Pre assumed Knowledge

Question 1

What makes up lease liability?

Answer 1

Fixed payment not yet made
Amounts expected to be paid under residual value (Only if it is reasonably certian to happen.
Option to purchase
Termination penalty

Question 2

What is the definition of a right of use asset? and how is it calculated?

Answer 2

It is a leased asset that is capitalised.
We recognise it at cost (Initial value of lease liability)
Plus ay direct initial costs
plus any payment made before lease starts
plus cost of removal/dismantling

Question 3

How to calculate lease term?

Answer 3

Non Cancellable term = The initial perido length
Option to extend
option to cancel
Both these options HAVE to be REASONABLY CERTIAN to happen.

Question 4

What is the difference between payments in advance and payments in arrears? and how does it affect the interest.

Answer 4

In advance means the payments are paid at the start of the period and arrears means they are paid at the end of a period. The interest is affect by this because the interest is taken as a percentage of the total liability left, payment in advance takes out a payment before interest is incurred. In arrears the interst is calculated before the payment so it would be higher.

Question 5

If you are given the present value of future lease payments and the payments are in advance what do you need to account for?

Answer 5

The payment for now has already been take out because it’s the value of future lease payments.

Question 6

What is a financial instrument? and some examples.

Answer 6

Financial instruments are contracts between two parties were one gains an asset and one gains a liability.
Shares, Bonds, Receviables, Loans, Payables

Question 7

What is a financial asset?

Answer 7

They are non physical assets e.g Ordinary shares, Contract to receive money (Receivables)

Question 8

What is a financial liability?

Answer 8

They are contractual obligations to deliver cash or an asset e.g Payables.

Question 9

What is an effective interest rate?

Answer 9

To add the interest which is not specified but is implied by paying higher return than borrowed over the course of the loan.

Question 10

How to account for conversion loans?

Answer 10

We use split accounting, you work out the present value based on how much the amount lent would be worth if discounted at the non conversion rate and the difference in ten transferred to equity for the remaineder of the term and at the end it can be either cleared or converted.

Question 11

When should financial assets and Financial liabilities be derecognised?

Answer 11

The contractual right to the cashflows expires (All payments have been made)
Or when the entity transfers most or all of the risk and reward to another entity
Financial liabilities are derecognised at expiration

Question 12

What is factoring and what is a recourse?

Answer 12

It is when you sell/Transfer the debt to a thirs party to try and gain some cashflow back from receivables.
A Recourse is a term used by factoring companies to say that if they can’t get the money back then they can transfer it back to the original company so the company can only account for it as a loan until redemption.

Question 13

What are the 5 Steps to recognising revenue?

Answer 13

COPAR
Contract - It’s an agreement between atleast two entities when terms are identified.
Obligation - What each company gets, e.g Good/service for Money
Price - Should be considered if there is variable price, non monertary items and consideration to the entity.
Allocate - Allocating the transactions with the one sale. If it is a good and service and a discount, split out each componant
Revenue - It is recognised when the entity satisfies the performance obligation by transferring good/service to a customer.

Question 14

What is the difference between the input method and output method?

Answer 14

Input method - Compares costs, Its cost already incurred divided by total costs.
Output method - Compares the value of work certified to date to the total contract price.

Question 15

How to recognise revenue to a point?

Answer 15

This is normally a bundle question where its an asset and service sold together.
We calculate what the service would normally cost and apportion it to the year end.

Question 16

What costs are included in the value of a non current asset at acquition?

Answer 16

Any costs attributed to getting the assets e.g Cost of asset, Legal fees, unrecoverable tax (Stamp duty), Delievry, Installation, Materials, labour, site prep and dsimantling costs.

Question 17

How to account for dismantling costs?

Answer 17

Calculate the present value of dismantling the asset at the end of it’s useful life. DR Asset, CR Liability (For the time inbetween installation and dismantling)

Question 18

How are abnormal costs treated?

Answer 18

They are removed from calculation as they don’t show the true value.

Question 19

What is the unit of production basis?

Answer 19

It is the other way to calculate depreciation costs. Formula = (Cost - Residual Value) x (Current years activities/Expected activity in useful life) .
The activities basis is decided by the company.
THE EXPECTED ACTIVITY IN USEFUL LIFE DOES NOT REDUCE OVER THE YEARS.

Question 20

How do can you account for the additional depreciation cost when an asset has been revalued?

Answer 20

It can put the additional depreciation to the revaluation reserve to stop it penalising the company for revaluation. IAS 16

Question 21

How to treat a revaluation deficit?

Answer 21

We clear the revaluation reserve first and then any of the remaining balance goes to the P&L.

Question 22

What are the different types of grants from the government?

Answer 22

Capital grants - Relates to assets (To help purchase or contruct long term assets)
Income Grants - Any other grant that isnt a capital grant E.g Payroll grant for employing or retaining employees.

Question 23

How to account for a revenue grant?

Answer 23

Split the income over the course of the contract.

Question 24

How to account for a capital grant?

Answer 24

Net Method - You deduct the grant amount from the value of the asset and depreciate from the net amount.
Deferred Income Method - The asset goes to the fixed asset register at full value and the grant goes to deferred income and is apportioned out over the course of the contract (Useful life).

Question 25

When can you capitalise borrowing costs?

Answer 25

When the asset takes a long time to construct and the following conditions are met: Expenses occur (Materials are being bought) Borrowing costs are being charged while construction is on going. (Not before or after). Activities are underway to prepare the asset as intended.

Question 26

How do we calculate the weight average cost of capital? in terms of a loan interest.

Answer 26

We calculate the interest of both loans and then divide the sum of both together by the total amoutn borrowed to get an average interest rate.

Question 27

How to account for investment properties?

Answer 27

Cost Model - We depreciate over the life of the asset Fair value - We revalue every year and the difference goes to the P&L.

Question 28

What are the conditions for an asset to be classed as held for sale?

Answer 28

Available to sell right now. Sale is highly likely Reasonable price Sale exected within one year.

Question 29

How to account for a non current asset held for sale?

Answer 29

We transfer to current asset at the lower of carrying amount or fair value less cost of sale. If we predict a loss, we account for it straight away, if its predicted to be a profitable sale, we don't account until the sales has occurred If the fair value is lower than carrying amount then we put the difference to impairment costs.

Question 30

How to capitalise internally generated intangible assets?

Answer 30

You can't, as they are internally generated, they hold no real value as they cant be seperated from the business and sold.

Question 31

Define research and development

Answer 31

Research is an original investigation undertaken in order to obtain new knowledge. This knowledge alone will not generate future benefit so it expensed through the P&L. Development is when knowledge is used to create a product, process or new/improved materials. This expenditure can be capitalised as long as it meets the requirements, If not it goes through the P&L

Question 32

What are the requirements for development cost to be capitalised.

Answer 32

Technically feasible - It's possible to achieve. Resouces to complete - have the funds to complete the work Intentions to complete. Demostrate probable future economic benefit - There is a market to sell to. Expenditure can be measured reliabily.

Question 33

What is the acronym for development criteria?

Answer 33

PIRATE P - Proabable flow of economic benefit I - Intention to complete R - Reliable measurement A - Adequate resources to complete the project T - Technically Feasible E - Expected to be profitable. Only if all are completed can the development costs be capitalised, if not it goes to the P&L.