Part C5-11: Reporting The Financial Performance Of Entities

Question 1

Types of post employment benefit plans

Answer 1

Defined contribution
- company promises to pay fixed contributions into a pension fund for the employee and has no further obligations

Defined benefit
- obligation to pay a defined pension

Question 2

Past service cost - definition and treatment

Answer 2

This is the change in the pension plan resulting in a higher pension obligation for employee service in prior periods

Should be recognised immediately

Dr income statement
Cr pension liability

Question 3

Current service cost - definition and treatment

Answer 3

Increase in pension liability due to benefits earned by employee service in the period

Dr income statement
Cr pension liability

Question 4

Interest cost on pension - definition and treatment

Answer 4

The unwinding on the discount of the pension liability

Dr interest
Cr pension liability

Question 5

Contributions to pension fund accounting treatment

Answer 5

Dr pension asset

Cr cash

Question 6

Benefits paid accounting treatment

Answer 6

Dr pension liability

Cr pension asset

Question 7

Termination benefits - when to recognise

Answer 7

Amount payable only recognised when committed to either

• terminating the employment of employees before the normal retirement date; or
• providing benefits in order to encourage voluntary redundancy

Discount down if payable in future

Question 8

Any pension asset recognised should be valued at..

Answer 8

The lower of
- the net total calculated
AND
- the net total of
i) past service costs not recognised as an expense
And
ii) the PV of any economy benefits available in the form of refunds from the plan or reductions in future contributions to the plan

Question 9

Defined contribution plan

Answer 9

The enterprise pays fixed contributions into a fund and has no further obligations

Contribution payable is recognised in the income statement for that period

If contributions are not payable until after a year they must be discounted

Question 10

Curtailments - definition and treatment

Answer 10

An amendment made to the plan which improves benefits for plan members

An increase to the obligation (and expense) is recognised when the amendment occurs

Dr P&L
Cr PV of defined benefit obligation

Question 11

Settlements - definition and treatment

Answer 11

A settlement eliminates all further obligations

The gain or loss on a settlement is recognised in P&L when the settlement occurs

Dr PV of obligation (as advised by actuary)
Cr FV plan assets transferred
Cr cash (paid directly by entity)
Cr/Dr profit or loss

Question 12

The Asset ceiling test

Answer 12

The net pension amount can’t be shown at more than its recoverable amount

So any net pension asset gets measured at lower of:
- net reported asset
Or
- PV of any refunds/reduction of future contributions available from the pension plan

Impairment loss charged immediately to OCI

Question 13

What tax rate to use for unrealised profit adjustments?

Answer 13

IAS12 says to use the tax rate of the buyer

Question 14

When to recognise a provision and at how much?

Answer 14

• there is an obligation (constructive or legal)
• there is a probable outflow
• it is reliably measurable

For a large population of items use expected values
For a single item the most likely outcome may be the best estimate

Question 15

Contingent liabilities definition

Answer 15

A disclosure in the accounts

They occur when a potential liability is not probable but only possible

Or when not reliably measurable

Question 16

Contingent assets definition

Answer 16

Prudence is important here!!

Must be virtually certain rather than just probable

Question 17

Contingent liabilities probability test

Answer 17

Remote chance of paying - do nothing
Possible chance - disclosure
Probable chance - create a provision

Question 18

Contingent assets probability test

Answer 18

Remote chance - do nothing
Possible chance - do nothing
Probably chance - disclosure
Virtually certain- create an asset in the accounts

Question 19

Specific types of provisions

Answer 19

Future operating losses

Onerous contracts

Restructuring

Question 20

Should we provide for future operating losses?!

Answer 20

No as there is no obligation

Question 21

When to create a provision for restructuring

Answer 21

When there is a detailed formal plan
AND
There is a valid expectation in those affected that it will carry out restructuring by starting to implement a plan or announcing it

Provide only for costs that are

• necessarily entailed by the restructuring
• not associated with the ongoing activities of the entity

Question 22

Should there be a provision?

1 Warranties

2 Major repairs

3 Self insurance

4 Environmental contamination clearance

5 Decommissioning costs

6 Restructuring

7 Reimbursements

Answer 22

1 Yes as legal obligation. Expected values

2 No. treated as replacement NCAs

3 No. no obligation

4 Yes if legally required or if other parties would expect it as known policy

5 Yes as a debit to asset

6 Yes if formal plan in place (don’t provide for training/marketing etc)

7 only when virtually certain

Question 23

When is the after the reporting date period?

Answer 23

Anytime between the period end and the date that the accounts are authorised for issue

Question 24

The types of share based payments

Answer 24

1 Equity-settled share-based payment

2 Cash-settled share-based payment

3 Transactions with a choice of settlement

Question 25

Equity settled share based payments treatment

Answer 25

Dr expense | Cr equity

Question 26

Cash settled share based payments treatment

Answer 26

Cash is paid based on share price Dr expense Cr liability

Question 27

Vesting period definition

Answer 27

Often share based payments are not immediately payable. The expense is spread over the period. This period is the vesting period

Question 28

How much to recognise for share based payments

Answer 28

Option 1: Direct method - use the FV of the goods or services received Option 2: Indirect method - use the FV of the shares issued by the company For equity settled - use FV of shares @ grant date For cash settled - update FV of shares each year IFRS 2 suggest using option 1 unless FV cannot be reliably measured

Question 29

Modifying equity instruments - accounting treatment

Answer 29

1. Continue to recognise the original FV of the instrument in the normal way 2. Recognise any increase in FV at the modification date (or any increase in number of instruments granted) spread over the period between modification date and vesting date 3. If modification occurs after vesting date, additional FV must be recognised immediately, unless there is an addition service period

Question 30

Equity instruments cancellations and settlements - accounting treatment

Answer 30

Charge any remaining FV immediately in P&L Any amount paid to the employees by the entity on settlement should be treated as a buyback of shares and should be recognised as a deduction from equity If the amount of the payment is in excess of the FV of the equity instrument granted, it should be recognised immediately

Question 31

Cash settlement made to an employee on cancellation- accounting treatment

Answer 31

Dr equity Dr IS Cr cash

Question 32

Share-based payments - which do you apply to IFRS 2?

Answer 32

Applies to all entity’s (incl private or small) Only when shares are issued in return for goods and services only ``` Share appreciation rates Employee share purchase plans Employee share ownership plans Share option pans Plans where share issues depend on certain conditions ```

Question 33

The FV hierarchy

Answer 33

Level 1 inputs - quoted prices in accessible active markets for identical assets - the most reliable and used without adjustment Level 2 inputs - observable inputs (other than quoted market prices) - include quoted prices for similar assets in active markets, inputs corroborated by observable market data (I.e. correlation) Level 3 inputs - unobservable inputs for the asset

Question 34

Most advantageous market definition

Answer 34

The market that maximises the amount received (after transaction costs and transport costs)

Question 35

Principle market definition

Answer 35

The market with the greatest volume and level of activity

Question 36

The three valuation techniques

Answer 36

Market approach - uses prices generated by market transactions of identical or comparable assets Income approach - converts future cash flows to a sing current (discounted) amount Cost approach - the amount needed to replace the device capacity of an asset (current replacement cost)

Question 37

Examples of simplifications for IFRS for SMEs

Answer 37

- Goodwill and other indefinite life intangibles are amortised over their useful lives, but if it cannot be reliably estimated then 10 years - simplified calculation is allowed if measurement of a defined benefit pension plan obligations in old undue cost or effort - cost mode is permitted for investments in associates and JVs

Question 38

IFRS for SMEs

Answer 38

More user friendly Easier transition to full IFRS Cost benefit improvement by relaxation of some measurement and recognition criteria Stewardship not so important May improve access to capital

Question 39

IFRS for SMEs- research and development and borrowing cost treatment

Answer 39

All research and development costs and all borrowing costs are recognised as an expense

Question 40

IFRS for SMEs- NCAs and goodwill treatment

Answer 40

Cost model only All intangible assets including goodwill are assumed to have finite lives and are amortised

Question 41

When can you recognise a government grant?

Answer 41

When there is reasonable assurance that: - entity will comply with any conditions attached - the grant will be received

Question 42

IAS 20 (government grants) does not apply to the following conditions

Answer 42

- tax breaks from the government - government acting as part owner of the entity - free technical or marketing advice

Question 43

Accounting for government grants approaches

Answer 43

Capital grant approach Income grant approach

Question 44

Capital grant approach - accounting for cr cost of asset

Answer 44

Dr cash Cr cost of asset Will reduce depreciation to the income statement and the asset on the SFP

Question 45

Capital grant approach- accounting for cr deferred income

Answer 45

Dr cash Cr deferred income Will keep full depreciation and full asset and liability on the income statement and SFP respectively Then Dr deferred income Cr income statement (over life of asset)

Question 46

Non-monetary government grants

Answer 46

Use FV to put a value on asset gifted

Question 47

Accounting treatment for capital grant repayment

Answer 47

Dr any deferred income balance or cost of asset Dr income statement with balancing figure Cr cash amount repaid Any extra depreciation to date should be recognised immediately as an expense

Question 48

Accounting treatment for income grant repayment

Answer 48

Dr income statement | Cr cash

Question 49

Income grant approach - accounting treatment

Answer 49

Dr cash | Cr other income (or expense)

Question 50

Minimum content of an interim financial report

Answer 50

``` Condensed balance sheet Condensed income statement Condensed statement of changes in equity Condensed cash flow statement Selected explanatory notes ```

Question 51

Accounting policy definition

Answer 51

Specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting the financial statements

Question 52

When to makes changes to accounting policy

Answer 52

If it is required by a standard or interpretation If it would give more relevant and reliable information

Question 53

What to change for changes in accounting policy

Answer 53

Adjust the comparative amounts for the affected item Adjust the opening retained earnings

Question 54

Accounting estimates definition

Answer 54

An adjustment of the carrying amount of an asset or liability, or related expense, resulting from reassessing the expected future benefits and obligations associated with that asset or liability

Question 55

Examples of accounts estimates

Answer 55

Allowance for doubtful debt Inventory obsolescence A change in the estimate of the useful economic life of PPE

Question 56

Examples of accounting policies

Answer 56

Valuation of fixed assets Depreciation methods Recognition of goodwill Inventory valuation

Question 57

Accounting treatment for post period errors

Answer 57

Adjust the comparative amounts for the affected item Adjust opening retained earnings