ACCT 90012 Corporate Reporting 1 Lecture 12a Course Review (Weeks 1 – 6) Fair Value Measurement PPE, Intangibles, Asset Impairment Leases Accounting for Income Tax Revenue Recognition Financial Instruments Lecture 1: AASB 13 FAIR VALUE MEASUREMENT AASB 13 Fair Value Measurement provides a framework for measuring fair value and requires disclosures about fair value measurement. The Standard defines fair value on the basis of an 'exit price' notion and uses a 'fair value hierarchy'. 2 Measurement follows a 4 step approach (for Assets) 1. Determine the asset that is the subject of measurement Considers the characteristics that market participants would use when pricing an asset 2. Determine the valuation premise that is appropriate Consider the intended use by the market participant - highest and best use of the asset (HBU) and these uses must be physically possible, legally permissible and financially feasible. 2 valuation premises for HBU - In combination valuation premise or Stand-alone valuation premise. 3. Determine the principal or most advantageous market 4. Determine the appropriate valuation technique(s). 3 possible valuation techniques: Market approach, Cost approach , Income approach AASB 13 Fair Value Measurement 3 Lecture 2: AASB116 PPE & AASB 136 Impairment of assets At recognition = Cost + directly attributable costs After recognition Cost model FV model Check for impair’t RA< CA Dr: IL Cr: AD & IL Revaluation increase Revaluation decrease Dr: AD Cr: NCA Write back dep Dr: NCA Cr: Gain on reval (OCI) Dr: Gain on reval (OCI) Cr: ARS Rev↓foll prior Rev ↑ Dr: AD Cr: NCA Write back dep Dr: LoR (P&L) : LoR (OCI) Cr: NCA Reval. Decrease Dr: ARS Cr: LoR of NCA Dr: AD Cr: NCA Write back dep Dr: LoR Cr: NCA Rev ↑reversing prior Rev ↓ Dr: AD Cr: NCA Write back dep Dr: NCA Cr: Gain on Reval (P&L) Cr : Gain on Reval. (OCI) Reval. Increase Dr: Gain on Reval (OCI) Cr: ARS IL of individual asset CA> RA Treated as a reval dec Note: CA cannot be reduced below the HIGHEST of (a) FV – costs to disposal (b) VIU and (c ) $0 Reversal of IL restricted (increased CA shall not exceed the CA if no IL had been det.) IL of CGU Recog. IL 1. Goodwill 2. Pro-rata on CA of each asset CA cannot be reduced below the HIGHEST of (a) FV – costs to disposal (b) VIU and (c ) $0 Reversal of IL of CGU - Reversal restricted IL of goodwill cannot be reversed Pro-rata allocation but CA of any asset cannot be increased above: Its RA; and the CA that would have been det. had no IL been recog Use Lower of FV & RA: This tests for revaluation & impairment simultaneously Dr: AD Cr: NCA Write back dep Dr: ARS Dr: LoR (P&L) Cr: NCA Reval. Decrease 4 AASB 138 Intangible Assets 5 Recognition of intangible assets a) It is probable that the expected future economic benefits that are attributable to the asset will flow to the entity; and b) The cost of the asset can be measured reliably • Acquisition of intangible assets vs. internally generated • Research & Development costs Lecture 3: AASB 16 Leases 6 • Identify a lease contract • From lessee’s perspective: Initial recognition and measurement of lease liability and R-O-U asset Subsequent measurements during the lease period A lease is a contract, or part of a contract, that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration • The right to use the identified asset • Implicitly or explicitly specified • Supplier has no substantive substitution right • Control the use of the identified asset • Obtain substantially all of the economic benefits from using the asset • Right to direct the use of the asset (when, how, etc.) 7 Lecture 3: AASB 16 Leases Lease payment schedule No. Date Payment Interest Principal Balance 8 • Initial Lease Liability = PV of future lease payments • If lessee intends to return the asset: FV of leased asset at the end of the lease term < Guaranteed residual value, add the difference between the two into initial lease liability • If lessee intends to purchase the asset: include bargain purchase option • Lease payment schedule Lecture 3: AASB 16 Leases • Initial R-O-U asset = Initial lease liability + initial lease payment + directly attributable costs • R-O-U asset needs to be subsequently depreciated Lecture 3: AASB 16 Leases 9 Date Item Dr Cr On inception Right-of-Use Asset xx Lease Liability xx Depreciation Depreciation if intend to purchase (Cost – RV)/Useful life If no intention to purchase (Cost)/Lease term Accumulated Depreciation Lease payment Lease Liability Lease Interest Bank Journal entries to account for leases from inception to date the right of use asset is returned or option to purchase is exercised Lecture 4: AASB 112 Accounting for Income Taxes Movement in the deferred tax assets and liabilities for the period recognised in profit or loss. Amount of income tax payable for the period (determined from tax return) recognised in profit or loss. Total tax expense (income) Current tax expense (income) Deferred tax expense (income) += 10 Tax effect accounting: Tax consequences of transactions that occur during a period should be ‘recognised as income or an expense in the net profit or loss for the period’ irrespective of when those tax effects will occur. A transaction may have two tax ‘effects’: 1.Tax payable on the current profit earned for the year may be reduced or increased because the transaction is not taxable or deductible in the current year (Current tax worksheet) 2.Future tax payable may be increased or reduced when that transaction becomes taxable or deductible (Deferred tax worksheet). This can cause timing differences between tax expense and tax payable 11 Lecture 4: AASB 112 Accounting for Income Taxes AASB 112 Income Taxes 12 Current tax worksheet • Reconcile accounting profit with taxable profit (including permanent differences) Deferred tax worksheet • Identify temporary differences (deductible & taxable) • Future taxable amounts, future deductible amounts Accounting losses and exempt income treatment Journal entries • Current tax paid & payable • Deferred tax adjustments incl DTL arising from revaluations Current Tax Worksheet Accounting profit Rent received Interest received Wages & salaries expense Annual leave expense Insurance expense Doubtful debts expense Acc depreciation – equipment Acc depreciation - buildings Non deductible - entertainment expenses Non deductible – goodwill impairment Rent revenue Interest revenue Wages & salaries paid Annual leave paid Insurance paid Bad debts written off Tax depreciation – equipment Tax depreciation – buildings Taxable profit Permanent differences Add: Assessable income (cash received) Add: Accounting expense Less: Accounting revenue Less: Deductible amount (expenses paid) 13 Deferred tax Assets Tax base = CA – FTA + FDA Liabilities Compare FTA with FDA FTA < FDA = DTA (deductible TD) FTA > FDA = DTL (taxable TD) Tax base = CA + FTA - FDA Compare FTA with FDA FTA < FDA = DTA (deductible TD) FTA > FDA = DTL (taxable TD) * Check if DA has been claimed. If already claimed, then FDA $0, if not claimed, then the amount that can be claimed in the future. 14 Deferred Tax Worksheet (Focus on Balance Sheet) Item CA FTA FDA TB DTD (DTA) TTD (DTL) FTA< FDA FTA> FDA ASSETS Accounts receivable Interest receivable Prepaid insurance Equipment (CA) Land Buildings (CA) LIABILITIES Accounts payable Accrued wages/Provisions Unearned/Prepaid rent rev 15 16 Lecture 5: AASB 15 Revenue from contract with customers • When is revenue recognised? 5 step process for recognition of revenue: • identify the contract, performance obligations, determine transaction price, allocate transaction price, recognise revenue when performance obligations satisfied • Principal vs. Agent • Allocation of consideration when services are bundled or multiple performance obligations present or loyalty points awarded and redeemed • Journal entries · 17 · Lecture 6: Financial Instruments • Define a financial instrument • Understand how to classify financial instruments into financial assets, financial liabilities, and equity instruments including compound financial instruments • Distinguish between financial liabilities and equity instruments • Understand the measurement of financial assets and financial liabilities • Impairment of financial assets • Journal entries 17 Initial measurement of financial assets • FV of financial assets + directly attributable transaction costs (not included if financial asset measured at FVTPL) Initial measurement of financial liabilities • FV of financial liabilities - directly attributable transaction costs (not included if financial liability measured at FVTPL) 18 Lecture 6: Financial Instruments Subsequent measurement: Financial Assets 19 Subsequent measurement: Financial liabilities 20 Issue a debt instrument – FL; Buy a debt instrument - FA Amortised cost table 21 Options is a derivative financial instrument • Call and put options – Buy a call option – FA (holder/buyer will only exercise under favourable conditions) – Sell/Write a call option – FL (issuer contractually obliged to sell under unfavourable conditions) – Buy a put option – FA (buyer/holder will only sell under favourable conditions) – Sell/Write a put option – FL (issuer contractually obliged to buy under unfavourable conditions) • Subsequent measurement of options at FVTPL Year Amortised cost atbeginning Interest expense Cash flows (fixed amount) Amortised cost at end Lecture 6: Financial Instruments ACCT 90012 Corporate Reporting 22 Lecture 12b Course Review (Weeks 7 – 11) Business Combinations & Consolidations – controlled entities Consolidations – wholly owned entities Consolidations – Intragroup transactions Consolidations – Non-controlling interest Equity accounting & Others Lecture 7 AASB 3: Business Combinations Identifying a business combination: Para 3: An entity shall determine whether a transaction or other event is a business combination … which requires that the assets acquired and liabilities assumed constitute a business. Conditions for a BC • the assets or net assets acquired must be a business • Acquirer must obtain control of the business AASB3/IFRS3 requires that the acquirer apply the acquisition method to account for the business combination. • Step 1: Identify the acquirer • Step 2: Determine the acquisition date • Step 3: Recognise and measure the FVINA • Step 4: Recognise goodwill or gain on bargain purchase 23 AASB3: Business combinations Buy assets or net assets directly Can be either amalgamations or absorptions Amalgamations: 2 entities combine to form a new company. Absorptions: when an entity buys another entity, the acquirer company becomes a larger entity and the target company is liquidated or target company operates with a reduced level of assets. On amalgamation or absorption, the net assets of the entities are combined. 24 AASB10: Consolidated Financial Statements An investor controls an investee when the investor is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Relevant activities – determine the relevant activities to identify the driver of variable returns Control can be passive, that is entity may not be active in decision making and yet we can determine that the entity has control 25 AASB10: Consolidated Financial Statements An investor can have power with less than a majority of the voting rights of an investee, through contractual arrangements with other vote holders, potential voting rights etc. Factors to consider include • size of the voting interest, • dispersion of other shareholders, • level of disorganisation of the remaining shareholders (‘de facto control’) Potential voting rights are rights to obtain voting rights of an investee (e.g. convertible instruments). Considered only if they are substantive – • no barriers to exercise rights, • whether practical mechanisms exist for collective exercise of rights, and • whether the holders will benefit from the exercise of those rights 26 • AASB 10: Consolidated Financial Statements: Parent / subsidiary / control • Consolidation adjustments: Eliminations & adjustments • BCVR adjustments & movements in BCVR • Pre-acquisition elimination adjustments • Measurement of NCI using the 3 step process • Intragroup adjustments: • Intragroup transactions (goods and services, loans and interest, non- current assets, tax effects) • Unrealised gains (inventory, NCA’s, current and prior periods) • You will only be tested on Consolidation Journal Entries. Lectures 8 – 10 AASB10: Consolidated Financial Statements 27 Consolidation worksheet journal entries 28 Consolidation worksheet journal entries continued 29 Investor/Associate relationship (significant influence) • Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies Equity method accounting • Acquisition / fair value adjustments • Share of profit / dividends / revaluations / unrecognised losses • Adjustments for transactions 2 scenarios • Investor as a parent entity (cost method to equity method on consolidation) • Investor is not a parent entity Impairment testing of Associate: Cease recognition if investor’s share of losses > CA of Investment, unrecognised losses disclosed in note Lecture 11: Equity Accounting 30 Journal entries 10 Investor is NOT parent entity Investor IS A parent entity Investor IS A parent entity Equity method Own books (Cost method) Consolidated Accounts On date of acquisition On date of acquisition Dr: Investment in Associate Cr: Bank (Amount paid as consideration) Dr: Investment in Associate Cr: Bank (Amount paid as consideration) In current period In current period Dr: Bank/Dividend receivable Cr: Investment in Associate (Share of dividend) Dr: Investment in Associate Cr: Share of Associate’s profit Cr: Opening RE (+ve post-acq profit) (Share of post-acq. profit) Dr: Investment in Associate Cr: Gain on revaluation (OCI) (Share of post- acq. revaluation) Dr: Bank/Dividend receivable Cr: Dividend revenue (Share of dividend) Dr: Investment in Associate Dr: Dividend revenue Dr: Opening RE (if –ve post-acq) Cr: Gain on revaluation (OCI) (post-acq) Cr: Share of profits (current) Cr: Op. RE (if +ve post-acq) 31 30.6.x1 30.6.x2 Post-acquisition profit after tax bef. dividends & transfer to General Reserve xxx xxx Additional dep on revalued non-current asset (after tax) (xxx) (xxx) Unreal. profit after tax on sale of non-current asset *(xxx) Realised profit through use after tax (recognised in proportion to depreciation of non-current asset) xxx xxx Unreal. profit after tax in closing inv. (xxx) Realised profit after tax in opening inv. xxx Unreal. profit after tax in closing inv. (xxx) xxx xxx Investor’s share of adj. post-acq. profit before div. xxx xxx Investor’s share of Asset revaluation surplus – all post acquisition Proforma: Determine adjusted profit of Associate *Assuming that inter-entity sale occurred in 30.6.x1 32 AASB 108 deals with Change in accounting policy - requires retrospective application Change in accounting estimates are applied prospectively from current period and future periods Correction of errors - requires retrospective restatement AASB 110 deals with events that occur after the reporting period. For adjusting events, the transaction will need to be updated with the new information For material non-adjusting events, disclosure is required AASB 124 deals with related party disclosures Subsidiary, associates etc are related parties Disclosure is important as it might affect assessments of an entity’s operations by users Lecture 11: Disclosure issues 33
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