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Flashcards in Accounting 5-8 Deck (75)
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1
Q

AASB 115 / IAS 16 defines property, plant and equipment as:

A
  • Held for use in the production or supply of goods or services, for rental to others, or for administrative purposes
  • They are expected to be used during more than one period
  • Assets with a specific use within the entity
  • Assets are non-current.
2
Q

PPE is considered in terms of

A
  • recogn of the asset
  • initial measurement of the asset
  • measurement subsequent to initial recog
  • derecognition of the asset
  • disclosure requirements
3
Q

Initial recognition of PPE

A
  • Cost of an item is recogn as an asset if:
    it is probable that econ benefits will flow to the entity & the cost can be measured reliably
  • The outlay must give rise to the expectation of future econ benefits
  • The term ‘measured reliably’ refers to recogn of PPE only where the measurement purports to faithfully represent the economic substance of the item and is free from material error or bias
4
Q

Initial recognition of PPE: significant parts approach

A
  • the total PPE of an entity may be broken down into seperate assets
  • to recogn both the value of the asset and the exp benefits consumed by the entity during the period in which the benefits are received
    e. g. an aircraft
  • the engines
  • the cockpit equipment inc computers, navigation equipment …
5
Q

Initial measurement of PPE: initially measured at cost which includes

A
  • purchase price
  • directly attributable costs
  • initial estimate of the costs of dismantling and removing the item or restoring the location site
6
Q

initial measurement of PPE : purchase price

A
  • is the base cost of the asset
  • the entity should re-measure the transferred assets to their fair values as at the acquisition date
  • acquisition date; the advantage of these dates is that they relate to a specific point of time and can be determined objectively
7
Q

Initial measurement PPE; directly attributable costs

A

Directly attributable costs
-The costs are capitalised into the cost of the asset.
-Costs to be included
Costs of employee benefits arising directly from the construction or acquisition of the item of PPE
Costs of site preparation
Initial delivery and handling costs
Installation and assembly costs.

8
Q

Initial measurement PPE : costs not to be included

A
  • costs of opening new facility
  • costs of intro new prod/service
  • costs of conducting business in new locn
  • costs incurred while an item capable of operating
  • initial operating losses
  • costs of relocating or reorganising part/all of these opps
9
Q

Initial measurement of PPE; cost of dismantling, removal or restoration

A

e.g. construction of offshore oil platform
- The platform gives rise to a liability for restoration under AASB 137/IAS 37 Provisions, Contingent Liabilities and Contingent Assets.
It is an essential condition of having the asset available for use.
Included in the value of the asset and depreciated over its useful life.

10
Q

Measurement subsequent to initial recognition

A

AASB 116/ IAS 16 allows a choice of two possible measurement models:

  • cost model
  • revaluation model
the choice of model is not an acct policy decision 
it is not applied to ind assets but to an entire class of PPE
11
Q

The cost model

A

AASB 116/ IAS 16 req that assets are carried at cost less any accumulated:

  • depreciation
  • impairment losses

the costs incurred at the time the capacity is changed must be able to be measured reliably

12
Q

The cost model ;

A

Depreciation
Under the cost model, after initial recognition.
Depreciation: the systematic allocation of the depreciable amount of an asset over its useful life.
Depreciable amount: the cost of an asset less its residual value.
Residual value: the estimated value that an entity would currently obtain from disposal if the asset were at the end of its useful life.

Useful life: the period over which an asset is expected to be available for use by an entity.
A systematic allocation
Depreciation is a process of allocation.
Depreciation is not a measure of change in value.
AASB 116/IAS 16 does not specify how this allocation process should be undertaken.

Methods of depreciation
Straight line method.
Diminishing-balance method.
Units-of-production method.

Useful life
Determination of useful life requires estimation of the asset’s useful life to the entity.
The expected usage of the asset by the entity.
Residual value
Residual value is an estimate based on what the entity would currently obtain on the asset’s disposal.
Residual value is not adjusted for expected changes in prices.

As an alternative to the cost model AASB 116/IAS 16 allows the revaluation model to be used for classes of assets:
Measurement basis is fair value (FV).
The principle for revaluation of the asset is that revaluations must be made with sufficient regularity.
It limits the ability of management to ‘cherry‐pick’ or selectively choose which assets to revalue.

13
Q

The revaluation model;

As an alternative to the cost model AASB 116/IAS 16 allows the revaluation model to be used for classes of assets:

A

Measurement basis is fair value (FV).
The principle for revaluation of the asset is that revaluations must be made with sufficient regularity.
It limits the ability of management to ‘cherry‐pick’ or selectively choose which assets to revalue.

14
Q

Revaluation inc and dec

A

AASB 116 / IAS 16 para 39:

  • revaluation in that class are done on an asset by asset basis
  • to inc is not recog in profit or loss but in other comprehensive income (OCI)

Revaluation increases and decreases involving reversals

  • There is a revaluation decrease, (due to a change in the fair value of an asset) and there has previously been a revaluation increase to that asset.
  • There is a revaluation increase to an asset that had previously recorded a revaluation decrease in the profit or loss.
15
Q

Depreciation of revalued assets

A

Applies for both the cost model and the revaluation model.
Depreciation is not determined simply as the change in fair value of the asset over a period.
It is calculated as the pattern of economic benefits relating to the asset and the residual value of the asset.

16
Q

AASB 116/IAS 16 para 67 identifies two occasions where derecognition should occur:

A

on disposal

where no future economic benefits are expected.

17
Q

On sale of an item of PPE, the entity must:

A

Account for depreciation from the beginning of the period to the date of sale.
Account for the sale and recognise a gain or loss on sale.

18
Q

According to paragraph 73 of AASB 116/IAS 16, entities are required to disclose

A

the measurement bases used
the depreciation methods used
the useful lives or the depreciation rates used.

19
Q

Accounting standards do not allow the recognition of some items that the market considers to be valuable such as:

A

Human resources
Brand names
Customer satisfaction.

20
Q

AASB 138 / IAS 38 identifies intangibles as and characterised as:

A

“an identifiable non-monetary asset without physical substance”

three key characteristics of intangibles

  • identifiable
  • non-monetary in nature
  • without physical substance
21
Q

Identifiable

A

an asset is identifiable if it either is separable or arises from contractual or other legal rights

the asset is separable:

  • an asset must be capable of being separated from the entity
  • if the entity sold, licensed, rented, exchanged or transferred the asset

the asset arises from contractual or other legal rights:

  • entity has right to use 2m litres of water / year in its prod process
  • these rights cannot be transferred between entities
22
Q

Non-monetary in nature

A
  • monetary assets are ‘money held and assets to be received in fixed or determinable amounts of money’
  • included as a req characteristic of an intangible asset in order to exc such financial assets as loans receivable from being classified as intangible assets
23
Q

Lack of physical substance

A
  • physical substance relates to the ability to see and touch an asset
  • it is inc in the definition to exc items of PPE from being classified as intangible assets
24
Q

The following recognition criteria must be met before it can be recognised as an asset

A
  • it is probable that future economic benefits attributable to the asset will flow to the entity
  • the cost of the asset can be measured reliably
25
Q

Intangibles that can never be recognised

A
  • specific internally generated intangibles assets

- research costs

26
Q

Intangibles may be acquired in the following ways:

A
  • by seperate acquisition
  • acquisition as part of a business combo
  • internally generated intangible assets
27
Q

separate acquisition

A
  • means that an entity acquires an ind intangible asset not a group of assets
  • assets obtained by separate acquisition are measured at cost
  • the cost is determined as the sum of the purchase price and the directly attributable costs
28
Q

acquisition as part of a business combo

A

Intangibles acquired as part of a business combination, no recognition criteria need be applied.
The acquirer will recognise the assets at fair value and the fair value is always considered measurable.
For example, the acquirer can recognize brands, mastheads or publishing titles as intangibles because these are acquired not internally generated assets.

29
Q

Internally generated intangible assets

A

Internally generated asset may be created over a period of time.
In contrast to separate acquisition and business combinations where there is a single acquisition date.
An entity has to classify the generation of the asset into
a research phase
a development phase.

Research
‘original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding’.
Research would be undertaken in the early stages of the project.

Development
The research phase of a project has been completed, the outlays are classified as development.
An intangible asset can arise from development outlays.
Recognition criteria are:
The technical feasibility
Its intention to complete the intangible asset
Ability to use or sell
How the intangible asset will generate future economic benefits
Availability of resources
Ability to measure costs reliably.

30
Q

Internally generated goodwill

A

Goodwill is not an intangible asset as it is not a separable asset, an entity does not have legal or contractual rights to the asset.
Internally generated goodwill shall not be recognised as an asset.
The reason for non‐recognition of internally generated goodwill is that the cost of the asset cannot be reliably measured.

31
Q

Ammortisation of intangible assets

A

the systemic allocation of the depreciable amount of an intangible asset over its useful life
deprn amount: the cost of an asset or other amount subs for cost minus its residual value

32
Q

Ammort of intangible assets; useful lives

A

Finite useful lives:
Amortisation principles are the same as for depreciating property
Straight-line method is to be used
The residual value of an intangible asset with a finite useful life is assumed to be zero.
Indefinite useful lives:
No amortisation expense for that asset
Useful life to be reviewed each year

33
Q

Useful life of an intangible asset can be influenced by these factors

A

Expected use of the asset
Product lifecycles for the asset
Technological and commercial obsolescence
Nature of the industry
Competitive action
Period of control over the asset
In general, assets whose lives depend on contractual or legal lives are amortized over those lives or shorter periods

34
Q

Cost Model:

A

: An intangible asset shall be carried at its cost less accumulated amortization and any accumulated impairment losses.

35
Q

Revaluation Model:

A

An intangible asset shall be carried at its revalued amount, being its fair value at the date of revaluation less subsequent amortization and any accumulated impairment losses.

36
Q

Subsequent expenditure

A

It is used to maintain the expected economic benefits embodied in the existing asset.
Subsequent expenditure on in‐process research or development projects, the principles are:
Expense any research expenditure
Expense any development expenditure if does not meet recognition criteria
Capitalise development expenditure that meets the recognition criteria.

37
Q

Disclosures for intangible assets

A

Disclosures for intangible assets are based on classes of assets.
An entity must disclose the carrying amount of the asset.
Requires the entity to disclose
The effective date of revaluation
The carrying amount of the revalued assets
The amount of any asset revaluation surplus that relates to intangible assets.

38
Q

Impairment of assets defines as:

A

the amount by which the carrying amount (CA) of an asset or a cash-generating unit exceeds it recoverable amount (RA)

the impairment does not apply to all assets, notable exc include

  • inventories
  • deferred tax assets
  • non-current assets held for resale
39
Q

The following assets must be tested annually for impairment regardless of whether there is any indication:

A

intangibles with indefinite useful lives
intangibles not yet available for use
goodwill acquired in a business combination

40
Q

AASB 136/ IAS 36 provides minimum indicators (internal and external) of impairment.

A

-External sources
Decline in market value.
Adverse changes in entity’s environment/ market.
Increases in interest rates.
CA of net assets exceeds market capitalisation.

Internal sources
Obsolescence or physical damage.
Adverse changes in the entity expected to effect asset’s use.
Evidence an asset’s economic performance is worse than expected.

41
Q

The three components of RA (recoverable amount)

A

FAIR VALUE
(as per AASB 13) the price that would be received to sell an asset in an orderly transaction between market participants

COST OF DISPOSAL
incremental costs directly attributable to the disposal

VALUE IN USE
the present value of the future cash flows expected to be derived from an asset

42
Q

An impairment loss is recognised where

A

Carrying amount > Recoverable amount

43
Q

downward revaluation is treated

A

as an expense unless there is a previous revaluation increase for that particular asset, the downward revaluation reduces the existing revaluation surplus and is recognised in other comprehensive income

44
Q

If an asset cannot be tested individually because no recoverable amount can be determined

A

then AASB 136 requires the company to identify the cash generating unit to which the asset belongs.

45
Q

If the FVLCOD < CA

A

it is necessary to calculate the VIU of an asset to determine whether or not it is impaired.

46
Q

Identification of cash generating units requires judgement and consideration of:

A
  • how mgmt monitors the entity’s operations

- how mgmt makes decisions about continuing or disposing of the entity’s assets and operations

47
Q

Goodwill impairment

A

goodwill is residual balance, consisting of assets that cannot be ind identified or separately recognised

it is not possible to det a FVLCOD for goodwill or to identify cash flows relating specifically to goodwill

goodwill can only be tested for impairment of a CGU

48
Q

impairment loss: cash gen units

A

impairment loss for a CGU
-If it is probable that the assets of the CGU are impaired, management then
calculate the recoverable amount of the CGU
compare it with the total carrying amount of the assets of the CGU
determine whether an impairment loss exists.

49
Q

impairment loss: cgu step 1

A

Reduce the carrying amount of any goodwill allocated to the CGU
Its carrying amount and its existence are considered less reliable than that of the identifiable assets.

50
Q

impairment loss: cgu step 2

A

Allocate any balance of impairment loss to the other assets on a pro-rata basis

51
Q

However, the carrying amount of each asset cannot not be reduced below the highest of:

A

a) its fair value less costs to sell,
b) its value in use, and
c) zero (Paragraph 105).

52
Q

Restriction of allocation of impairment losses

A

If the amount of an impairment loss allocated to an
asset causes its CA to fall below its FV less costs to
sell, then that portion of the impairment loss (i.e.
difference between CA and FV) that would otherwise be
allocated to that asset shall be allocated pro rata to the
other assets of the unit (Paragraph 105).

53
Q

reversal of an impairment loss

A

If the amount of an impairment loss allocated to an
asset causes its CA to fall below its FV less costs to
sell, then that portion of the impairment loss (i.e.
difference between CA and FV) that would otherwise be
allocated to that asset shall be allocated pro rata to the
other assets of the unit (Paragraph 105).

54
Q

Previously recognised impairment losses in relation to individual assets, including those recognised as part of a CGU, are able to be reversed with the following exceptions:

A
  • good will
  • the new carrying amount cannot be higher than the CA that would have been determined had no impairment loss been previously recognised
55
Q

disclosures impairment losses

A

The amount of impairment losses (and reversals of impairment losses) recognised in profit or loss during the period and the line items of the comprehensive income statement in which they are included.

The amount of impairment losses (and reversals of impairment losses) on revalued assets recognised in other comprehensive income during the period.

56
Q

During the period for an individual asset, including goodwill, or a CGU, an entity must also disclose:

A
  • The events and circumstances that led to the recognition or reversal of the impairment loss
  • The amount of any impairment loss recognised or reversed
  • For an individual asset: the nature of the asset
  • If recoverable amount is fair value less costs of disposal, the basis of the measurement used.
  • If recoverable amount is value in use, the discount rates used.
57
Q

AASB 137/ IAS 37 addresses the recognition, measurement and presentation of:

A
  • provisions
  • contingent liabilities and contingent assets
  • onerous contracts
  • restructuring provisions
58
Q

A provision is a subset of liabilities, defined in AASB 137/IAS 37 as:

A

A liability of uncertain timing or amount.

59
Q

A present obligation may be

A

legal: arising from a contract
constructive: arising from est. pattern of past practice

60
Q

Typical provisions:

A

warranty
restructuring
provisions for onerous contracts

61
Q

Contingent liabilities are either:

A

(a) A possible obligation whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly in control of the entity
e. g. a guarantee on a loan for another entity

(b) A present obligation that fails the recognition criteria because:
it is not probable an outflow of resources will be required to settle the obligation or
the amount cannot be measured reliably e.g. a law suit where amount of damages is uncertain.

62
Q

Contingent liabilities do not meet

A

the recognition criteria stated in the conceptual framework and therefore are not recognised in the financial statements

63
Q

A provision should be recognised when (Para 14 of AASB137):

A
  • An entity has a present obligation as a result of a past event.
  • It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation;
  • A reliable estimate can be made of the amount of the obligation.
64
Q

‘Best estimate’ of provision amount recognised:

A

requires professional judgements
is calculated using ‘expected value’ estimation
measured before tax.

Estimates should be discounted to present value where material.

65
Q

measurement of provisions

A

Should account for expected cash outflows only, disregarding any expected cash inflows.

Reimbursements must be virtually certain (not just probable) to be recognised.

Must review provisions at each end of reporting period.

66
Q

future operating losses

A
  • It states that provisions must not be recognised for future operating losses.
  • The entity’s management will generally have the ability to avoid incurring future operating losses by either disposing of or restructuring the operation.
67
Q

An onerous contract is defined as:

A

A contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it.

-the present obligation under an onerous contract must be recognised as a provision

68
Q

restructuring provisions

A
  • can be recognised as part of an acquisition of another business (AASB 3)
  • AASB 137/ IAS 37 addresses non-business combination restructuring
69
Q

Essential conditions to recognise a restructuring provision:

A
  • must have a present obligation to restructure
  • costs must be directly and necessarily caused by the restructuring
  • if the restructuring involves the sale of an operation, a binding sale agreement is needed.

It is rare for a legal obligation to restructure to exist therefore focus is on constructive obligation.

70
Q

Constructive obligation to restructure is considered to arise when the entity has a detailed plan identifying at least:

A
  • the business (or part therof) concerned
  • the principal locations affected
  • the employees affected
  • the expenditures that will be undertaken
  • the timing of implementation
71
Q

Examples of qualifying costs include:

A

the costs of terminating leases and other contracts
costs associated with employees dismantling plant etc.
employee redundancy costs

72
Q

Costs specifically excluded:

A

employee retraining and relocation costs

marketing costs.

73
Q

Binding sale agreement

A

The final requirement for recognition of a restructuring provision is that if the restructuring involves the sale of an operation, no obligation is deemed to arise for the sale until the entity is committed to the sale by a binding sale agreement.

74
Q

Contingent assets

A

Possible asset arising from a past event whose existence will be confirmed by the occurrence/non-occurrence of one or more uncertain future events not within the control of the entity.

Contingent assets are not recognised in the statement of financial position but must be disclosed in the notes to the financial statements where an inflow of benefits is probable.

75
Q

AASB 137/IAS 37 paras 84- 92 outline the disclosure requirements:
provisions , contingent liabilities and contingent assets

A
Disclosure for each class of provision required.
Disclosure for each class of contingent liability required.
Disclosure of nature of contingent assets.
Exemptions permitted in rare cases (para 92).