Financial Accounting & Reporting

Why do we recognise deferred tax?

* Adjustments for deferred tax are made in accordance with the accruals concept and in accordance with the definition of a liability in the Conceptual Framework, i.e. a past event has given rise to an obligation in the form of increased taxation which will be payable in the future and the amount can be reliably estimated. A deferred tax asset similarly meets the definition of an asset. * If the future tax consequences of transactions are not recognised, profit can be overstated, leading to overpayment of dividends and distortion of share price and earnings per share.

What are the advantages of current cost accounting (CCA)?

- By excluding holding gains from profit, CCA can be used to indicate whether the dividends paid to shareholders will reduce the operating capability of the business. - Assets are valued after management has considered the opportunity cost of holding them, and the expected benefits from their future use. CCA is therefore a useful guide for management in deciding whether to hold or sell assets. - It is relevant to the needs of information users in: * Assessing the stability of the business entity; * Assessing the vulnerability of the business (e.g. to a takeover), or the liquidity if the business; * Evaluating the performance of management in maintaining and increasing the business substance; and, * Judging future prospects. - It can be implemented fairly easily in practice, by making simple adjustments to the historical cost accounting profits. A current cost statement of financial position can also be prepared with reasonable simplicity.

What are the disadvantages of current cost accounting (CCA)?

- It is impossible to make valuations of EV or NRV without subjective judgments. The measurements used are therefore not objective. - There are several problems to be overcome in deciding how to provide an estimate of replacement costs for non-current assets. - The mixed value approach to valuation means that some assets will be valued at replacement cost, but others will be valued at NRV or EV. It is arguable that the total assets will, therefore, have an aggregate value which is not particularly meaningful because of this mixture of different concepts. - It can be argued that 'deprival value' is an unrealistic concept, because the business entity has not been deprived of the use asset. This argument is one which would seem to reject the fundamental approach to 'capital maintenance' on which CCA is based.

How is a deductible temporary difference and associated asset calculated?

A deductible temporary difference arises where the tax base of an asset exceeds its carrying amount or the tax base of a liability is less than its carrying amount, and is calculated as the difference between the tax base and the carrying amount. The resultant deferred tax asset is calculated by applying the relevant tax rate to the deductible temporary difference. The deferred tax asset must also satisfy the recognition criteria given in IAS 12. This is that a deferred tax asset should be recognised for all deductible temporary differences to the extent that it is probable that taxable profit will be available against which it can be utilised.

What is a limited liability company?

A limited-liability company is one in which the business, not the owner, is liable for the company's debts. It can have one owner, or many owners, called members. An LLC doesn't pay business income taxes, but the LLC's income "flows through" to the members and they pay income at their own tax rates. Members are not personally liable, but have limited liability.

How are all items of property, plant and equipment initially recognised?

All items of property, plant and equipment are recognised at cost. Cost includes the following: - Purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates; - Directly attributable costs of bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. Examples of directly attributable costs include delivery, installation costs and relevant professional fees. Examples of costs that are not costs of an item of property, plant and equipment are costs of opening a new facility and administration, and other general overhead costs. - Estimated cost of dismantling and removing the item and restoring the site on which it is located due to obligation (IAS 37 Provisions, Contingent Liabilities and Contingent Assets) incurred when the item is acquired or through use (other than to produce inventories).

What is an unmodfied (unqualified), or 'clean' audit report?

An unmodified (unqualified), or 'clean' audit report is where the financial statements give a true and fair view.

Current cost definition

Assets are carried at the amount of cash or cash equivalents that would have to be paid if the same or an equivalent asset was acquired currently. Asset: The cost of an equivalent asset at the measurement date, comprising the consideration that would be paid at the measurement date plus the transaction costs that would be incurred at that date. Liability: The consideration that would be received for an equivalent liability at the measurement date minus the transaction costs that would be incurred at that date.

What are some examples of common transactions which result in taxable temporary differences?

Common transactions which result in taxable temporary differences include the following: * Interest revenue: received in arrears and included in accounting profit on the basis of time apportionment. It is included in taxable profit, however, on a cash basis i.e. when it is received. * Depreciation: of an asset is accelerated for tax purposes. When new assets are purchased, allowances may be available against taxable profits which exceed the amount of depreciation chargeable on the assets in the financial accounts for the year of purchase. * Development costs: which have been capitalised will be amortised through profit or loss, but they were deducted in full from taxable profit in the period in which they were incurred. * Prepaid expenses: have already been deducted on a cash basis in determining the taxable profit of the current or previous periods.

How is amortisation of development costs calculated?

Definition: Is the systematic allocation of the depreciable amount of an intangible asset over its useful life. Once capitalised as an asset, development costs are amortised and recognised as an expense to match the costs with the related revenue or cost savings. This must be done on a systematic basis, to reflect the pattern in which the related economic benefits are recognised. If no other pattern can be identified then the straight-line method should be used. The amortisation will begin when the asset is available for use. Until the asset is available for use it should be subject to an annual impairment review. If the intangible asset is considered to have an indefinite useful life, it is not amortised but subjected to an annual impairment review.

What is current purchasing power (CPP) accounting?

Definition: Measures profits as the increase in the current purchasing power of equity. Profits are therefore stated after allowing for the declining purchasing power of money due to price inflation. When applied to historical cost accounting, CPP is a system of accounting which makes adjustments to income and capital values to allow for the general rate of price inflation.

What is a taxable temporary difference?

Definition: Taxable temporary differences are temporary differences that will result in taxable amounts in determining taxable profit (tax loss) of future periods when the carrying amount of the asset or liability is recovered or settled.

When can development costs be capitalised?

Development costs: Development costs are recognised as an expense in the period in which they are incurred unless the criteria for asset recognition below are met. Development costs initially recognised as an expense cannot be subsequently recognised as an asset in a later period. Development expenditure is recognised as an asset when the business can demonstrate all of the following (where these criteria are met, development expenditure must be capitalised ): - The technical feasibility of completing the intangible asset so that it will be available for use or sale; - Its intention to complete the intangible asset and use or sell it; - Its ability to use or sell the intangible asset; - How the intangible asset will generate probable future economic benefits. Among other things, the entity should demonstrate the existence of a market for the output of the intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset; - The availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset; and, - Its ability to measure reliably the expenditure attributable to the intangible asset during its development.

Explain how the direct method is utilised to calculate operating cash flows.

Direct method: Discloses major classes of gross cash receipts and gross cash payments. The direct method discloses information that is not available elsewhere in the financial statements, which could be used in estimating future cash flows. There are different ways in which the information about gross cash receipts and payments can be obtained. The most obvious way is simply to extract the information from the accounting records. A proforma for the direct method is given below: Cash flows from operating activities Cash receipts from customers Cash paid to suppliers & employees Cash generated from operations Interest paid Income taxes paid Net cash from operating activities

What is fair value?

Fair value is defined by IFRS 13 Fair Value Measurement as 'the price that would be received to sell and asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.' This is the market price in the principal market for the asset. Where a market price is unavailable, current replacement cost (adjusted for obsolescence) or present value techniques are used.

Fair value definition

Fair value is the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date.

Fulfilment value (for liabilities) definition

Fulfilment value is the present value of the cash, or other economic resources, that an entity expects to be obliged to transfer as it fulfils a liability.

What is general price inflation?

General price inflation is the average rate of inflation which reduces the general purchasing power of money.

What is the average rate of inflation?

General price inflation, which is the average rate of inflation, which reduces teh general purchasing power of money.

How is impairment of goodwill recognised?

Goodwill arising on consolidation is subject to an annual impairment review, and impairment may be expressed as an amount or as a percentage. The double entry to write off the impairement is: Dr. Group retained earnings Cr. Goodwill However, when non-controlling interest is valued at fair value the goodwill in the statement of financial position includes goodwill attributable to the non-controlling interest. In this case the double entry will reflect the non-controlling interest proportion based on their shareholding as follows: Dr. Group retained earnings Dr. Non-controlling interest Cr. Goodwill

Historical cost definition

Historical cost measures provide information about elements that is derived from the historical price of a transaction or event that gave rise to the item being considered for measurement; so, for an asset, this would be the cost incurred in acquiring/creating the asset. For a liability this would be the value of the consideration received to incur/take on the liability. The historical cost of both an asset and a liability will be updated over time to depict, for example, any consumption of the asset or fulfilment of the liability, or the impact of any events that cause the asset to become impaired or the liability onerous.

What is shown within the statement of changes in equity?

IAS 1 requires a statement of changes in equity. This shows the movement in the equity section of the statement of financial position. A full set of financial statements includes a statement of changes in equity.

How is amortisation of intangible assets calculated?

Intangible assets with a finite useful life are amortised over their useful life, beginning when the asset is available for use. Amortisation should be on a straight-line basis unless some other basis better reflects the way in which the asset's future economic benefits are expected to be consumed by the entity. The residual value of the asset is nil unless there is a commitment by a third party to purchase the asset at the end of its life or there is an active market for the asset that is likely to exist at the end of its useful life. Intangible assets with an indefinite useful life are not amortised but tested each year for impairment.

What is a modified, diclaimer and adverse audit opinion?

Modified audit opinions are rare, and may arise due to material misstatements or a lack of sufficient appropriate audit evidence. Because of the potential damage to a company's reputation, management and auditors normally resolve any disagreements. The financial statements are adjusted if this is necessary. A modified audit opinion states that the financial statements give a true and fair view or a fair presentation except for a particular matter of matters. Where problems are pervasive (fundamental), the auditor can either disclaim an opinion (due to a lakc of sufficient appropraite audit evidence that is both material and pervasive) or given an adverse opinion (due to a lack of sufficient appropriate audit evidence that is both material and pervasive) or give an adverse opinion (due to a misstatement that is both material and pervasive).

What is normative accounting theory?

Normative accounting theory differs from positive theory in that it describes what should occur rather than predicting what actually does occur. This theory suggests that accounting should specify how items should be defined and recognised. Normative theory may not be based on actual accounting practice as its basis is not what actually happens what should happen. For example, the use of a conceptual framework and accounting standards based on that framework would be an example of normative theory. The module looks into two main systems that have been developed as possible alternatives to historical cost accounting: current cost accounting (CCA) and current purchasing power (CPP). These are both normative theories of accounting.

What is financial capital maintenance?

Profit is the increase in nominal money capital over the period. This is the concept used under historical cost accounting.

What are the components of research and development costs?

Research and development costs will include all costs that are directly attributable to research and development activities, or that can be allocated on a reasonable basis. The Standard lists the costs which may be included in R&D, where applicable (note that selling costs are excluded): - Salaries, wages and other employment related costs of personnel engaged in R&D activities; - Costs of materials and services consumed in R&D activities; - Depreciation of property, plant and equipment to the extent that these assets are used for R&D activities; - Overhead costs, other than general administrative costs, related to R&D activities; these costs are allocated on bases similar to those used in allocating overhead costs to inventories; and, - Other costs, such as the amortisation of patents and licenses, to the extent that these assets are used for R&D activities.

How are revaluation gains reported?

Revaluation gains are reported in other comprehensive income (and the revaluation surplus in the statement of financial position) except where reversing a previous revaluation loss charged to profit or loss.

How are revaluation losses reported?

Revaluation losses are charged directly in profit or unless, the asset has a credit balance existing in the revaluation surplus. In that case, revaluation losses will first be charged to other comprehensive income (in respect any revaluation surplus relating to the particular asset) any remainder as an expense in profit or loss. The revaluation surplus may be transferred directly to retained earnings when the asset is derecognised. This may be when the asset is retired or disposed of. However, some of the surplus may be transferred as the asset is used, calculated as the difference between depreciation based on the revalued amount and depreciation based on original cost.

What is specific price inflation?

Specific price inflation measures price changes over time for a specific asset or group of assets.

What is shown within the statement of cash flows?

Statement of cash flows are a useful addition to the financial statements of an entity because accounting profit is not the only indicator of performance. Statements of cash flows show the sources and uses of cash and are a useful indicator of an entity's liquidity and solvency. The aim of IAS 7 (Statement of Cash Flows) is to provide information to users of financial statements about an entity's ability to generate cash and cash equivalents. The statement of cash flows provides historical information about cash and cash equivalents, classifying cash flows between operating, investing and financing activities which readers can use to make predictions of future cash flows.

Explain what should be included within the investing activities section of the statement of cash flows.

The cash flows classified under this heading show the extent of new investment in assets which will generate future profit and cash flows. The Standard gives the following examples of cash flows arising from investing activities: - Cash payments to acquire property, plant and equipment, intangibles and other non-current assets, including those relating to capitalised development costs and self-constructed property, plant and equipment; - Cash receipts from sales of property, plant and equipment, intangibles and other non-current assets; - Cash payments to acquire shares or loan capital of other entities; - Cash receipts from sales of shares or loan capital of other entities; - Cash advances and loans made to other parties; and, - Cash reciepts from the repayment advances and loans made to other parties.

How is the deprival value of assets reflected in the current cost accounting (CCA) statement of profit or loss?

The deprival value of assets is reflected in the CCA statement of profit or loss by the following means: - Depreciation is charged on non-current assets on the basis of gross replacement cost of the asset (where NRC is the deprival value). - Where NRV or EV is the deprival value, the charge against CCA profits will be the loss in value of the asset during the accounting period; that is, from its previous carrying value to its current NRV or EV. - Goods are charged at their replacement cost. Therefore if an item of inventory cost $15 to produce, and sells for $20, by which time its replacement cost has risen to $17, the CCA profit would be $3.

Explain what should be included within the financing activities section of the statement of cash flows.

This section of the statement of cash flows shows the amount of cash which the entity's capital providers have claimed during the period. This is an indicator of likely future interest and dividend payments. The Standard gives the following examples of cash flows which might arise under these headings: - Cash proceeds from issuing shares; - Cash payments to owners to acquire or redeem the entity's shares; - Cash proceeds from issuing debentures, loans, notes, bonds, mortgages and other short or long-term borrowings; and, - Cash repayments of amounts borrowed.

What is carrying amount?

Definition: Is the amount at which an asset is recognised after deducting accumulated depreciation and impairments. Impairment definition: A fall in the value of an asset, so that its 'recoverable amount' is less than its carrying amount.

Explain what should be included within the operating activities section of the statement of cash flows.

This is perhaps the key part of the statement of cash flows because it shows whether, and to what extent, companies can generate cash from their operations. It is these operating cash flows which must, in the end pay for all cash outflows relating to other activities, such as the acquisition of non-current assets. Most of the components of cash flows from operating activities will be those items which determine the net profit or loss of the entity, that is they relate to its main revenue-producing activities. The Standard gives the following as examples of cash flows from operating activities: - Cash receipts from the sale of goods and the rendering of services; - Cash receipts from royalties, fees, commissions and other revenue; - Cash payments to suppliers for goods and services; and, - Cash payments to and on behalf of employees. Certain items are included in the net profit or loss which are not operational cash flows, for example, the profit or loss on the sale of a piece of plant will be included in net profit or loss, but the cash flows will be classed as investing.

What is development?

Definition: Is 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. Examples include: - The design, construction and testing of pre-production prototypes and models; - The design of tools, jigs, moulds and dies involving new technology; - The design, construction and operation of a pilot plant that is not a scale economically feasible for commercial production; and, - The design, construction and testing of a chosen alternative for new/improved materials.

What is income?

Definition: Increases in economic benefits during the accounting period in the form of inflows or enhancements of assets and decreases of liabilities that result in an increase in equity, other than those relating to contributions from equity participants.

What is value in use?

Defintion: The value in use of an asset is measured as the present value of estimated future cash flows (inflows minus outflows) generated by the asset, including its estimated net disposal value (if any) at the end of its expected useful life.

What is positive accounting theory?

A positive approach to accounting is one where accounting theory is thought of as a body of knowledge that explains and attempts to predict actual accounting practice. Positive theory does not attempt to prescribe what businesses should or ought to do, it merely predicts behaviour. It originated as a theory from the work of two academics, Watts and Zimmerman in the 1970s and 1980s. Therefore, information that provides guidance on accounting for particular events would be based on what has been observed as actual accounting for particular events would be based on what has been observed as actual accounting practice rather than what should occur. It is an explanation of what actually happens rather than what should happen. Supporters of positive accounting theory can attempt to predict accounting behaviour by observing what actually happens and applying this to particular situations. One example of a positive accounting theory is the Efficient Market Hypothesis (or EHM). This is a theory which attempts to explain the way in which share prices move in response to new information, and it is in this theory that positive accounting theory found its roots.

How is a taxable temporary difference and associated liability calculated?

A taxable temporary difference arises where the carrying amount of an asset exceeds its tax base, or the carrying amount of a liability is less than its tax base and is calculated as the difference between the carrying amount and the tax base. The resultant deferred tax liability is calculated by applying the relevant tax rate to the taxable temporary difference.

According to IAS 1 Presentation of Financial Statements, what components make up a complete set of financial statements and what items comprise the accompanying mandatory disclosures?

According to IAS 1 Presentation of Financial Statements, a complete set of financial statements includes the following components: - Statement of financial position; - Statement of profit or loss and other comprehensive income; - Statement of changes in equity; - Statement of cash flows; - Accounting policies and explanatory notes; and, - Comparative information in respect of the preceeding period. The preparation of these statements is the responsibility of the board of directors. IAS 1 also encourages a financial review by management and the production of any other reports and statements which may aid users. The auditor's report must also be disclosed with the financial statements as it provides an independent opinion as to whether the financial statements show a fair presentation/true and fair view of the performance and position of the entity and comply with relevant accounting standards. Reporting requirements are also found in the listing requirements of stock exchanges for example, in Australia the Australian Securities Exchange (ASX) Listing Rules. Corporate governance disclosure helps the shareholders understand the way the company is being run and ensures that the directors have proper procedures in place to deal with accountability, audits, directors' roles and responsibilities, internal control and relations with shareholders. The disclosures should explain how the company achieves good corporate governance and should clearly state instances where the company fails to meet the recommendations of the relevant corporate governance code, for example, if there is no audit committee.

What are accounting estimates?

Accounting estimates involve the use of judgement when applying accounting policies. For instance, the accounting policy may state that non-current assets are depreciated over their expected useful life. The decision regarding the length of the useful life is a matter of estimation. The decision regarding method of depreciation is also a matter of estimation, rather than accounting policy.

What is an agency relationship?

Definition: Is a contract under which one or more persons (the principals) engage another person (the agent) to perform some service on their behalf that involves delegating some decision-making authority to the agent. There are a number of specific types of agent. These have either evolved in particualr trades or developed in response to specific commercial needs. The most common in accounting is the relationship between directors and shareholders as the shareholders task the directors and management with running the company on their behalf.

What is capital?

Capital is a broad term that can describe any thing that confers value or benefit to its owner, such as factory and its machinery, intellectual property like patents, or the financial assets of a business or an individual. While money itself may be construed as capital is, capital is more often associated with cash that is being put to work for productive or investment purposes. In general, capital is a critical component of running a business from day to day and financing its future growth. Business capital may derivefrom the operations of the business or be raised from debt or equity financing. When budgeting, businesses of all kinds typically focus on three types of capital: working capital, equity capital, and debt capital. A business in the finance industry identifies trading capital as a fourth component. Key Takeaways: - The capital of a business is the money it has available to pay for its day-to-day operations and to fund its future growth. - The four major types of capital include working capital, debt, equity, and trading capital. Trading capital is used by brokerages and other financial institutions. - Any debt capital is offset by a debt liability on the balance sheet. - The capital structure of a company determines what mix of these types fo capital it uses to fund its business. - Economists look at the capiatl of a family, a business, or an entire economy to evaluate how efficiently it is using resources. Understanding Capital: From the economists' perspective, capital is key to the functioning of any unit, whether that unit is a family, a small business, a larger corporation, or an entire economy. Capital assets can be found on either the current or long-term portion of the balance sheet. These assets may include cash, cash equivalent, and marketable securities as well as manufacturing equipment, production facilities, and storage facilities. Capital is typically cash or liquid assets being held or obtained for expenditures. In a broader sense, the term may be expanded to include all of a company's assets that have monetary value, such as its equipment, real estate, and inventory. But when it comes to budgeting, capital is cash flow. In general, capital can be a measurement of wealth and also a resource that provides for increasing wealth through direct investment or capital project investments. Individuals hold capital and capital assets as part of their net worth. Companies have capital structures that include debt capital, equity capital, and working capital for daily expenditures. How individuals and companies finance their working capital and invest their obtained capital is critical for their prosperity.

What disclosures are required when a change in accounting policy has a material affect on the current period or any prior period presented, or when it may have a material effect in subsequent periods?

Certain disclosures are required when a change in accounting policy has a meterial affect on the current period or any prior period presented, or when it may have a material effect in subsequent period: - Reasons for the change - Amount of the adjustment for the current period and for each period presented - Amount of the adjustment relating to periods prior to those included in the comparative information - The fact that comparative information has been restated or that it is impracticable to do so An entity should also disclose information relevant to assessing the impact of new IFRS on the financial statements where these have not yet come into force.

How is a change is accounting estimate accounted for?

Changes in accounting estimate are not applied restropectively. Estimates arise in relation to business activities because of the uncertainties inherent within them. Judgments are made based on the most up to date information and the use of such estimates is a necessary part of the preparation of financial statements. It does not undermine their relaibility. Here are some examples of accounting estimates: - A necessary irrecoverable debt allowance - Useful lives of depreciable assets - Provision for obsolescence of inventory The rule here is that the effect of a change in accounting estimate should be accounted for prospectively that is, it should be included in profit before tax or loss in either: - The period of the change, if the change affects the period only; or, - The period of the change and future periods, if the change affects both. An example of a change in accounting estimate which affects only the current period is the irrecoverable debt estimate. However, a revision in the life over which an asset is depreciated would affect both the current and future periods, in the amount of the depreciation expense. The effect of a change in accounting estimate should be included in the same expense classification as was used previously for the estimate. This rule helps to ensure consistency between the financial statements of different periods.

How are changes in accounting policies accounted for?

Changes in accounting policies are normally applied restrospectively. The same accounting policies are usually adopted from period to period, to allow users to analyse trends over time in profit, cash flows and financial position. Changes in accounting policy will therefore be unusual and should be made only if: - The change is required by an IFRS; and, - The change will result in a more relevant and reliable presentation of events or transactions in the financial statements of the entity. IAS 8 requires retrospective application, unless it is impractible to determine the cumulative amount of change. Any resulting adjustment should be reported as an adjustment to the opening balance of retained earnings. Comparative information should be restated unless it is impracticable to do so.

What are some examples of common transactions which result in deductible temporary differences?

Common transactions which result in deductible temporary differences include, but are not limited to, the following: * Retirement benefit costs (pension costs) are deducted from accounting profit as service is provided by the employee. They are not deducted in determining taxable profit until the entity pays either retirement benefits or contributions to a fund. (This may also apply to similar expenses). * The NRV of inventory, or the recoverable amount of an item of property, plant and equipment falls and the carrying amount is therefore reduced, but that reduction is ignored for tax purposes until the asset is sold. * Research costs (or organisation/other start-up costs) are recognised as an expense for accounting purposes, but are not deductible against taxable profits until a later period. * Income is deferred in the statement of financial position, but has already been included in taxable profit in current/prior periods. * Tax losses arise which are carried forward against future taxable profits.

What is research?

Definition: Is original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding. Examples include: - Activities aimed at obtaining new knowledge; - The search for applications of research findings or other knowledge; - The search for product or process alternatives; and, - The formulation and design of possible new or improved product or process alternatives.

How are items of property, plant and equipment measured after recognition?

Cost model: Property, plant and equipment is carried at cost less accumulated depreciation and accumuluated impairment losses. Revaluation model: Property, plant and equipment is carried at a revalued amount whose fair value can be measured reliably. Revalued amount = fair value at date of revaluation less subsequent accumulated depreciation and subsequent accumulated impairment losses. Where an item of property, plant and equipment is revalued, all assets in the same class must also be revalued. Fair value: Fair value is defined by IFRS 13 Fair Value Measurement as 'the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This is the market price in the principal market for the asset. Where a market price is unavailable current replacement cost (adjusted for obsolescence) or present value techniques are used. Frequency: Revaluations must be made with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the end of the reporting period.

What is current cost accounting (CCA)?

Current cost accounting (CCA) reflects an approach to capital maintenance based on maintaining the operating capability of a business. The conceptual basis of CCA is that the value of assets consumed or sold, and the value of assets in the statement of financial position, should be stated at their value to the business (also known as 'deprival value'). 'Value to the business' is the required method of valuation in CCA, because it reflects the extra funds which would be required to maintain the operating capability of the business entity if it suddenly lost the use of an asset. The deprival value is the lower of replacement cost and recoverable amount. In turn the recoverable amount is the higher of net realisable value and economic value. If the asset is worth replacing, its deprival value will always be net replacement cost. If the asset is not worth replacing, it might have been disposed of straight away, or else it might have been kept in operation until the end of its useful life. We have already seen that if an asset is not worth replacing, the deprival value will be NRV or EV. However, there are many assets which will not be replaced either: - Because the asset is technologically obsolete, and has been (or will be) superseded by more modern equipment; or, - Because the business is changing the nature of its operations and will not want to continue in the same line business once the asset has been used up. Such assets, even though there are reasons not to be replace them, would still be valued (usually) at net replacement cost, because this 'deprival value' still provides an estimate of the operating capability of the business.

How is deferred tax recognised?

Deferred tax (and current tax) is recognised as incomeor expense and included int he net profit or loss for the period, unless the tax arises from a transaction or event which is recognised as other comprehensive income or directly in equity in which case the tax is charged or credited to other comprehensive income or directly to equity. Examples of IFRSs which allow items to be credited or charged to other comprehensive income or directly to equity include: * Revaluations of property, plant and equipment (IAS 16) - credited to other comprehensive income; and, * The effect of a change in accounting policy (applied retrospectively) or correction of a material error (IAS 8) - credited or charged directly to equity.

What is an asset's recoverable amount?

Definition: The recoverable amount of the asset is the higher value of: * The asset's fair value costs of disposal; and, * It's value in use. An asset's fair value less costs of disposal is the amount net of selling costs that could be obtained from the sale asset. Selling costs include sales transaction costs, such as legal expenses. Selling costs do not include restructuring or reorganisation expenses, or any costs that have already been recognised in the financial statements. The concept of 'value of use' is very important. Defintion: The value in use of an asset is measured as the present value of estimated future cash flows (inflows minus outflows) generated by the asset, including its estimated net disposal value (if any) at the end of its expected useful life.

What is a cash-generating unit?

Definition: A cash-generating unit is the smallest identifiable group of assets for which independent cash inflows can be identified and measured.

What is a performance obligation?

Definition: A promise in a contract with a customer to transfer to the customer either: * A good or service (or a bundle of goods and services) that is distinct; or, * A series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer.

What is a contract?

Definition: An agreement between two or more parties that creates enforceable rights and obligations.

What is a deductible temporary difference?

Definition: Deductible temporary differences are temporary differences that will result in amounts that are deductible in determining taxable profit (tax loss) of future periods when the carrying amount of the asset or liability is recovered or settled.

What are deferred tax assets?

Definition: Deferred tax assets are the amounts of income taxes recoverable in future periods in respect of: * Deductible temporary differences; * The carry forward of unused tax losses; and, * The carry forward of unused tax credits.

What is revenue?

Definition: Income arising in the course of an entity's ordinary activities.

What are temporary differences?

Definition: Temporary differences are differences between the carrying amount of an asset or liability in the statement of financial position and its tax base. Temporary differences may be either: * Taxable temporary differences, which are temporary differences that will result in taxable amounts in determining taxable profit (tax loss) of future periods when the carrying amount of the asset or liability is recovered or settled. * Deductible temporary differences, which are temporary differences that will result in amounts that are deductible in determining taxable profit (tax loss) of future periods when the carrying amount of the asset or liability is recovered or settled. A taxable temporary difference gives rise to a deferred tax liability. A deductible temporary difference may give rise to a deferred may give rise to a deferred tax asset. The tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes. You may have foudn the definition of temporary differences somewhat confusing. Remember that accounting profits, form the basis for computing taxable profits, on which the tax liability for the year is calculated. However, accounting profits and taxable profits are different due to differences between the carrying amount of an asset or liability in the statement of financial position and its tax base, which are referred to as temporary differences, and are determined as follows. Temporary differences are identified by: * Comparing the carrying amount (in the statement of financial position) of each asset and liability with its tax base. * Temporary difference can be simplified as below: Temporary difference = Carrying amount - Tax base amount * Identifying all items that have a carrying amount of $nil (in the statement of financial position) but have a tax base.

What is replacement cost?

Definition: The amount needed to replace an item with an identical item. This is the same as current cost.

What is a transaction price?

Definition: The amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties.

What is deprival value?

Definition: The lower of replacement cost and recoverable amount. In turn the recoverable amount is the higher of the net realisable value and economic. Value to the Business (Deprival Value): Current cost accounting (CCA) reflects an approach to capital maintenance based on maintaining the operating capability of a business. The conceptual basis of CCA is that the value of assets consumed or sold, and the value of assets in the statement of financial position, should be stated at their value to the business (also known as 'deprival value'). (a) A basic assumption in CCA is that 'capital maintenance' should mean maintenance of the business substance' or 'operating capability' of the business entity. As we have seen already, it is generally accepted that profit is earned only after a sufficient amount has been charged against sales to ensure that the capital of the business is maintained. In CCA, a physical rather than financial definition of capital is used: capiatl maintenance is measured by the ability of the business entity to keep up the same level of operating capability. (b) 'Value to the business' is the required method of valuation in CCA, because it reflects the extra funds which would be required to maintain the operating capability of the business entity if it suddenly lost the value of an asset. The deprival value is the lower of replacement cost and recoverable amount. In turn the recoverable amount is the higher of net realisable value and economic value. If the asset is not worth replacing, its deprival value will always be net replacement cost. If the asset is not worth replacing, it might have been disposed of straight away, or else it might have been kept in operation until the end of its useful life. We have already seen that if an asset is not worth replacing, the deprival value will be NRV or EV. However, there are many assets which will not be replaced either: - Because the technology is technically obsolete, and has been (or will be) superseded by more modern equipment; or, - Because the business is changing the nature of its operations and will not want to continue in the same line of business once the asset has been used up. Such assets, even though there are reasons not to replace them, would still be valued (usually) at net replacement cost, because this 'deprival value' still provides an estimate of the operating capability of the business.

What is residual value?

Definition: The net amount which the entity expects to obtain for an asset at the end of its useful life after deducting the expected costs of disposal.

What is a stand-alone selling price?

Definition: The price at which an entity would sell a promised good or service separately to a customer.

What is the tax base of an asset or liability?

Definition: The tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes. We can expand on the definition given above by stating that the tax base of an asset is the amount that will be deductible for tax purposes against any taxable economic benefits that will flow to the entity when it recovers the carrying amount of the asset. Where those economic benefits are not taxable, the tax base of the asset is the same as the carrying amount. The tax base can also be described as the written-down value, or carrying amount, of the asset or liability for tax purposes. Essentially this is the valuation of the asset or liability under tax rules rather than accounting rules. For example, tha tax base of a non-current asset would be its tax written down value (cost less tax/capital allowances) as opposed to its carrying value (cost less accumulated depreciation).

What is financial capital maintenance?

Definition: Under this concept a profit is earned only if the financial (or money) amount of the net assets at the end of the period exceeds the financial (or money) amount of net assets at the beginning of the period, after excluding any distributions to, and contributions from, owners during the period.

What is physical capital maintenance (operating concept of capital)?

Definition: Under this concept a profit is earned only if the physical productive capacity (or operating capability) of the entity (or the resources or funds needed to achieve that capacity) at the end of the period exceeds the physical productive capacity at the beginning of the period, after excluding any distributions to, and contributions from, owners during the period.

What are deferred tax liabilities?

Definiton: Deferred tax liabilities are the amounts of income taxes payable in future periods in respect of taxable temporary differences.

What is the definition for impairment?

Defintion: A fall in the value of the asset, so that its 'recoverable amount' is less than its carrying amount.

What is net realisable value?

Defintion: The estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated cost necessary to make the sale.

What is substance over form?

Defintion: The principle that transactions and other events are accounted for and presented in accordance with their substance and economic reality and not merely their legal form. For instance, one party may sell an asset to another party and the sales documentation may record that legal ownership has been transferred. However, if agreements exist whereby the party selling the asset continues to enjoy the future economic benefits arising from the asset, then in substance no sale has taken place e.g. a lease agreement.

What is economic vale (EV), or value in use?

Defintion: What the existing asset will be worth to the company over the rest of its useful life, that is, the present value of future cash flows associated with the asset.

What items are required to be classified within the other comprehensive income section?

IAS 1 requires the following line items for the amounts for the period in the other comprehensive income section: - Items of comprehensive income grouped into those that: - Will not be reclassified subsequently to profit or loss - Will be reclassified subsequently to profit or loss when certain conditions are met - Share of other comprehensive income of associates and joint ventures accounted for using equity method. Items of other comprehensive income may be presented either: - Net of related tax effects; or, - Before related tax effects with an aggregate amount of tax disclosed separately for items which will not be reclassified to profit or loss. An entity shall present the following items, in addition to the profit or loss and other comprehensive income sections, as allocation of profit or loss and other comprehensive income for the period: - Profit or loss for the period attributable to: - Non-controlling interests; and, - Owners of the parent. - Comprehensive income for the period attributable to: - Non-controlling interests; and, - Owners of the parent.

Who appoints the IFRS Advisory Council?

IFRS Foundation Trustees

Explain how the indirect method is utilised to calculate operating cash flows?

Indirect method: Net profit or loss is adjusted for the effects of transactions of a non-cash nature, any prepayments or accruals of past or future operating cash receipts or payments, and items of income or expense classified as investing or financing cash flows. Using The Direct Method The profit or loss from operations for the period is adjusted for the following: (a) Non-cash items, for example, depreciation, provisions, profits/losses on the sale of assets (b) Changes during the period in inventories, operating recievables and payables. A proforma of such a calculation is as follows: Profit before tax (statement of profit or loss) Add: depreciation Finance expense Loss/(profit) on sale of non-current assets (Increase)/decrease in inventories (Increase)/decrease in receivables Increase/(decrease) in payables Cash generated from operations Interest paid Dividends paid Income taxes paid Net cash flow from operating activities It is improtant to understand why certain items are added and others subtracted. Note the following points: - Depreciation is not a cash expense, but is deducted in arriving at the profit figure in the statement of profit or loss and other comprehensive income. It makes sense, therefore, to eliminate it by adding it back. - By the same logic, a loss on a disposal of a non-current asset (arising through under provision of depreciation) needs to be added back and a profit deducted. - An increase in iventories means less cash - you have spent cash on buying inventory. - An increase in receivables means the company's customers have not paid as much, and therefore there is less cash. - If we pay off payables, causing the figure to decrease, again, we have less cash.

What is the five-step model that is to be applied for the recognition of revenue?

Step 1: Identify the contract with the customer. A contract is only within the scope of IFRS 15 when: * The parties are commited to carrying it out; * Each party's rights to be transferred can be identified; * The payment terms can be identified; * The contract has commercial substance; and, * It is probable that the entity will collect the consideration A contract can be written, verbal or implied. Step 2: Identify the separate performance obligations. A performance obligation is a promise to transfer a good or a service to a customer. Performance obligations should be accounted for separately provided the good or service is distinct. When a promised good or service is not distinct it is combined. A good or service is considered to be distinct if it could be sold separately. Step 3: Determine the transaction price. The amount to which the entity expects to be entitled. For variable consideration probability-weighted expected value or most likely amount is used. An example of variable consideration is settlement discounts. Discounting is not required where less than a year. Step 4: Allocate the transaction price to the performance obligation. Where a contract contains more than one distinct performance obligation a company allocates the transaction price to the separate performance obligations in proportion to the relative stand-alone selling price of each performance obligation. Step 5: Recognise revenue when or as a performance obligation is satisfied. The entity satisfies a performance obligation by transferring control of a promised good or service to the customer. This could be at a point in time when goods are delivered to a customer, or over a period of time. An obligation satisfied over time is recognised when one of the following criteria is met: *The customer simultaneously receives and consumes the benefits as the performance obligation takes place. *The entity's performance creates or enhances an asset that the customer controls as the asset is created or enhanced. *The entity's performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to payment for performance completed to date. The amount of revenue recognised is the amount allocated to that performance obligation in Step 4. An entity must be able to reasonably measure the outcome of a performance obligation before the related revenue can be recognised.

How are subsequent costs incurred after the initial recognition of property, plant and equipment recorded?

Subsequent costs on property, plant and equipment are capitalised when the cost of replacement is incurred providing the recognition criteria are met. For example, the cost of replacing part of the machine due to wear and tear is recognised and the part it replaces is derecognised.

What is the International Accounting Standards Board (IASB)?

The IASB has the sole responsibility for setting international financial reporting standards. The IASB is the standard-setting body and is an independent privately-funded accounting setter based in London. It is part of the International Regulatory Framework, reporting to the IFRS Foundation. The IASB has an important role to play in the regulation of financial information as it is responsible for issuing IFRS, which are then adopted for use in many different jurisdictions.

What is the IFRS Advisory Council?

The IFRS Advisory Council is the formal advsiory body to the IASB and Trustees of the IFRS Foundation. It meets three times a year to advise the IASB on a range of issues including the IASB's agenda and work program.

What is the IFRS Foundation?

The IFRS Foundation, is an independent, not-for-profit private sector organisation working in the public interest. It is the parent entity of the IASB. It's mission statement is 'to develop IFRS Standards that bring transparency, accountability and efficiency to financial markets around the world.' The IFRS Foundation oversees two main areas: the standard-setting process and the IFRS Advisory Council.

What is the IFRS Interpretations Committee?

The IFRS Interpretations Committee provides timely guidance on the application and interpretation of IFRS. It deals with newly identified financial reporting issues not specifically addressed in IFRS, or issues where unsatisfactory or conflicting interpretations have developed, or seem likely to develop.

When should an impairment loss be recognised?

The basic principle underlying IAS 36 is relatively straightforward. If an asset's value in the accounts is higher than its 'recoverable amount,' the asset has suffered an impairment loss. It should therefore be reduced in value, by the amount of the impairment loss. The general rule is that the amount of the impairment loss should be written off against profit or loss immediately. An entity should assess at the end of each reporting period whether there are any indications of impairment. The concept of materiality applies, and only material impairment needs to be identified. If there are indications of possible impairment. The suggestions are based largely on common sense. *External sources of information: - A fall in the asset's market value that is more significant than would normally be expected from passage of time or normal use. - A significant change in the technological, market, legal or economic environment of the business in which the assets are employed. - An increase in market interest rares or market rates of return on investments likely to affect the discount rate used in calculating value in use. - The carrying amount of an entity's net assets being more than its market capitalisation. *Internal sources of informmation: evidence of obsolescence or physical damage, adverse changes in the use to which the asset is put, or the asset's economic performance. Even if there are no indications of impairment, the following assets must always be tested for impairment annually: * An intangible asset with an indefinite useful life; * An intangible asset which is not yet available for use; and, * Goodwill acquired in a business combination.

Going concern definition

The entity is normally viewed as a going concern, that is, as continuing in operation for the foreseeable future. It is assumed that the entity has neither the intention nor the need to liquidate or curtail materially the scale of its operations. This concept assumes that, when preparing a normal set of accounts, the business will continue to operate in approximately the same manner for the foreseeable future (at least the next 12 months). In particular, the entity will not go into liquidation or scale down its operations in a material way. The main significance of a business being a going concern is that: 1. Assets should not be measured at their 'break-up' value that is the amount they would sell for if they were sold off piecemeal and the business was broken up (unless the assets satisfy the requirements of IFRS 5 Non-Current Assets Held for Sale and Discountinued Operations). If assets are classified as held for sale in accordance with IFRS 5, they should be measured at the lower of carrying amount and fair value less costs to sell. 2. Liabilities are classified as current or non-current depending on when they are due to be settled.

What are the four enhancing qualitative characteristics of useful financial information?

The four enhancing qualitative characteristics are comparability, verifiability, timeliness and understandability. These qualities enhance the usefulness of financial information. Comparability is the qualitative characteristic that enables users to identify and understand similarities in, and differences among, items. Information about a entity is more useful if it can be compared with similar information about other entities and with simialr information about the same entity for another period or date. The consistency of treatment is therefore important across like items over time, within the entity and across all entities. Verifiability helps assure users that information faithfully represents the economic events it purports to represent. Verifiability means that different knowledgeable and independent observers could reach consensus (not necessarily complete agreement) that a particular depiction is a faithful representation. Timeliness means having information available to users in time to be capable of influencing their decisions. Generally, the older the information is, the less useful it is. However, older financial information may still be useful for identifying and assessing trends (for example, growth in profits over a number of years). Understandability: Classifying, characterising and presenting information clearly and concisely makes it understandable. Some information is inherently complex and difficult to understand. Excluding this information from the financial statements would make them more understandable, but they would also be incomplete and potentially misleading.

Who are the IFRS Foundation Trustees (Governance)?

The governance and oversight of the IFRS Foundation and its standard-setting bodies rests with the Trustees. They are also responsible for promoting IFRS amd securing the organisation funding.

When is revenue recognised?

The key principle within IFRS 15 is that revenue is recognised when there is a transfer of control to the customer from the entity supplying the goods or services. IFRS 15 Revenue from Contracts with Customers was issued in May 2014, replacing both IAS 18 Revenue and IAS 11 Construction Contracts. It is effective for reporting periods beginning on or after 1 January 2018. Under IFRS 15 the transfer of goods and services is based upon the transfer of control rather than the transfer of risks and rewards as in IAS 18. Control of an asset is described in the standard as the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset. IFRS 15 applies to all contracts with customers except: * Leases within the scope of IFRS 16; * Insurance contracts within the scope of IFRS 4; * Financial instruments and other contractual rights and obligations within the scope of IFRS 9, IFRS 10, IFRS 11, IAS 27 or IAS 28; and, * Non-monetary exchanges between entities in the same line of business.

What is the difference between financial capital maintenance and physical capital maintenance (operating concept of capital)?

The main difference between the two concepts of capital maintenance is the treatment if the effects of changes in the prices of assets and liabilities of the entity. In general terms, an entity has maintained its capital if it has as much capital at the end of the period as it has at the beginning of the period. Any amount over and above that required to maintain the capital at the beginning of the period is profit. (a) Financial capital maintainence: profit is the increase in nominal money capital over the period. This is the concept used under historical cost accounting. (b) Physical (or Operating) capital maintenance: profit is the increase in the physical productive capacity over the period. This is the concept used in current cost accounting (CCA).

What is current value accounting?

The move towards current value accounting has already taken a number of steps. Entities are now permitted to revalue non-current assets such as land and buildings in line with fair value, and certain financial assets and liabilities such as securities and investments can be carried at fair value, defined in several IFRS as: 'the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.' These developments, and the use of fair values in acquisition accounting (to measure the assets of the subsidiary and therefore arrive at a realistic goodwill valuation) are relatively uncontroversial. However, there are those who would like fair value to be used more widely as a system of current value. Under Current Value Accounting (CVA) the original cost of the asset would be replaced with its discounted present value, that is, the present value of its future cash flows. This is obviously suitable for monetary items such as receivables and payables. The expected inflows and outflwos would be discounted to present value using an interest rate which reflects the current time value of money. For assets such as vehicles, which do not yield a pre-determined future cash flow, current cost would be a more applicable measure - based either on the current cost of the original asset or on its replacement by a more up to date version. For inventories, current replacement cost or net realisable value would be indicated.

How are research and development costs recognised?

The relationship between the R&D costs and the economic benefit expected to be derived from them determines the allocation of those costs to different periods. Recognition of the costs as an asset will only occur where it is probable that the cost will produce future economic benefits for the entity and the costs can be measured reliably. Research costs: Research costs are recognised as an expense in the period in which they are incurred. They cannot be subsequently recognised as an asset in a later period. Development costs: Development costs are recognised as an expense in the period in which they are incurred unless the criteria for asset recognition below are met. Development costs initially recognised as an expense cannot be subsequently recognised as an asset in a later period. Development expenditure is recognised as an asset when the business can demonstrate all of the following (where these criteria are met, development expenditure must be capitalised ): - The technical feasibility of completing the intangible asset so that it will be available for use or sale; - Its intention to complete the intangible asset and use or sell it; - Its ability to use or sell the intangible asset; - How the intangible asset will generate probable future economic benefits. Among other things, the entity should demonstrate the existence of a market for the output of the intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset; - The availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset; and, - Its ability to measure reliably the expenditure attributable to the intangible asset during its development.

How is an impairment loss recognised and measured?

The rule for assets at historical cost is: *Rule to learn: If the recoverable amount of an asset is lower than the carrying amount, the carrying amount should be reduced by the difference (i.e. the impairment loss) which should be charged as an expense in profit or loss. The rule for assets held at a revalued amount (such as property revalued under IAS 16) is: *Rule to learn: The impairment loss is to be treated as a revaluation decrease under the relevant IAS. Once reduced to the recoverable amount, the depreciation charge on the asset is based on recoverable amount, estimated residual value (if any) and estimated remaining useful life.

Accounting policies definition

The specific principles, bases, conventions, rules and practices adopted by an entity in preparing and presenting financial statements.

What are the two fundamental qualitative characteristics of useful financial information?

There are two fundamental qualitative characteristics: relevance and faithful representation. Information must possess these in order to be useful. Relevance: Relevant financial information is capable of making a difference in the decisions made by users. Relevant financial information has predictive value, confirmatory value, or both. Information on financial position and performance is often used to predict future position and performance and other things of interest to the user, for example likely dividend, wage rises. Financial information is also used to confirm (or change) users' past conclusions about an entity's financial performance or financial position. Faithful Representation: A faithful representation is complete, neutral and free from error. - A complete depiction includes all the information necessary for a user to understand the phenomenon being depicted, including all necessary descriptions and explanations. - A neutral depiction is without bias in the selection or presentation of financial information. This means that information must not be manipulated in any way in order to influence the decisions of users. - Free from error means there are no errors or omissions in the description of the phenomenon and no errors made in the process by which the financial information was produced. It does not mean that no inaccuracies can arise, particularly where estimates have to be made. To be useful, financial information must faithfully represent the economic events that it purports to represent. The user must be able to depend on it being a faithful representation.

What is the procedure for testing cash-generating units with goodwill for impairment?

There are two situations to consider: * Where goodwill has been allocated to a cash-generating unit. * Where it has not been possible to allocate goodwill to a specific cash-generating unit, but only to a group of units. A cash-generating unit to which goodwill has been allocated is tested for impairment annually. The carrying amount of the unit, including goodwill, is compared with the recoverable amount. If the carrying amount of the unit exceeds the recoverable amount, the entity must recognise an impairment loss. Where goodwill relates to a cash-generating unit but has not been allocated to that unit, the unit is tested for impairment by comparing its carrying amount (excluding goodwill) with its recoverable amount. The entity must recognise an impairment loss if the carrying amount exceeds the recoverable amount. The annual impairment test may be performed at any time during an accounting period, but must be performed at the same time every year.

Is a revaluation of assets treated as an change in accounting policy?

There is one important exception. Where an entity revalues assets for the first time this is treated as a revaluation under IAS 16 Property, Plant and Equipment, not as a change of accounting policy under IAS 8. Therefore it is not applied restrospectivley.

What are agency costs?

To alleviate the agency problem, shareholders have to take steps to exercise control, such as attending annual general meetings or ultimately becoming directors themselves. However, agency theory assumes that it will be expensive and difficult for: - Verify what the agent is doing, partly because the agent has more available information about their activities than the principal does; and, - Introduce mechanisms to control the activities of the agent. Agency costs arise therefore, from attempts by principals to monitor the activities of the agents, and may be viewed in monetary terms, resources consumed or time taken in monitoring. There will also be costs involved in establishing methods of control such as contracts. These costs may not just be incurred by the shareholders. To fulfil the requirements imposed on them and to obtain the rewards of fulfilment, managers will spend time and resources proving that they are maximising shareholder value by, for example, providing increased disclosure. Types of agency costs include salaries paid to directors in their role as agents running the company on shareholders' behalf. Additionally, the principal incurs monitoring costs to ensure that the agent is doing what they should be. This can include costs of preparing financial information including corporate governance reports, the cost of an external auditor who reports independently on the financial statements, and the internal audit function (if there is one). An agency cost can also include the shareholders' personal cost of accepting higher risks than they would perhaps wish to, as they are tasking the agent with running the business on their behalf.

What is fiduciary duty?

Under common law it is usually the case that company directors owe a fiduciary duty to the company to exercise their powers in what they honestly consider to be the interests of the company. This duty is owed to the company and not generally to individual shareholders.

Value in use (for assets) definition

Value in use is the present value of the cash flows, or other economic benefits, that an entity expects to derive from the use of an asset and from its ultimate disposal.

What is deferred tax?

When a company recognises an asset or liability, it expects to recover or settle the carrying amount of that asset or liability. In other words, it expects to sell or use up assets, and to pay off liabilities. What happens if that recovery or settlement is likely to make future tax payments larger (or smaller) than they would otherwise have been if the recovery or settlement had no tax consequences? In these circumstances, iAS 12 requires companies to recognise a deferred tax liability (or deferred tax asset).