Summary Notes

Question 1

What are the qualitative characteristics?

Answer 1

• Relevance

- Faithful representation

Question 2

What are the 4 enhancing characteristics?

Answer 2

• Comparability
• Understandability
• Faithfulness
• Verifiability

Question 3

What is an asset?

Answer 3

‘a present economic resource controlled by the entity as a result of past events’

Question 4

What is a liability?

Answer 4

‘a present obligation of the entity to transfer an economic resource as a result of past events’

Question 5

What is equity?

Answer 5

‘the residual interest in the assets of the entity after deducting all its liabilities’

Question 6

What is income?

Answer 6

‘increase in assets or decreases in liabilities, that result in increases in equity other than those relating to contributions from holders of equity claims’

Question 7

What are expenses?

Answer 7

‘decreases in assets or increases in liabilities, that result in decreases in equity other than those relating to distributions to holders of equity claims’

Question 8

When do you allow recognition?

Answer 8

• ‘the item meets the element definition’
• it provides useful information to users (i.e relevant and faithful representation’

Derecognition normally occurs when the item no longer meets the definition of an asset or liability

Question 9

What are the two main bases of measurement?

Answer 9

• Historical cost (often obtained from the original transaction or event price)
• Current value (aims to correct some disadvantages seen with historical cost and uses more recent information. It provides a few alternative measurement basis: fair value, value in use, current cost)

Question 10

What should you capitalise at initial measurement?

Answer 10

Directly attributable (incremental) costs in getting asset into working condition for its intended use:

• purchase price
• improvement costs
• commissioning and testing (less proceeds from by-products)
• dismantling costs at their present value

Assets under construction:

• Labour costs
• Material costs
• Directly attributable borrowing costs under IAS 23 Borrowing Costs

Question 11

What should you exclude at initial measurement?

Answer 11

• Non-incremental costs
• Costs incurred after asset is ready for use but not yet being used
• Repair/maintenance costs
• Abnormal costs
• Incidental income

Question 12

When should you start depreciation?

Answer 12

• Start depreciation when asset available for use
• Stop depreciation when asset is sold or held for sale
• Check UL, RV and method annually and revise if necessary

Question 13

How do you deal with a change to the useful life?

Answer 13

(CA @ change - Residual value)/Remaining UL

Question 14

How do you deal with a change to the depreciation method?

Answer 14

CA @ date of change and apply new method

Question 15

How do you revalue an asset upwards?

Answer 15

1. DR Cost (by increasing to fair value)
2. DR Accumulated depreciation (remove all accumulated depreciation to date)
3. CR Revaluation Surplus (with the difference between carrying amount and fair value)

The gain will also be shown in the statement of comprehensive income

Subsequent depreciation charge:
(Revalued amount - Residual value)/Remaining UL

Question 16

What are the double entries for the reserves transfer?

Answer 16

Any increase in the depreciation charge due to a revaluation can be transferred each year between reserves:
DR Revaluation surplus
CR Retained earnings

This transfer is shown in the SOCE

Question 17

How do you calculate profit/loss on disposal of asset?

Answer 17

Proceeds - CA = Profit/(Loss)

This is recognised in the SPL

Question 18

What happens when a disposed asset is held under the revaluation model?

Answer 18

The revaluation surplus is transferred to retained earnings upon disposal:

DR Revaluation Surplus
CR Retained Earnings

Question 19

In order to capitalise an intangible asset it must be what?

Answer 19

ICE
Identifiable: separable or contractual/legal right
Controlled by the entity = power to obtain future economic benefits
Economic benefits (future revenue or future cost savings)

Question 20

How do you measure intangible assets separately acquired?

Answer 20

Capitalise at cost plus directly attributable costs

Question 21

How do you measure internally generated intangible assets ?

Answer 21

Research:
- Write off to the SPL as incurred

Development:

• Capitalise if criteria met
• Capitalise the direct costs incurred

Question 22

How do you measure intangible assets from a business combination?

Answer 22

• Capitalise at fair value

Question 23

Can you amortise intangible assets?

Answer 23

• Indefinite UL - no amortisation, annual impairment and UL review
• Finite UL - annual amortisation, impairment if indication
• Assumed residual value is nil

Question 24

Can you revalue intangible assets?

Answer 24

• May revalue to FV but only if an active market exists
• An active market is where:
  the items are homogenous, buyers and sellers can be found at any time, prices are available to the public
• Revaluations are treated the same as in IAS 16 PPE

Question 25

When should an impairment review be carried out?

Answer 25

1. Annually for intangibles with an indefinite UL and goodwill 2. When there is indication of impairment

Question 26

What are some indications of impairment?

Answer 26

- Operating losses - Net cash outflows - Decline in market value - Obsolescence/Physical damage - Significant changes to the business or market - Commitment by management to undertake a significant reorganisation

Question 27

How do you perform an impairment review?

Answer 27

Compare carrying amount against recoverable amount (this is the higher of value in use (PV of future cash flows) and FV less costs to sell) Impairment expense = Carrying amount - Recoverable amount

Question 28

What is the accounting treatment for an impairment review?

Answer 28

Cost model: DR SPL CR NCA Revaluation Model: DR Revaluation Surplus DR SPL (excess) CR NCA

Question 29

How do you classify an asset as held for sale?

Answer 29

- Asset must be available for sale in its present condition - Sale must be highly probable (within 12 months) and - It must be actively marketed at a reasonable price

Question 30

How do you make an asset 'held for sale'?

Answer 30

Cost: 1. Compare CA to FV-CTS, and impair if necessary - The impairment must go through the SPL 2. Remove the PPE from NCA and stop depreciating and recognised NCA HFS in current assets Revaluation: 1. Revalue PPE to fair value per IAS 16 2. Compare CA to FV-CTS, and impair if necessary (The CTS will be equal to the impairment charge) - The impairment must go through the SPL 3. Remove the PPE from NCA and stop depreciating and recognise NCA HFS in current assets

Question 31

How do you treat abandoned assets?

Answer 31

Abandoned assets can never be classified as held for sale as the carrying amount is not being recovered principally through a sale transaction

Question 32

Where do NCA fall in the SOFP?

Answer 32

NCA: PPE Intangibles CA: NCA held for sale Equity: Revaluation Surplus

Question 33

Where do NCA fall in the statement of comprehensive income?

Answer 33

``` (Less) Depreciation Expense (Less) Impairment Expense (Less) Amortisation Expense Profit/(Loss) on disposal (Less) Non-directly attributable costs/recurring costs Gains on property revaluation ```

Question 34

What is the first step in approaching right-of-use assets?

Answer 34

Per substance over form the lessee should recognise a right-of-use asset on the SFP Cost (Less) Depreciation ------------ Carrying amount on SFP

Question 35

What is the second step in approaching right-of-use assets?

Answer 35

Set up a lease liability table Payments in arrears: b/f Interest Cash paid c/f Payments in advance b/f Cash paid Balance Interest C/f * no payment is shown in year 1 within the table above as payments are made in advance

Question 36

What is step 3 in the approach to right-of-use assets?

Answer 36

Split the year end liability: NCL = number directly to the right of next year's payment CL = year end liability - NCL When payments are in advance, CL = lease payment

Question 37

How do you treat short term leases (less than a year) and low value assets?

Answer 37

- The lessee can choose to recognise the lease payments in profit or loss on a straight line basis. No lease liability or right-of-use asset would therefore be recognised The election to use the exemption: - must be made by asset class for short-term leases - can be made on a lease-by-lease basis for low-value assets

Question 38

How do you deal with lease payments in arrears in cash flow?

Answer 38

The statement of cash flow records: - the payment of interest under cash from operating activities - the repayment of the loan under cash from financing activities

Question 39

What do you do with an asset in a sale and leaseback transaction if the transfer is NOT a sale?

Answer 39

- Continue to recognise asset | - Recognise a financial liability equal to proceeds received

Question 40

What do you do with an asset in a sale and leaseback transaction if the transfer is a sale?

Answer 40

- Derecognise the asset - Recognise a right-of-use asset as the proportion of the previous carrying amount that relates to the rights retained - Recognise a lease liability - A profit or loss on disposal will arise

Question 41

What are the double entries for a sale and leaseback transaction that is a sale?

Answer 41

Proceeds = FV ``` DR Cash (Proceeds) CR PPE (CA) ``` DR Right-of-use asset (CA x Lease liability/FV) CR Lease Liability (PV of lease payments) DR/CR Loss/Profit on disposal (balancing figure)

Question 42

What is the 5 step revenue process?

Answer 42

1. Identify the contract - Parties have approved the contract and rights can be identified - Payment terms can be identified - Contract has commercial substance - Probable the selling entry will receive consideration 2. Identify the separate performance obligations - A good or service is distinct if it can be sold separately and has a distinct function 3. Determine the transaction price - Variable consideration should only be recognised if highly probable - If payment terms are more than a year the proceeds should be discounted 4. Allocate the transaction price to the performance obligations - In proportion to stand-alone selling price 5. Recognise revenue as or when a performance obligation is satisfied - Recognise over time if satisfy one of the following criteria: Customer simultaneously receives and consumes the benefit Creating an asset controlled by the customer The asset does not have an alternative use to the seller, and the seller can demand payment for performance to date - Otherwise: recognise at the point control is transferred to the customer

Question 43

In the consolidated statement of profit or loss, how do you account for intra-group trading?

Answer 43

- In the adjustments column of the consolidation schedule cancel all intra-group sales/interest charges/management charges - Increase cost of sales of the selling company by the amount of the PURP

Question 44

In the consolidated statement of profit or loss, how do you account for non-current asset transfers (PPE PURP)?

Answer 44

CA at year end after transfer - CA if transfer never occurred = PPE PURP - Adjust seller's column (usually in operating expenses unless the question tells you specifically where to adjust)

Question 45

In the consolidated statement of profit or loss, how do you account for fair value adjustments?

Answer 45

- If the FV of PPE is greater than CA, increase the expenses of S by the current year's depreciation

Question 46

In the consolidated statement of profit or loss, how do you account for dividends received?

Answer 46

Remove P% of dividends paid by S (Investment income in W2)

Question 47

In the consolidated statement of profit or loss, how do you account for acquisitions part-way through a reporting period?

Answer 47

Pro-rate S's results on a line-by-line basis (W2)

Question 48

In the consolidated statement of profit or loss, how do you account for adjustments between the parent and associate? (Inventory PURPS)

Answer 48

Inventory PURPS: The adjustment is always made for P% of the unrealised profits - If P is the seller, increase P's cost of sales in W2 - If A is the seller, reduce share of profit of associate in W4 Dividends: - Remove P% of dividend paid by A (Investment Income in W2)

Question 49

What are the trigger words to suggest there is a joint arrangement?

Answer 49

- 'contract of joint control over financial and operating activities' - 'unanimous decision making'

Question 50

What are the two different types of joint arrangement? How do you treat them?

Answer 50

1. Joint operations (no new entity exists) - The company will show its share of the jointly run operation in its financial statements (awareness needed only) 2. Joint ventures (where a new entity exists) - Use equity accounting as for an associate

Question 51

How do you treat the disposal of a subsidiary in the Parent's FS?

Answer 51

``` Gain/Loss on disposal: Sale proceeds Less: Cost of investment ------------ Gain/(loss) to P ``` Exceptional item should be disclosed on the face of the parent company SPL after operating profit

Question 52

How do you treat the disposal of a subsidiary in the group accounts?

Answer 52

- CSFP: Ignore Sub that is being disposed of - CSPL: Present in accordance with IFRS 5 This line will include: - Profit of S pro-rated up to the date of disposal; plus - Consolidated profit/(loss) on disposal: Sale proceeds Less: (CA of GW at disposal) (CA of NAs at disposal) Add: NCI at date of disposal -------------- Profit/(Loss) on disposal - CSOCE: Remove NCI of subsidiary disposed of

Question 53

How do you treat the fair value of consideration under goodwill calculation in the group accounts?

Answer 53

Fair value of consideration: Cash: now, deferred, contingent Shares: Now, deferred, contingent Acquisition expenses to be charged to CSPL

Question 54

How do you treat the fair value of identifiable assets and liabilities existing at the acquisition date under goodwill calculation in the group accounts?

Answer 54

Fair value of identifiable assets and liabilities existing at the acquisition date: - Remove internal GW - Add internally generated intangibles - Fair value uplifts on PPE/Inventory - Contingent liabilities