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Question

Describe Level 3 inputs:

Answer 1

Level 3 inputs: - “unobservable inputs for the asset or liability” * Data may come from the entity itself - adjust for factors that market participants may build into the valuation - Eliminate effects specific to the entity but not relevant to other market participants * Example: - Cash-generating units - financial forecast of cash flow or earnings based on the entity’s own data

Answer 2

IASB Conceptual Framework 2010 (New approach): * Fundamental qualitative characteristics: * Relevance * Faithful representation * Comparability * Verifiability * Timeliness * Understandability * Relevance - Financial statement should be relevant by providing information that users of financial statements need at the the time being. The information is capable of making a difference to users decisions. Information can be relevant but unreliable if provided to early. However, information can be reliable but not relevant if provided too late. There is therefore a conflict with reliability and and relevance in regards to timeliness. - Important qualitative characteristic to relevance: materiality --> Only information that can make a difference to users decisions should be recognized. * Faithful representation - Useful information “must also faithfully represent the phenomena that it purports to represent” (IASB CF QC12) - Three characteristics of a faithful representation * complete, neutral and free from bias * Comparability: Financial statements should be prepared on a consistent basis to facilitate comparability. Users must be able to compare financial statements of the same entity through time and of different entities. Changes in accounting policies should be disclosed according to IAS 8 to facilitate comparability. * Verifiability: - Knowledgeable and independent observers could reach consensus, but not necessarily complete agreement, that a depiction is a faithful representation * Timeliness: - Information to be available to decision-makers in time to be capable of influencing their decisions * Understandability: - The information should be understandable by users - Users are assumed to have a reasonable knowledge of business and economic activities and accounting and a willingness to study the information with reasonable diligence - Information should be classified, characterized and presented clearly and consistently

Answer 3

* Revenue is not defined in the CF - Consists of sales, fees, interest, dividends, royalties, rent * A definition of revenue is found in IAS 18 Revenue §7 – consistent with the CF definition of income * But it further describes revenue as the gross inflow of economic benefits... * Revenue to be recognized when (CF § 4.47 on income): - An increase in FEB’s related to an increase in an asset (=accounts receivable) has arisen that can be measured reliably (=goods have been delivered)

Answer 4

“an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time” (IAS 17 paragraph 4)

Answer 5

A finance lease is a lease whicht ransfers substantially all ownership risk and rewards, with or without eventual title transfer - Risks of ownership include – obsolescence, loss on sale - Rewards of ownership include – use of asset, gains on sale

Answer 6

* Measurement can have important effects on the economic decisions made by users * A number of different measurement bases may be used for assets, liabilities, income and expenses in varying degrees and in varying combinations in financial statements (IASB CF para 4.55)

Answer 7

Historical cost * An asset is recorded at the amount of cash paid to acquire it at the acquisition date . * Liabilities are recorded at the amount of proceeds received in exchange for the obligation * Current cost * Assets are carried at the amount of that would have to be paid if the same or an equivalent asset was * Liabilities are carried at the undiscounted amount of cash that would be required to settle the obligation currently * Often referred to as replacement cost * Realizable (settlement) value * Assets are carried at the amount of cash that could currently be obtained by selling the asset in an orderly disposal * Liabilities are carried at their settlement values; that is, the undiscounted amounts of cash expected to be paid to satisfy the liabilities * Present value * Assets are carried at the present discounted value of the future net cash inflows that the item is expected to generate * Liabilities are carried at the present discounted value of the future net cash outflows that are expected to be required to settle the liabilities

Answer 8

* To assist the Board (IASB CF 2010 page 6): * in the development of future IFRSs and in its review of existing IFRSs; * in promoting harmonization of regulations, accounting standards and procedures relating to the presentation of financial statements by providing a basis for reducing the number of alternative accounting treatments permitted by IFRSs; * To assist national standard-setting bodies: * in developing national standards; * To assist preparers of financial statements: * in applying IFRSs and in dealing with topics that have yet to form the subject of an IFRS; * To assist auditors: * in forming an opinion on whether financial statements comply with IFRSs; * To assist users of financial statements: * in interpreting the information contained in financial statements prepared in compliance with IFRSs; * To provide those who are interested in the work of the IASB with information about its approach to the formulation of IFRSs.

Answer 9

* Accrual basis * Effects of transactions and other events are recognized when they occur (and not as cash or its equivalent is received or paid) * They are recorded in the accounting periods and reported in the financial statements of the periods to which they relate * Recognise an element when it satisfies the definition and recognition criteria * Compare with matching concept: * The matching of revenues with the expenses incurred in earning that revenue * Difficult to keep apart. Example: * The revenue of $100 from selling an item of inventory of $70 is recognised 28 December. Accounts prepared 31 december will include profit of $30 and an asset of $100 (cash) * Instead the revenue $100 is recognised on 2 January. So is the expense of $70. The accounts for 31 December will include an asset of $70 (inventory), no revenue and no expense

Answer 10

Traditional accounting conventions * Continuity (is when the company is going concern, not quitting – depreciation) - Unless evidence to the contrary, the busines will continue into the indefinite future * Conservatism (prudence) - Recognize all possible losses but not anticipate possible gains - Prudence – Not recognize all gains, be careful and safe. Losses are important but gains must be valued carefully. Not giving numbers that are too optimistic. IASB are however saying to corporates to be neutral, not to recognize too many risks. * Consistency - Apply the same accounting rules, methods or procedures in each similar case, year by year → important for comparability - Avoid manipulation of reported results *Materiality - Auditors set the level of the audit. * Objectivity - Qualified individuals working independently should arrive at the same conclusions from the same evidence. → If all users can think that the information is giving a true picture. * Matching - The matching of revenues with the expenses incurred in earning that revenue. Is not done in Sweden.

Answer 11

Prudence in national GAAP that is creditor oriented is of greater importance than in national GAAP that is shareholder oriented. This is due to the fact that the financing from creditors usually involves banks and financial institutes. The main concern for these shareholders is whether or not the company will be able to repay their debt and therefore prefers a more prudent presentation of the company's assets (e.g. historical cost). The shareholder oriented perspective receive most of their financing from external investors and are more concerned about the return on investment and whether to buy/hold/sell their shares. They therefore prefer a market-value of the company and prefer the assets being recognized at fair value instead of historical cost which could be seen as less prudent.

Answer 12

Matching - The matching of revenues with the expenses related to earning that revenue can be in conflict with the prudence concept. For example, how to account for advertising cost. According to the IFRS, the prudence concept requires companies to expense advertising immediately as the occur while the matching concept would prefer to spread the cost over the time in proportion as revenues from the advertising occurs. Relevance - Information is relevant if it makes a difference in making economic decisions. Shareholders prefer assets showed at their market value (fair value) when making their investment decisions. The prudence concept may be in favor of historical cost values rather than fair value which creates a conflict between relevance and prudence. True and fair view - Prudence recognize all possible losses but do not anticipate possible gains. True and fair view requires all information to be complete, neutral and free from bias. There might be a conflict here as being prudent and intentionally recognize a possible loss but not a gain could be seen as not being complete, neutral and free from bias.

Answer 13

The "reducing balance method" could bee seen as more prudent than the "straight line method" since it depreciates larger amounts in the beginning of the economic life of the assets and smaller in the end as opposed to the straight line method which depreciates the same amount each year of the economic life. This makes the reducing balance method more prudent than the straight line method. Example: An asset has an estimated economic life of five years, but after 3 years it breaks down and cannot be used anymore. This makes the reducing balance method to have recognized more depreciation and shows the asset at a lower amount than according to the "straight line method".

Answer 14

Benefits - A uniform set of accounting standards would facilitate international investing because it would be less costly for firms since they only would be required to prepare one set of financial statements in compliance with IFRS. It would also enhance comparability among firms in different countries. A higher convergence will make it easier for shareholders and investors to compare companies all over the world. Moreover they will make better and more informed decisions on where to invest their money, this in turn will will lead to a lower cost of capital. Previous studies have shown that one set of high quality accounting standards decreases information asymmetry and increases transparency. A higher convergence would increase comparability between firms and between industries. Drawbacks - Changing one of the elements of the institutional framework in a country can have a negative effect on the economy as a whole. It might require more resources for comparing in accordance to IFRS which creates costs. The reporting incentives of firm are also important to consider. A set of high quality accounting standards will not provide any benefits if firms don't implement them correctly and have questionable reporting incentives. There is also a possibility that, when IFRS, is translated into another language the intended message might be interpreted in a different way depending on which language it is being translated into. It is therefore important that the legal structures of countries protect shareholders and implement stringent rules to avoid violation. Having more than one set of global standards increases the quality of the standards because it facilitates competition. One set of accounting standards can therefore decrease competition, and stifle innovation and creativity. Moreover, countries that already have a high quality accounting standards would not benefit with a switch to a uniform set of accounting standards in regards to quality. It would also be costly in the short-term for a country to switch to a different set of accounting standards as preparers would have to be retrained and accounting systems overhauled. Political lobbying is another drawback that is likely to occur when there only is one accounting standard setter. One coherent framework would might also be difficult to reach due to different tax-laws, cultures, and other national differences that prevents convergence. Countries that will benefit the most from a switch to a uniform set of accounting standards such as iFRS are the ones with lower quality accounting standards, stringent legal structures that protect shareholders, and smaller economies with fewer firms.

Answer 15

A company asset that is vital to business operations but cannot be easily liquidated. The value of property, plant and equipment is typically depreciated over the estimated life of the asset, because even the longest-term assets become obsolete or useless after a period of time. Depending on the nature of a company's business, the total value of PP&E can range from very low to extremely high compared to total assets. International accounting standard 16 deals with the accounting treatment of PP&E. An example of a business with a high amounts of PP&E would be a shipping company, because most of its assets would be tied into its fleet of ships and administrative buildings. On the other hand, a management consulting firm would have less PP&E, because a consultant would only need a computer and an office in a building to run its operations. This item is listed separately in most financial statements because PP&E is treated differently in accounting statements. This is because improvements, replacements and betterments can pose accounting issues depending on how the costs are recorded.

Answer 16

When you put together your balance sheet, you need to start with your gross property, plant and equipment and then wind down to your net property, plant and equipment. Your gross property, plant and equipment is the amount that you paid for any property, buildings or other assets that you own. You then need to depreciate these assets each year. Depreciation reduces the value of the asset as you use it. The net property, plant and equipment is your cost for the equipment less your accumulated depreciation. Step 1 Add your assets that can be classified as property, plant and equipment from your general ledger. These should be your costs for purchasing each asset. For example, assume you have been in business for five years. During the five years you purchased land for $100,000, a building for $20,000 and a machine for $5,000. So your gross property, plant and equipment is $100,000 plus $20,000 plus $5,000 for a total of $125,000. Step 2 Add the current year's depreciation to your accumulated depreciation. Accumulated depreciation is the amount of depreciation from prior years. In the example, assume your accumulated depreciation is $40,000 and this year’s depreciation is $6,000, so your total accumulated depreciation is $46,000. Related Reading: Definition of Operating Income and Net Sales Step 3 Subtract your total accumulated depreciation from your gross property, plant and equipment. In the example, $125,000 minus $46,000 equals $79,000 for your net property, plant and equipment.

Answer 17

1. A reduction in a company's stated capital. 2. The total capital that is less than the par value of the company's capital stock. Explanation - This is usually reduced because of poorly estimated losses or gains. - Impairment can be used in many contexts. Whatever the situation, impairment is bad for the company.

Answer 18

A company's asset that is worth less on the market than the value listed on the company's balance sheet. This will result in a write-down of that same asset account to the stated market price. Accounts that are likely to be written down are the company's goodwill, accounts receivable and long-term assets. If the sum of all estimated future cash flows is less than the carrying value of the asset, then the asset would be considered impaired and would have to be written down to its fair value. Once an asset is written down, it may only be written back up under very few circumstances. Firm's carrying goodwill on their books are required to make tests of impairment annually. Any impairments found will then be expensed on the company's income statement.

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