
temporary
- no need to adjust for permanent
- both catch up by end of useful life
what are temporary differences in profit?
differences between the carrying amount (SFP) and tax base
what are the steps for accounting for deferred tax?
- calculate the temporary difference
- calculate the deferred tax balances as at the year end
tax liability if CA>TB
tax asset if CA
where is the cumulative deferred tax balance presented in the SFP?
as a non-current item
according to IAS 12, what is a deferred tax asset?
recognised on unutilised losses carried forward (as there will be a future tax benefit when the losses are offset against future profits)
when can the deferred tax asset future taxable profits be recognised?
the the extent that the profits are probable
where should any deferred tax charge/credit that related to an item that has been recognised in OCI be recognised?
in OCI
e.g revaluation reserve which gives rise to deferred tax liability and reval surplus in OCI
what is functional currency?
the currency of the primary economic environment in which the entity operates
-day-to-day records
what are the primary determining factors of functional currency?
- mainly influences SALES prices for goods and services
- the currency of the COUNTRY whose COMPETITIVE FORCES and regulations mainly determine the sales prices of goods and services
- the currency that mainly influences labour, material and other COSTS of providing goods and services
what are secondary factors to consider in determining a functional currency?
- the currency in which FUNDING from issuing debt and equity is generated
- the currency in which RECEIPTS from operating activities are usually retained
what is closing rate(CR)?
the rate of exchange in existence as at year end
what is the historic rate(HR)?
the rate of exchange in existence at the time a transaction occurs (AKA spot rate)
what is the opening rate(OR)?
the rate of exchange in existence at the start of a period
what is the average rate(AR)?
the average rate of exchange for a period
what is a foreign currency transaction?
businesses buy or sell in a different currency to the entity’s functional currency
-must be translated back to functional currency
what is initial recognition of a foreign currency transaction?
at the spot rate aka historic rate
what is subsequent measurement of settled transactions?
translated using spot rate on settlement date
-differences to gain/loss P/L
what is subsequent measurement of unsettled transactions?
depends on if:
- monetary - retranslate using YE/close exchange rate
- non monetary-leave at historic rate
According to IFRS 10 Consolidated Financial Statements, what is the definition of control for a parent owning a subsidiary?
an investor controls an investee if and only if the investor has all of the following elements:
- power over the investee
- exposure, or rights, to variable returns from its involvement with the investee
- the ability to use its power over the investee to affect the amount of the investor’s returns
According to IFRS 10, what is the definition of power?
existing rights that give the current ability to direct the relevant activities i.e activities that significantly affect the investee’s returns (majority of shares and voting rights)
according to IFRS 10, what are the rules of acquisition accounting?
- the parent and subsidiary’s assets, liabilities, income and expenses are combined in full. Represents the 100% control that the parent has over the subsidiary
- goodwill is recognised in accordance with IFRS 3
- share capital of the group is the share capital of the parent only
- intra-group balances and transactions are eliminated in full
- uniform accounting policies must be used
- NCI are presented within equity, separately from the equity of the owners of the parent. Profit and total comprehensive income are attributed to the owners of the parent and to the NCIs
What conditions exempt a parents needing to present CFS?
- wholly owned sub or partially-owned and owners allow for this
- debt or equity are not publicly traded
- FS not filed with regulatory org for the purpose of issuing debt instruments
- ultimate parent produces CFS available for public use that comply with IFRS standards
Is NCI included in goodwill at acquisition?
yes, added to the value of the parent’s investment in the subsidiary
according to IFRS3, what are the 2 methods of valuing NCI at the date of acquisition?
- fair value
- proportionate share of net assets method
can groups value some subsidiaries by fair value method and some by others?
yes, method is on an acquisition basis
what method of valuation is used for NCI if the subsidiary’s shares are not traded in an active market?
anything other than the fair value method as it is based on market value
before IFRS 3 revision in 2008, what was the only method of NCI valuation?
the proportionate share of net assets method
-deemed inconsistent with the treatment of other assets
why is goodwill fully consolidated in the same way as property, inventory?
it is an asset of the subsidiary too
according to IFRS 3, how often should goodwill be tested for impairment? how is it adjusted?
at each reporting date
-written down if loss and charged as expense on CSPL
how is impairment loss charged to both the parent and NCI shareholder in the equity section of the CSFP??
reduce GW by full amount of loss (Cr)
reduce NCI balance held in equity by the NCI% of he impairment loss (Dr)
reduce consolidated RE by the P% of the impairment loss (Dr)
what must be done to intra-group balances in the consolidated accounts?
they must be eliminated in full
-cash/goods in transit must be recorded as received
what is PUP?
provision for unrealised profit
- if goods are sold to eachother and still held by the purchasing entity at the year end
- this means the profit is unrealised and should be removed
where does PUP adjustment take place?
only in the group accounts as the individual accounts will be correct
what is a cost structure?
the method an entity uses to ensure a selling price is set that will make a profit
-cost plus vs gross profit margin
what are some reasons goodwill might arise?
positive reputation
loyal customer base
staff expertise
according to IFRS 13 fair value measurement, what is the definition of fair value?
the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date
how is FV of parent's consideration calculated for the following types? cash shares issued by parent deferred consideration contingent consideration
cash: FV=amount paid
shares issued by parent: FV= market price of shares issued as at the acquisition date
deferred consideration:FV=present value of amounts paid
contingent consideration:FV=probability weighted present value
what is excluded from consideration?
legal and professional fees
provisions for future losses in subsidiary acquired
when must the group recognise the fair value of assets and liabilities of the subsidiaries acquired?
when they are identifiable and meet the definition of an asset or liability
according to IAS 38 Intangible assets and IFRS 3 business combinations, when is an asset identifiable?
if it is capable of being sold separately
why might there be there be differences between group accounts and individual accounts when it comes to intangible assets and contingent liabilities?
intangible: not recognised in individual accounts but must be recognised during consolidation
contingent: not recognised in the individual FS but recognised in consolidated if FV can be reliably measured
how is FV measured for the following assets/liabilities? PPE intangible assets inventories receivables, payables and loans
Ppe: Market value
intangible assets:market value
inventories: finished goods=selling price - disposal cost-profit allowance, WIP=ultimate selling price -costs to sell, raw materials=current replacement costs
receivables, payables and loans:PV of future cash flows
what cost concept is recording fair value adjustments of the subsidiary’s net assets at acquisition?
historical cost concept
why does the historical cost concept of fair value adjustments lead to an accurate measurement of goodwill?
as FV is usually higher than the carrying amount of the net assets, goodwill will be overstated without the FV adjustments
what is an associate?
an entity over which the investor has significant influence
-neither a subsidiary nor a joint venture of the investor
what is the definition of significant influence?
the power to participate in the financial and operating policy decisions of the investee but not control or joint control of those policies
what is considered control of an associate?
20-50%
significant influence
what are the requirements for significant influence?
- represented on the board of directors
- it participates in policy-making processes, including decisions about dividends or other distributions
- there are material transactions between the investor and investee
- there is interchange of managerial personnel
- there is provision of essential technical information
why are there no consolidated accounts for associates?
parent does not have control
-equity accounting
who usually uses equity accounting?
associates and joint ventures
what are the exemptions to equity accounting?
- the investment is classified as held for sale (IFRS 5)
- the parent is exempted from having to prepare consolidated accounts on the grounds that it has a parent
what is a joint arrangement? (IFRS 11)
an arrangement of which two or more parties have joint control
what is joint control?(IFRS 11)
the CONTRACTUALLY agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the UNANIMOUS consent of the parties sharing control
what is a joint venture? (IFRS 11)
joint arrangement whereby the parties that have joint control of the arrangement have rights to the ENT ASSETS of the arrangement
what is a joint operation? (IFRS 11)
joint arrangement whereby the parties that have joint control of the arrangement have rights to the ASSETS, OBLIGATIONS of the arrangement
According to IAS 27 Separate Financial Statements, how should an entity prepare these statements?
at cost or
in accordance with IFRS 9 Financial Instruments or
using the equity method
what are the 2 types of joint arrangement?
- joint ventures
- joint operations
