FR flashcards

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

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

What are the two fundamental qualitative characteristics contained with the IASB Conceptual Framework?

The fundamental qualitative characteristics are relevance and faithful representation.

What are the four enhancing qualitative characteristics within the IASB Conceptual Framework? The four enhancing qualitative characteristics are:

• Comparability
• Verifiability
• Timeliness
• Understandability

Per IAS 1, a complete set of financial statements comprise of which 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

In the context of a change in accounting estimate, it is NOT necessary to restate the opening balances nor last year's financial statements.

Is the following statement true?

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

In the context of a change in accounting estimate, it is necessary to restate the opening balances and last year's financial statements.

Is the above statement true?

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.

In the context of a change in accounting policy, it is necessary to restate the opening figures.

Is the above statement true?

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.

In the context of a change in accounting policy, it is NOT necessary to restate the opening figures nor last year's financial statements.

Is the above statement true?

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.

When is a change an accounting policy permitted?

• 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.

For a non-current asset to be classed as “held for sale” it should be available for sale within the period three months to six months after being so classified.

Is the above statement true?

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

When an asset is classed as “held for sale” not only must management be committed to the sale but in addition there must be plans actively to market the asset within the next three months

Is the above statement true?

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.

A discontinued operation (not having been classed as an asset held for sale) is one which is being disposed of.

Is the following statement true?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

If an investor is exposed to, or has the rights to, variable returns from its investment and has the ability to affect those returns, does that indicate control by the investor over the investee?

Is the following statement true? 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

If a liquidator has been appointed to the subsidiary, this represents a loss of control and therefore the statement of financial position of the subsidiary is not included within the consolidated financial statements.

Is the following statement true? 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

If a lender has, within the loan agreement, the right to appoint a majority of the board of directors of a subsidiary, this represents a loss of control and therefore the statement of financial position of the subsidiary is not included within the consolidated financial statements.

Is the following statement true? 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

When calculating Goodwill in working 2, I know I have made a mistake if the figure is negative.

Is the following statement true? 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

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

Of what is "nci" the abbreviation?

“nci” stands for non-controlling interest”

The Share Premium Account is (at least in FR!) ALWAYS a pre-acquisition reserve

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

What is the difference between “mark-up” and “margin”?

• “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

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 ….. which account? 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

Where the closing inventory of the intra-group traded goods is zero, the value of goods traded during the year is 300,000 and mark-up is 20%, the pup necessary is 50,000

Is the following statement true? 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

Where the closing inventory of the intra-group traded goods is 240,000, the value of goods traded during the year is 1,300,000 and mark-up is 20%, the pup necessary is 48,000

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

Where the closing inventory of the intra-group traded goods is 240,000, the value of goods traded during the year is 1,300,000 and margin is 20%, the pup necessary is 48,000

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

In a consolidated statement of income question, any pup which is calculated on the closing inventory needs to be adjusted within consolidated cost of sales. The adjustment is to reduce consolidated revenue

Is the following statement true? No, the adjustment is to ADD the pup to consolidated cost of sales

What is the extent of an investor's influence when the investor holds > 20% but < 50% of the voting power of another company? 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.

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

When is an investee classed as an associate? 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.

What is the definition of “control of an investee”? 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]

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

The parent has a 75% holding in a subsidiary. Before the year end, the subsidiary directors declared a dividend of $6,000. How much dividend should be deducted from the calculation of consolidated retained earnings? 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 )?

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. What adjustment is necessary? 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!

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

What is the Framework definition of an Asset? The Framework definition of an asset is:- A present economic resource controlled by the entity as a result of past events.

What is the Framework definition of a Liability? The Framework definition of a liability is:- A present obligation of the entity to transfer an economic resource as a result of past events.

What is the definition of a Provision?A provision is a probable obligation of uncertain timing or amount

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

What is the definition of a Contingent Liability?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

What is the definition of “Investment Property”? 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

What are the two alternative accounting treatments for investment properties?The two alternative accounting treatments for investment properties are:

• the cost model, and
• the fair value model

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

• the cost model, and
• the revaluation model

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

What is the definition of “development expenditure”? 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 asset impairments, of what is “CGU” the abbreviation? 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]

What is the appropriate accounting treatment for a short-life, leased asset? The appropriate accounting treatment  is to expense the total lease payments over the lease period through profit or loss.

At what value should a lease liability be measured? A lease liability should be measured at the the present value of the minimum lease payments.

What is the definition of a lease? 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.

What three characteristics are required to faithfully represent a transaction? The three characteristics are complete, neutral and free from bias.

Define the term “financial asset”. 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)

Details of a contract in its first year are as follows: * contract value $2,000,000 *costs to date $1,250,000 * 60% complete * amounts invoiced $1,150,000 * amounts received $1,100,000 * estimated costs to complete $850,000 Revenue is recognised over time and on the basis of percentage complete. What is the value of costs to be recognised? 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.

What is a “constructive obligation” of an entity? 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.

What is an onerous contract? 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.

What is the definition of “events after the reporting period”? 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]

What is the definition of an “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.

What is the definition of a “non-adjusting event” 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.

What is the correct double entry to reflect a non-adjusting event? 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.

What is the appropriate accounting treatment for an adjusting event? 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.

What is the full title of the abbreviation “P/E ratio”? 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.

Having calculated an entity's ROCE at 13%, what question does this answer? 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.

How is the asset turnover multiple calculated? Asset turnover is calculated by dividing revenue by capital employed (equity plus net debt)

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

What is the basis of the calculation for “dividend yield”? Dividend yield is computed as the cent return per dollar invested – in other words, dividend per share / share price.

What is meant by the term “window dressing”? Window dressing is the entering into (or not entering into) a transaction with the intention of distorting the view shown by the financial statements.

What is a “cash equivalent” in the context of a Statement of Cash Flows? 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.

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

• Operating activities
• Investing activities, and
• Financing activities

In any question in an FR examination, which are the easiest marks to gather – the first 50% or the last 50%? 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!

What are the 6 qualitative characteristics of financial information?

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

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

Should you depreciate PPE and investment properties if held at FV? PPE – yes Investment properties - no

What is the accounting for negative goodwill? Negative goodwill should be credited to the P&L immediately.

What are the five stages of the revenue recognition model?

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

What is the formula for EPS? 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

How should a company account for a government grant? Recognise in the P&L over the period in which the related expenditure is recognised.

How is the initial liability calculated in a convertible debt instrument? 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.

How are financial assets classified? Financial assets are measured at either:

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

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

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

When can an entity measure a financial asset using amortised cost? A financial asset can be measured at amortised cost when it fulfills BOTH the business model test and cash flow characteristics test.

Where are gains and losses on translation of a monetary item at the reporting date recognised. Gains/losses on translation of a monetary item are recognised through profit or loss.

What exchange rate is used to translate monetary assets/liabilities at the reporting date? Monetary assets/liabilities are translated at the reporting date using the closing rate.

What is a biological asset? A biological asset is a living plant or animal.

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

What figure is shown under current liabilities for tax payable on the statement of financial position? The tax payable figure is the estimate of tax at the reporting date.

How is the income tax expense figure calculated on the statement of profit or loss? The income tax is made up of the following:

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

When is a deferred tax liability recognised? A deferred tax liability it recongised when the carrying value is greater than the tax base.

What are the limitations of financial statements? 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

Over what period of time should a right-of-use asset be depreciated? A right-of-use asset is depreciated over the shorter of the lease term and the useful life of the asset.

How is a lease incentive accounted for within the financial statements? A lease incentive is deducted from the initial measurement of the asset.

How are fixed overheads allocated to the cost of an item of inventory? 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.

How are variable overheads allocated to an item of inventory? Variable overheads are allocated based on the actual level of production.

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

Do goods purchased (inventory) in a currency different to the functional currency need to be retranslated at the reporting date? No.  Inventory is a non-monetary item and non-monetary items are not re-translated at the reporting date.