Fin Acc Reporting - EXAM

Service component of a lease

must serparate the service from the asset. Service part expensed Page 388 Dr: Service Exp Dr: Interest Expense Dr: Lease liability Cr: Cash

Intangible Assets

non-monetary assets* without physical substance Patents, mastheads, goodwill, brand names, copyright, research adn developmetn, trademarks *apply asset defintion if asked in a question

Reporting entity: who shall prepare GPFR

"Reporting entities are all entities in respect of which it is reasonable to expect the existence of users dependent on general purpose financial reports for information which will be useful to them for making and evaluating decisions about the allocation of scarce resources. Reporting entities shall prepare general purpose financial reports."

*AASB 101 Characteristics of CA (whats a NCA) LOOK UP WHAT IS OPERATING CYCLE

(a)it is expected to be realised in, or intended for sale or consumption in, the entity's normal operating cycle (b)it is held primarily for the purpose of being traded (c)it is expected to be realised within 12 months after the reporting date; OR (d)it is a cash or cash equivalent If none of the above, it is classified as a NCA

Table for derterming DTA OR DTL (2by2 and the one where u record it in a long table)

**ITEM - CA - TB - TTD - DTD - DTL - DTA 1. CA>TB for assets: taxable temporary difference; DTL 2. CA< TB for assets: deductable temporary difference; DTA Vice versa (L: 1. DTA, 2. DTL

Contingent Liablities: Define -Where are these foudn

-Defined as: 1. possible obligation that arises from past events and whose existencewill only be confirmed by uncertain future events that are not in control within the entity. (obligations only payable contingent/conditional upon a future event) 2. present obligation, but not recognised because outflow of FEB not yet probable OR the amount cannot be measured reliably. -Notes to the financail statements -These are important as they can be material, and failing to include these in the notes may make the financial statements misleading.

Why do companies organise in groups?

-Dimesinoal growth (increase of productive capacity, vertical intergration and diversification) -Economies of scale -Cost reduction and synergies -Learning/acquiring skills and expertise.

*How frequent are revaluations to be made?

-Must be made with sufficient regularity; so the CV of the assets do not differ materially from its fair value. -if value changes reguarly and changes are material, revaluations might be necessary each reporting period -otherwise, 3-5 years is sufficient.

*Assymetric treatment of revaluation increment/decrement?

-Revaluation Surplus is an equity reserve account in shareholders equity (this is not a part of the income statement; but it is a part of OCI) -Loss on Revaluation is an expense in the Income Statement Why different treat? -Convervatism/prudent: avoid risks Record losses when probable, and only record gains when definite. -Ensures assets and income are not overstated and that liabilities and expenses are not understated.

Adjusting Events - An adjustment is required directly on finanical statements. -Dvidiends declared after RP are not liabilites as no obligation exists at the end of the RP -No longer agoing concern

-They are adjusting events if the events provide additional evidence of conditions existing at reporting date (e.g. the settlement of a legal claim outstanding at reporting date), or reveal for the first time a condition that existed at reporting date (e.g. the destruction of a building at a remote site) -

Fair value through Profit/loss; when is it used? where is the change in FV recorded\ -ACQUISITION DR: INVESTMENT Dr: TRANSACTION COSTS (THESE ARE SEPARTE IN THIS METHOD) CR: CASH -REVALUE Dr: Investment Cr: Gain in fair value of included in profit or loss

-When assets are held for trading the change in FV is recorded directly in Profit and Loss and affects the profit/loss of the year

Goodwill (unindentifiable intangible asset) -Internally generated goodwill -purchased goodwill (busienss combination)

-built up within a company; CANNOT be recognised as an intangible asset -the custoemr base, efficient management, suppliers, employee skills etc that are purchased together with the company that built it up: CAN be recognised as an intangible asset by the purchasing company.

Fair value through OCI; when it is used? where is the change recorded? -ACQUISATION DR: INVESTMENT CR: CASH (this method incldues transaction costs; like amortise) -revlaue DR: INVESTMENT CR: GAIN IN FAIR VALUE included in OCI

-if the business normally holds assets both for contractual cash flows arising for the assets and selling the assets -the change in FV is recorded in Other Comprehensive income and does not affect the profit/loss of the year, but OCI (Week 7)

Why Can only goodwill in a business combination be recorded? -How is goodwill calculated?

-purchased goodwill can be measured reliably based on the amount paid -Total cost to purchase the company less the fair value of net assets [total assets less total liabilities less contingent liabilities]

Examples of finanical assets and related financial liabilities

-trade acc recievable and payable -notes rec and payable -loans rec and pay -bonds rec and pay, (IN EACH CASE, ONE PARTYS CONTRACTUAL RIGHT OT RECIEVE CASH IS MATCHED BY THE OTHER PARTYS CORRESPONDING OBLIGATION TO PAY)

lease liability split into current and non current

.

When may intangible assets me recognised? (2)EC

1)Only upon acquisation from an external party 2)only when there is an associated cost (purchase price + attributle costs + dismantling) 3)Must be indetifiable (goodwilll is an exception) -FEB probable, costs can be measured reliably, control over the FEB.

Two types of after reporting period events

1. Adjusting events after the RP If the event provides evidence or further elucidates conditions that existed at the end of the report period 2. Non-adjusting events after the RP If the event creates a totally new condition, distinct from any conditions that might have existed at the end of the reporting period

Issue of Control: Business Combinations -Which entities shall the parent company include in its consolidated financial statements? 2-How is control defined?

1. All entities that it controls (both directly and indirectly) 2. Exisiting rights that give the parent company the ability to direct the relevant activity of the subsidiary. *where relevant activities are the activties that affect the subsidiary's financial profit and, as a consequence, also the parent company's return from the investment in the subsidiary. To direct releveant activity, the parent company has to have the majority of votes as a shareholder in the subsidiary.

Intangible assets - cost model: 1. If assets have a limited and defined useful life 2. If intangible assets have an indefinite (cannot be predicted) useful life.

1. Amortise. -Useful life, residual value and amortisation method need to be reviewd annually. -Useful life is zero, unless; (1)committment by 3rd party to buy at end of life OR (2) there is an active market for the asset, residaul amount can be found wiht refernce to the market and it is probable the market will exist at the end of the assets useful life. 2. No amortise, only annual impairment testing -Annual impairment testing at the end of each reporting period.

Steps for doing a revaluation w/ depreciable assets

1. Close off the Acc. Depn account to get the CA of the asset in its accoutn: Dr: Acc. Depn Cr: Asset 2. Compare F.V to CV 3. Record the revaluation loss/gain 4. Calculate new depreciation expense; with remaining useful life.

-1 Two ways of classifiying assets on balance sheet? Which method to choose

1. Current/Non-current presentation 2. Liquidity presentation Who uses liquidity? Choice depends on the presentation that: provides more reliable and relevant information (specific industries). -1 There is minimum content that needs to be included?

STEPS TO CALCULATE GOOD WILL

1. Determine the fair value of net assets acquired, taking into account non recognised intangibles and contingent). Multiply this by the % sharecapital owned. 2. Explain the differnce between price and fair value of acquired net assets (goodwill/bargain)

Direct control and indirect control

1. Direct shareholder ownership in Company B 2. Company A effectively controls company C even though it has no direct shareholdering in Company C.

how do we work out taxable profit?

1. Identify which accounting revenues and accounting expenses have a different treatment according to tax legislation 2. the accounting revnues are subtracted from the accounting profit and replaced by taxable revenues calculated according to tax legsilation 2. the accounting expenses are added back to accounting profit and replaced by dedudctable expenses calculated according to tax legislation *Acc profit - Non taxable accounting revenues + taxable revenues + non deductable expenses - deductable expenses =Taxable profit

Active market (FHP)

1. items traded are homogenous 2. willing buyers and sellers can normally be found 3. prices are publicly avaliable. **an active market cannot exist for brands, newspaper mastheads, music and film publishing rights, patents or trademarks, because each such asset is unique. Also, although intangible assets are bought and sold, contracts are negotiated between individual buyers and sellers, and transactions are relatively infrequent. For these reasons, the price paid for one asset may not provide sufficient evidence of the fair value of another. Moreover, prices are often not available to the public.

If you own less than 100% of an entity, what is this percentage mean? Own less than 50%? Own exactly 50%?

1. If the parent company controls the subsidiary by owning less than 100% of its share capital the remaining part of shares that are not owned by the parent company represents the non-controlling interests. Both the parent entity and the non-controlling interests will have an ownership interest in the subsidiary's profits, dividend payments, and share capital and reserves. 2. No control - If the shares acquired do not consent the direction of the activities of the other company (i.e. the acquirer does not obtain control on the business) the transaction shall represent a financial asset and the acquirer has no requirements to prepare the consolidated financial statement. 3. Joint venture. • Joint venture, (50% shares by 2 companies), does not allow consolidation for jointly controlled entities. One entity is not the parent as there needs to be an unanimous vote. As there is no control, the investee is not consolidated.

DTA

1. It is generated by a deductible temporary difference (when the tax base of an asset exceeds its carrying amount or the carrying amount of the liability exceeds the tax base) 2. It represent an anticipation of tax payments in early years. 3. The tax payment are higher in early years, but lower later (reversal of deferred tax asset). ---E.g. The DTA explains the difference between tax payable and tax expense and represents the higher tax payment on 30 June 2015 in respect to the tax expense

DTL

1. It is generated by a taxable temporary difference (when the carrying amount of the asset exceeds the tax base, or the tax base of a liability exceeds its carrying amount) 2. It represent a deferral of taxation payments to future periods 3. The tax payment is reduced (or 'saved') in early years, but additional tax will need to be paid later. 4. Tax payments are simply delayed to future periods *value represents the tax payment deferred to future years e.g. The DTL that was accumulated over the three years had reached $45,000 and it is now reversed. The tax payable, once deferred, is now due (CHECK TEXTBOOK FOR THEORY)

"All leases are represented in the balance sheet" Provide two exceptions. How are these recorded

1. Leases with a duration of less than 12 months 2. leases of low value assets (tables, phones etc) Dr: Rental Expense - Asset Cr: Cash.

Reasons why the new lease standard is better than the old one?

1. Many leases that were not represented on the entitys balance sheet are now represented using AASB16 2. The previous standard was complicated and difficult in the application due to the the classifying of and difference in recording between operating and finance leases

Amortised Cost method. -What two requriements need to be met? -What is amortised cost calculated as? -effective interest rate method table **The amortised cost is recalculated every FY deducting the principal repayment. *Note the annual interest rate is calculated from the face value or the value excluding transaction costs. Weary of impairment losses.

1. Two requirements -Business model test: Normally the business holds financial assets in order to collect their contractual cash flows -Cash flows characterisitics test: The contractual terms of the financial asset on specified dates give rise to cash flows that represent only payments of principal and interests on the principal amount outstanding. *ONLY AVALIABLE FOR DEBT INSTRUMENTS, AND EQUITY INSTRUMENTS HAVE TO BE MEASURED WITH THE OTHER TWO METHODS. 2. Initial amount - principal repayments - any other reudctions = Amortised cost. (CANNOT REVALUE) 3. Date- opening AC - contractual cash receipts - effective interest revenue - principal repayment - closing AC.

residual value guarantee

1. a guarantee made to a lessor by a party (gen. lessee) unrelated to the lessor that the value of an underyling asset at the end of the lease will be at least a specified amount (u can sell asset for 50, ends up they can only sell for 35, thus 15.

Liabilty: (3 points) + recognition (Where time and amount are certain)

1. must be a future outflow of economic benefits to other entities 2. present obligation 3. past transaction or other event msut have created the obligation. Recognition: 1. FEB otuflow probable. 2. cost/value that can be measured reliably.

Provision Liabilities: Define 2.Double entry (for recognise and later paid) 1.What does not constitute a provision liablity.

1. present obligations - but the timing of payment AND/OR amount of the payment is uncertain (amount can be reliably estimated) 2. Dr: Warranty Expense Cr: Provision for Warranty expense When amount is actually incurred Dr: Provision for warranty expense Cr: Cash at bank 3. amounts that are 'provided' for future expenditure, but do not constitue an obligation to an external party. incl; repair + maintentce (becoz the party cannot both recieve and lose the FEB)

*Asset Recognition - when is an asset to be recognised in the balance sheet?

1. probable that FEB embodied in the asset will occur (probability requires professional judgement) 2. asset posssess a cost or other value that can be measured reliably.

Classification of liabilities:

1.Current/non-current basis -CL' payable within the entitys normal operating cycle or within 12 months -NCL; all liabilities that are not current. 2. In order of liquidity.

Journal entries for amortised cost 1.-acquisation of government bond 2.-Years of amortised cost table

1.Dr: investment in government bonds Cr: Cash at bank 2. Dr: Cash at bank Cr: Interest Revenue Cr: Investment in govenrment bonds

What does business combination defined as?

A transaction or other event in which an acquirer obtains control of one or more businesses

Why are leases assets? liabilities? *control of the lease.

A: Main issue here is control, as ecnomic benefits and past event is clear. The lessee controls the use of the leased asset throughout the lease term as: (1)they obtain substantially all the economic benefits from the use of the asset and (2)they direct the use of the asset (can change how the asset is used during the leased term) *Control additional: legally enforceable right established by contract. L: legally forceable obligation to pay lease payments to the lessor as per lease contract

AASB - Development of Accounting standards. FRC oversees this ASIC - enforces corporations act (outlines responsibilties of company's directors, establisehs which companies are required to comply with Accounting standards ASX

ASIC - Which companies are required to comply with AASB standards? Tier 1 Companies - full compliance Public and propreitary large companies. Tier 2 Companies - reduced Small Proprietary Companies exempted -Revenue less than 25million -Asssets less than 12.5million -Employees" Less than 50

What is a group of companies?

Aggregation of two or more companies, where one company (parent) acquires the total/majority of the share capital of other companies (subsidiaries) and, by means of this acquisation, controls them.

Good will amortised?

Amortisation of goodwill is prohibited. Goodwill is onyl subejct to annual impairment testing because defintino for goodwill has indefinte useful life.

Recognition of Financial Instruments

An entity may recognise a financial instrument in its statement of financial position 'when the entity becomes party to the contractual provisions of the instrument'

initial measurement of intangible assets

At cost of acquisation, which includes: purchase price + any directly attributable costs to prepare the asset to its intended use.

Measurement of lease liability

At the commencement date, measure the lease liability at the present value of the lease payments that are not yet paid -Fixed payments (lease payments) + guaranteed residual + bargain purchase option.

When do we recognise a lease? what is the commencement date?

At the commencement date. Which is "the date on which a lessor makes the underlying asset avaliable for use by the lessee

exercising bargain purchase option end of lease

At this point the lease liability will have a 0 balance and the leased asset will have a balance of 100 (leased asset 400 - 300 acc depn) Dr: Asset 100 Dr: Acc Depn 300 Cr: Leased Asset 400 **Closing off the acc depn and transfer the remaining amount into an asset account.

Why is there a differnce between taxable profit and tax expense *timing difference? (CHECK)

Balance sheet method (accounting balance sheet vs tax balance sheet) is used to explain the difference -This method is based on the differences between accounting and tax values of assets and liabilities -It compares the carriyng value (accounting rules) of A/L with the tax base for those assets and liabilites.

how to calculate taxable payable (liability) and tax expense (income statement)

Taxable profit x tax rate = tax payable (tax due to ATO) accounting profit x tax rate = tax expense

Intangible assets - revalaution model: *GOODWILL cannot be revalued

Can ONLY be used if there is an active market (very rare for intangibles) -Revaluation must be to fair value of asset

subsequent measurement of intangible assets

Cost (subject to amortisation) or at fair value if there is an active market.

Carrying amount of an asset

Cost less Acc. Dep less Acc. Impairment losses

*Cost model: What value is the assest carried at?

Cost less any accumulated depreciation and any accumulated impairment loss.

A)If managers remuneration is tied to reported profits, will they prefer revalue or not revalue assets? B)If bank contracts are tied to company's profit, will the company prefer revalue or not? C)If bank contracts are tied to the debt/equity ratio of the company, is it more convenient for the company to revaluate assets or carry them at cost? ****Use textbook for more information

Cost: Get more profit due to a larger gain on sale (where revaluation increments/surplus' have occured) and a lower depreciation charge Fair value: when assets are increasing, higher depciation charges and lower gain on sale. A)cost model, in order for a bigger reported profit when sellling an asset (greater gain on disposal). also revluations increase asset value, but also creates larger depreciation expenses each year. Bigger profit = bigger remuneration. b)higher profit, therefore cost model. ROA is decreased, as assets (base of ratio) is increasing. C)Revaluation model where the expecation is that the fair value of assets are rising. Why? because the ratio will decrease when assets increase with debt constant. Lower the better. Revaluation can loosen debt convenats. EXTRA -As revaluation surplus is transferred to retained earnings directly, potential investors may view the company negatively as these gains are not shown in their profit. Cost may present more positive message to investors. -

What does the sum of total assets represent

Does not reflect a total specific value - as different methods are used for different assets. Different methods are used as they better catch the different chararcteristics of assets

How to reverse impairment?

Dr: Acc. Impairment Loss Cr: Gain from reversal of previous impairment loss

Disposal of a depreciable asset?

Dr: Accumulated Depreciation Dr: Cash Cr: Asset Dr or Cr for the gain/loss on disposal

Reversal of previous revaluation decrement

Dr: Asset Cr: Gain on Revaluation (only up to the amount of the previous decrement, if any excess... Cr: Revaluation Surpus.

Revaluation Increments (revaluation surplus is reserve in equity/account of the balance sheet - found under shareholders equity)

Dr: Asset Cr: Revaluation Surplus

Tax effect: of revaluation of NCA

Dr: Asset Cr: Revaluation Surplus Cr: DTL (%30 revaluation surplus.) -The tax base is not affected by the revaluations becoz depn for tax purposes will continue to be based on the original cost. As the carrying amount will be affected by the revaluation increment, there will be a temporary difference, resulting in a DTL. -Unlike previous examples where DTL is adjusted against income tax expense, asset revaluations requires us to recognise the DTL at the time of the revaluation. This is because revaluation increments directly credits equity (revaluation surplus) and does not go through the income statement. -The DTL represents the tax the company will be paying in the future when the revaluation increment will become a 'profit' (part of retained earnigns; when the balance of revaluation surplus is closed when the asset is sold/disposed)

Disposal of a non depreciable NCA

Dr: Cash Cr: Land Dr or Cr a loss or gain on disposal, which are showing in the income statement If there is a revaluation Surplus balance Dr: Revaluation Surplius Cr: Retained Earnings

If you have to record a DTA or a DTL without income tax payable.. Do the following

Dr: DTA Cr: Income tax expense or Dr: Income tax expense Cr: DTL

Change in accounting estimates; inventoyr obsolete, useful life of asset, warranty obligations. Change of these is not a correction of an error. -circumstnacs change or new information is obtained, estiamtes may be changed. -Additional dislcousure requried if mateirla change in estimates about the nature and amount of the change.

Dr: Depn Expense Cr: Accumulated Depreciation.

*PRACTICAL: If, at a given time, the asset is not able to generate any future economic benefits (defintely not able to? E.g ----Sun Ltd has purchased UV equipment for ultraviolet tanning for $1,000 in 2015. In the same year, the Australian government has banned the practice of ultraviolet tanning. As a consequence, the equipment is not going to generate any future economic benefit and it is written off from Sun's Statement of Financial position. (Topic 2 - Tangible Assets)

Dr: Impairment Loss 1000 Cr: Asset 1000

Account/record for income taxes

Dr: Income tax expense Cr: Income tax payable (Dr)/Cr: (Deferred tax asset)/deferred tax liability

Revaluation Decrement

Dr: Loss on Revaluation Cr: Asset

Reversal of previous revaluation increment

Dr: Revaluation Surplus (Only up to the amount of this balance, if any excess. *Dr: Loss on Revaluation Cr: Asset

Journal entry for lease liabilty/asset ^ w/ direct costs

Dr: Right to use Asset Cr: Lease Liability. Dr: Right to use asset Cr: Lease Liability Cr: Cash

Development- capitalising development costs

Dr: Sampling and testing costs Cr: Cash Dr: Development Cost (Capitalised) Cr: Sampling and testing costs

The consolidation entry to elminate the investment in Y:

Dr: Share Capital Dr: Retained Earnings Dr: Goodwill Dr: BRAND NAME Cr: Invsetment in XXX XLTD

Reversal of DTL (when the DTL is no longer deferred' now due)...THIS OCCURS WHEN THE ASSET/LIABILITY IS SETTLED *Note we get rid of the DTL as it is no longer deffered as the ATO now deems this amount due.

Dr: income tax expense Dr: DTL Cr: income tax payable

Reversal of DTA (when the DTA is no longer deferred) *The previous DTA that was recorded last year is now reversed to balance the lower tax payment (as higher payment (?tax payable) was recorded in the previous year).

Dr; income tax exp cr; dta cr; income tax payable

Retained earnings

Equity account that accumulates all previous profits earned that have not yet been distributed as dividends.

Finanical Assets - subsequent measurement - 3 methods and what does this choice depend on?

Following initial recogntion there are three ways 1. Amortised cost 2. fair value through profit or loss 3. fair value through OCI The CHOICE depends on: 1. the entity's business model for managing its finanical assets, and 2. the contractual cash flows characterisign the finanical asset.

What is meant by a single economic entity

In consideration of the reasons for group creation and how they originates, the companies of the group are related together by proprietary rights and the group is considered as a single economic entity • Consolidated financial statements defined in AASB: The financial statements of a group in which the assets, liabilities, equity, income, expenses and cash flows of the parent and its subsidiaries are presented as those of a single economic entity

*How are PPE measured initially? subsequently?

Initially at cost of acquisiation/construction - Subsequent measurement of the carrying amount either (a) Cost Model or (b) Fair Value (Revaluation Model)

Can one building be cost model and one relvauation mdoel? What about one building being cost model and one land being revaluation mode?

No - the chosen method must be the same one for the entire class. Yes - as all buildings (entire class) will be at cost and all land will be at fair value

*Affect of Revaluation surplus on income statement

No effect. However higher depreciation charges.

Can goodwill be revalued or amortised? -can impairment of goodwill be reversed? NO

No to both. cannot be amortised as it is considered to have an indefinte useful life. THEREFORE it is subject only to annual impairment testing. (Carrying amount of goodwill > recoverable amount)

Prior period errors (math errors, mistakes in rules, fraud) -What are they? -How to treat it when the error is DISCOVERED

Omissions or misstatements in the entity's financial statements from prior periods. The info that was mistakingly provided was avliable at the time the statmets were authroised for issue and could reasonbly have been obtained and taken into accout . -Adjutsed against opening retained earnings (will not appear in statements) Dr: Retained Earnings 8,500 (can be a credit) Cr: Accounts Payable 8,500

Financial Asssets - Initial Measurment

Only at fair value +/- transaction costs

OCI DEFINED

Other comprehensive income is defined as follows: Other comprehensive income comprises items of income and expense that are not recognised in profit or loss as required or permitted by other Australian Accounting Standards

Practical and social impacts of R&D treatment

PRACTICAL: -Still "true and fair" if much research activity that does lead to economic benefits is written off? -Entities strongly involved in R&D will have major expenses for research and lower profits SOCIAL: -Dismissal of important R&D projects (health, environment etc...) -Problems in attracting potential investors. -Reduce innovation and competitiveness

What costs are to be considered if the asset is acquired? (Cost of Acquisation/construction) DRP

Purchase price + directly attributable costs* + costs of dismantling/removal = cost of acquisation. **Directly attributable to bring the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. Includes: assembelly, employee benefits/wages, site preparation, testing costs, professional fees, depreciation of equipment used to make. These costs are capitalised (depreciation, wages) -OVERHEAD/ADMINISTRATIVE ARE NOT PART OF THE COST. -Maintence not included - Cs does not include costs of the day to day servicing of the asset.

*Revaluation Model

Reasses (both upward and downward) the carrying amount of a non-current asset to its fair value

**When and how is an asset imapired?

Recoverable amount (remaining future economic benefits) less than carrying amount (cost less accumualted depn) How? carrying amount is reduced to recoverable amount, with the difference being a loss (impairment loss) recorded in the income statement

Positive differnce: Goodwill. Where willl this appear?

Represents goodwill: an asset representing FEB arising from assets acquired in a business combiniation that are not capable of being individually identified and separately recognised APPEARS ONLY IN THE CONSOLIDATED FINANCIAL STATEMENTS. (as purchased goodwill can only be recognised as an asset for the parenty company who paid for it)

*What is revaluation surplus?

Revaluation surplus is an equity reserve account that holds all the upward revaluations of a company's assets until those assets are disposed of. This is not in show in the income statement,but is shown as part of OCI. Found in the balance sheet, under shareholders equity.

NOW TOPIC 6: LEASES

TOPIC 2, 3 , 6

3) There can be peculiar circumstances when a gain on bargain purchase arise from a business combination, explain why it is considered a gain and how you account for it in the consolidated financial statement?

The gain on bargain purchase is a gain because it is a gain I have made because I have acquired something of a higher value for a lower consideration. As a gain, in the consolidated financial statement the gain on bargain purchase will be recorded as a gain (credit side) in the consolidated income statement (and only here, it arises only when consolidating).

Future Economic Benefits

The capacity of the assets to provide benefits (cash flows) to the entity that controls them.

Negative difference; Gain on bargain purchase -What is it? -Why is it a bargain -where is it reported? *Selling business for a value less than the fair value of net assets.

The gain on bargain purchase is possible (though not common) when a company gains control of an entity by paying an amount that is less than the fair value of the net assets acquired. If the price paid in an acquisition (not only a business combination) is lower than the value of the object acquired, the acquisition is made at a discount and the "saved amount" is a gain on the bargain purchase. For accounting purposes the gain on bargain purchase is to be recognised immediately in consolidated income statement, as a gain (income).

After the acquition/business combination, what is the acquierer (parent company) required to do?

The parent company is required to account for the enttites (subsidiaries) it controls through their acquisition. They account for this by preparing CONSOLIDATED FINANCIAL STATEMENTS FOR THE GROUP TO PROVIDE A TRUE AND FAIR VIEW OF THE PERFORMANCE AND THE FINANCIAL POSITION OF THE GROUP AS A SINGLE ECONOMIC ENTITY.

Describe the major factors to be considered when determining which are the entities to be consolidated by the parent company to produce consolidated financial statement.

The parent company shall include in the consolidated financial statement all the entities (subsidiaries) that it CONTROLS Control is defined as: Existing rights that give the parent company the ability to direct the relevant activity of the subsidiary In general, to direct relevant activity the parent company has to have the majority of votes as a shareholder in the subsidiary

What happens to the balnace in revaluation surplus when the associated asset is disposed of

The revaluation sruplus is transferred directly to retained earnings (another equity account) and cannot be transferred to the income statement Dr: Revaluation Surplus Cr: Retained Earnings

Implications for reporting liabilites *can underestimate amounts to meet certain ratio requirements.

There is subjectivity (and professional judgment) involved in the measurement and recognition of liabilities -There are situations where the choice of recognising or not a liability can be driven by other reasons (than fair and true view): Influence on contractual arrangements tied in part to liabilities (debt-to-asset ratio) -Presence of debt covenants for the company (specific conditions linked to accounting figures: income or total debts)

What does the present value do? Reasons?

Time value of money; a dollar today is worth more than a dollar in 10 years. Calculating the value of future lease payments in todays dollars. -inflation rate, uncertainty of future (GFC) The value of future payments is discounted using a interest/discount rate which takes into consideration; risks and inflation.

Subsequent Measurement of right of use asset

To be deperciated over the lease term or the economic life of the actual asset (if the asset is going to be purchased by the lessee at the end of lease, the economic life is used)

identifiable intangible assets

a specific value can be placed on each individual asset, and they can be separately identified and sold. patents, trademarks, brand names, and coyprights.

Measurement of right to use asset

Valued at cost, which commrpomises. (a) Lease Liability (b) any lease payments made at/before the commencement date (c)inditial direct costs (incremental costs of obtaining a lease that would not have been incurred if the lease had not been obtained) (d)estimate of dismantling/removal.

TOPIC 4: INTANGIBLE ASSETES

WOO

Expenses when recognising vs not recognising the lease Aseet and liability

When recognised, the expenses tend to be front-loaded in earlier years (high exp early, low exp later) total expense for lease would be the same - just timing differences.

Temporary difference? two types?

Where tax base and carrying value do not equal. 1. taxable temporary difference: will result in an increase (decrease) in income tax payable (recoverable) in future periods when the carrying amount of the asset/liability is recovered or settled. (DTL) 2. deductable temporary difference: will result in a decrease (increase) in income tax payable (recoverable) in future periods when the carrying amount of the asset/liability is recovered or settled. (DTA) ***These explain the diff b/w income tax payable and tax expense.

Why is DTL a liability

While the entity was given tax deductions relative to the accounting expense (tax epenses) for the early years of the assets life, effectively it has reduced the tax payable in in those years. However in doing so, no deduction will be given in the (most likely last year, refer to question) of the asset, which results in the them having to pay more tax. That is, they deferred the tax to this year.

Are .... show in the incoem statement loss on revaluation revaluation surplus transfer of revaluation surplus to retained earnings Gain on revaluation

Yes, No, No, Yes

Can an entity switch from cost model to revaluation model?

Yes, if it is for a justifiable reason and they provide adequate disclosures

Lease

a contract conveying the right from a lessor to a lessee to use an asset for a period of time in exchange for a series of payments.

Financial Liability (e.g) -From sellers perspective; option contracvt that gives right to acquire shares for a set price. This is a financial liability becaues it is POTENTIALLY UNFAVOURABLE (if the price of the shares become greater than the set price on the OPTIOn) **e.gs -contractual obligation to deliver cash or another financial asset to another entity -a contract that will or may be settled in the entity's own equity instruments (share option)

a contractual obligation to deliver cash or another financail asset to another entity, or to exchange finanical assets or finanical liablities with another entity under conditions that are potentially unfavourable to the entity e.g.

present obligation

a duty/responsibility to act in a certain way, doesnt have to be legally enforceable as it can arise from repairing faulty goods outside the warranty period.

goodwill acquired in a business combinatino represents? PUT CGU HERE.

a payment made by the acquirer in anticipation of FEB from assets that are not capable of being individually indentified and separately recognised. Goodwill does not generate cash flows independelty of other assets or group of assets and therefore canno tbe measured directly.

*Assets Defintion in Conceptual Framework

a resource controlled by the entity as a result of past events and from which economic benefits are expected to flow to the entity.

Tax expense and tax payable, why do we record both?

accounting income tax expense ; based on what the org earned from a finanical accoutning perspective income tax payable is based on what is owed to the ATO

Difference between accounting profit and taxable profit? Why do these two figures differ in values?

accoutning profit is determined by accounting rules (AASB accounting standards) for calculating profit/loss of a company. taxable profit is determined in accordance with Australian income tax legilsation (ATO) -As they are calculated using diffrent rules, this will mean some of the revenues and expenses recoginsed for accounting purposes may not be recoginised for tax purposes (vice versa) TLDR: Acc Profit = acc revs less acc exp Taxable profit = taxable revs less taxable exp *Typically taxable revenues/expenes are taxed when paid/recieved.

Financial Asset (e.g.) cash equity instrument of another entity contractual right to recieve cash or another financial asset from another entity

an asset that is cash or a contaractual right to recieve cash from or exchange financail instruments with another entity. e.g.

Financial Instruments

any contract that gives rise to both a financial asset of one entity and a financial liability or equity instrument of another entity

Development + examples -When may this be capitalised as an intangible asset? -What next if they are capitalised?

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 prior to the commencement of commercial production or use Examples: design, construction and testing of prototypes, model, pilot plants; new technology; improved materials or devices (See AASB 138 When -1. FEB probable -2. cost of the asset can be measured reliably. **If capitalised, they follow the general rules for intangle assets with refernce to amortisation, impairment test and revaluation.

unidentifiable intangible assets

cannot be separately sold and measured individually (reliably).. We treat these as a composite asset, known as GOODWILL loyal customers, good reputation.

Capitalising expenditure - effect on profit

compared to expensing as incurred, Assets and Profits higher in year of deferal.. Years after deferal profits of the firm will be lower as higher depreciation/amorisation charges will occur.

Derivative financail instruments

create rights and obligations with the effect of transferring one or more of the financial risks inherent in an underlying primary financial instrument -include financial options, futures, forward contracts and interest rate and currency swaps

acquisition date?

date where the acquirer obtains control of the acquiree,

internally generated intangibles, what does this mean?. Can these be recognised as assets?

developed within the organisation rather than acquired from at cost from an external party. NO> internally generated intangible assets cannot be recognised as assets (however, developemnt costs may be an exception)

Equity Instrument (e.g)

financial instrument that provides the holder with a residual interest in an entity after deduction of its liabilities. e.g.

OCI

general rule that all itmes of income and expenses in a period should be recongised by an entity in profit or loss unless a particular accounting stadnard requires or permis otheriwse (as OCI) -standards specially stat certain gains are not to be included in the profit or loss but in the OCI.

Why is an asset depreciated

if an asset is held for a number of periods, the future economic benefits of the assets are expected to decline over time. This is recognised as an expense.

Primary Financial Instrument

include receivables, payables and equity securities such as ordinary shares—accounting treatment fairly straightforward

Lease term as defined in the accounting standard

is: The non-cancellable period for which a lessee has the right to use an underlying asset, together with both: **1)periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that option; and 2)periods covered by an option to terminate the lease if the lessee is reasonably certain not to exercise that option *Reasonably certain: If the price is below the market price it will be sufficinetly favrouable for the lesssee to exercise it or if the asset has had significant changes/customisations that may indicate the lessee is intending to exercise the option.

What is the core pricniple of the new accounting standard? What is the nature of the asset and liablitity recorded under the new standard?

it is that an entity shall recognise assets and liabilities arising from a lease ''to ensure that lessees and lessors provide releveant information in a manner that faithfully represents those tranctions". .Requires assets and liabilities to be recognised for all leases (greater than 12 months) with the asset being of the nature of a right to use asset that provdies a right to use the leased asset for the term of the lease and the liablity would be for the lease payments that are economically unavoidable over the lease term

Control over the assets upon past event/transaction

its the capacity of the entity to benefit from the asset and to deny or regulate access of others to those benefits (dont have to have legal ownership, lease agreements)

Lesse and lease payments define

leasee: the individual/firm acquring the right to use asset and having an obligation to pay the lessor at established dates lease payments: fixed payments + residual value guarantee and/or price of purchase option

Lease Accounting for lessors

lessor: : the individual/firm providing the asset and receiving a payment at established dates Initial measurement: the liability for the lessee is a receivable for the lessor. -Dr: Lease Recievable Cr: Asset Subequent measurement: Lease revenue, same table but lease payment received and interes revenue and lease receivable. -Dr: Cash Cr: interest revenue Cr: lease recieveable

*Critiques of cost model

may be underestimating what can actually be made out of the fair value of the asset. This is why historical cost is critised; bears no relation to current asset values.

Research (preceeds development generally) -Define -Rule and why

original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding Rule: -Any sort of research expenditure CANNOT be capitalised as intangible asset but has to be written off as incurred. This is because; it is deemed impossible to demonstrate in the research phase that an intangible asset exists and will generate probably FEB.

useful life

period over which the asset is expected to generate economci benefits.

statement of changes in equity

provides reconcillation of opening and closing equity. (Effects of transactions with owners)

GPFS - needed to make econmoic deicisons.

public annual reports that meet the information eneds common to external users that dont have the power to demand special purpose financial statements.

**Recoverable Amount -

remaining future economic benefits from using or selling the asset. It is the higher of: Value in use (present value of the future cash flows generated by an aset) and fair value less costs of disposal (aka nsp): amount obtained from the sale of an asset less any selling expense

tax base?

the amount that would be attributed to an asset or liability for tax purposes. represents the amount of an asset or liablity that would be recorded if the balance sheet were prepared applying taxation rules.

key difference between finanicail liability and equity instrument?

the existence of a contractual obligation.

*Fair Value

the price that would be recieved to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. (its an estimate)

Effective interest rate

the rate that equals the cash inflows and out flows generated by the instrument.

CGUS -Define -Account -Impairment/amortisation

the smallest identifiable gruop of assets that generates cash flows that are largely independent of the cash inflows from other groups of assets. -An entity shall determine the recoverable amount of the CGU to which the asset belongs Dr: Impairment Loss; Goodwill Dr: Impairment loss; identifiable assets Cr: Acc Impairment loss -GOODWILL Cr: Acc impairment loss - A1 Cr: Acc impairment loss - A2

subsequent measuremnt of lease liability? table

treat it as a financai liability - amortised cost basis; Each lease payment corresponds to a reduction of the lease liability (prin. red) and cost of interest (int exp) Dr: Lease Liability Dr: Interest Expense Cr: Cash. Table: date - lease payment - int exp - principle reduction - lease liability

Goodwill Can it be purchased or sold separately?

unidentifiable intangible asset, Represents the future economic benefits associated with a company's existing customer base, efficient management, reliable suppliers, employees skills etc. Cannot be purchased or sold separately, but can only be acquired/purchased together with the entity.

NOTE WHEN WRITING THE JORUNAL ENTRIES DR: INCOME TAX EXPENSE CR: INCOME TAX PAYABLE INCLUDE ONLY THE NET DTA OR DTL.

yes