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1
Q

How to know if something is equity or financial liability

A

If obligated to pay cash then it is a liability if option to pay cash then usually equity

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2
Q

What is the definition for financial assets

A

Equity investments in another company or contractual rights to receive cash

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3
Q

What is the definition for financial liability as in financial instruments

A

Contractual obligation to deliver cash

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4
Q

What is the definition for equity as in financial instruments

A

Residual interest in assets after deducting the liabilities

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5
Q

What does it mean when question say issue

A

It means that they are issuing either liability e.g. debt or equity e.g. shares for something in return usually cash

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6
Q

Steps for impairments

A

Must be an impairment indicator or annually if goodwill or intangible has infinite life

Impair the cash generating unit which is an independent stream of income

Compare carrying amounts versus recoverable amount

Loss goes into profit and loss

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7
Q

Types of rights when considering control

A

Protective rights
New control e.g. managing articles of association

Substantive rights
Right to the have power over investees

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8
Q

How is FRS 102 difference to IFRS

A

PPE
Rather than annual reviews for impairments it’s only when indicators for change are present

Borrowing costs
Can be expense rather than capitalised

Subsidiaries
Can be excluded from consolidation when either long-term restrictions hinder parents over subsidiaries assets or the subsidiary was acquired solely for resale and hasn’t been used in the consolidated accounts

Intangibles
Can choose not to capitalise and Does not have indefinite life. Must be less than 10 years

Goodwill
Use proportionate share method and amortised over life not exceeding 10 years

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9
Q

What is a cash generating units

A

It is the smallest identifiable group of assets which is an independent stream of income

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10
Q

How to account for subsidised loan on adjusted present value

A

Firstly calculate the tax shield and then calculate the subsidiary benefits

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11
Q

Points to consider with debt versus equity

A

Debt is cheaper due to tax shield since interest is paid before a company pays its corporation tax

More debt equals more risk so cost of capital is higher

The cost of capital is higher weighted average cost of capital is lower

Static trade of theory looks to find a balance

Pecking order theory. First retained earnings second debt third equity

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12
Q

What are the two types of applications within provisions

A

Legal and constructive (past practice aka if paid for similar issues in past they should continue to do so)

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13
Q

What are the conditions for something to be capitalise as development

A

Sell or use
Expense e.g. measure costs reliably
Commercially viable
Technically feasible
Overall future economic benefits
Resources to complete

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14
Q

What is the concentration test

A

If the fair value of gross assets is concentrated within one assets that it is not a business

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15
Q

How should a contingent liability be valued at

A

The percentage amounts multiplied by the contingent liability amount and then discounted to present value

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16
Q

What are operating segments

A

It is disclosing segments of the business which is material so users of accounts can see which areas are influential

To qualify
More than 10% of total revenue. If not then
More than 10% of total profits. If not then
10% of total assets
Overriding rule is 75% of revenue must be separated out if not then more segments need to be disclosed

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17
Q

What is a provision

A

Present obligation as a result of past events

Probable transfer

Measure outcome reliably

Credit provisions debit profit and loss

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18
Q

How to recognise a lease

A

Initially
Debit right to use assess at amount Of lease liability plus costs
Credit lease liability which is the present value of lease payments over term

Subsequently
Right to use assets at cost less accumulated depreciation
Lease liability at financial liability at amortised cost

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19
Q

How to identify a lease

A

The right to control the use of an identified asset For a period of time in exchange for consideration.

Control is defined as the right to direct use of asset and to obtain substantially all of the economic benefits.

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20
Q

How to record lease through P&L rather than statement of financial position

A

Either less than 12 months lease

Or low value leases e.g. under £5000

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21
Q

How to account for equity based options

A

We take the star value at the grants dates and don’t change as movements in share price of benefits for the employee. We spread it out over the vesting period. For example if we had 10,000 share options for five of its directors and they have to stay in the position for three years(three-year vesting period) and after one year to directors will leave and after two years one director will leave and the grant date price is $30 then

Year one
SFP 300,000 (10,000 x 30 x 5-2 x 1/3)
P&L 300,000

Year 2
SFP 800,000 (10,000 x 30 x 5-1 x 2/3)
P&L 500,000 (b)

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22
Q

How to account for cash base share based options

A

The same as equity base options however we credit liability and not equity and the fair value is calculated at each reporting date rather than just the grant date

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23
Q

What are the dates to remember with ShareBase payment

A

Grant date - today

Vesting date - number of years from grant date and when employees are entitled to share option/cash

Vesting period - difference between grant and vesting date

Exercise date - when employees receive payment

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24
Q

What we impairment indicators

A

External
Decline in market value
Advancement in technology

Internal
Physical damage
Use of item (idle)
Operating losses from item
Loss of key personal

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25
How to record investment property
Valued at cost then revaluation. Gain and losses go through P&L as like rental income and don’t depreciate.
26
How to recognise government grants
Recognise when received or comply with conditions Recognised as deferred income E.g. bought PPE for £10 million over 10 years and given a government grant of £2 million. Each year 1/10 of 10, million and 2 million goes into profit and loss
27
Disposing of a foreign subsidiary
Gains and losses are stripped out of OCI and go through PL
28
How to record foreign transactions (group)
Before consolidating record both monetary and nonmonetary transactions at closing rate gains and losses are not recorded in PL But OCI instead
29
How to record foreign transactions (individual accounts)
Record transaction at rate when transaction occurred At reporting date If monetary re-translate at closing rate with difference going through PL Non-monetary don’t re-translate
30
What is the retained earnings pro forma
100% of parents Parents share of subsidiary post acquisition retained earnings Parents share of associates post acquisition retained earnings Less impairments
31
What must be stripped out of consolidated accounts
Unrealised profits Intracompany group sales and cost of sales
32
How to account for bond with anticipated credit loss
As it’s a financial asset initially at fair value plus cost. Let’s say a $10,000 credit loss is expected but it is low risk we credit allowance for impairments accounts to offset as it’s the amount for one year. For next year recognise bond as normal at amortised cost and if risk increases increase allowance account further.
33
How to accounts for impairments of financial assets
It would credit allowance for impairments (bad debt provision) and debit PL. The amounts depends on the risk factor. Stage one Initial recognition when no subsequent significant deterioration in credit quality. Present value of expected credit losses 12 months after reporting date. Stage two Significant deterioration in credit quality (30 days arrears). Impairment recognise at present value of expected credit shortfalls (lifetime expected credit losses) Stage three Objective evidence of an impairments. Again lifetime expected credit losses
34
Went to classifies something as discontinued operation
When it is disposed of Or if house for sale and: Separate major line of business or geographical area Single coordinated plan Subsidiary acquired exclusively with plan to resell
35
What is meant by the discontinued operation
Within the numbers of revenue cost of sales profit et cetera will be discontinued operation and to ensure use a spotted this we had a line in PL
36
How to account for non-current asset held for sale
Must be available for immediate sale and sell highly probable (less than one year) It is valued at lower of carrying value and fair value less cost of sale Once classified as non-current asset health for sale if there is no longer depreciated Sale goes through PL
37
How to account for a foreign currency assets owned by a subsidiary
Imagine subsidiary deals in euros when we first acquire subsidiary with value assets at fair value and also convert to pounds on date of acquisition. We then depreciates/amortised over life of assets then we we calculate exchange rate reporting date using the closing rate and foreign exchange differences go through OCI. Income and expenses are translated as exchange rate at date of transaction
38
What is the definition of functional currency
Currency of the primary economic environment in which the entity operates. Factors to consider – Currency that dominates determination of sale price Currency that most influences operating costs
39
What is an intangible assets
An identifiable non-monetary assets without physical substance. Identifiable means it is either separable or has legal/contractual rights
40
How is control defined within a subsidiary
Power over the investee Exposure to all rights to variable returns from its involvement with investee Ability to use its power over investment to affect amount of investors return
41
What is the definition of fair value
The price that would be received to sell an asset or paid to transfer liability in an orderly transaction between market participants at the measurement date
42
How to identify performance obligations
If the goods and services are distinct (could be sold separately) if not must be bundled This means they are separately identifiable Also customers can gain benefits from the performance application. E.g. if you buy a license and the license comes with updates then it would be considered as a bundle because without the updates the customer would not receive the correct level of benefit
43
What is pro forma for no control into control
Do you recognise currents 40% back to Nil Recognise 40% at fair value and difference goes through PL Usual pro forma from there
44
What is the pro forma for equity accounting
Cost + percentage of post acquisition reserves - dividends received
45
What is the pro forma from going from control to control
All that changes is NCI either increases or decreases so debit/credit bank and debit/credit NCI movements and difference goes through SOCIE
46
How are subsidiaries included in the statement of financial position
Net assets plus Goodwill
47
When can deferred tax assets be utilised
Deferred tax asset is when the tax base is higher than the carrying value I can only be recognised when profits are realistically expected in the future
48
How to work out deferred tax
What is the difference between carrying value and tax base Multiplied by tax rate Is it asset or liability (if carrying value is greater than tax base it’s a liability and vice versa) Movements goes through PL (income tax expense and deferred tax provisions)
49
How to deal with convertible loans
Let’s say we issue $1 million loan with a nominal value of $100 Similar debt is 6% effective rate is 6.34%. Firstly debits cash $99 million and split out of credit to equity (balancing figure) and liability. To get liability work out the net present value so let’s say three years at 6% plus $100 nominal With discount factor of 6% is $94.7 million we take the 99,000,000×94.7% to give liability and difference to equity. No equity doesn’t change but we do usual table to get carrying forward position of $100 million after three years and the end of period either credit cash or equity as well as debit liability
50
How to account for financial liabilities
Initial measurement is fair value less transaction costs Subsequently via amortise costs (use table)
51
How to accounts for a debt instruments within financial assets
Use the amortisation table
52
How to account for financial assets within financial instruments
Initially recognised at fair value plus transaction costs. Then subsequently Each year we value of fair value and the gain or loss expense movement PL unless IRREVOCABLE elect to put through OCIas less volatile. This is for equity instruments like shares and amortised cost if debt instrument like lending money
53
What is the pro forma from control to no control
Add sale proceeds and fair value of remaining shares Less net assets plus goodwill less noncontrolling interest
54
What is the recoverable amount
Higher of fair value less cost to sell and value in use
55
What are examples of revenue recognition at a single point in time
Present right to payments for the assets Transfer legal title of the assets Transferred physical possession of the assets Transferred the risks and rewards of ownership to the customer Customer has accepted the asset
56
Requirements for identifying a contract
The contract is approved by all parties The Rights and payment terms can be identified The contract has commercial substance It is probable that revenue will be collected
57
How to workout revenue when there is free interest (usual interest 5%)
Let’s see a car then we discount the value of the car by the number of years of free interest and the usual interest rate. This amount and then goes into revenue and then each year we unwind the amount and put it in finance income
58
How to accounts for revenue that has a bundle price
Set up two columns. First column call individual and second column called bundle. In the rose put the difference items within the performance application and sports in the individual prices with a total at the bottom. The total of the bundle amounts put in what the bundle amount is and then divide the individual amounts by the total individual amount multiplied by the bundle total. You will notice that if you add all the bundles up they should come to the total bundle amount
59
How to define over A period of time within revenue recognition
If the customer simultaneously consumes the benefit of the performance
60
What are the areas of sustainability
Environmental conduct Social conduct
61
What are the asset recognition rules
If virtually certain recognise the asset If probable disclose If possible ignore
62
What are the liability recognition rules
If probable create a provision If possible disclose in the notes
63
What are the levels within fair value
Level one input Quoted prices in active markets for identical assets and liabilities Level two input Inputs of the quoted market prices: Quoted prices for similar assets or liabilities in active markets Quoted prices for identical assets in markets that are not active Inputs other than quoted prices that are observable e.g. interest rates Level three input Unobservable imports where there is little if any active market
64
What are the liquidity ratios
Current ratio Quick ratio
65
What are the efficiency ratios
Receivables collection Inventory holding Payable days
66
What are the gearing ratios
Debt to equity Debt to debt and equity Operational gearing
67
What are the investor ratios
Dividend cover David and yield Interest cover Interest yield Earnings per share Price earnings ratio
68
What are the profitability ratios
Return on capital employed Operating profit margin Gross profit margin Asset turnover
69
What is return on capital employed
PBIT / capital employed
70
What is asset turnover
Revenue / capital employed
71
What is debt to equity ratio
Non current liabilities / ordinary shareholder funds
72
What is operational gearing
Contribution / PBIT
73
What is the dividend cover
Profit after tax / total dividend
74
What is dividend yield
Dividend per share / share price
75
What is interest cover
PBIT / interest
76
What is interest yield
Coupon rate / share price
77
What is earnings per share
Profit after tax - preference shares / number of shares
78
What is price earnings ratio
Share price / EPS
79
What are the two types of leases for the lessor
 Finance lease If risks and rewards of ownership transfer to Lessee Operating lease Any other lease other than finance lease. Risks and rewards have not been transferred. Continue to recognise asset and depreciate etc and money receive is just rental income which is expensed
80
What are the two types of leases for the lessor
Finance lease Risks and rewards of ownership transfer to Lessee. As no longer control asset, derecognise asset and recognise a receivable Operating lease
81
Examples of finance lease
Ownership passes at the end of lease term Option to purchase assets below fair value at end of lease Lease term represents the major part of the assets economic life Present value of minimum lease payments represent substantially all of the assets fair value Lease assets is specialised in nature
82
Difference between principal and agent
An agent is like an intermediary so we should only book the commission as revenue. For example if a third-party buys goods and we are invoiced for those goods however we then also invoice the third-party with a management fee on top for those goods sent as agents which the only recognise the management fee in the PL
83
What is an onerous contract
Where costs exceed revenues Provision would be the lower of costs of performing contact and costs of cancelling contact
84
What information do investors expect from financial statements (framework) (characteristics of financial information)
Fred ran under the Chelsea viaduct Faithful representation, relevance, understandability, timeliness, comparability, verifiability
85
What are the types of hedge accounting
Fair value hedge Relevant to a business who is concerned about fair value of recognised asset. Gains or losses go to pl Cash flow hedge Concerned about cash flows from highly probably future transactions. Gains or losses on derivative go to OCI

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