CIMA F1: B. Financial Accounting and Reporting Flashcards

Question

IAS 2 - INVENTORIES B. MEASUREMENT

Answer 1

B. MEASUREMENT 1) Costs of purchase (including taxes, transport, and handling) net of trade discounts received 2) Costs of conversion (including fixed and variable manufacturing overheads) and 3) Other costs incurred in bringing the inventories to their present location and condition Inventory cost should not include: 1) Abnormal waste 2) Storage costs 3) Administrative overheads unrelated to production 4) Selling costs 5) Foreign exchange differences arising directly on the recent acquisition of inventories invoiced in a foreign currency 6) Interest cost when inventories are purchased with deferred settlement terms.

Answer 2

A. DEFINITION 1) Tangible asset 2) Held for use 3) Expected to be used during more than one accounting period

Answer 3

B. INITIAL MEASUREMENT 1) Initially measured at costs. Components include: a. Purchase Price b. Import duties c. Directly attributable costs of bringing asset to location and working condition d. Best estimate of dismantling and Restoration costs if obliged to incur them by the date initial cost is established (IAS 37 – Provisions, Contingent Liabilities and Contingent Assets) 2) Subsequent expenditure can be capitalised if it meets recognition criteria: a. Probable future economic benefits b. Cost can be measured reliably

Answer 4

C. SUBSEQUENT MEASUREMENT Two methods: 1) Cost Model: asset is carried at cost less accumulated depreciation and impairment 2) Revaluation Model: asset is carried at FV less subsequent depreciation and impairment a. Revalue entire class of assets b. Revalue sufficiently often c. Increases are credited to OCI and SOCIE (revaluation surplus) or used to reverse previous decreases d. Decreases are expensed to profit and loss or used to reverse previous decreases e. Depreciate the new value over remaining useful life

Answer 5

D. DEPRECIATION 1) Depreciable amount (cost less residual value) should be allocated on a systematic basis 2) Residual value and useful life should be reviewed at least each financial year end 3) Depreciation method used should reflect pattern in which the asset’s economic benefits are consumed a. Straight line b. Reducing balance c. Machine hour 4) Charged to profit and loss 5) Begins when asset is available for use and continues until derecognised.

Answer 6

A. SCOPE Outlines the accounting and disclosure requirements for investments in subsidiaries, joint ventures and associates when an entity prepares separate financial statements.

Answer 7

B. ACCOUNTING METHOD Choice of: 1) Cost 2) As a financial asset (at FV) (IAS 39 - Financial Instruments: Recognition and Measurement) 3) Using Equity Method (IAS 28 – Investments in Associates and Joint Ventures)

Answer 8

A. SCOPE IAS 28 applies to all entities that are investors with either: 1) Significant Influence (Associate) a. The power to participate in the financial and operating policy decisions of the investee but is not control or joint control of those policies (>20%) i. Representation on Board of Directors ii. Participation in policy making iii. Material transactions between entity and investee iv. Interchange of management v. Provision of essential technical info 2) Joint Control (Joint Venture) a. 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

Answer 9

B. ACCOUNTING FOR ASSOCIATES/JOINT VENTURES 1) In separate financial statements (IAS 27) a. Cost b. As a financial asset (at FV) (IAS 39) c. Using Equity Method 2) In consolidated financial statements a. Using Equity Method

Answer 10

C. EQUITY METHOD 1) SOFP (single line) a. Initial recognition at cost b. Post-acquisition i. Add P’s share of post-acquisition retained earnings ii. Deduct impairment losses on associate to date 2) SPLOCI (single line) a. A’s profit for the year x group % b. A’s OCI for the year x group %

Answer 11

D. PROCEDURES 1) Not part of group so no cancellation of intra-group transactions 2) Eliminate Group’s share of unrealised profit (PUP x group%) a. P sells goods, A holds inventories Dr Group RE (SOFP) / Dr COS (SPLOCI) Cr Investment in Associate (SOFP) b. A sells goods, P holds inventories (overstated inventories) Dr Group RE (SOFP) / Dr Share of A’s Profit (SPLOCI) Cr Group inventories (SOFP) 3) Ensure Uniform accounting policies 4) Ensure same reporting date (or within 3 months) 5) Losses of an investee => do not reduce the investment below 0

Answer 12

E. EXEMPTIONS 1) Parent is wholly owned subsidiary 2) Parent is partially owned subsidiary and NCI does not object 3) Its debt or equity instruments are not publicly traded 4) It did not file FS with a securities commission for purpose of issuing instruments in a public market 5) Its ultimate or any intermediate parent publishes consolidated financial statements that are available for public use and comply with IFRS

Answer 13

A. SCOPE If an asset’s carrying value is higher than it’s recoverable value (the higher of FVLCTS and its value in use), it should be reduced in value by the impairment loss and written off against profit (unless previously revalued).

Answer 14

B. VALUE IN USE Present value of future cash flows. The calculation of value in use should reflect the following elements: 1) Estimated future cash flows from asset 2) Expectations about possible variations in the amount or timing of those future cash flows 3) Time value of money, represented by the current market risk-free rate of interest 4) Price for bearing the uncertainty inherent in the asset 5) Other factors, such as illiquidity, that market participants would reflect in pricing future cash flows

Answer 15

C. INDICATORS OF IMPAIRMENT 1) External sources a. Fall in asset’s market value b. Change in PESTEL environments c. Increase in market interest rates affecting discount rates (which affect Value in use) d. Net assets of company higher than market capitalisation 2) Internal sources a. Obsolescence/damage b. Idle or held for disposal c. Adverse changes in use or economic performance 3) Annually tested a. Intangibles with indefinite useful life b. Intangibles not yet available for use c. Good will acquired in a business combination

Answer 16

D. RECOGNITION AND MEASUREMENT 1) Assets at historic cost: charged to PL 2) Assets at a revalued amount: charge to revaluation surplus (OCI) and excess to PL

Answer 17

A. DEFINITION 1) Identifiable a. Arises from contractual or other legal rights (acquired through purchase) b. Separable (capable of being sold/transferred/licensed) 2) Non-monetary asset (controlled and probable FEBs) 3) Without physical substance

Answer 18

B. INITIAL RECOGNITION 1) Purchased: measure at cost 2) Acquired: measure at FV (if possible), separate from goodwill (IFRS 3 – Business Combinations) 3) Internally generated: split into a. Research phase (no certainty of FEBs): expense as incurred b. Development phase: capitalise if PIRATE, otherwise expense i. Probable FEBs ii. Intention to complete and use/sell iii. Resources adequate to complete and use/sell iv. Ability to use/sell v. Technical feasibility vi. Expenditure can be reliably measured

Answer 19

C. SUBSEQUENT MEASUREMENT Two methods: 1) Cost Model: asset is carried at cost less accumulated amortisation and impairment 2) Revaluation Model (rare): asset is carried at FV less subsequent amortisation and impairment ONLY IF FV can be determined by reference to an active market a. Revalue entire class of assets b. Revalue sufficiently often c. Increases are credited to OCI and SOCIE (revaluation surplus) or used to reverse previous decreases d. Decreases are expensed to profit and loss or used to reverse previous decreases e. Amortise the new value over remaining useful life

Answer 20

D. AMORTISATION 1) Indefinite life: Cost but with no amortisation 2) Finite life: Cost should be amortised on a systematic basis 3) Residual value and useful life should be reviewed at least each financial year end 4) Amortisation method used should reflect pattern of benefits a. If unable to determine pattern: Straight line 5) Charged to profit and loss 6) Begins when asset is available for use and continues until derecognised.

CIMA F1: B. Financial Accounting and Reporting Flashcards

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