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Accounting > FAR > Flashcards

FAR Flashcards

1
Q

What class of item needs to be retranslated at their closing rate?

A

Monetary assets eg receivables and liabilities eg payables

NOT NON-MONETARY

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2
Q

What is the conceptual framework for financial reporting?

A

Document that states the principles behind the financial statements

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3
Q

Where is conceptual framework in the open book

A

A23 - book A. Conceptual framework has 10l

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4
Q

What are the 3 fundamental qualitative characteristics?

A

1)Relevance - needs to be relevant to users needs and have predictive and confirmatory value
(Eg HFS assets separate from NCA, so they’re predictive value)

2) Faithful representation - must be complete, neutral and free from bias and error - (transactions are accounted for according to its substance and economic reality)
3) Materiality

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5
Q

What are the 4 enhancing qualitative characteristics?

A

Comparability
Verifiablity
Timeliness - presenting to shareholders within 6 months of year end
Understandability - eg disclose accounting policies so users can understand transactions

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6
Q

What is the most reliable way of measurement?

A

Historical cost - most reliable but company may use other valuation

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7
Q

What are the 4 ways of measurement according to conceptual framework?

A

Historical cost
Current cost - market value
Realisable (settlement) value related to disposal
Present value - after discounting future net cash flows

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8
Q

What is an asset?

A

A resource CONTROLLED by an entity as a result of PAST events leading to an INFLOW of economic benefits

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9
Q

Define recognised

A

1) asset - must meet definition of element
2) probability of in/outflow of economic benefits
3) reliable estimate

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10
Q

What is a liability

A

A PRESENT obligation arising from PAST events - the settlement of which is expected to result in an outflow from the entity

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11
Q

Are warranty provisions CL or NCL?

A

NCL / don’t have to pay them back within 12m

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12
Q

When drafting accounts, does RE have to change and why?

A

Yes because there is the old profit from P+L is still in RE

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13
Q

What is a discontinued operation?

A

1) A component of an entity that has been actually sold/ceased or is classified as HFS
a) AND represents (or is part of a single coordinated plan) to dispose a major line eg BPP uni or geographical area eg BPP London

OR
b)is a subsidiary acquired exclusively with the view to resale

2) can be clearly distinguished operationally and financially, from the rest of the entity

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14
Q

When must a disclosure be made for a discontinued operation?

A

Disclosures will be in the period whereby the disposal (or the decision to dispose for HFS) takes place

And it should probably be sold within 12 months of classification

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15
Q

How can we define that a HFS asset is likely to be sold within 12m of classification?

A

Management are committed
Advertised
Reasonably priced

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16
Q

In application - how is it treated to financial statement qs, what is the approach? Example of HFS

A 
IDENTIFY ISSUE
How to deal with discontinued operations
STATE RULES
Per the standard, a discontinued op is defined as a major component which has been disposed or HFS
APPLY RULES TO Q
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17
Q

How to eliminate threats with safeguards?

A 
Profession
- entry requirements
- CPD
- professional standards
Work place
- ethics programmes
- internal controls
- leadership
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18
Q

What is the approach for ethics questions?

A

Discussing the principles/threats
Explain what the issue is and how you know
What actions you will take

PEA - PRINCIPLES. EXPLAIN. ACTIONS

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19
Q

What to do in an ethical dilemma? List actions

A
  • Speak to relevant party eg Financial Director
  • Speak to ICAEW Ethics Helpline
  • Speak to Board of Directors/Audit Committee (if PLC)
  • Legal Advice
  • Resign (LAST RESORT)
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20
Q

What threats are there? (Ethics)

A 
Self interest
Advocacy
Familiarity
Intimidation
Self review
SAFIS
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21
Q

What is stock valued at? Re; accounting policies

A

Lower of cost and NRV (net realisable value - selling price)

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22
Q

What would happen if closing stock was incorrect (eg higher)?

A

Have to adjust retrospectively, same with accounting policy (eg historical vs fair value, charging expenses to either cos or as overheads)

LAST YEARS cos was lower and profit was higher
THIS YEARS b/f RE would be wrong and this years opening stock

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23
Q

How do you set up the discontinued operation as a proforma?

A 
Revenue
Expenses
LOSS
Tax
Net LOSS
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24
Q

What is functional currency?

A

The currency of the economic environment where the company operates

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25
Q

What is presentation currency?

A

The currency that the financial statements are presented in

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26
Q

What is the spot exchange rate?

A

The rate on the day of the transaction

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27
Q

What is the closing rate?

A

Spot exchange rate at the year end date

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28
Q

What are counted as monetary items? And at what rate are they restated at year ends?

A

Currencies cash, trade receivables, trade payables, loans

They are stated using closing rate

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29
Q

How are non monetary items restated at year ends?

A

Non-monetary assets eg NCAs and inventories are measured at historical cost are restated using the historical rate

When they’re at fair value - spot rate at date of VALUATION

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30
Q

Are replacement parts capitalised of assets?

A

Yes provided they enhance economic benefits

The original cost of items should be derecognised at time of replacement

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31
Q

What is included in cost for PPE?

A

List price
Directly attributable costs (bringing asset to location and condition) VAT, trade discounts and import duties
Estimate of dismantling and site restoration costs

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32
Q

What is included in directly attributable costs?

A

Site preparation
Delivery
Installation and assembly costs
Cost of testing
Professional fees (eg legal costs and architects fees)
Employee benefits from asset acquisition

6!

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33
Q

What is the revaluation model (IAS16)? What is the difference with cost?

A

The revaluation model - an item of PPE is carried at revalued amount = FAIR VALUE less AD and Impairment Losses

Cost model is just carried at cost (still less AD and impairment losses)

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34
Q

When should depreciation be applied?

A

When the asset is in the location and condition necessary (even if asset is put to use later)

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35
Q

What to do with revaluations? (Accounting)

A

Dr building - cost (to revalued amount)
Dr building - AD (to remove it)
Cr revaluation reserve in capital (which is also disclosed in OCI)

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36
Q

How to do a revaluation reserve transfer?

A

1) disclosure in OCI-difference between before and after
2) work out the new depreciation on the revalued asset
3) work out the revaluation transfer. Revaluation gain divided by UEL equals the revaluation transfer for every year (into Retained Earnings)

(Transfer is shown in SOCIE)

37
Q

What is best practice?
1) leave gain in RR until asset is sold
Or
2) revaluation reserve transfer

A

Res transfer

38
Q

Re: impaired assets - what are assets valued at the lower of?

A

NBV and Recoverable Amount (RA)

Re: RA - higher of VIU (value in use) OR FV (net selling price)

VIU - value of the asset if the company continues to use it) - company made
FV - costs to sell less costs of disposal

39
Q

What is the accounting treatment of impairments of assets when its carried at FV?

A

1) Reverse gain in RR (by charging impairment losses to OCI)
2) Excess to P/L

Anytime there is a revaluation, clear the old AD as it relates to old AD

40
Q

How is an impairment measured for assets?

A

If there is a difference between NBV and RA (if NBV is higher)

41
Q

When should borrowing costs be capitalised re: construction or acquisition of assets?

A

borrowing SPECIFICALLY for construction of assets (less any investment income that is not used for the asset just now)

Construction financed from GENERAL borrowing costs (less any borrowing for specific construction)

42
Q

When should borrowing costs cease to be capitalised?

A

When all activities necessary to get the asset ready for intended use/sale are complete

43
Q

What is a qualifying asset?

A

An asset that takes a substantial period of time till its intended use or sale

44
Q

What 3 conditions need to be met before capitalisation of assets commence?

A

COMPANY:

  • incurs borrowing costs
  • incurs expenses for asset
  • undertakes activities that are necessary to prepare asset for its use or sale
45
Q

When is judgment required for borrowing costs?

A
  • Time period to get asset ready
  • Borrowing costs which are ‘directly attributable’ for the qualifying asset (esp in groups - think WAC for group borrowings)
  • Activities necessary to prepare the qualifying asset - holding the asset is not enough for capitalisation
  • the point when capitalisation should ceas
46
Q

Re: HFS assets, what conditions should be met for a sale to be highly probable?

A
  • management commitment to sell asset
  • active to locate a buyer
  • reasonable price
  • within 1 year date of classification
47
Q

What is accounting treatment for HFS assets?

A

1) Revalue to fair value (changes in cost and remove AD)
2) Transfer to HFS under IFRS 5 IE lower of NBV and FV
3) remove cost, remove AD and move to CA (Dr HFS asset)*

*when it’s HFS asset, ther s a year to get rid of it after classification

48
Q

Is internally generated goodwill recognised as an asset?

A

No

Includes brands, publishing titles, customer lists as its not possible to find a reliable cost measurement

49
Q

How do you recognise an intangible asset?

A
  • identifiable
  • under control of entity

Separable - should be able to be valued
OR
Arises from contractual or other legal rights

Recognition

  • future economic benefit will flow to or from the entity
  • has a value that can be measured reliably
50
Q

What expenditure is excluded from cost of intangible?

A
  • cost of introducing a new product including marketing and advertising
  • cost of conducting business in a new location
  • staff training

[cannot control people; cannot measure economic benefits]

51
Q

In consolidated accounts, what is done if P does not sell S’ goods to a 3rd party?

A
  • Cancel receivables and payables
  • Profit is not realised and is overstated - reduce the profit (RE) of the seller
  • Decrease stock on B/S
52
Q

What is a financial asset?

A

Asset

  • cash
  • equity instrument (shares) in another company
  • a contractual right to receive cash or another financial asset
  • a contractual right to exchange financial assets/liabilities that are favourable
53
Q

What is an equity instrument?

A

ORDINARY SHARES ISSUED (A contract that evidences a residual interest in entity after net assets)

54
Q

How to derecognise PPE?

A

1) remove cost
2) remove AD
3) record proceeds
4) calc profit/loss
5) remove any valuation gains

55
Q

What are the steps for a sale and finance leaseback?

A

“Finance” - in substance, there is no sale

1) derecognise/”sale”
Dr Cash
Cr Asset
Cr DI

2) Buyback
Dr Asset
Cr Lease Liability @ lower of PVMLP and FV

3) Depn (shorter of lease term and UEL)
Dr Expense
Cr Asset (AD)

THEN LEASE LIABILITY TABLE - to get NCL and CL and get finance charge

56
Q

What to do with monetary items if have not been sorted at end of period?

A

Monetary items eg cash, receivables, loans

Restate using closing exchange rate and any gain taken to PL

57
Q

At subsequent year ends re: foreign exchange what to do with

1) monetary items
2) non-monetary items

A

1) use closing rate
NON-MONETARY ITEMS
2) historical cost - at date of transaction
2) FV - exchange rates at date of fair valuation

58
Q

What is DI and how is it treated for finance leases?

A

DI is deferred income - they’ve paid the money but you still owe the LESSEE all the risks and rewards of ownership

It’s the difference between
proceeds and NBV
Separate it into NCL & CL

59
Q

What is the netting method for government grants?

A

1) deduct from cost of asset (to get to NBV)

Recognised by way of a reduced Depn charge, over life of depreciable asset

60
Q

What is the deferred income method for grants related to assets?

A
  • Value of grant = deferred income liability (separate into NCL and CL)
  • Recognised as income in PL over useful life of asset
61
Q

What is the accounting treatment for government grants related to income?

A

Credited to DI and Grant Income is released to PL over the period of related expenses

Presented

1) credit in PL
2) deduction from related expenses

62
Q

What’s the disadvantages of netting off method for government grants?

A

Reduces comparability. To ensure understandability and improve comparability - give full details of costs/asset and impact of netting off of grant in notes in FA

63
Q

What issues can arise for the netting off method for government grants related to assets?

A

Less representativeness as lower likelihood of impairment loss as grant lowers NBV (impairment loss is comparison of NBV and FV)

64
Q

How are intangible assets measured?

A

Separately - initially measure at cost

Business combination - fair value on date of acquisition

65
Q

Can intangible assets be revalued to fair value?

A

Yes - only when an active market exists.

66
Q

What is an active market?

A
  • all items are homogeneous
  • willing buyers/sellers
  • prices are available to the public
67
Q

How to recognise revenue for services and investment income?

A

SERVICES
- revenue is measured reliably
– Probable transfer of benefits
– Stage of completion measured reliably

INVESTMENT INCOME
– Revenue measured reliably
– Probable transfer of benefits

68
Q

1) What is the overall effect on the FS for the netting off method or deferred income method?
2) Which one do companies prefer?

A

1) Overall effect is the same

2) Companies may prefer the DI method because netting off affects carrying amount of assets

69
Q

When are financial instruments recognised? What about PPE?

A

Contract!

PPE - recognise it when it’s delivered to you and risk and rewards have been transferred

70
Q

How are financial instruments measured subsequently (each accounting period)?

A
  • assumed to be held to maturity, measured at AMORTISED cost using the effective interest method

Amortised cost is like leasing. (Op balance, int (effective interest rate), repayments (coupon rate), closing balance)

71
Q

How to classify a compound financial instrument (part-equity, part-liability)? What does it mean is happening for the co?

A
  • obligation to pay annual interest and repay capital - LIABILITY
  • also option to purchase shares

IN EXPLAIN QUESTION -Classification
Record the substance of the transaction. Legally - loan, but substance is part debt, part-equity

72
Q

How to do split accounting for compound financial instruments,

A

1) calculate PV of a similar non-convertible bond (discounted actual future cash flows and discount rate of similar debt)
2) compare that with total proceeds
3) balancing figure is equity

73
Q

What are the steps for a finance lease (leasing an asset from another company)?

A

1) classification (finance/operating)
2) record asset and liability - lower of PVMLP and FV
3) depreciation - lower of UEL and lease term
4) Make periodic payments
5) Finance charge in both FS

LEASE LIABILITY TABLE
SPLIT INTO NCL AND CL (capital repayment)

Always go 1 extra PAYMENT above the requirement

74
Q

What is an adjusting event? Provide example and consequence

A

If we receive further information after the year end regarding a condition that existed at y/e, this is an adjusting event

Example: determination of a court case
Consequence: adjust accounts - setting up an expense and accrual. Remove disclosure

75
Q

Why do we do fair value adjustments for group accounts?

A

In individual accounts, co can keep asset and liability at HC but in group accs they must be FV to get GW as accurate as possible

76
Q

What to do for inter company NCO transfers?

A

1) Find out profit on disposal
2) Find out proper depreciation amount for asset whilst it’s been in group (using NBV at time and remaining UEL)

3) Net off two amounts - adjust PPE and RE of seller

77
Q

What are basic group SOFP workings?

A

1) Group Structure
2) NA table - subsidiary
3) Goodwill @ acqn
4) NCI (in equity part of group)
5) RE - parent
6) Investment in Assoc/JV (CSI)

78
Q

What is the difference between FV and % (proportionate) method for group accounts?

A

FV
NCI @ acqn is given to you

for impairments, work out NCI %

% PROPORTIONATE

  • work out NCI @ acqn
  • take full % of impairment for A and S
79
Q

What are the indicators that a lease is a finance lease?

A 
A) ownership - title at end
B) option to purchase at a price significantly below MV
C) UEL = lease term
D) PVMLP = assets FV
E) specialised nature
80
Q

What is a present obligation?

A

Legal obligation - eg contract, warranty

Constructive obligation - past practice or published policies have led to valid expectations that they are obliged

81
Q

What three criteria needs to be fulfilled for recognition of provisions?

A
  • present obligation
  • probable outflow
  • reliable estimate
82
Q

What are the workings for group SOFP?

A

Read Q, set time, proformas
Transfer easy numbers
Complete adjustments

Proformas

1) Group structure (>50% OSC = control = linebyline consolidation)
2) NA @ acq - y/e, acq, post(movement)
3) GW @ acq
4) NCI (equity) (if FV % of impairment)
5) RE
6) Investment in Associate/JV - CSI

83
Q

How to deal with operating leases?

A

Find out total cost

Dr straight-line lease expense every year
Cr Bank x
May be a Dr of Prepayment or Cr Accrual

Operating lease - anything but a finance lease
Prove that only using it for some of its UEL, not getting ownership etc (thus why it’s not in the accounts)

84
Q

For a PUP adjustment, what is the accounting treatment in SOFP?
A) subsidiary - so in group
B) associate - not in group

A 
A) Dr RE of seller
Cr Inventory (consolidated)

B) Dr RE of P
Cr Investment in Associate (NA in that line) if A holding stock or Inventory if P holding stock

85
Q

How to adjust for NCA transfers (ICO balances)?

A

1) work out profit/loss on disposal
2) work out depreciation on NBV
3) net them off against each other (as you need ACTUAL cost to the group)
4) Deduct PPE and RE of seller

86
Q

What to include in profit from discontinued operations in disposal of subsidiary?

A

Profit for year of subsidiary [TRADING element] and profit on disposal (proceeds less NA and GW)

87
Q

What is an adjusting event after the reporting period?

A

One that occurs between the year end and the date when the FS are authorised for issue, which provides evidence of conditions that existed at the year end

88
Q

What is involved in
A) cash generated from operations
B) cash generated from investing activities
C) cash generated from financing activities DO

A

A

89
Q

What is dividends paid to NCI classified as?

A

Cash flows from financing activities

Accounting (4 decks)

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