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61 Cards in this Set
- Front
- Back
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Do you disclose CONTINGENT ASSETS? |
Yes, but only if there is a PROBABLE inflow of economic benefit. (>50%) |
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Definition of an ASSET |
A present economic resource controlled by the entity as a result of past events. Economic resource has the potential to produce economic benefits. |
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What is the definition of a LIABILITY |
A present obligation of the entity to transfer an economic resource as a result of past events. Entity has no practical ability to avoid transfer. |
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What is the definition of INCOME |
Increases in ASSETS or decreases in LIABILITIES that result in an increase in EQUITY. NOT CONTRIBUTION FROM SHAREHOLDERS. |
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What is the definition of an EXPENSE |
Decreases in ASSETS or increases in LIABILITIES that result in a decrease in EQUITY. NOT DISTRIBUTIONS TO SHAREHOLDERS. |
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What is the definition of EQUITY |
Residual interest in the ASSETS of the entity after deducting all its LIABILITIES. |
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Can the conceptual framework override the IFRS? (international financial reporting standards) |
NO |
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Re: Recognition and Derecognition - what is this? |
Recognition of something in the FS must meet the definition of an element. Results in relevant information that FAITHFULLY represents event. Derecognition is the removal of all or part of a recognised asset or liability from an entity’s statement of financial position. No longer control over economic resource (paid off the debt?) No longer a present obligation. |
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What are the five main elements in FS’s? |
Assets, Liabilities, Income, Expenses, Equity |
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Accounting treatment when Obligation of a provision is paid? |
DR Provision CR Cash/Bank Obligation is effectively paid off. |
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Provision is in accordance to what IAS? |
thirty seven |
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A provision is a liability of… |
..uncertain timing or amounts. |
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What is the most important aspect of a liability? (in the definition) |
It meets the definition that something is a PRESENT OBLIGATION. (this will help with exams) |
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What are the two types of measurement of value outlined in the Conceptual Framework? (H vs C) |
Historic cost: Original transaction price Current value: Information updated to reflect conditions at the measurement date Other possible measures: Fair value (AKA market value) Value in use (asset) or fulfilment value (liability) Current cost (to acquire now in its current form with depreciation in consideration) |
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What is the most important concept in choosing which measurement base to use to provide in the FS’s? |
Information that is provided should be chosen for RELEVANCE and adhere to FAITHFUL REPRESENTATION of the item. For example, something that is not intended to be sold soon should not use the Fair value (market value). |
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Define a PROVISION |
A liability of UNCERTAIN TIMING or UNCERTAIN AMOUNT |
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A liability only exist when there is an.. |
Obligation |
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What 3 criteria is required for a provision to be recognised? “provision? 3 needed!” |
- A present obligation as a result of a past event (legal or obligation - like contractual or regulatory or constructive obligation like valid obligation) - A probable future outflow of rescources. (more likely that not, opinions of experts whether that outflow is going to happen). - A reliable estimate of the amount |
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Accounting treatment of recognition of a provision? |
DR Expense/Asset CR Provision We are recognising a liability on SoFP |
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Account treatment to increase a provision? |
DR Expense/Asset CR Provision |
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Accounting treatment of decreasing or derecognition of a provision? |
DR provision CR Expense/Asset Perhaps overestimation of what you had to pay |
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When measuring provisions, what 3 methods do we adhere to? |
- Use of “best estimate” of “unavoidable costs” where these are not known. (past experiences, expert opinion, effect of similar transactions, events after the reporting period) - Expected values can be applied for large population of items -If outflow exceeds 12 months, discount to present value |
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37; what is a contingent liability? |
A POSSIBLE obligation of uncertain timing and/or amount. Or could be a PRESENT obligation but it is NOT recognised either due to : ::not probable that an outflow of economic benefits will be required to settle the obligation (<50%) or ::amount of the obligation cannot be measured with sufficient reliability (very rare there is no numerical value) |
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HOW TO: DISCLOSURE OF PROVISIONS, CONTINGENT LIABILITIES |
What is the nature of the contingency What are the uncertainties expected to affect the ultimate outcome What estimate can be made on the potential financial effect |
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Do you disclose contingent liabilities too? |
yes |
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Do you disclose CONTINGENT ASSETS? |
Yes, but only if there is a PROBABLE inflow of economic benefit. (>50%) |
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What 3 things are DISCLOSED for Provisions, Contingent liabilities and Contingent Assets? NatUnEst NatUnEst! |
Nature of the contingency Uncertainties expected that may affect outcome Estimate on potential financial effect |
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What does the ominous IAS 10 entail? |
Events AFTER the reporting period and before FS issue date eg: Organisations y/e is 31/12x1 & the FS are authorised for issue on 11/3/x2 |
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What two class of events are in accordance with IAS10? |
Adjusting event: that provide evidence of conditions that existed at the end of the reporting period (as for provisions etc) FS ARE AMENDED Non-adjusting events:conditions that arose after the end of the reporting period. If considered material to the user of financial statements, disclosure is made (nature of event, and estimate of financial effect) But of course if the non-adjusting event indicates that the business is NOT A GOING CONCERN (entity may be liquidated or cease trading), the entity’s FS’s must be adjusted to reflect that the entity is not a going concern. |
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3 recognition criteria for a provision? |
PRESENT OBLIGATION as a result of a past event. Obligated legally or constructively(raised a valid obligation). If there is a practical way to avoid that outflow then this is not an obligation. PROBABLE OUTFLOW OF BENEFITS! (>50% more likely than not) RELIABLE ESTIMATE! This is likely reached, standard notes that only in rare cases is a reliable estimate is impossible.
IF ALL THREE CONDITIONS ARE MET, ITS A PROVISION THROUGH AND THROUGH! |
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In terms Provisions, is a legal obligation the only requirement? |
No, there is a constructive aspect to an obligation in that even if an entity is not contractually obliged, they can be constructively obliged. Eg, a company that states that it will make good on any environmental damage caused by its operations had caused damage in a country with no environmental laws, they are still obligated and thus meets the criteria of a provision. |
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What is capital expenditure? What is revenue expenditure? |
Capital expenditure: Purchase price + directly attributable costs in the acquisition of longterm assets. Expenditure incurred to IMPROVE earnings capacity of longterm assets. Revenue expenditure: Expenditure incurred to MAINTAIN the earning capacity of longterm assets. (NOTE ONLY REVENUE EXPENSE IS RECOGNISED IN PROFIT/LOSS) (NOTE IF EXPENDITURE IS DEEMED TO GIVE FUTURE BENEFIT, IT IS A CAPITAL EXPENDITURE AND SO RECOGNISED IN SOFP) |
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IAS:16 PPE; define Property, Plants and Equipment WHAT 3 CRITERIA MUST BE FULFILLED?
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It is a TANGIBLE asset. Held by entity for use in production, supply of goods or services, for rental to others (for rental based companies) or for admin purposes (like computers, head office). Expected to be used for more than 1 Period (12 months). |
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What is included in the Initial measurement of PPE? |
INCLUDE DIRECTLY ATTRIBUTABLE COSTS! (COSTS THAT ARE REQUIRED FOR THE PURCHASE TO HAPPEN; EG MERCHANT BANKING FEES etc) INCLUDE FEES NEEDED TO MAKE THE PPE WORKING. BUT IAS 16 PPE IS VERY STRICT ON “MANAGEMENT FEES” IN NEGOTIATION OF THE PURCHASE AS NOT SOMETHING TO BE CAPITALISED. ALSO “SALES TAX” IS RECOVERABLE SO IS NOT CAPITALISED! |
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When a question asks what will be recorded as the cost of the machine as a non-current asset, what do you include in the answer? |
In accord. with IAS16 - it will be capitalised as PPE as: Production machinery (used for production) Tangible asset Life is beyond 1 year — What needs to be capitalised is thus: Purchase costs + directly attributable costs (costs to get machine readyfor intended use). |
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Capitalise or Revenue? 1: When IMPROVING current PPE (enhance economic benefit) 2: When MAINTAINING current PPE |
1: Capitalise 2 Revenue |
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Is LAND in PPE subject to depreciation? |
Very rarely (no) |
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Is LAND (not buildings) in PPE subject to depreciation? |
Very rarely (no) |
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As per IAS16, is depreciation charged when the PPE asset has begun usage or immediately when asset is ready for intended use? |
Immediately when ready for the intended use. |
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What are the two types of depreciation? |
Reducing balance basis Straight-line depreciation |
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Depreciation is an.. |
EXPENSE |
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Define INVESTMENT PROPERTY |
Property, Land or Building: held by the owner for longterm capital apreciation rather than shortterm sale. Property intended to be rented out for short periods of time. EG leases to 3rd party companies. |
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Treatment of INVESTMENT PROPERTIES? IAS 40 |
Cost model; treatment in line with PPE cost model (disclose FAIR VALUE of investment property In notes to the accounts) Fair value; Measure all investment properties must be measured at fair value Any gain or loss arising from change in fair value is recognised in NET PROFIT OR LOSS for the period. (DONT DEPRECIATE WHEN USING FAIR VALUE.) |
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IAS 16 - PPE subsequent costs! What is there to capitalise? |
Anything that ENHANCES economic benefit. Regular replacement of SUBSTANTIAL PARTS. Costs of MAJOR INSPECTIONS (maintenance inspections that are required for operation) |
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Depreciation is supposed to match the pattern of consumption of the asset. It’s supposed to inform you of how much of an asset is used up in the year. T or F? |
True |
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WHEN YOU OPEN A PROVISION ACCOUNT DUE TO THE INFORMATION TELLING YOU THE COMPANY HAS AN “ESTIMATE” THAT MUST BE PROVIDED FOR, DO YOU EVER CLOSE THE PROVISION ACCOUNT? |
No, it must be added to. Eventually teaching the total estimated provision needed. (unless provision was shown to be overestimated!) |
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WHEN YOU OPEN A PROVISION ACCOUNT DUE TO THE INFORMATION TELLING YOU THE COMPANY HAS AN “ESTIMATE” THAT MUST BE PROVIDED FOR, DO YOU EVER CLOSE THE PROVISION ACCOUNT? |
No, it must be added to. Eventually teaching the total estimated provision needed. (unless provision was shown to be overestimated!) |
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IAS 16 PPE - Revaluation model What is used as a revaluation if market value is not available? |
Current cost (cost - depreciation) |
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IAS 16 PPE - When revaluation occurs, what is the accounting treatment for the PPE in question? |
Dr PPE Cr Revaluation Reserve (Equity) |
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What do we need to think about when dealing with Intangible assets? |
Criteria for initial recognition and measurement of these intangible assets. Accounting treatment of INTERNALLY GENERATED or PURCHASED intangible assets. |
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IAS 38: What is an intangible asset? |
An IDENTIFIABLE non-monetary asset without physical substance. |
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Criteria required in recognition of an INTERNALLY GENERATED intangible asset? PIRATES ARE INTANGIBLE |
P I R A T E Probably future economic benefit Intention to complete and use or sell asset Resources to complete Ability to use or sell asset Technically feasible Estimate/measure reliably |
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Typical examples of Internally generated intangible assets? |
Software developments Patents, copyright Licences E-commerce websites |
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Re: internally generated intangible assets- when the project meets all the criteria (PIRATE), what phase does it go to? Also what are the criteria again? |
Development phase - all costs must be capitalised! When not, it enters the “research phase” and is expensed.
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Revaluation of Intangibles. If you choose to revalue, you must revalue every intangible, not just one and keep the rest at “cost” |
True |
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You can only revalue an intangible asset if.. |
there is an active market for the asset. No unique lists like “customer lists” |
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IAS 36 - impairment of assets |
Standards aim is to ensure assets are carried in the financial statements at no more than their recoverable amount. (ie ensure asset is not OVERSTATED in the statement of financial position. |
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What is the recoverable amount in regards to IMPAIRMENT OF ASSETS? |
Asset is said to be impaired if its carrying value on the statement of financial position exceeds its recoverable amount. The recoverable amount is the most economic benefit that can be yielded from the asset: Higher of VALUE IN USE(present value) vs FAIR VALUE(market value less disposal costs) |
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What are some impairment indicators? What are some factors/events that indicate an asset may be overstated in the SoFP? |
External sources Decline in Market Value Change in environment Competitor actions Changes to regulation Internal sources Obsolescence Damage Change in use of asset Worse than expected performance Operating losses on asset |
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If there is an impairment indicator, we have to do an impairment test on the asset. An impairment test ascertains the recoverable amount. The recoverable amount is higher/lower? of ______ vs ______. |
Net sales value vs value in use. |
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With impairment losses to a CGU (cash generating unit eg factory etc), we DR ____.. so what on earth do we CR? |
DR impairment expense CR assets priority list: 1st:Goodwill, (assets after goodwill are on a pro-rate basis) 2nd: take all assets and see their proportions of total assets and CR accordingly |
