MELBOURNE UNIVERSITY INTERMEDIATE FINANCIAL ACCOUNTING 2017 ACCT20002 Notes written by Megan Cheung

Transcription

1 MELBOURNE UNIVERSITY INTERMEDIATE FINANCIAL ACCOUNTING 2017 ACCT20002 Notes written by Megan Cheung

2 Topics Covered - Reporting Regulation and conceptual Framework - Accounting for Asset Acquisition - Measure of PPE after acquisition - Impairment losses for CGUS - Accounting for Foreign Currency Transaction -Lease -Consolidation part 1 -Consolidation part 2 -Consolidation Non Controlling Interest - Equity Method

3 LECTURE 1 Reporting regulation and Conceptual Framework Reporting and recording Recording -All company or disclosing entity must keep/record written financial records. Must be correctly recorded and would enable true and fair financial statements to be prepared and audited. CA2001 s286 Reporting - A financial report, directors report and an auditor s report must be prepared for each financial year by: à All disclosing entities, all public companies, all large proprietary companies and all registered schemes. CA 2001 s292(1) *small proprietary don t need to prepare financial reports unless directed by 5% of votes from shareholders or by ASIC but still must keep records. This is because typically there is less info asymmetry between management and shareholders in small pty company due to small number of shareholders. Cost of preparing exceed the benefit to users because shareholders access to info is much greater in small pty. - Financial reports includes; financial statements for the year, notes to the financial statements, disclosures required by the regulations, notes required by acc standards and.any other info necessary to give a true and fair view. Also directors declaration about statement and notes/ CA2001 s96(1) - We need reporting rules to ensure information asymmetry between shareholders and managers -All financial reports must comply with Accounting standards (AASBs) Disclosing entity = on ASX - Must prepare half year financial and directors reports - Must have financial reports audited and obtain audit reports with ASIC - Must lodge financial, directors and audit report with ASIC CA s302 *Summary Table of reporting in L1, slide 21 Types of Reports àdirectors declaration = Directors confirm they are solvent (values are true and fair) à CEO and CFO s Declaration = confirming their financial records are prepared in accordance of rules. They can be held personally liable if made fraudulently or negligently à Directors report = directors to provide info on specific matters. (list of matters slide 25, L1) à Auditor s report = confirming values are true and fair, in accordance of rules. - Unqualified audit Opinion = Auditor approved values true and fair view - Qualified audit Opinion =Auditor says NOT given in true and fair view, so they company can choose if they change their report or not given auditor opinion. If they don t change there report will state qualified report however if they do change they don t need to include qualified report in report. Conceptual Framework - The framework sets out the concepts that financial statements are prepared for external users. - The objective of general purpose financial reporting (GPFR) forms the foundation of the Framework. (Framework outlines out GPFR should be prepared). It is used to provide financial info about reporting entity that is useful for stakeholders for decision making. - Qualitative Characteristics The two fundamental characteristics are Relevance and Reliability (Faithful representation) 1) Relevance/Materiality = financial info is capable for making difference in decision making for users. It should have predictive and confirmatory values 2) Reliability/Faithful representation = A depiction would be complete, neutral and free from error. - Enhancing qualitative characteristics - Comparability able to compare report overtime - Verifiability the ability to ensure that the chosen method of measurement has been used without error or bias - Timeliness available in time to users for decision making - Understandability clear and concise - Accounting Elements -Asset = controlled by the entity, due to past event, future eco benefit Recognition = Probable + measured reliably - Liability = present obligation, due to past event, outflow of eco benefit Recognition = Probable + measured reliably - Equity = Residual interest, after deducting liability - Expenses = decrease in eco benefit, decreases asset (increase liability), decreases in equity other than those elating to distribution of equity participants. Recognition = Probable + measured reliably - Income = increases in eco benefit, increases asset (decrease liability), increases in equity other than those elating to distribution of equity participants. Recognition = Probable + measured reliably *Probable = probable that any future economic benefit associated with the item will flow to or from the entity Measured reliably = the item has a cost or value that can be measured reliably.

4 3. Impairment of assets - Definition: An impairment loss is the amount by which the CA of an asset or a cash generating unit exceeds its recoverable amount. If recoverable amount is less than CA, then the CA should be reduced to the recoverable amount. That reduction is an impairment loss. - Impairment test applies equally to PPE whether carried under cost model or the revaluation model. - The main objective is to ensure that an entity s asset are not carried above the amount to be recovered through its use (future benefit) or sale (Fair value). 3.a Frequency of impairment testing - Impairment needs to be done at end of each reporting period. If indication exists then must estimate recoverable amount. Note: This test should be done at the end of each reporting period IF the asset gives an indication of impairment, however the following assets must be tested annually regardless; - intangible assets with indefinite useful lives - Intangibles not yet available for use (eg capitalised development costs) - Goodwill acquired in a business combination 3.b) Difference between CA, RA and Value in use Carry amount The amount at which an asset is recognised after deducting any accumulated depreciation and accumulated impairment loss. (Book value, written down value) Recoverable amount The higher of its fair value less costs of disposal and its value in use. à Fair value: Price that would be received to sell and asset or paid to transfer a liability in an orderly transaction b/w market participants at the measurement date à Cost of disposal; costs attributed to the disposal of the asset à Value in use; the present value of the future cash flows expected to be derived from an asset or CGU It is a two step process; Step 1) Indications of impairment External indicators - Decrease in market value below CA - Adverse change in entity s environment/market (increase in prices of G&S) - Increase in interest rates or market rates of return (Increase in WACC adversely impacting NPV of asset) Internal indicators - Obsolescence or physical damage (Uninsured flood damage) - Carry amount of net assets is more than market capitalisation of entity Could be simply saying no sign for impairment then step 1 is done if there is no sign tho - Adverse change in entity expected to affect asset s use ( anticipating early disposal due to major restructure) - Asset s economic performance is worse than expect. (Unexpected reduction in output, higher than expected running/maintenance costs) (Fair Value - Cost of disposal) 3.c) Recognising an impairment loss Recovereable amount or Value in use Step 2) Determine extent (working out recoverable amount) If Recoverable amount is less than carrying amount then; à Identify impairment loss amount (CA-RA) à write down asset to its recoverable amount *After an adjustment for impairment all subsequence depreciation calculated are based on the new Carry amount (less any Recoverable value) allocated over the new estimated remaining useful life

5 Subsequent measure of Right of Use asset and Lease Liability Right to use asset - After commencement date; lease shall measure the right to use asset applying cost model unless: - the ROU asset meets the definition of an investment property - The ROU asset relates to a class of PPE of which the revaluation model is applied. (Lessee can pick cost or revaluation for ALL ROU assets in that class) Under the cost model - Depreciation over economic life if lessee anticipates transfer of ownership (automatically or exercise the purchase option). -if not; then lease terms - Subject to impairment under AASB 136 Lease Liability - After commencement date; measure the lease liability by: (PV of future CF) - increasing the CA to reflect interest on the lease liability - Reduce the CA to reflect the lease payments made Note: Part of the payment is interest and principle hence you need to separate it so you know how much of each is paid. Executory cost (eg, costs imposed by lessor to cover insurance/servicing etc) are excluded from the lease liability calculation. This is recorded as a separate expense when paid. Presentations - Statement of financial position (or disclose in notes) - ROU assets separately from other assets - Lease Liabilities separately from other liabilities - Statement of P/L and other comprehensive income - Interest expense (as part of finance costs) - Depreciation of ROU asset - Statement of cash flows - Cash payments of principle in financing activities - Cash payments of interest in operating or financing activities Disclosure - Include information that gives a basis for users to assess the effect that leases have on the financial position, financial performance and cash flows of the lessee. Further disclosure include (in addition to those mentioned in presentation) - Expenses relating to short term lease and low vale assets - Nature of leasing activities - Future cash outflows to which the lessee is potentially exposed - Details of leases not yet commenced but to which entity is committed - Restrictions/covenants imposed by leases. Recognition Exemptions - A lessee may elect not to apply these requirements to: à Short term leases (<12months) àleases with Low value assets (eg PCs and Tablets, small items of office furniture, telephones) - The above would be recognised as expense lease expense Bank *these will be off b/s however has no materialistic effect

6 EXAMPLES/ TEMPLATE Step Land Deferred Tax Liability Business combination valuation reserve Share Capital Retained profits Reserves One of Goodwill* Gain on bargain purchase Investment in subsidiary Example in lecture notes; Lecture example 1-3 2) When dividend declared but paid Dividend Revenue Dividend Declared (Retained earnings) Dividend Receivable Dividend Payable Elimination of intra group dividends Note: No tax effect on any of these FULL EXAMPLE IN LECTURE ILLUSTRATION: PRINTED Step 3 Example in Slide Elimination of intra group mgt fees Mgt fee rev Mgt fee expense Acc Payable Acc Recievable Elimination of intra group mgt fees Elimination of intra group loans and interest Loan Other NCA (loan receivable Interest Rev Borrowing Cost Elimination of intra group Loan and Interest Note: If Bank then it offsets and nothing happens Note: If accrued Interest then you Accrued Exp Accrued Rev Elimination of intra group dividend 1) When dividend declared and paid at the same time Dividend Rev Dividend declared (retained earnings) Elimination of intra group dividend

7 Template for Sales/Inventory Closing Inventory 3 Entries Sales COGS Eliminate Sale of Inventory COGS Inventory Eliminate unrealised profit in closing inventory Deferred tax asset Income Tax expense Tax on unrealised profit in closing inventory Opening Inventory 1 entry Retained Earning Income Tax Expense COGS Unrealised profit in opening inventory Unrealised Gain/Loss on asset disposal Gain on Sale Equipment/Plant Adjustments for intragroup sales DTA ITE Tax Effect on profit on sale Acc Dep Dep Expense Adjustment for excess depreciation ITE DTA Tax effect on excess depreciation WHEN NEXT YR OCCURS 4 entries Opening Retained Earning Equipment (Elimination of unrealised gain on equipment from prior period) DTA Opening Retained Profits (Tax Effect on unrealised gain on equipment from prior period) Acc Depreciation Retained Start Depreciation Expense (Elimination of excess depreciation from prior period) Retained start ITE DTA (Tax effect on excess depreciation from prior period)

8 Lecture 7 Consolidation Non Controlling Interest à A parent shall present NCI in the consolidated statements of financial positions within equity, separately from the equity of the owners of the parents. Step 2 and 3 *This is simple version, more add on in next example à An entity shall attribute the P/L to the owners of the parents and to the NCI. [Note: OCI should also be attributed but not taught in IFA] STEPS 1) Eliminate in FULL A,L, Eq,I & Ex(&CF) relating to intragroup transactions (including unrealised gains/losses in inventory or non current asset - No changes here, done as previously however times the full amount by percentage investment. Eg) Company holds 80% then you times the intragroup transaction by 80%. 2) Determine NCI s share of subsidiary s contribution to the group profit [and OCI but not in IFA] Note: Only upstream matters (Working out net profit and Retaining profit) 3) Determine NCI s share of the subsidiary s equity as it relates to the group [at reporting date] - Contributed equity - Reserves (Including FV increments at acquisition) - Retained profits (including NCI profit above less NCI dividends) Note: Only upstream matters 4) Put into consolidation worksheet STEP 1 (Same as before except times by percentage of investment ß 400k x 80% ß ( ) x 80% ß 250k x 80%