ACCA FR Flashcards

The gain on revaluation of PPE is recognised through other comprehensive income and the associated tax is also recognised through other comprehensive.

Variable overheads are allocated based on the actual level of production.

Fixed overheads are allocated on the basis of normal/budgeted capacity.  This is the capacity that is expected to be achieved based on the average over several years.

A lease incentive is deducted from the initial measurement of the asset.

A right-of-use asset is depreciated over the shorter of the lease term and the useful life of the asset.

The limitations of financial statements are as follows:

• Historic (prepared to a specific date and published after the reporting date)
• Standardised format
• Limited narrative information
• Based on estimates and judgements
• Different accounting policies limiting comparison on a company y company basis

A deferred tax liability it recongised when the carrying value is greater than the tax base.

The income tax is made up of the following:

• Current year tax estimate
• Prior year under/over provision
• Movement in deferred tax balance

The tax payable figure is the estimate of tax at the reporting date.

Biological assets are measured at fair value less costs to sell.

A biological asset is a living plant or animal.

Monetary assets/liabilities are translated at the reporting date using the closing rate.

Gains/losses on translation of a monetary item are recognised through profit or loss.

A financial asset can be measured at amortised cost when it fulfills BOTH the business model test and cash flow characteristics test.

Financial liabilities are initially measured at fair value LESS transaction costs.

Financial assets are initially measured at fair value PLUS transaction costs, unless held at FVTPL where they are recognised immediately through profit or loss.

Financial assets are measured at either:

• Fair value through profit or loss (FVTPL)
• Fair value through other comprehensive income (FVTOCI)
• Amortised cost

The liability is calculated as the present value of the future cash flows, assuming that the debt is a 100% debt instrument, i.e. no conversion option.  The cash flows are the annual coupon payments plus the redemption amount.  These are then discounted at the rate of interest on similar debt without the conversion option.

Recognise in the P&L over the period in which the related expenditure is recognised.

Profit for the year attributable to the ordinary sharehokders (i.e. and after NCI)

divided by:
Weighted average number of equity shares

multiplied by 100

• Identify the contract.
• Identify the performance obligations.
• Determine the price.
• Allocate the price to the performance obligations.
• Recognise revenue as performance obligations are satisfied.

Negative goodwill should be credited to the P&L immediately.

PPE – yes
Investment properties – no

Currency of the primary economic environment in which the entity operates.

• Relevance
• Faithful representation
• Comparability.
• Verifiability.
• Timeliness.
• Understandability

The correct time-allocation for a 20 mark question in the FR examination is 36 minutes (1.8 minutes per mark) – not a minute more, not a minute less. The formula for quickly calculating time allocation in the FR examination is …. number of marks for the question multiplied by 2 and take off 10%. So, for a 20 mark question …. 20 multiplied by 2 = 40 and 40 – (10% of 40) = 40 – 4 = 36 minutes

In any question in an FR examination, the easiest marks to gather are the first 50%.  It is therefore vitally important in the examination to focus on the easier marks first and develop a solid exam technique to ensure that you pass the exam.  Any marks above the pass mark are a bonus!

Neither! The figure for an increase in the value of closing inventory when compared with the previous year’s figure is not shown in the financing activities section of a Statement of Cash Flows. The figure would be deducted within the operating activities section

The two alternative methods for the preparation of a Statement of Cash Flows are the “direct method” and the “indirect method”
(the indirect method is the only method examined in the FR exam)

Neither! The figure for tax paid is not shown in the investing activities section of a Statement of Cash Flows. The figure would be deducted within the operating activities section.

In a Statement of Cash Flows a profit on disposal of an asset is deducted in arriving at cash generated from operations.  If a loss on disposal of an asset was made then this would be added in arriving at cash generated from operations.

The three main sub-divisions in a Statement of Cash Flows are:

• Operating activities
• Investing activities, and
• Financing activities

A cash equivalent in the context of a Statement of Cash Flows is the expression applied to short-term, highly liquid investments that are readily convertible into known amounts of cash and are subject to an insignificant risk of changes in value.  An example being government bonds/guilts.

Window dressing is the entering into (or not entering into) a transaction with the intention of distorting the view shown by the financial statements.

Dividend yield is computed as the cent return per dollar invested – in other words, dividend per share / share price.

It is not possible to conclude anything at all from an isolated piece of information!  To be able to analyse the ratio, you will need a comparative figure to see if we are in a stronger position.  Comparative figures are usually those of the prior year but can be against industry averages or a competitor.

* A substantial sale just before the year end
* A result of management strategy to increase credit period offered to customers
* Registration for sales tax this year
* Change in cash / credit sales mix
* Break down in credit control department

Other reasons could equally be a contributory cause and you need to analyse the specific scenario in the question.

The quick ratio (acid test) is calculated by (current assets excluding inventory) / current liabilities

Asset turnover is calculated by dividing revenue by capital employed (equity plus net debt)

A calculated ratio in isolation answers NO question. All it can do is raise questions – how, why, when?  How has it changed from the previous year?  Why is it different from the industry average/competition?  When did the change arise?  Could it have been at the start or the end of the year?

When answering an analysis question within the constructed response question in section C always use the word ‘because’ to help you explain the movement.

The full title of the abbreviation P/E ratio is “Price / Earnings ratio” and is an important performance ratio.  It allows the user of the accounts to make a more like-for-like comparison of the performance of two different entities.

The disclosed diluted earnings per share would be 57 cents – the worst position is always shown and anti-dilutive conversions are therefore ignored.

The appropriate accounting treatment for an adjusting event is to ….. adjust the financial statements as though the event had happened before the reporting date.  So, if a customer went into liquidation after the reporting date but prior to the accounts being authorised for issue, this would be an adjusting event and the receivable balance would be written off through profit or loss.

A non-adjusting event does not have a double entry as we do not need to adjust the accounts. The appropriate accounting treatment is to disclose the matter in the notes to the financial statements, if it is material.

A non-adjusting event is defined as “any event that occurs after the reporting date but which does not relate to a condition or situation which existed at the reporting date but knowledge of the matter is material for a proper understanding of the financial statements”.  A fire, flood or the fall in the value of an investment after the reporting date is an example of a non-adjusting event.

An adjusting event is defined as “any event that occurs after the reporting date and which relates to a condition or situation which did exist at the reporting date or fixes with greater certainty an amount or estimate as at the reporting date”.  Common example are where a credit customer goes bankrupt after the reporting date, where there is a sale of inventory at below cost, or the discovery of fraud/error.

Events after the reporting period are defined as “those events, both favourable and unfavourable, that occur between the end of the reporting period and the date when the financial statements are authorised for issue.”  IAS 10 [3]

An onerous contract is one where the costs under the contract exceed the economic benefits of fulfilling the contract.  It essentially gives an entity no chance of an overall inflow of economic benefit and the company must provide for the onerous contract.

A constructive obligation of an entity is one which is neither legal nor contractual but, because the entity has acted in a consistent manner in the past (a demonstrable pattern of past practice), the entity has raised in the minds of those affected the valid expectation that it will continue to act in that consistent manner.

An example of this would be where a company states on its website that it will clean up any environmental damage, so that even if there is no legal obligation to do so they have created the constructive obligation and must provide for the clean up costs.

Costs to be recognised in this first year of the contract are $1,300,000.

A loss is anticipated overall and must be recognised in full.  The loss is $100,000 ($2,000,000 – $1,250,000 – $850,000)

Revenue of $1,200,000 (60% of $2,000,000) is recognised and to recognise a loss of $100,000, costs must be $1,300,000.

In the context of financial instruments, a compound instrument is a financial instrument that has the characteristics of both equity and a liability.

In the FR examination, convertible debentures/loan stock will be an example of a compound financial instrument.  Split accounting is used to recognise a liability and equity element on initial recognition.

A financial asset is defined as any asset that is:
* cash
* a contractual right to receive cash or another financial asset from another entity (trade receivable)
* a contractual right to exchange financial assets or liabilities with another entity under conditions that are potentially favourable (favourable forward contract)
* an equity instrument of another entity (investment in shares)

Going Concern is the underlying assumption.

Short life assets in a lease agreement are NOT depreciated.

The three characteristics are complete, neutral and free from bias.

A lease is where there is the right to obtain substantially all of the benefits of using the asset and direct the use of the asset.

A lease liability should be measured at the the present value of the minimum lease payments.

The appropriate accounting treatment  is to expense the total lease payments over the lease period through profit or loss.

* it must be available for immediate sale
* the sale must be highly probable
* management should be committed to the sale
* there is an active programme to find a buyer
* the asset is being actively marketed
* the sale is expected to be completed within 12 months
* it is unlikely that the plan will be changed significantly

The appropriate accounting treatment for an asset which has been classified as a “non-current asset held for sale” is to measure it initially at the lower of carrying amount and fair value less costs to sell.  If it is held under the revaluation model then it must be revalued first according to IAS 16 prior to reclassification.

It should be shown separately on the Statement of Financial Position under current assets and should not be depreciated

In the context of asset impairments, no asset should be impaired to an amount lower than its recoverable amount.

Its recoverable amount is the higher of the value in use and fair value less costs to sell.

In the context of asset impairments, a cash generating unit is defined as:
“the smallest group of identifiable assets which generates cash inflows independently of other assets or groups of assets”

In the context of asset impairments, “CGU” the abbreviation for a “Cash Generating Unit”.

A CGU is the the smallest identifiable group of assets that generate cash inflows that are largely independent of the cash inflows from other assets or groups of assets.  IAS 36 [6]

In the context of asset impairments, “recoverable amount” is the higher of “value in use” and “fair value less costs to sell”

When considering whether an asset needs to be impaired, the carrying value should be compared with the recoverable amount of that asset, which is the higher of the value in use and fair value less costs to sell.

Development expenditure is defined as:-
the application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials, devices, products, processes, systems or services before the start of commercial production or use.

In the context of research and development expenditure, the appropriate treatment of “applied research” as distinct from “pure research” is to expense it in the Statement of Income. “Pure research” is treated in exactly the same way – expense in the year in which it is incurred.

In the context of goodwill, the appropriate treatment for goodwill which has been internally generated is to ignore it completely

In the context of intangible assets, an asset with an infinite life is an asset which is expected to “live” forever whereas an asset with an indefinite life is one where it is accepted that the asset will be used up over a period of time, but we are unable to determine a reasonable estimate of just how long that life may be

The two methods of measuring the value of an intangible asset are:

• the cost model, and
• the revaluation model

Where an investment property is held under the fair value model, the appropriate treatment for this asset is to:-
revalue the asset at the end of every year
show any gain or loss within the Statement of Income
do not charge depreciation on the asset

The two alternative accounting treatments for investment properties are:

• the cost model, and
• the fair value model

Investment property is defined as:
land or a building held to earn rentals or for capital appreciation (or both), rather than for use or sale in the ordinary course of the entity’s business

In the context of borrowing costs, the situations when borrowing costs should cease to be capitalised are:-
when the qualifying asset is substantially complete
when work on the qualifying asset is halted during a prolonged period of inactivity

The appropriate treatment of borrowing costs incurred on a qualifying loan is to capitalise the borrowing costs into the carrying value of the asset

The two alternative methods of accounting for the receipt of a government grant received in respect of an asset are:
* deduct the grant from the cost of the asset
* credit a deferred income account

If the subsequent expenditure improves the earning capacity of the asset, the expenditure should be capitalised. If, however, the subsequent expenditure merely extends the useful life of the asset, the expenditure should be written off in the year in which the expenditure is incurred.

The appropriate accounting treatment when an entity revises its assessment of the remaining useful life of an asset is to depreciate the asset over its revised estimated useful life. This is an example of a change in accounting estimate and no adjustment is made to previously reported figures when an estimate is changed.

The appropriate treatment in the current year’s Financial Statements when an entity discovers a fundamental error which, if detected last year, would have caused the previous year’s reported figures to be different is to restate as a prior year adjustment the figures previously reported

The appropriate treatment in the current year’s Financial Statements when an entity changes an accounting policy is to restate the figures brought forward from previous years and apply the new policy prospectively

A Contingent Liability is a possible obligation that arises from some past event and the existence of which will be confirmed by the occurrence or non-occurrence of some substantially uncertain future event not wholly within the control of the entity or it is an item which should be provided for, but is not capable of reliable measurement

The Framework definition of Equity is: the residual amount after deducting all liabilities of the entity from all of the entity’s assets

A provision is a probable obligation of uncertain timing or amount

The Framework definition of a liability is:-

A present obligation of the entity to transfer an economic resource as a result of past events.

The Framework definition of an asset is:-

A present economic resource controlled by the entity as a result of past events.

The full title for which IASB is the abbreviation is “International Accounting Standards Board”

When preparing the Consolidated Statement of Profit or Loss, you are told that the associate entity sold goods to the parent during the year of $60,000 (at cost to the parent). The parent had none of these goods in inventory as at the year end.

No PURP adjustment is required as the goods have all been sold and no adjustment is necessary for the sales amount because the associate is NOT a group entity and they are therefore not intra-group sales.

The basis for the calculation of Consolidated Retained Earnings for the Consolidated Statement of Financial Position is:
* the parent entity’s own retained earnings (100%), plus
* the parent’s share of the subsidiary’s post-acquisition retained earnings, less
* any impairment of goodwill (full goodwill method)

The basis of the calculation of the non-controlling interest investment for the Consolidated Statement of Financial Position is:-
* NCI value at date of acquisition, plus
* NCI share of subsidiary’s post acquisition movement in net assets, less
* NCI share of any impairment of goodwill

When preparing a Consolidated Statement of Profit or Loss, we are told that during the year the subsidiary sold goods to the parent with a selling value of $27,000. The goods had cost the subsidiary $27,000.

The adjustment necessary is to deduct $27,000 from both the combined revenue and the combined cost of sales.

There is no PURP as the goods were sold for the same amount as they cost, hence zero profit!

The parent has a 75% holding in a subsidiary. Before the year end, the subsidiary directors declared a dividend of $6,000.

The parent’s share of the dividend (75% of $6,000) $4,500 dividend should be deducted from the calculation of consolidated retained earnings ( Working 5 )?

The value of the provision for unrealised profit is $32,500 ($40,000 – $7,500 ($40,000/ 4 * 9/12))

The situations that give rise to a bargain purchase include:
* where the fair values attributed by the acquirer to the subsidiary net assets are greater than the carrying value of those assets in the subsidiary’s records
* where the acquiree’s owners were in a “forced sale” situation
* where the acquiree’s owners are simply looking to sell their entity because, for example, of approaching retirement

The subsidiary’s assets and liabilities on the Statement of Financial Position are NEVER time-apportioned.  At the reporting date, the parent has control and therefore consolidated 100% of the assets and liabilities.

When a subsidiary has sold goods to the parent and the unrealised profit is calculated as $2,760, the adjustment for $2,760 is deducted from the Retained Earnings of the subsidiary.

When a parent sells $130,000 goods to a subsidiary achieving margin of 30% and the subsidiary has a quarter of these goods in inventory at the year end, the provision for unrealised profit is $9,750 (¼ * 30/100 * $130,000)

When a parent sells $130,000 goods to a subsidiary at a mark up of 30% and the subsidiary has none of these goods in inventory at the year end, no provision for unrealised profit is required

The three ways are:

• telling you the fair value of the investment
• telling you the fair value of the goodwill attributable to the non-controlling interest (add NCI share of S’s net assets)
• telling you the fair value of the subsidiary’s shares immediately before acquisition (multiply by the number of NCI shares)

When the non-controlling interest is valued on a proportional basis, any impairment of goodwill is allocated entirely to the parent entity, none is allocated to the NCI.

The investment of the investment of the non-controlling interest may be measured on a proportional basis (share of net assets) or on a full, fair value basis.

A non-controlling interest is the interest of the owners of the subsidiary shares not owned by the parent entity

Control of an investee is the power to direct the operating and investing activities of the entity and is defined as “an investor controls an investee when the investor is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee”  IFRS 10 [6]

An investee is classed as an associate when the investor holds a significant influence in the investee.  Significant influence is the power to participate in the financial and operating policy decision of the investee.  Ownership of 20% or more of the voting power of the investee signifies significant influence.

Influence is usually evidenced by representation on the board of directors.

An entity must prepare consolidated financial statements when the entity has had control over another entity at any time within the accounting period

The extent of an investor’s influence when the investor holds > 20% but < 50% of the voting power of another company is normally “significant” and the investor equity accounts for the investment.

Yes, equity accounting IS the usual manner of accounting for an investment in an associate

No, not true. If an investor has > 20% and < 50% of another company's voting power, it would normally expect to treat the investment as an associate under the principles of equity accounting. However, this treatment is dependent upon the disposition of the remaining shares / voting power

No, not true. If an investor has no subsidiaries, there is no requirement to produce / present consolidated financial statements

Yes, it is true

No, we DO NOT calculate “goodwill” on the acquisition of an associate. Any amount paid by the investor over the investor’s share of the associate’s fair valued net assets at date of acquisition is called “premium on acquisition” not goodwill

No, we consolidate the FULL 100% amount of the subsidiary’s assets and liabilities ie the value which is under our control!

No, the adjustment is to reduce revenue and cost of sales by the transfer value of the intra-group traded goods

No, we consolidate the newly-acquired subsidiary’s results for the period AFTER the acquisition

Yes, the adjustment is to add the pup to consolidated cost of sales

No, the adjustment is to ADD the pup to consolidated cost of sales

No, the adjustment is to ADD the pup to consolidated cost of sales

No, the adjustment is to ADD the pup to consolidated cost of sales

No, not true. The selling company will have recognised a profit when they recorded the sale as they despatched the goods to the other group company. And it’s that profit which needs to be eliminated from the retained earnings of the selling company

No, the adjustment is to debit the cash account in the parent and to credit the “receivable from the subsidiary” included within the parent’s receivables

No, the adjustment necessary is to reconcile the two balances and then cancel the receivable against the payable

No, margin is a percentage based on selling price, so the profit element is 20% x 240,000 = 48,000

Yes, margin is a percentage based on selling price, so the profit element is 20% x 240,000 = 48,000

No! Mark-up is a percentage based on cost, so the profit element is 20/120 x 240,000 = 40,000

No! It is calculated based on the value of the CLOSING INVENTORY of those intra-group traded goods and, since that is zero, the pup is zero

No! It is calculated based on the value of the CLOSING INVENTORY of those intra-group traded goods and, since that is zero, the pup is zero

No! It is calculated based on the value of the CLOSING INVENTORY of those intra-group traded goods

The amount to eliminate is the NET amount of the unrealised profit – ie as reduced by the depreciation which has been charged on the unrealised profit recognised on transfer

When an item of TNCA is transferred at a profit within a group, and is still in the possession of a group company as at the year end, the adjustment necessary to remove the unrealised profit is to credit the TNCA and debit the retained earnings of the company WHICH RECOGNISED THE PROFIT

• “margin” is used where the profit is expressed as a percentage based on the selling / transfer price
• “mark-up” is used where the profit is expressed as a percentage based on the cost price of the item transferred

YES! It IS true. This is the “working 3”

Yes, in FR (and substantially always in SBR!) the Share Premium Account is a reserve which existed at the date of acquisition

When an exam question says that “the directors value the nci investment on a proportional basis” the examiner is effectively saying that the nci is valued on the basis of their percentage applied to the fair value of the subsidiary’s net assets as at the date of acquisition

Yes, there is NO goodwill attributable to the nci where they are valued on a proportional basis so there is no impairment attributable to them

“nci” stands for non-controlling interest”

A bargain purchase is the expression used when the fair value of a subsidiary’s net assets at date of acquisition exceed the “value” attributable to that subsidiary taking into account the fair value of the purchase consideration and the value attributable to the nci

No, it is not true. Negative goodwill should, having been reassessed at the first year end after acquisition, be credited to Retained Earnings at the end of the year of acquisition

No, it is not true. Negative goodwill should, having been reassessed at the first year end after acquisition, be credited to Retained Earnings at the end of the year of acquisition

No, it is not necessarily true. Where the fair value of the subsidiary’s net assets at the date of acquisition exceeds the “value” of the subsidiary, then negative goodwill will be the result

No, it is not ALWAYS true. Where the disposition of the remaining shares is wide-spread, the holding of 35% COULD represent effective control in which case it could fall to be consolidated as a subsidiary as explained in IFRS 10

No, it is not ALWAYS true. If the other 65% are held by another party, the 35% holder has no influence and would therefore treat the investment as though it were merely an investment and account for the dividend stream from that investment

No, it is not true. The subsidiary’s statement of financial position is “as at a moment in time” and, by definition, this must be post acquisition

Yes, the statement is true. A subsidiary is “a company which is under the control of another” and, if control has now been lost to the foreign government, then it is no longer a subsidiary

Yes, the statement is true. A subsidiary is “a company which is under the control of another” and, if control has now been lost to the foreign government, then it is no longer a subsidiary

Yes, the statement is true. A subsidiary is “a company which is under the control of another” and, if control has now been lost to a lender, then it is no longer a subsidiary

Yes, the statement is true. A subsidiary is “a company which is under the control of another” and, if control has now been lost to a liquidator, then it is no longer a subsidiary

No, it’s NOT true. The holding of greater than 50% of the voting rights does not automatically represent control.

Yes, under IFRS 10, where the investor is so exposed to or has such rights, this indicates control and therefore the requirement to incorporate the investee’s results as a subsidiary

Yes, the statement is true. In fact, it’s the ONLY reason identified by IFRS for the exclusion of a subsidiary from the group financial statements

No, it is not true. A discontinued operation (not having been classed as an asset held for sale) is one which HAS BEEN disposed of

No, it is not true. Not only must management be committed to the sale but an active programme to locate a buyer must have been started.

The statement is not true. To be classed as “held for sale” it should be available for immediate sale

• If required by an IFRS; or
• Results in the financial statements providing reliable and more relevant information

IAS 8 [14]

Information is usually reliable and more relevant when there is a change in recognition, presentation or measurement.

The statement is NOT true. In the context of a change in accounting policy, it is necessary to restate the opening figures and last year’s financial statements. The effect of the change is that the financial statements should reflect the position as if the new policy had always been in operation.

The statement is TRUE.  In the context of a change in accounting policy, it is necessary to restate the opening figures and last year’s financial statements.

The statement is not true.  In the context of a change in accounting estimate, it is not necessary to restate the opening figures or last year’s financial statements. The change in estimate applies only prospectively and not retrospectively.  A change in accounting policy or prior year error requires the opening balances to be restated.

The statement is TRUE.  A change in accounting estimate is applied prospectively, i.e. to the current period and future periods.  It is NOT necessary to restate the opening figures nor last year’s financial statements

• Statement of Financial Position
• Statement of Profit or Loss and Other Comprehensive Income
• Statement of Cash Flows
• Statement of Changes in Equity
• Notes to the Financial Statements

Perceived disadvantages of standardising accounting practices include:
* pressure groups may succeed in asking for amendments thus reducing comparability
* inflexibility leading to possible inappropriate accounting treatment
* introduction of rules removes the concepts of skill and judgement

Standardised accounting practices:
* provide a focal point for debate
* require disclosure of policies adopted
* encourage global discussion
* are flexible
* enable meaningful comparison
* reduce the penumbral areas of divergent possibilities

The four enhancing qualitative characteristics are:

• Comparability
• Verifiability
• Timeliness
• Understandability

The fundamental qualitative characteristics are relevance and faithful representation.

Research costs should be expensed in the Income Statement.

If it is probable, then the asset should not be recognised in the Financial Statements, but it should be disclosed by way of note.

A contingent asset is a possible asset that may appear due to past events.

Buildings will be depreciated because they have a limited useful life.
Land will not normally be depreciated because it has an unlimited life.

Inventory is valued at the lower of cost and net realisable value (NRV).