Checkpoint 4 Flashcards
(30 cards)
What is a provision?
A provision is a liability of uncertain timing or amount.
A provision is recognised when:
An entity has a present obligation (legal or constructive) as a result of a past event, and
It is probable (> 50% chance) that an outflow of economic resources will be required to settle the obligation, and
A reliable estimate can be made of the amount of the obligation.
e.g. litigation, warranty
What is a legal obligation? what about a constructive obligation?
- A legal obligation is one that derives from a contract, legislation or any other operation of law.
- A constructive obligation is an obligation that derives from an entity’s actions, i.e. we promised publicly that we are going to settle the liability.
How do we calculate a warranty provision?
An entity that sells goods “under warranty” will have a legal obligation to repair those goods should any faults occur.
We use Probabilities and Expected Values to calculate it.
Do we make a provision for decommissioning costs/future repairs?
If there is an obligation to make these repairs, the business should make a provision for them. If the costs relate to a non-current asset, then we can:
Dr. PPE (instead of expense account)
Cr. Provision
Don’t forget to discount the provision back to the present value!
What is an onerous contract?
An onerous contract is a contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefit expected to be received under it.
In short terms, we expect to make a loss from the contract.
The unavoidable costs under a contract are the lower of the cost of fulfilling the contract and any compensation
penalties arising from failure to fulfil it.
What is a contingent liability?
A contingent liability is either:
(a) A possible obligation (< 50% chance); or
(b) An existing obligation that arises from past events but is not recognised because:
it is not probable that an outflow of economic benefit will be required to settle the obligation; or
because the amount of the obligation cannot be measured with sufficient reliability.
A contingent liability is disclosed in notes.
e.g. court case
What is a contingent asset?
A contingent asset is a possible asset arising from past events whose existence will only be confirmed by the occurrence of one or more uncertain future events not wholly within the control of the entity.
If the realisation is merely probable (> 50% chance), then we can refer to that asset as a contingent asset and disclose it in the notes to the financial statements.
e.g. insurance claim, court case
What is an adjusting event?
Adjusting events are events taking place after the reporting period which provide further evidence of conditions existing at the end of the reporting period.
e.g. settlement of a court case, bankruptcy of a customer, discovery of theft and fraud
What is a non-adjusting event?
Non-adjusting events provide evidence of conditions arising after the end of the reporting period. If the event is material, we still need to disclose it in notes.
e.g. decline in market value, destruction of an asset [fire], announcement to close a manufacturing plant, change in the tax rate
What is current tax?
Current tax is the amount of income taxes payable (or recoverable) by a company in respect of its taxable profit or loss for a period.
Dr. Income tax expense
Cr. Income tax liability
What is deffered tax?
Deferred tax is not a “real” tax, but is simply an accounting adjustment which matches recorded accounting transactions with the related tax effect where these occur in different periods.
What is a temporary difference?
A temporary difference is the difference between the carrying amount of an asset or liability in the statement of financial position and its tax base: the value of the asset or liability for tax purposes.
We multiply this difference by the tax rate and we get the deffered income!!!!!!!
What is a capital allowance?
A capital allowance is the tax depreciation.
Deffered Tax. Proforma.
Year / Carrying Amount / Tax WDV (base) / Difference [we then multiply it by the tax rate to get the —> ] / Deffered Tax
Deffered tax relating to revaluation gains
This arises on the gain on the revaluation surplus. If they decide to asset from which this gain arose, then they won’t get to keep the whole gain - tax will be charged on it.
Dr. Revaluation Surplus
Cr. Deffered tax Provision
Tax loses - DT asset [future tax saving]. What if a company makes tax loses?
If a company makes tax losses, it will generally be allowed to carry forward those losses against any future profits, thus reducing the tax payable in the future.
Taxable profit - Tax loss x Tax rate % [This is a deffered tax asset]
Dr. Deffered Tax Asset
Cr. Tax Expense
How do we calculate the Taxable Profit? [Proforma]
Accounting profit (say)
Add: depreciation charge (non-allowable)
Less: tax depreciation (already received full allowance)
Taxable profit
Unsettled transactions. What are the monetary items?
Monetary items are cash and other assets and liabilities which have a fixed value upon settlement e.g. cash, accounts receivable, accounts payable.
These should be retranslated using the exchange rate at year end. Any exchange gain or loss is taken to the statement of profit or loss.
Unsettled transactions. What are the non-monetary items?
Non-monetary items are assets and liabilities which do not have a fixed exchange value e.g. property, plant and equipment, inventory.
If these are denominated in a foreign currency and measured at historical cost, they should be translated using the exchange rate at the date of the transaction and are not re-translated at the year-end. There will therefore be no exchange gain or loss.
What is EPS and how many types of EPS are?
It is the profit of the company divided by the number of shares.
There are two types:
Basic earnings per share [actual shares]
Diluted earnings per share [actual shares + potential shares that we might issue]
What is the EPS formula to calculate the basic earnings per share?
EPS (in cents) = Earnings / Weighted avg. no. of shares x 100
How do we calculate a weighted average number of shares if we issue the shares at full market price?
Date —> Narrative —> No. of shares —> Time [apportion] —> Weighted average no. of shares [total]
Bonus issue. How does it impact the EPS calculation and what do we do to fix it?
Bonus shares are issued for no consideration. Therefore, the same level of profits will now be applied to a higher number of shares. From a comparative perspective this can lead to a distortion.
To make EPS comparable, we need to restate the PY figure as if it had the same share capital as CY. To do this, we apply a “bonus fraction” to all shareholdings prior to the bonus issue.
Bonus Fraction = New Number of Shares / Old Number of Shares
How do we calculate the PY EPS in case of a bonus share issue?
EPS (in cents) = Earnings / Weighted avg. no. of shares x Bonus Fraction x 100
