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mim sem 2 > Financial Accounting > Flashcards

Financial Accounting Flashcards

1
Q

What is the purpose of accounting?

Topic:intro

A
  • To Provide useful information for making good decisions
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2
Q

What can the information from acccounting be used for?

Topic:intro

A
  • Stewardship (past) - Information about the performance of the company
  • Contracting - the basis for contracts. E.g. debt covenants, supplier contracts etc
  • Valuation role (future) - Information about the prospect of the company
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3
Q

Describe the process of accounting

Topic:intro

A

Business transactions are recorded according to rules (which require judgments), and aggregated information is disseminated to the public.

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4
Q

What 3 things are defined by rules of accounting?

Topic:intro

A
  • If and when a transaction is recorded (recognition)
  • Where an item is disclosed (disclosure)
  • How items are valued (valuation)
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5
Q

Describe the typical steps in the operation of a business?

Topic:intro

A
  1. raises money=>
  2. develops product=>
  3. produces prod=>
  4. sales=>
  5. payouts (taxes, dividend etc)
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6
Q

Why we do managers do earnings management?

Topic:intro

A
  • Performance base compensation
  • Raising capital
  • meet/beat targets
  • Avoid debt covenant violations
  • Quiet life
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7
Q

What are Real Effects?

Topic:intro

A

Is deviating from the normal business activities to influence reported performance although this may affect the future economic performance of the firm negatively.
In contrast to earnings management, “real effects” involve changing the actual operations of the business, such as investment decisions or operational strategies, in order to achieve more favorable accounting outcomes.

Earnings management is like wearing make up, real effects is like plastic surgery.

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8
Q

What counter measures are in place to police earnings management?

Topic:intro

A
  • Financial auditors
  • Enforcement bodies
  • (Supervisory) board and audit committee
  • corporate governance mechanisms
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9
Q

What are 3 types of economic units in accounting?

Topic:intro

A
  • Public budget (e.g. governments)
  • Private person (e.g. me)
  • Enterprise - companies + public authorities (the focus of this course)
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10
Q

What is a company (as a Functional term)

Topic:intro

A

a legal or natural person who is entrepreneurially planning and operating.

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11
Q

What is a company (as a Institutional term)

Topic:intro

A

is commercial activity in the economy and with a minimum level of institutional means.

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12
Q

Name 3 types of companies

Topic:intro

A
  • Service companies - banks, insurance, transport..
  • Industrial companies - raw materials into products
  • Disposal companies - waste recycling, collection and sorting
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13
Q

Name any 7 Functional units of a company

Topic:intro

A
  • Procurement
  • Productions
  • Sales
  • Research
  • Development
  • Construction
  • HR
  • Materials
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14
Q

Name 5 uses of data that is gathered from functional units of a company

Topic:intro

A
  • Documentation
  • Forecasting
  • Planning
  • Budgeting
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15
Q

Describe the flow of information in an industrial company from functional units to Top management

Topic:intro

A
  • Data is collected and data processed in each functional unit.
  • Processed data is used for accounting.
  • This processed data and accounting are contained in the MIS (management information system)
  • Top management access the MIS and uses the information to make decisions
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16
Q

What decisions can be made with the help of accounting?

Topic:intro

A
  • Individual decisions - e.g do I invest or not?
  • Decision about activity programs - e.g decide about something to produce
  • Decision about activity sequence. E.g how to structure my process for optimality
  • Decision on total entrepreneurial structures. (location, business model, suppliers)
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17
Q

What types of targets are set by management to help employees in decision making?

Topic:intro

A
  • Safety target - e.g risk reduction
  • Performance targets - e.g Offer certain services
  • Success target - e.g Profit maximisation, Increase in market share
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18
Q

What follows after targets are set for an organisation?

Topic:intro

A
  • Planning. I.e alternative, search, assessment, comparison and decision
  • Budgeting. I.e allocating resources according to the plans
  • Control. i.e comparing targets to actuals
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19
Q

Name 5 examples of standard accounting processes

Topic:intro

A
  • Purchase - to - Pay (Purchasing process) - The P2P process is all about procuring the necessary inputs for the business to function, so it primarily involves the procurement and finance departments.
  • Order - to - Cash (Sales process) - Is the typical process between company and it’s customers
  • Fixed assets accounting
  • General ledger
  • Master Data Management
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21
Q

Name and describe the Order - to - Cash (Sales process) in order

Topic:intro

A
  1. Order intake - Customer expresses interest in product
  2. Disposition - order confirmation happens here, check if we have inventory in stock
  3. Order processing - if we have stock, we process the order
  4. Picklist - ??
  5. Withdrawal from warehouse - A delivery note is given
  6. Create an invoice - invoice is given out
  7. Transfer of data in accounts
  8. Record payment receipts
  9. Transfer of data in accounts
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21
Q

Name the two fields of accouting

Topic:intro

A
  • Financial Accounting (External accounting)
  • Management (internal) accounting
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22
Q

What are the 3 components of financial accounting?

Topic:intro

A
  • Bookkeeping,
  • inventory,
  • Financial statements
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23
Q

What are the 3 components of Management (internal) accounting?

Topic:intro

A
  • Statistics and comparative methods: descriptive explanatory statistics, in-company comparison, intercompany comparison.
  • Cost (and performance) accounting: cost type accounting, cost centre accounting, cost unit/cost unit time accounting.
  • Budgetary accounting: Procurement/production/sales planning. Investment planning, Financial planning.
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24
Q

What are the differences between Financial accounting and management accounting?

Topic:intro

A

Financial accounting
- for decision makers outside the company
- Representing a company’s net assets, financial position and
results of operations to its stakeholders
- is Subject to legal requirements by the government, standard setters, stock exchanges
- Preparation of financial statements and standardised reports about financial information

Management Accounting
- for decision makers inside the company
- Representing the important financial and operational processes of a company
- No formal requirements
- Company-specific reports about financial (and non-financial
information) that is useful for managerial decision making (e. g. planning, monitoring and controlling of company‘s operations)

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25
Q

What are the four types of accounting?

Topic:intro

A
  • Financial planning => for management
  • Investment planning => for management
  • Financial accounting => for externals
  • Cost- (and performance) accounting => for management
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26
Q

What the flow values, level of information and central questions answered by Financial planning?

Topic:intro

A

Flow Values:
- Cash-inflows
- Cash-outflows

Level of information:
- Increase and decrease of cash and cash equivalents of the period

Central Questions:
- Is the future solvency secured?

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27
Q

What the flow values, level of information and central questions answered by Investment planning?

Topic:intro

A

Flow Values:
- Cash-inflows
- Cash-outflows

Level of information:
- Present value

Central Questions:
- Are the planned or realised investments profitable

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28
Q

What the flow values, level of information and central questions answered by Financial accounting?

Topic:intro

A

Flow Values:
- Income
- Expenses

Level of information:
- Changes in net assets of the period

Central Questions:
- How successfully has the company performed in the last period?

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29
Q

What the flow values, level of information and central questions answered by cost (and performance) accounting?

Topic:intro

A

Flow Values:
- Performance
- Costs

Level of information:
- Operating Profit

Central Questions:
- How beneficial are individual measures in the short run?

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30
Q

Differentiate between Cash-outflow and cash inflow

Topic:intro

A

Cash outflow are Cash and cash equivalents that are spent by the company within a period. Every cash-outflow decreases the amount of cash on hand and cash in banks. (= total of cash and cash equivalents).

Cash-inflow are Cash and cash equivalents that flow directly to the company within a period. Every cash- inflow increases the amount of cash on hand and cash in banks.

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31
Q

Differentiate between Expenditure and Receipts

Topic:intro

A

Expenditure are monetary value of a company’s acquired economic goods(a) within a period. Regardless whether the cash-outflows are made in the previous or following years.

Receipts are monetary value of a company‘s delivered economic goods (a) within a period. Regardless whether the cash-inflows are made in the previous or following years.

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32
Q

Differentiate between Expense and Income

Topic:intro

A

Expenses are expenditures periodised and net income affecting. The period expense equals the amount of all consumed respectively used economic goods within that period.
Income are receipts periodised and net income affecting. The period income equals the amount of the realized increase in value within that period.

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33
Q

Differentiate between Cost and Perfomance

Topic:intro

A

Cost Monetarily assessed consumption of goods and services due to providing goods and services. Perfomance Monetarily assessed increase in value due to providing goods and services.

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34
Q

What are the differences between corporated (capital) and unincorporated (partnership) companies?

Topic:intro

A

Partnership
- Partners are responsible for daily business
- Each partner has power of representation
- Legal independence (capacity to enjoy rights and be subject to obligations)
- Acting in legal communication is attributed to the natural persons behind
- Partners bear liability personally and unlimited for the company’s liabilities (Exception: limited partners)
- Examples are OHG, KG, GbR

Capital companies
- Partners in the background in respect of daily business
- Only management board has power of representation
- Legal independence (capacity to enjoy rights and be subject to obligations)
- Acting in legal communication is attributed to the company, since it has its own legal personality (legal person)
- Separation of company assets and partners
(Partners do not bear liability for the company‘s liabilities)
- examples: AG, GmbH, KGaA, GmbH & Co. KG

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35
Q

What is a capital market oriented company

A

A company is capital market oriented if equity instruments (shares or similar securities) or bonds are traded on an organized market

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36
Q

What is a listed company?

Topic:intro

A

A company is listed if equity instruments
are traded on an organized market.

  • Only stock corporations, public partly limited partnerships, or a SE can be listed.
  • They have Hard disclosure obligations (quarterly reports, ad hoc announcements)
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37
Q

What is a capital company?

Topic:intro

A

also known as a corporation, is a type of business entity that is owned by shareholders. These shareholders invest capital into the company in exchange for shares, which represent ownership in the company.

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38
Q

In which situations is judgement required in accounting?

Topic:intro

A

When:
- there’s no rules at all
- rules are wooly (“significant”, “probably”)
- rules require estimates (“future cash flows”, “fair value”)

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39
Q

What are the 3 (Generally accepted) accounting principles?

Topic:intro

A
  • Generally accepted bookkeeping principles
  • Generally accepted inventory-taking principles
  • Generally accepted financial accounting principles
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40
Q

What are the 3 framework principles of accounting?

Topic:intro

A
  • Completeness - Show all transactions in the books
  • Accuracy & neutrality - Accurate in the recording. Have as little estimates as possible
  • Transparency & understandability - everybody should understand what you record
    Complementary
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41
Q

What are the 4 complementary principles of accounting

Topic:intro

A
  • Prudence - Don’t overvalue your assets or undervalue your liabilities
  • consistency - should have comparable figures/presentation across years
  • Going concern - assumption the company will continue to exist
  • Single asset valuation - all assets should be counted on their own
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42
Q

What are the 3 Accrual principles of accounting

Topic:intro

A
  • Accrual principle - expenses & income are in the period where they occur
  • Realisation principle - Only realise profit when you realise it
  • Imparity principle - account for loss when probable
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43
Q

What are the components of a Individual financial statement in accordance to HGB?

Topic:intro

A
  • Balance sheet
  • Income statement
  • Notes
  • Statement of Cash flows (SoCF)
  • Statement of Changes in equity (SoCE)
  • Segment reporting

The management report is not part of the financial statement, but an additional document.

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44
Q

What are the components of the consolidated financial statements in accordance with HGB?

Topic:intro

A
  • Balance sheet - mandatory
  • Income statement - mandatory
  • Statement of changes in equity - mandatory
  • Statement of cash flows - mandatory
  • Notes - mandatory
  • Management report - mandatory
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45
Q

What are the components of the consolidated financial statements in accordance with IFRS?

Topic:intro

A
  • Statement of financial position - mandatory
  • Statement of comprehensive income - mandatory
  • Statement of changes in equity - mandatory
  • Statement of cash flows - mandatory
  • Notes - mandatory
  • Management report - mandatory only according to german law
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46
Q

Describe the Annual closing process based on german AG

Topic:intro

A

Preparation:
1. Board of directors decide business transactions
2. Business transactions are posted into the books
3. Postings are used to prepare unaudited financial statements.

Audit:
4. the unaudited financial statement is audited by an auditor, and an audit report is created

Fixing:
5. The report is given to the supervisory board for approval. The audit report and statement are approved.

Disclosure:
6. Should be released within the first three months of the year.

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47
Q

What is the accounting equation

Topic:intro

A

Assets = Liabilities + Equity

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48
Q

What is the minimum content found in a Journal?

Topic:intro

A
  • date,
  • document memo,
  • posting text,
  • journal entries,
  • amount
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49
Q

What is the minimum content in a general ledger.

Topic:intro

A
  • date,
  • document memo,
  • posting text,
  • journal entries,
  • amount
  • additional contra account,
  • amount in Debit or Credit
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50
Q

What are examples of Subsidiary (ancillary) books of account?

Topic:intro

A
  • Current accounts,
  • payroll accounts

These are Outside of the account system books to split accounts further

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51
Q

Describe tripple entry book keeping with Triple-entry with Gigg & blockchain technology

Topic:intro

A

accounting entries by two parties are cryptographically sealed by a third entry on a common (=shared), immutable (=distributed) ledger (which would even allow a single entry system with an inter-company ledger)

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52
Q

AG,
GmbH,
KGaA,
AG & Co. KG,
GmbH & Co are abreviations for which type of companies?

Topic:bookkeeping

A

Corporations

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53
Q

KG,
OHG,
GbR,
Stille Gesell- schaft Are abbreviations for which type of companies?

Topic:bookkeeping

A

Partnerships

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54
Q

What are the what are the consequences for of being a merchant?

Topic:bookkeeping

A
  1. Every merchant is obligated to keep books clearly showing his Business transactions and his financial position in accordance with generally accepted accounting principles.
  2. A merchant is obliged to retain copies of all business correspondence sent out conforming to the original (such as copies, prints, duplicates or other reproductions of the text on a writing surface, photographic or other data storage device).
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55
Q

What are the requirements for a merchant to be exempted from duty to keep books?

Topic:bookkeeping

A
  1. Individual merchant
    Company form with a sole owner, who runs a commercial business as a merchant
  2. Revenues ≤ 600,000 EUR and Net profit ≤ 60,000 EUR (each in two consecutive reporting dates)

Both criteria need to be met

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56
Q

What are the two forms of capital?

Topic:bookkeeping

A

Debt capital - provided by creditors
Equity capital - provided by owner

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57
Q

What is a “business transaction”?

Topic:bookkeeping

A

A business transaction is an event, which changes the company‘s financial situation (= assets or
liabilities).

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58
Q

What is a “Company‘s financial situation”?

Topic:bookkeeping

A

This describes the condition of all assets and liabilities of a company. This includes both the assets and capital

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59
Q

What are the components of a T account?

Topic:bookkeeping

A
  • Account number, Account name
  • Account sides - debit, credit
  • Account balances
  • Account changes
  • Account balance
  • Account sum
  • Further account information
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60
Q

In a T account, Asset-side accounts Increase on which side?

Topic:bookkeeping

A

Debit side

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61
Q

In a T account, Liability-side accounts Increase on which side?

Topic:bookkeeping

A

Credit Side

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62
Q

What is the difference between a temporary account and permanent account?

Topic:bookkeeping

A

Permanent Accounts
- The balances in these accounts are carried forward from one accounting period to the next.
- These accounts are not closed at the end of the accounting period.
- They include all balance sheet accounts, such as assets, liabilities, and equity accounts

Temporary Accounts
- The balances in these accounts accumulate over the course of an accounting period, but at the end of the period, they are closed out to zero
- their balances are transferred to a permanent account (usually Retained Earnings)
- They include all income statement accounts, such as revenues, expenses, gains, and losses, as well as the dividend account.

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63
Q

What is a permanent acccount?

Topic:bookkeeping

A

Permanent accounts are all accounts that are on the company’s balance sheet. Each item in the balance sheet is associated with its own permanent account.

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64
Q

What is a temporary account?

Topic:bookkeeping

A

This where all business transactions effecting the company‘s net income are recorded on temporary accounts. They „collect“– separately for different types of income and expenses – all income and expenses of a reporting period.

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65
Q

When balancing accounts, If the debit side is higher than the credit side, then the balance carried over is called a ….

Topic:bookkeeping

A

debit balance.

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66
Q

When balancing accounts, If the credit side is higher than the debit side, then the balance carried over is called a ….

Topic:bookkeeping

A

credit balance

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67
Q

When balancing accounts, what does it mean to have the balance “cleared”?

Topic:bookkeeping

A

This is when credit and debit side are equal and there is no need to balance

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68
Q

What is a “Chart of accounts”?

Topic:bookkeeping

A

Is a Systematic register of all accounts for bookkeeping for certain industries.

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69
Q

Give two examples of Chart of accounts

Topic:bookkeeping

A
  • Common chart of accounts - The structure follows the process organizational principle
  • Industrial chart of accounts - The structure follows the completion of organizational principle (balance sheet and income statement)
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70
Q

What are is a Journal entry?

Topic:bookkeeping

A

Journal entries are instructions to which T-accounts a business transaction (and the amount) has to be posted

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71
Q

What are the components of a journal entry?

Topic:bookkeeping

A
  • the accounts affected,
  • the amount,
  • an explanatory posting text.
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72
Q

What are 2 Types of journal entries?

Topic:bookkeeping

A
  • Simple journal entries - A business transaction that deals with exactly
    two accounts
  • Composite journal entries - A business transaction deals with more
    than two accounts
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73
Q

What is a voucher?

Topic:bookkeeping

A

Document, containing information about business transactions to be recorded and thus can be used as proof of the correctness of the information concerning the relevant business transaction.

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74
Q

Name examples of internal vouchers

Topic:bookkeeping

A
  • Outgoing invoices
  • Receipts
  • Business letters
  • Payrolls
  • Material withdrawal slips
  • Documents for cancellations
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75
Q

Name examples of external vouchers

Topic:bookkeeping

A
  • Incoming invoices
  • Receipts
  • Bank statements
  • Business letters
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76
Q

Describe the business process from transaction to journal entry

Topic:bookkeeping

A
  1. Business transaction
  2. Voucher
  3. Which two accounts are affected?
  4. What type of accounts are these?
  5. Do these accounts increase or decrease?
  6. Are the increases/decreases in debit or credit?
  7. Creating a journal entry
  8. Posting to the T-accounts
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77
Q

Name the four examples of Profit neutral changes in financial situation

Topic:bookkeeping

A
  • Assets swap
  • Liabilities swap
  • Balance extension
  • Balance shortening
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78
Q

Name the two private accounts under equity accounts

Topic:bookkeeping

A
  • Withdrawals
  • Investment accounts
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79
Q

Name the two Income&expense accounts under equity accounts

Topic:bookkeeping

A
  • expense account
  • income account
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80
Q

Given two balance sheets from year 2020 and year 2021, how can you calculate the profit/loss?

Topic:bookkeeping

A

Equity capital Year end 2021 - Equity capital Year end 2020

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81
Q

What are differences between balance sheet and income statements?

Topic:bookkeeping

A

Balance sheet is a Point-of-time calculation, incomePeriod-of-time calculation)

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82
Q

What is the relationship between profit/loss in a balance sheets and income statement?

Topic:bookkeeping

A

in balance sheets, profit/loss is increase/ Decrease in Equity capital

while in income statement, is the net result

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83
Q

What are “Value adjustments”?

Topic:bookkeeping

A

For current assets value adjustments are made if the book value exceeds the time value. Otherwise, the financial situation would be presented properly. (using the so-called strict lowest value principle)

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84
Q

What are requirements for “Deferred income and charges” to be recorded?

Topic:bookkeeping

A
  • Cash inflow/outflow during the reporting period
  • Expense/income during the following period
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85
Q

What are Provisions?

Topic:bookkeeping

A

Debts of the company, created to third parties before or at the reporting date, which are not certain in amount or time of payment yet (e.g. the creditor‘s invoice is still missing), are recorded under the account Provisions. A failure to record these facts would lead to a wrong financial situation.

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86
Q

What happens to private accounts during year end clossing?

Topic:bookkeeping

A

This account is sub-accounts of the equity capital account and is balanced to zero at the year-end closings of the equity account and thereby dissolved.
In the next year it starts at zero with no opening balance

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87
Q

What are the main concerns of financial statement analysis?

Topic:FinancialStatementAnalysis

A

company-specific analysis of the net assets, financial position and results of operations and the decoding of the accounting policies applied by the company.

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88
Q

What is the distinction btween information obtained from the analysis of the net assets and the analysis of the capital structure?

A

The analysis of the net assets is used to obtain information on the development of the** asset structure, asset turnover and business growth, while the analysis of the capital structure provides information on forms of financing** and financing risks.

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89
Q

What insights can we get from analysis of the financial position and liquidity?

A

The analysis of the financial position and liquidity sheds light on the current and future solvency of a company.

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90
Q

What insights can we get from analysis of the results of operations?

A

it shows the company-specific earnings potential, in particular the return on equity generated by an enterprise and the total return on capital.

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91
Q

What are the two groups of stakeholders in F/S Analysis?

A
  • External stakeholders
  • Internal stakeholders
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92
Q

Give 5 examples of external stakeholders in F/S analysis.

A

Stakeholders with contract income
- Creditors
- Suppliers
- Employees

Stakeholders with residual income
- Shareholders
- Stock options eligible

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93
Q

What are the components of financial statements?

A
  • Balance sheet
  • Statement of profit or loss and other comprehensive income
  • Statement of cashflows
  • Statement of changes in equity
  • Notes
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94
Q

Name 3 internal stakeholder groups in F/S analysis

A
  • Management boards
  • Supervisory boards
  • Advisory boards
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95
Q

Which reports are used for strategic analysis?

A
  • Management report
  • Strategy information
  • Environmental reports
  • Sustainability Reports
  • Press releases
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96
Q

Describe the relationship between a company’s target system and the different types of analysis

A
  • Potential for success - You plan potential for success - using Strategic analysis
  • Success - realise the success with biz activity - Measured by Financial Statement Analysis
  • Liquidity - Gain liquidity from this success - Measured by Financial statement analysis.
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97
Q

What are absolute key figures used for?

A
  • used mainly for classification (e.g mid-sized, etc).
  • Can also be used for trend analysis. I.e.: e.g Compared to last year, or Over several years
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98
Q

Name 4 types of relative key figures

A
  • Breakdown figures - comparison of partial sizes to total size
  • Relationship figures - Ratio of different-types of aggregates which are in a logical context.
  • Index figures - useful for representing temporal changes in size
  • Other metrics - Ratios of equally ordered sizes which differ by one characteristic
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99
Q

What is the central question to financial-based analysis?

A

How safe is the future solvency?

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100
Q

What is the central question to Performance-based analysis?

A

What is the future profitability?

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101
Q

What kind of analysis can be done by looking at Asset structure (asset-side)?

A
  • Analysis of the type, composition and binding time of the assets
  • Analysis of the asset turnover
  • Analysis of the investment
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102
Q

What kind of analysis can be done by looking at Capital structure (liabilities-side)?

A
  • Analysis of debt/equity ratios
  • Analysis of the structure and development of equity capital
  • Analysis of the structure and development of debt capital
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103
Q

What kind of analysis can be done by looking at Liquidity structure?

A
  • Analysis of the long-term coverage of capital and assets (Investment coverages)
  • Analysis of short-term liabilities and assets (congruence of time limits)
  • Analysis of the cash flows
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104
Q

What kind of analysis can be done by looking at Earnings- structure?

A
  • Analysis of the cleaned-up operating profit
  • Analysis of the earnings sources and earnings structure
  • Profitability analysis
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105
Q

What is the aim of accounting policy?

A

The accounting policy aims to present the net assets, financial position and results of operations of a company as positively as possible in the annual financial statements as well as in the management report

106
Q

What are the incentives for accounting policy / earnings management?

A
  • Performance-based compensation - Bonuses are usually linked to accounting numbers
  • Raising capital - Cleaning up shop to look neat for investors (e.g at IPO or SEO)
  • Meeting/beating Targets - Can be fueled by rival companies’ figures. You want to look good compared to your competition.
  • Avoid debt covenant violations - Sometimes, money from banks comes with specific performance conditions.
  • Quiet life - When you want everything to be smooth so, you make sure your books are good. This may also mean that your earning are erratic graphically and thus harder for investors to predict the direction of growth.
107
Q

Who are the Audiences (addressees) for accounting policy.

A

External stakeholders:
Stakeholders with contract income (focus on stability i.e credit risk )
- Creditors
- Suppliers
- Employees

Stakeholders with residual income (focus on profitability i.e income risk)
- Shareholders
- Stock option eligible

Internal stakeholders: (they focus on decision making and behavioural control)
- Management boards
- Supervisory boards
- Advisory boards

108
Q

What are the two instruments of accounting policy

A
  • Designing economic facts - Everything that needs to happen before the balance sheet date
  • Presentation of economic facts - Everything that needs to happen after the balance sheet date
  • Appropriation of profits - How we distribute profits
109
Q

Give examples of activities carried our under “Designing economic facts”

A
  • Determination of the balance sheet date
  • Transactions before the balance sheet date
110
Q

Name the options available under “Presentation of economic facts”

A
  • (1) Recognition options
  • (2) Measurement options
  • (3) Discretion in estimates
111
Q

Give examples of activities carried our under “Appropriation of profits”

A
  • (1) Formation and dissolution of open reserves (i.e., retained earnings)
  • (2) Formation and dissolution of silent reserves
112
Q

What Instruments of accounting policy fall under Material accounting policy?

A
  • Determination of balance sheet date
  • Transactions before the balance sheet date
  • Recognition options
  • Measurement options
  • Discretion in estimates
  • Appropriation of profits
113
Q

What Instruments of accounting policy fall under Formal accounting policy?

A
  • Structuring and presentation options
114
Q

What Instruments of accounting policy fall under Publication policy?

A
  • Determination of the F/S publication date
115
Q

Why would a company choose a financial year that deviates from the calendar year?

A
  • Adjustment to the financial year of the parent company
  • Adaptation to seasonal processes in the agricultural, forestry and sports sector
  • Adaptation to the competitive environment - either adapt to competitor’s dates or go with an offset
  • Use of temporary production stops/reductions through regular maintenance and cleaning - E.g when you have some shutdown times of the year
  • Other adjustments to avoid seasonal peaks - e.g Christmas season companies push dates to March.
116
Q

When is a transaction recorded In accounting?

A

When
- Goods are paid for by the buyer, and the seller will deliver. - the flow of cash
- Or Goods are delivered by the seller, and the buyer will pay later. - the flow of goods

117
Q

What is the difference between An obligation transaction transaction ?

A

Obligation transactions (i.e., purchase agreement, rental agreement, loan agreement, etc.) justify commitments between the parties involved.
In the case of a purchase contract, the seller undertakes to hand over the goods/services and the buyer to pay the agreed price.

it is In principle (yet) non-booking-relevant transaction

118
Q

What is a Disposal transaction?

A

The buyer becomes the owner of the goods/services (flow of goods/services) and the seller receives the money (flow of cash). Even within a company, movements of goods/services and cash (i.e., the consumption of raw materials) represent at disposal transactions.

119
Q

Give examples of transactions before the balance sheet date used for accounting policy

A

Financing policy
- Determining the timing of capital increases
- Determination of the optimal level of indebtedness;
- Meaningful scheduling of borrowing
- Sale of receivables (factoring)

Corporate structure policy
- Legal independence of business areas;
- Outsourcing of research and development activities
- Spin-off of production and service sectors;

Innovation
- Decision on in-house or external development
- Pre-postponement of measures for the development of products as well as manufacturing and information technologies

Investment
- Investment in new manufacturing and information technologies
- Purchase, rent, leasing, sale-and-lease-back;
- Logistical optimization of factories;
- Date of replacement investments

Procurement policy
- Date of purchase of raw materials, auxiliary materials and consumables
- Agreement of longer payment terms with suppliers

Production policy
- Targeted production in stock;
- Accelerated completion of long-term contracts;
- Determination of the time of maintenance and repair
- Accelerated completion of long-term contracts;
work on production equipment

Sales policy
- Acceleration of sales;
- Abandoning advertising in the old year;
- Granting shorter payment terms for customers;
- Sale of inventories at special conditions

120
Q

Give 5 examples of measurement options available in accounting policy

A
  • (1) Semi-finished and finished products
    (right to activate administrative overheads in the context of production costs)
  • (2) Similar inventory items
    (method selection in determining the notional acquisition cost)
  • (3) Pension
    (right to vote in the discount interest rate reference period)
  • (4) Property, plant and equipment & Intangible assets (in the case of scheduled depreciation: right to choose linear, degressive, performance-related)
  • (5) Financial assets
    (depreciation choice according to a reduced principle of lower value in case of likely temporary impairment (HGB)
121
Q

What are the two categories of inventory valuation method

A
  • Average methods - An average value is formed from the value of the initial stock and the acquisition cost of the additions.
  • Fictional consumption follow-up methods - For the valuation of the final stock, it is assumed that this consists of certain additions (corresponding to the assumed consumption behavior)
122
Q

Name the two average methods available for inventory valuation

A
  • Simple average method - Average price formation at the end of each period
  • Moving average method - Average price formation after each receipt
123
Q

Name 4 Fictional consumption follow-up methods for valuing inventory items

A

Time oriented
- Last in – First out (LIFO)
- First in – First out (FIFO)

Value oriented
- Highest in – First out (HIFO)
- Lowest in – First out (LOFO)

124
Q

Name 5 causes of Causes of depreciation/amortization/impairment

A
  • Substance reduction - Reduction of the stock of specific raw material resources (i.e., mining, quarrying, gravel plant)
  • Wear & Tear - Usage-related wear and tear Time-related wear and tear, Standstill-related wear and tear
  • Technical overhaul: Possibility of using new, more effective technologies for the same production purpose
  • Economic overhaul: Decreased revenues from plant use, Declining sales and Increase in operating costs
  • Expiry dates: Temporary expiry of acquired intellectual property rights (i.e., patents, licenses, concessions, design protection)
125
Q

Name 5 types of depreciation/amortization/impairment

A
  • Substance reduction
  • Wear & Tear
  • Technical overhaul
  • Economic overhaul
  • Expiry dates:
126
Q

Name 5 Procedures of scheduled depreciation

A
  • Straight-line depreciation: Depreciation in periodic equal amounts
  • Degressive depreciation: Depreciation in periodic decreasing amounts
  • Arithmetic-degressive depreciation: Consistent difference between falling depreciation amounts
  • Geometric-degressive depreciation: Depreciation as a constant percentage of the residual book value
127
Q

Name 5 examples of Discretionary margins

A
  • (1) Provisioning: (according to reasonable commercial assessment)
  • (2) Scheduled depreciation: (distribution over expected useful life)
  • (3) Reduced lower value principle for financial assets (depreciation requirement only in case of likely permanent impairment)
  • (4) Impairment calculations(Unscheduled depreciation) (to fair value)
  • (5) Activation of production costs (including appropriate parts of overheads)
128
Q

How do we recognise virtually certain obligations?

A

Liabilities

129
Q

How do we recognise “uncertain, but
more likely than not” obligations?

A

Provisions

130
Q

How do we recognise “not remote, but also not more likely than not” obligations?

A

Contingent liabilities

131
Q

Where do we disclose contingent liabilities

A

the notes

132
Q

Name Significant examples of provisions

A

~~~

```- Tax provisions: expected, in the amount and timing uncertain tax repayments
- Disposal provisions: Obligations for reforestation, disposal of nuclear power plants or mining
- Pension provisions: Obligations arising from the company’s direct pension commitments to its employees (occupational pensions)
- Warranty provisions: expected in the amount and timing of uncertain payments for warranty services
- Provisions for litigations: expected obligations arising from ongoing litigations
- Other provisions: Annual financial statements and audit costs, Holiday obligations, Social plan commitments

133
Q

Give examples of Structuring and presentation options

A
  • (1) Structure of the profit or loss statement: (total cost method vs cost of sales method)
  • (2) Company-size and -type dependent reliefs: (structuring/presenting the statement of financial position and the statement of profit or loss)
  • (3) Special netting options: (i.e., deferred taxes, plan assets/pension liabilities, Prepayments received for inventories)
  • (4) Formation of valuation units: (i.e., underlying and hedging transactions
  • (5) Individual regulations for structuring/presentations
134
Q

What are the advantages of Financial statement analysis?

A
  • International and company comparisons are only possible with ratios
  • Starting point to analyze a company and to ask further questions
  • No better alternatives for controlling activities
  • In a constant economic environment, the ratios can be a good base for a forecast
  • Ratios and key figure systems clarify and explain economic relationships and dependencies of business activities
  • Useful for a root-cause-analysis
135
Q

What are the disadvantages of Financial statement analysis?

A
  • Ratios normally only meaningful when considered together with other ratios
  • Ratios based on the past and mostly on static figures, that change very quickly
  • Definition of ratios are not legally defined; variations are at the discretion of the company
  • Ratios can be influenced by accounting policy of the company
  • In a changing economic environment, it is difficult to derive a forecast based on past key ratios
  • Time-lag between the year-end-date, the date of publishing the financial statements and the date of analyzing the financial statements
136
Q

Why do we have different accounting systems around the world?

A
  • Culture
  • Legal framework
  • Taxation system
  • Importance of investors and Capital Market
137
Q

Name 4 Types of legal frameworks

A
  • Civil law - developed by Romans based on principles
  • Common law - Developed in England based on judges
  • Islamic law
  • A mix of (civil and common)
138
Q

Why do we need internal standards of IFRS?

A
  • Support cross-border investments
  • A global language for financial reporting - lowers the cost of capital and cost of reporting
  • A trusted source of truth - transparency, accountability, and efficiently
139
Q

Name the 4 groups of accounting standard setters.

A
  • Standard setters. e.g gov’t, IASB
  • Auditors - monitoring compliance
  • Supervisory Authority - check compliance, but after auditors are done
  • Professional association - association for auditors. they define who can be a public auditor
140
Q

Name 3 Standard setters for accounting.

A
  • FASB - USA
  • IASB - International (IFRS)
  • Government
141
Q

name 4 auditing organisations

A
  • KPMG
  • EY
  • Deloitte
  • PWC
142
Q

Name 2 Supervisory Authorities

A
  • SEC
  • BaFin
143
Q

Name 2 Professional associations for accounting

A
  • PCAOB - USA
  • IDW - Germany
144
Q

Who appoints IASB members?

A

IASB members are appointed by Trustees of the IFRS Foundation.

145
Q

To whom are the Trustees of the IFRS Foundation accountable to?

A

Monitory board

146
Q

Describe the process of How IFRS standards are developed (in order)

A
    • Research program - explore issues and identify solutions. Ideas are in a discussion paper, and receive feedback on how to proceed
    • Seek feedback on how to proceed
    • Select which project should make it to the standard-setting phase
  4. Sketch out the standard as draft
  5. Publish draft as exposure for public
  6. Discuss feedback and make changes
  7. Standard has start date.
147
Q

Describe the endorsement process of IFRS in europe.

A

European commission requests EFRAG opinion on IFRS standard.

EFRAG does an impact assesment and the advice is passed back.

The full process is:

1. impact assessment =>
2. Efrag advice=>
3. Commission proposal =>
4. ARC vote =>
5. council and Parliament scrutiny =>
6. endorsement decision

148
Q

What are the 3 endorsement criteria for IFRS standard in the EU?

A
  • Must be understandable, reliable and comparable
  • Not contrary to the tru fair view
  • conducive to the european public good
149
Q

How is IFRS enforced in europe?

A
  • European enforcement is coordinated by the European Securities and Markets authority (ESMA)
150
Q

What are the goals of ESMA

A
  • Promote the conistent application of IFRS
  • Foster convergence of enforcement practices across Europe
151
Q

What tools does the ESMA use to achieve it’s objectives?

A
  • Guidelines, statements and opinions
  • European Common Enforcement Priorities (ECEP) on an annual basis
  • Extracts of enforcement decisions of national enforcers
152
Q

Describe the Differences between IFRS and German GAAP

A

Major principle
IFRS: True and fair view - true financial position of the firm in the financial standing
GGAAP: Prudence - as conservative as possible

Type of standards
IFRS: Rules based + Principles based
GGAAP: Principles based

Fair value orientation
IFRS: High
GGAAP: Low

Statement of performance
IFRS: Income statement + Other comprehensive Income
GGAAP: Income statement

Level of disclosure
IFRS: High
GGAAP: low

153
Q

Name the 3 components of IFRS

A
  • Standards
  • Conceptual Framework
  • Interpretations
154
Q

What is contained in the IFRS component: standards?

A

rules regarding the recognition, measurement and disclosure of certain assets

155
Q

What is contained in the IFRS component: Conceptual Framework?

A

sets out the fundamental concepts for financial reporting. It primarily guides the IASB in developing IFRS Standards, but it also assists companies in developing accounting policies when neither a specific IFRS Standard exists

156
Q

What is contained in the IFRS component: Interpretations?

A

clarifications for some accounting issues. Companies might can also use interpretations of professional associations

157
Q

Describe the basic Structure of an IFRS standard

A
  • Objective - what the standard is about
  • Scope - what is covered by the standard
  • Recognition - Under which conditions do you recognise a transaction
  • Initial measurement - How do you value the item you are entering
  • Subsequent measurement - How do we value the item after it is entered at each date
  • Derecognition - When do you remove the item from the balance sheet
  • Presentation - How do you present the item in a balance sheet
  • Disclosure - What additional info do you need to add about the item in the note
158
Q

What are the Components of an IFRS Financial Statements (IFRS annual report)?

A
  • Statement of Financial Position (Balance Sheet): Consists of assets, liabilities and equity
  • Statement of Performance/ Income Statement: Income Statement consists of income and expenses.
  • Statement of Changes in Equity: Reports how profits, dividends, shares and other items have affected shareholder’s equity
  • Statement of Cash Flows: shows changes in cash
  • Notes: Contains additional information regarding all the above components.
159
Q

What is the definition of current assets according to IAS 1?

A
  • expected to be realised within the entity’s normal operating cycle (=time from buying raw materials until selling finished goods)
  • held primarily for trading
  • expected to be realised within 12 months after the reporting period
  • cash and cash equivalents
160
Q

What is the definition of current liabilities according to IAS 1?

A
  • expected to be settled within the entity’s normal operating cycle (=time from buying raw materials until selling finished goods)
  • held primarily for trading
  • due to be settled within 12 months after the reporting period
  • for which the entity does not have an unconditional right to defer settlement beyond 12 months
161
Q

What are the contents of the Total Comprehensive Income (TCI).?

A
  • Income statement - profit or loss for the period
  • Other Comprehensive Income (OCI) - contains bypass items. Items here do not affect Profit & Loss.
162
Q

Components of a cash flow statement?

A
  • cash flow from operating activities - source and use of funds regarding the core business
  • cash flow from investing activities - shows how a company invest its funds
  • cash flow from financing activities - shows how a company raises cash
163
Q

What are the sections of the “notes”

A

1. the basis of preparation - In this section; a company explains which accounting standards are applied.

2. accounting policies. In this section of the notes, a company explains its accounting policies according to different types of assets.

164
Q

What are the components of equity in the IFRS report

A
  • subscribed capital (share capital) - Capital from selling shares to the public
  • Retained earnings - represents all past profits kept in the business less all past dividends paid and losses. increases by profits and decreases by dividend payments and losses
  • capital reserves - created when a company issues shares at a price higher than their face value. The amount received in excess of the face value is recorded as a share premium reserve.
  • treasury shares - shares which were re-acquired by the issuing company itself.
165
Q

What is subscribed capital?

A

Capital from selling shares to the public
Retained earnings - represents all past profits kept in the business less all past

166
Q

What are Retained earnings?

A

represents all past profits kept in the business less all past dividends paid and losses. increases by profits and decreases by dividend payments and losses

167
Q

What are capital reserves?

A

created when a company issues shares at a price higher than their face value. The amount received in excess of the face value is recorded as a share premium reserve.

168
Q

What are treasury shares?

A

shares which were re-acquired by the issuing company itself.

169
Q

What is the difference between German GAAP and IFRS financial statements?

A

Under German GAAP, the concept of OCI does not exist.

170
Q

What are the two categories of Non-Current Assets?

A

1. Investment property (IP): Held to earn rentals or for capital appreciation. A warehouse is not IP, Office space is not IP, houses kept to be sold by real estate co are not IP. Examples land held for undetermined use, building rented out, land for future usage.

2. Plant, Property and Equipment

171
Q

What are the IFRS conditions for recognising Investment Property?

A
  1. it is probable that the future economic benefits associated with the investment property will flow to the entity, and
  2. the cost of the investment property can be measured reliably.
172
Q

How is Initial measurement determined for Investment Property?

A
  1. Cost of purchase: Purchase price + Import duties and non-refundable purchase taxes (not VAT!) - Trade discounts and rebates.
  2. Cost of construction: Costs of materials + Costs of conversion (including fixed and variable manufacturing overheads)
173
Q

What are the two methods for Subsequent measurement of Investment Property?

A

1. Cost model
Value at the start of a new period (carrying amount) is previous value - depreciation (assuming we use straight-line depreciation)

2. Fair value
the asset is valued at (the current) fair value at the fiscal year-end. We keep measuring the value every year. If the fair value model is used, revaluation changes are recognized in the income statement.

174
Q

Name 3 ways to do depreciation in IFRS

A

Straight line
you lower the original cost each year by the same amount of money until the end of the useful life.

Diminishing balance
depreciation rate = 1 - n√(residual value/asset cost). n = useful life

Units of productions (e.g machine hours)
calculated based on the number of units expected to be produced in a given year. The higher the number of units produced, the higher the depreciation in that year.

175
Q

What is “Discounting cashflows”?

A

Discounting cash flows is a financial analysis technique used to determine the present value of future cash flows. (time value of money)

176
Q

How do we calculate in “Discounting cashflows”?

A

We need:
Risk-free rate + risk = discount factor

then time value of money will be
present value = money received ÷ (1+ discount rate)^y

where y = the year of entry. eg 1 in year 1, 2 in year 2 etc

177
Q

When do we derecognize items of investment property?

A
  • on disposal or
  • when the asset is permanently withdrawn from use and no future benefits are expected through the disposal
178
Q

During disposal of Investments property, any differences between the carrying amount and net disposal proceeds are recognized as …

A

income or expenses

179
Q

What are Property, Plant and Equipment (PPE)?

A

They are Property whose purpose is to use it in the production or supply of goods or services or for administrative purposes or the sale in the ordinary course of business. Are expected to be used during more than one period.

180
Q

What are the IFRS conditions for recognising PPE?

A
  • it is probable that the future economic benefits associated with the item will flow to the entity, and
  • the cost of the item can be measured reliably.
181
Q

How is Initial measurement determined for PPE?

A
  1. Cost of purchase: Purchase price + Import duties and non-refundable purchase taxes (not VAT!) - Trade discounts and rebates.
  2. Cost of construction: Costs of materials + Costs of conversion (including fixed and variable manufacturing overheads)
182
Q

What subsequent measurement methods are allowed by IFRS for PPE?

A
  • Cost model - Value at the start of a new period (carrying amount) is previous value - depreciation (assuming we use straight-line depreciation)
  • Revaluation model - asset revalued at fair value. However, it is only done at a defined frequency e.g every 3 years. This frequency depends on the volatility of fair value.

For revaluation: Also, note that depreciation is measured yearly, similar to the cost method. I.e if the property was bought in 2021 - we depreciate + measure, 2022 - depreciate, 2023 - depreciate, 2024 - depreciate + measure. Increases in value are recorded in the OCI, and decreases in value is recorded in expenses

183
Q

What is an Impairment test?

A

is a check to see if your asset has less value on the market compared to what the books actually say.

184
Q

Where in IFRS is impairment test done?

A

Used in both IP for the cost method and PPE for cost and revaluation methods

185
Q

When should you do an impairment test?

A

only when there is an indication of impairment. Except when you have goodwill

186
Q

What is a Cash Generating Unit (CGU)

A

This is the smallest identifiable group of assets that generate cash inflows that are largely independent of the cash inflows from other assets or groups of assets.

187
Q

What is an Impairment loss?

A

The amount by which the carrying amount of an asset or cash-generating unit exceeds its recoverable amount.

If we do an impairment test, if the value is less than market, then the difference == the impairment loss

188
Q

What are some External Indicators of impairment?

A
  • Fall in market value
  • Material adverse change in the regulatory environment
  • Material adverse change in the market
  • Material long-term increase in market rates of return used for discounting
189
Q

What are some internal Indicators of impairment?

A
  • Material changes in operations, obsolescence or physical damage
  • Major reorganisations
  • Loss of key personnel
  • Loss from operating activities if this is expected to continue or is a continuation of a loss-making situation
190
Q

When is it necesary to Revise your carrying amount?

A

This is necessary when an asset’s carrying amount is greater than the recoverable amount. This situation is called impairment loss.

191
Q

What is the formula for Recoverable value (amount)?

A

if we sell then:
Recoverable value = Fair Value - cost of disposal
or
if we keep and use the asset then
Recoverable value = Value in use: The value you would get from the remaining use of this asset

Cost of disposal can be for example cost of sending the item to the buyer or some fee you need to pay that cuts into your price.

192
Q

When doing subsequent measurement of assets, how can we estimate value in use?

A
  • Use internal forecasts and extrapolations from your current budget
  • We only consider cash-flows from current use (no-restructuring considered)
  • We exclude any taxes and financing activities
193
Q

How do we determine the discount rate (for discounting)

A
  • Use pre-tax discount rate
  • Time value of money
  • Risk specific to the asset
194
Q

When do you Derecognise PPE?

A
  • on disposal or
  • when the asset is permanently withdrawn from use and no future benefits are expected through disposal.
195
Q

What are intangible assets according to IFRS?

A

An intangible asset is an identifiable non-monetary asset without physical substance

196
Q

What are examples of intangible assets?

A
  • Patented technologies
  • Trademarks
  • License (e.g. a tax license), royalties, franchise agreements
  • Computer software and databases
  • Internet domains
  • Video and audiovisual material (e.g. motion pictures, television programs)
  • Customer lists or customer data (e.g. Facebook’s data on its users)
197
Q

What are the conditions for recognising intangible assets?

A
  • it is probable that the future economic benefits associated with the asset will flow to the entity, and
  • the cost of the asset can be measured reliably.
198
Q

name two categories of intagible assets

A
  • Acquired Assets - Probability of economic benefit is assumed by default. Therefore they are always added to the balance sheet
  • Self-generated Assets - special criteria for R&D. see graphic below
199
Q

What are the six criteria for probable economic benefits from an intangible Asset? (a requirement for rec of IA)

A
  • Technical feasibility of completing the intangible asset for use/sale
  • Intention to complete it
  • Ability to use or sell
  • Future economic benefit from selling or using it
  • Availability of adequate technical, financial and other resources to complete development
  • Ability to measure the expenditure
200
Q

What intangible assets are explicitly prohibited from inclusion by IFRS?

A
  • Startup, pre-opening and pre-operating costs
  • Training costs
  • Advertising and promotional costs including mail order catalogues
201
Q

What are methods allowed by IFRS for Subsequent measurement of intangible assets?

A

Cost model: i.e. subsequent measurement at cost less any subsequent accumulated amortisation and any subsequent accumulated impairment losses

Revaluation model: i.e. subsequent measurement at fair value less any subsequent accumulated amortization and any subsequent accumulated impairment losses

202
Q

What are the differences between Subsequent measurement in PPE vs Intangible assets?

A
  • The term amortisation is used instead of depreciation. But concept is the same
  • To apply the revaluation model, we need an active market. An active market cannot exist for brands, newspaper mastheads, music and film publishing rights, patents or trademarks, because such assets are unique [IAS 38.78].
  • There are IA with a definite and indefinite useful life. Indefinite useful life indicates that there is no foreseeable limit to the period over which an IA is expected to generate new cash inflows [IAS 38.88]. I.e. indefinite is not equal to unlimited useful life! Examples of such assets are trademarks because they do not end after a specified period of time (as patents do). In case of indefinite useful life, IAS 38 requires an impairment-only approach, i.e. no amortization and impairment tests annually and upon indications
203
Q

What are inventories according to IFRS?

A

Are assets:
- held for sale in the ordinary course of business (e.g., merchandise)
- in the process of production for such sale (e.g., finished goods)
- in the form of materials or supplies to be consumed in the production process or the rendering of services (e.g., production supplies).

204
Q

What are the requirements for recognition of inventories?

A
  • the asset can be measured reliably and
  • future economic benefits are probable.
205
Q

How is innitial measurement of inventories done with IFRS?

A

Initially measured at Cost.
it can be
Individually
- Cost of purchase
- Cost of conversion
- other costs directly attributable to bringing the inventories to their present location and condition

or in bulk Using cost formulas (bulk cargo or screws). These are costs for items that are ordinarily interchangeable.
- FIFO (First in first out) - Oldest purchases are sold first
- Weighted average - Items valued at weighted average
- Newest purchase sold first

206
Q

Which inventory measurement method is not allowed by IAS2?

A
  • LIFO (Last in first out)
207
Q

How is subsequent measurement of inventories done in IFRS?

A

Inventories are measured at the LOWER of cost and net realisable value.

i.e if cost is lower, we take cost, if NRV is lower, we take NRV

208
Q

What are the steps to measure Net Realisable Value?

A
  • Determine the market value of item
  • Subtract all costs associated with completing and selling the inventory item
209
Q

What are Write-downs?

A

An accounting process that records the reduction of an inventory’s value.

210
Q

Where are write downs recorded In IFRS?

A

Write-downs are recognized in profit and loss statements and are usually determined on an item-by-item basis.

211
Q

What are the conditions for recognition of Provisions?

A
  • There must be a present obligation as a result of a past event;
  • The outflow of economic benefits to satisfy the obligation must be probable (i.e. more than 50% probable).
  • The amount of economic benefits required to satisfy the obligation must be reliably estimated.
212
Q

What are possible types of obkigations that may lead to provisions?

A
  • Legal obligation (e.g. purchase agreements, contracts, court orders.)
  • Constructive obligation (30-day return policy, money-back guarantees)
213
Q

What happens when only partial requirements for recognition of provisions are met?

A
  • Disclose a contingent liability in the notes: a contingent liability is a liability that does not meet the probability requirement of more likely than not.
  • Do nothing if the outflow of economic benefits is not likely (“remote”).
214
Q

How are provisions measure in IFRS?

A
    1. Most likely amount method: This method is suitable in the case of a one-off-event (single obligation), e.g. a provision for a possible loss in a court case).
    1. Probability-weighted expected value method: You would use this method when you have a range of possible outcomes or you measure the provision for a large amount of similar events (e.g. warranties). In this case, you need to weigh each outcome by its probability (for example, warranty repair costs for 10 000 products).
215
Q

What items need to be included when disclosing provisions in IFRS?>

A
  • a brief description of the nature of the obligation and the expected timing of any resulting outflows of economic benefits,
  • an indication of the uncertainties regarding the amount or timing of those outflows
  • the amount of any expected reimbursement, stating the amount of the asset that has been recognised for that expected reimbursement
216
Q

What should be included when in the disclosure of contingent liabilities?

A
  • An estimate of its financial effect;
  • An indication of the uncertainties relating to the amount or timing of any outflow; and
  • The possibility of any reimbursement.
217
Q

What are Contingent liabilities according to IFRS?

A

Def 1: A possible obligation that arises from past events and whose existence will be confirmed only on the occurrence or non-occurrence of one or more uncertain future events which are not wholly within the control of the reporting entity; or

Def 2: A present obligation arising from past events, which is not recognised either because it is not probable that an outflow of resources will be required to settle the obligation, or where the amount of the obligation cannot be measured with sufficient reliability.

218
Q

What are the 4 dimensions (focus areas) of corporate sustainability ?

A
  • Societal
  • Environmental
  • Governance
  • Economical - necessary
219
Q

What are the 3 parts of the EU Sustainable Finance Framework?

A
  • Non-Financial Reporting Directive (NFRD)/ Corporate Sustainability Reporting Directive (CSRD)
  • The EU Taxonomy
  • Sustainable Finance Disclosure Regulation (SFDR)
220
Q

What are the contents of the The EU Taxonomy?

A

Definitions of sustainable economic activities

221
Q

What are the contents of Non-Financial Reporting Directive (NFRD)/ Corporate Sustainability Reporting Directive (CSRD)?

A

They contain Rules and standards for corporate sustainability reporting

222
Q

What is contained in the Sustainable Finance Disclosure Regulation (SFDR)?

A

Rules and standards for sustainability reporting regarding financial instruments and financial institutions

223
Q

What information do companies have to report with The NFRD?

A
  • environmental matters
  • social matters and treatment of employees
  • respect of human rights
  • anti-corruption and bribery
  • diversity on company boards.
224
Q

What improvements does CSRD offer compared to NFRD?

A
  • More detailed disclosed information (e.g. scope 1, 2, and 3 emissions; pollution, water management, waste, etc.)
  • Mandatory audit (assurance) of reported information
  • Reporting based on EU sustainability reporting standards (ESRS).
  • Digital “tagging” of the reported information, so it is machine-readable
225
Q

What other major avenues exist for sustainability reporting?

A

ESG Ratings and Agencies:
For example, the Dow Jones Sustainability Index uses information provided in sustainability reports to construct sustainability measures used to measure a company’s sustainability performance.

Global Goals and Principles:
For example, the Green House Gas (GHG) Protocol published the so-called Corporate Standard, which prescribes accounting rules for GHG reporting. Unfortunately, the GHG Protocol Corporate Standard is not very detailed and out-of-date.

Reporting Standards and Frameworks:
these are sets of rules for sustainability reporting that are more detailed than global goals or EU regulations. E.g The Global Reporting Initiative (GRI), the European Financial Reporting Advisory Group (EFRAG), and the International Sustainability Standards Board (ISSB).

226
Q

Which stakeholders does the Global Reporting Initiative (GRI) work with?

A
  • Investors
  • Policy makers
  • Civil society
  • Labour organisations
227
Q

What is the role of the GRI?

A

The GRI publishes standards that define what companies shall disclose regarding sustainability topics.

228
Q

What are the 3 types of standards in the GRI System?

A
  • Universal Standards
  • Sector Standards
  • Topic Standards
229
Q

What topics are covered in Universal Standards of the GRI?

A
  • Requirements and principles for using the GRI Standards
  • Disclosures about the reporting organization
  • Disclosures and guidance about the organization’s material topics
230
Q

What are “material topics” in the GRI

A

material topics are topics that represent an organization’s most significant impacts on the economy, environment, and people, including impacts on their human rights

231
Q

Describe the 3 step process for determining material topics in GRI

A
  • Step 1: In the first step, a company has to be aware of all of its impacts.
  • Step 2: group these impacts into topics.
  • step 3: rank topics based on the significance of impacts and
    define a reporting threshold, i.e. only topics above this threshold will be reported as material topics.
232
Q

What is the role of EFRAG in in sustainability reporting?

A

EFRAG develops the European Sustainability Reporting Standards (ESRS).

233
Q

Describe the components of The ESRS 3-layer architecture

A
  • Sector-agnostic standards that apply to all sectors.
  • Sector-specific standards that define additional disclosure requirements for specific sectors.
  • Entity-specific disclosures that best illustrate a unique situation of an entity in case such a situation is not properly covered by sector-agnostic and sector-specific standards.
234
Q

The EFRAG develops the ESRS as two sets of standards, what are they?

A

1) cross-cutting standards
define disclosure requirements in strategy and business model, governance and organisation and materiality assessment.

2) topical standards
define disclosure requirements for specific environmental, social and governance topics

235
Q

What is the role of the ISSB

A

International Sustainability Standards Board (ISSB), responsible for developing the IFRS Sustainability Disclosure Standards.

236
Q

Name the two IFRS Sustainability Disclosure Standards.

A
  • IFRS S1 General principles
  • IFRS S2 Climate-related disclosures.
237
Q

What is defined in IFRS S1?

A
  • general disclosure requirements about governance, strategy, risk management and metrics and targets.
  • major principles and concepts.
238
Q

What is defined in IFRS S2?

A

defines specific disclosure requirements that are climate-related.

239
Q

What is Robotic Process Automation (RPA)?

A

A computer software, or a “robot” that emulates and integrates the actions of a human interacting within digital systems to execute a business process. Can be useful for repetitive tasks

240
Q

What are the benefits of RPA?

A
  • 24/7 operations: Non-stop performance
  • Cost reduction: Cost reduction net 30-60% per automated process
  • Speed increase: Turn-around-time decrease (up to 80%)
  • Quality: Increased quality by avoiding human errors and forcusing on exceptions
  • Short payback period: RPA implementation costs are paid off in <12 months
  • Scalability: Capacity can be increased without long build-up phase
  • Internal control: Avoidance of human fraud, easy performance of control and compliance checks
241
Q

What are examples of RPA systems?

A
  • Roborana
  • Automation Anywhere
  • Blueprism
  • UiPath
242
Q

What is Process Mining?

A

Situation where existing data (e.g. ERP system data) is used to visualise business processes.

243
Q

What are the advantages of process mining?

A
  • captures the actual process, not the “gut feeling” of managers.
  • It allows an objective comparison between the actual and target process.
  • Processes are quantifiable through the collection, visualization and analysis of process KPIs.
  • Process mining helps to identify optimisation and automation opportunities.
244
Q

What are the disadvantages of process mining?

A
  • Event logs required, i.e., user must have access to IT system extracts.
  • Manual activities are not taken into account
  • The tool does not provide a suggestion for improving processes.
  • implementation effort is relatively high, especially in terms of feeding all the data and learning how to use the tool and interpret the findings correctly.
245
Q

What are the uses of IOT in accounting?

A
  • Stock taking
  • Carbon emission calculations
  • Estimating depreciation
  • Forecasting utility costs
246
Q

What is a Financial Instrument?

A

Is a contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.

247
Q

What are examples of Examples of financial instruments (both assets and liabilities)

A
  • Cash (in the bank or your drawer)
  • equity instrument of another entity (if the company owns shares of another company)
  • a contractual right to receive cash (e.g when you sell goods)
  • Contractual right to exchange financial liabilities (e.g options and forwards)
248
Q

What are xtics of a Derivative?

A
  • Its value changes in response to the change in a specified underlying asset which can be an interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index, or other variables, provided in the case of a non-financial variable that the variable is not specific to a party to the contract (sometimes called the “underlying”).
  • it requires no initial net investment or an initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factors.
  • It is settled at a future date.
249
Q

What are examples of derrivatives?

A
  • options
  • forwards
250
Q

What are the two types of options?

A
  • Put - financial contracts giving the buyer of the put option the right to sell the underlying asset at a fixed price within a certain period of time or at a specified future date.
  • Call - contracts giving the buyer of the call option the right to buy the underlying asset (e.g., stocks, bonds, commodities, etc.) at a fixed price within a certain period of time or at a specified future date.
251
Q

What is the difference between a forward and an option?

A

forwards differ from options because they are both a right and an obligation. In other words, if you have an option, you CAN buy or sell the underlying asset under specified conditions; if you have a forward, you MUST buy or sell the underlying asset under specified conditions.

252
Q

1.

What is a Financial liability?

A
  • a contractual obligation to deliver cash or another financial asset to another entity
  • a contractual obligation to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavourable to the entity.
253
Q

In IFRRS when are financial instruments recognised?

A

All financial instruments are recognised when the entity becomes a party to the contractual provisions of the instrument.

254
Q

What are the possible Classifications of financial instruments during recognitions?

A
  • Debt instruments - contractual obligations of the issuer to repay the lender in accordance with a specified maturity and under the contractual terms. (e.g. bonds)
  • Equity instruments are contracts that act as legally recognised evidence of ownership rights in an enterprise.
  • Derivates (derivative) - we already talked about this up there
255
Q

How are financial instruments innitially measured?

A

All financial instruments are initially measured at fair value plus or minus transaction costs.

EXCEPTION: If the financial instruments are initially measured with “Fair value through profit and loss” FVTPL. Then we measure fair value ONLY (i.e. without minus or plus transaction cost. In this case, all occurred transaction costs are expenses/income)

256
Q

How are Equity instruments Subsequently measured in IFRS?

A

Depends on the use:

if for trading then FVTPL
if Not the FVTOCI option is given, if choice is taken then FVTOCI applies else FVTPL applies

257
Q

Describe measurement with In FVTOCI

A
  • Re-valued every year at fair value
  • Both increase (profit) and decrease(loss) in fair value are recorded in OCI
258
Q

What are the conditions for using FVTOCI?

A

Conditions of use:
- Equity investment not held for trading
- Decisions to measure at FVTOCI is irrevocable after initial measurement

259
Q

Describe measurement with In FVTPL

A
  • Re-valued every year at fair value
  • Both increase(profit) and decrease(loss) is recorded in the income statement
260
Q

How are derivatives subsequently measured?

A

The subsequent measurement of derivatives is always at fair value through profit and loss (FVTPL)

261
Q

How are debt instruments subsequently measured?

A

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