Comments

  1. avatar says

    I have a question relating to cash flows!
    If a company has revalued its property up by 5m, and the acc depn on these properties of 2m is written down to zero, then why is only the net increase in revaluation of 3m shown in the debit side if the asset account? Please sort this out!
    Thanks a load!

    • avatar says

      One more issue- own work capitalised (relating to development expenditure) has been added to the revenue. So should this not be subtracted from the profit while ascertaining cash flows from operating activities? Please help me out with these two issues! Thanks in advance! :)

      • Profile photo of MikeLittle says

        Hi again

        You’re going to have to help me here …. I cannot understand why own work capitalised should be added to revenue! Which question are you looking at? Are you still asking about a cash flow issue as in your post from 5 minutes before this or has your mind leapt onto a new topic?

        Please let me know and I’ll get back to you as soon as I can

      • avatar says

        Hi!
        This is a question from the Kaplan LRP kit. (Qn 22)
        In the question, own work capitalised has been added to the revenue. But this has not been subtracted in the Cash flow statement. Should it not be subtracted?
        Thank you once again, Sir!

      • Profile photo of MikeLittle says

        Ok , then I’m stuck – I cannot help you. I WILL say that the concept of adding to revenue the value of own work capitalised has left me very quiet indeed. I cannot imagine what has happened in order that this add back should now be happening

      • avatar says

        Oh.. :( Own work capitalised SHOULD NOT have been added, whereas it has been added in the QUESTION. Logically thinking, this should be reversed in the cash flow computation, but it has not been subtracted,
        I was a little stumped by this treatment!
        Anyway, thanks for your help, sir! :)

      • Profile photo of MikeLittle says

        IF ……. IF the company has Debited TNCA and Credited Revenue with the value of own work capitalised, then, ok, we need to deduct the value from revenue

        But we need to back-track a bit further.

        During the building phase of the TNCA, we would have been debiting wages, materials, direct costs and crediting cash.

        At the end of the construction phase, we would have debited TNCA and credited revenue

        In fact, the correct entry would have been debit TNCA and credit wages, materials, direct expenses.

        So, to correct, we need to reduce revenue and reduce the expense accounts (debit revenue and credit wages, materials and direct expenses)

        After that correcting entry has been put through, you will realise that, in fact, there is NO AFFECT on profit before tax

        Does that solve it for you?

    • Profile photo of MikeLittle says

      Hi

      Think of it this way. When we depreciate a property and then after, say, 10 years we look at that property and say that its value has actually increased, effectively what we are saying is that we have depreciated too much, too soon. So, when revaluing any asset upwards, the initial entry is to reverse the accumulated depreciation. If the upward revaluation is greater than the accumulated depreciation, then the surplus will be debited to the asset account

      OK?

    • avatar says

      Oh yes, I do get your point! :) But the capitalisation is in respect of Development expenditure (as I had stated initially). Does that make the treatment any different?
      Thanks again!
      OT is a blessing, and you are god-sent, sir! :D

      • Profile photo of MikeLittle says

        Ok, here we go again. During the development stage, costs will have been incurred (Dr Expenses Cr Cash)

        Now, at the end of the year, the directors are happy that the project satisfies the strict criteria of being a qualifying project and so the development expenditure (not the research costs, nor development expenditure incurred BEFORE the project was determined to be viable) should now be debited to INCA Development Expenditure. OK, in practice, I could see that expenditure originally debited to expense accounts and relating to the project is potentially going to be wanting to be capitalised by the directors.

        If that were to happen, the double entry would be Dr INCA and Cr Expenses.

        According to you, it looks like that entry has been put through as Dr INCA and Cr Revenue.

        OK, let’s correct that bad entry – Dr Revenue and Cr Expenses.

        It has NO affect on profit before tax

        Is that better?

  2. Profile photo of tauraiversatile says

    Thank you MikeLittle, you are the best. However, the 1 500 difference could be locked in AFSI workings. And there is 5 700 Other Reserve which has been worked & included in Equity section . I think we also made a mistake by picking 33 260 for Ret ears instead of 26 060 as per qn at 01 Oct 2008, ie, before adjusting it.

    Was not an easy question I think.

  3. Profile photo of sab says

    hi Mike
    I’ve some doubt regarding note( iv) available for sale investment
    here u’ve added gain 2500 (29000-26500) with investment income, which actually should be taken to the other comprehensive income right? as per IFRS 9, IAS 39 and should be added with other reserve
    what about the profit on the sale of these investment ?
    seperate line on profit/loss account should be shown for profit on sale of investment account right?
    i.e 2200 (11000-8800) and it should be transferred to retained earnings right?
    here you have icluded it just with r.e and has not recognized in the soci,
    from ACCA website the answers of december 2009 shows they have included 1800 {(8800-7000), increase from the cost to carrying amount} with the profit on the sale of available of sale investment 2200 and a total of 2200 +1800 =4000 is shown as profit on sale of investment
    and in the oci and from other reserve they have deducted 1800 as realised profit recycled /reclassified to income
    why are they taking these prior periods gains to current years account ?? is it because it has disposed off??
    which is the right method?
    I’m confused
    plz help……..

  4. Profile photo of nkmile64 says

    Thank you for an excellent lecture that yet again adds value to OpenTuition!
    I was wondering about the so-called “Available For Sale” Investments. A search I performed in the text of the relevant IFRSs (IAS 32, IAS 39, IFRS 7 and IFRS 9) did not produce any results which is quite embarrassing. The closest thing I could get to is a Financial Asset that is an equity instrument and classified as FVTOCI; the gains and losses are recognised in a reserve in OCI and not in Profit or Loss. Still, I don’t understand how previous reserves from gains on the investments are treated in case of disposal of these FVTOCI investments. Are they recycled through Profit or Loss or just moved from the reserve to Retained Earnings?

    Your assistance would be more than gratefully appreciated.

      • avatar says

        @MikeLittle, Hiya, thanks for the reply. No its not the deferred tax, deferred tax is right. It is something to do with available -for – sale investment. As in the website :
        Profit/gain on sale of available-for-sale investments (w (iv)) 4,000
        ( 4000 = 2200+1800)
        Gain on available-for-sale investment 2500
        ( under other comprehensive income)
        Realised profit reclassified (recycled) (1800)
        to income on available-for-sale investment

      • Profile photo of MikeLittle says

        @diepnguyen97, None of those adjustments, nor any combination of them, explains a 1,500 difference between my answer / BPP’s answer / Kaplan’s answer and the ACCA’s version!

        But you appear to have identified where the difference is!

      • avatar says

        i think that where the problem is, but i dont have a clue why the examiner treats the investment like that. So if this question come in the exam, or similarly, I ll be stuck as i dont understand the reason behind it :(

      • Profile photo of angelcorpse says

        think I got what the problem is here. Mike, see, you overlooked the sale of AFS investment which had a carrying value of $8.8m and was sold for $11m which gave a gain of $2.2m for current year and since the investment originally did cost $7m and revalued to $8.8m giving us past revaluation gain of $1.8m. Therefore, total AFS invest. in. is $4m(2.2+1.8). And the gain of $2500 that you included into Inv. Inc. they put this figure under ‘other comprehensive income” section as a gain on AvFS. :)

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