ACCA SBR Important Points - Asra PDF

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ACCA SBR ImportantPoints(Definitions & Very importantpoints are Highlighted)When an entity disposes off a small part of the control of the subsidiary, the relevant portion of the exchange rate gain should be re attributed to the NCI, rather than the Retained Earnings.Contingent consideration...

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ACCA SBR Important Points (

& are Highlighted)

When an entity disposes off a small part of the control of the subsidiary, the relevant portion of the exchange rate gain should be re attributed to the NCI, rather than the Retained Earnings."

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" Important Notes for Ethics Questions

- Accountants have a duty to ensure that the financial statements are fair, transparent and comply with accounting standards. "

- The accountant appears to have made a couple of mistakes which would be unexpected from a professionally qualified accountant. "

- Accountants must carry out their work with due care and attention for the financial statements to have credibility. They must therefore ensure that their knowledge is kept up to date and that they do carry out their work in accordance with the relevant ethical and professional standards. Failure to do so would be a breach of professional competence. "

- The accountant must make sure that they address this issue through, for example, attending regular training and professional development courses."

- Accountants have an ethical duty to be professionally competent and act with due care and attention. It is fundamental that the financial statements comply with the accounting standards and principles which underpin them."

- This may be a genuine mistake but even so would not be one expected from a professionally qualified accountant. The financial statements must comply with the fair presentation principles embedded within

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" Current tax is based on taxable profit for the year. Taxable profit is different from accounting profit due to temporary differences between accounting and tax treatments, and due to items which are never taxable or tax deductible. Tax benefits such as tax credits are not recognised unless it is probable that the tax positions are sustainable." Provision for deferred tax is made for temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and their value for tax purposes. The amount of deferred tax reflects the expected recoverable amount and is based on the expected manner of recovery or settlement of the carrying amount of assets and liabilities, using the basis of taxation enacted or substantively enacted by the financial statement date."

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" IAS 12 Income Taxes requires that deferred tax liabilities must be recognised for all taxable temporary differences. Deferred tax assets should be recognised for deductible temporary differences but only to the extent that taxable profits will be available against which the deductible temporary differences may be utilised." Deferred taxes represent the amounts of income taxes payable or recoverable in future periods in respect of temporary differences. Temporary differences are differences between the carrying amount of an asset or liability and its tax base. A deferred tax asset arises where the tax base of an asset exceeds the carrying amount. A deferred tax asset can also occur when the tax base of a liability differs from its carrying amount; the eventual settlement of the liability represents a future tax deduction. In relation to unused trading losses, the carrying amount is zero since the losses have not yet been recognised in the financial statements of Hudson. A potential deferred tax asset does arise but the determination of the tax base is more problematic. The tax base of an asset is the amount which will be deductible against taxable economic benefits from recovering the carrying amount of the asset. Where recovery of an asset will have no tax consequences, the tax base is equal to the carrying amount."

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The fair value of non-cash consideration may vary. If the non-cash consideration varies for reasons other than the form of the consideration, entities will apply the guidance in IFRS 15 related to constraining variable consideration. However, if fair value varies only due to the form, the variable constraint guidance in IFRS 15 would not apply. " The return on equity (ROE) ratio measures the rate of return which the owners of issued shares of a company receive on their shareholdings in terms of profitability. ROE signifies how good the company is in generating profit on the investment it receives from its shareholders. This metric is especially important from an investor’s perspective, as it can be used to judge how efficiently the firm will be able to use shareholder’s investment to generate additional revenues." How to find the value of NCI in full goodwill method when no information is given about it ? Answer : Find the carrying value of net asset of subsidiary and add goodwill to it. Then multiply this amount with the NCI’s share."

The net profit margin (net profit/sales) tells how much profit a company makes on every dollar of sales. Asset turnover (sales/assets) ratio measures the value of a company’s sales or revenues generated relative to the carrying amount of its assets. The asset turnover ratio can often be used as an indicator of the efficiency with which a company is deploying its assets in generating revenue. The equity ratio indicates the relative proportion that equity is used to finance a company’s assets. The equity ratio is a good indicator of the level of leverage used by a company by measuring the proportion of the total assets which are financed by shareholders, as opposed to creditors."

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The accounting treatment is driven by the concept of substance over form. In substance, there has been no disposal because the entity is still a subsidiary, so The transaction is, in effect, a " "

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If the contingent payment condition is beyond the control of both the entity and the holder of the instrument, then the instrument is classified as a financial liability. " A contract resulting in the receipt or delivery of an entity's own shares is not automatically an equity instrument. The classification depends on the so- called 'fixed test' in IAS 32. A contract which will be settled by the entity receiving or delivering a fixed number of its own equity instruments in exchange for a fixed amount of cash is an equity instrument. In contrast, if the amount of cash or own equity shares to be delivered or received is variable, then the contract is a financial liability or asset." " " " " Entity could improve the usefulness of underlying EPS by: "

• Including an appropriate description of how the measure is calculated " • Ensuring that the calculation of underlying EPS is consistent year on year and that • • •

comparatives are presented " Explaining the reasons for presenting the measure, why it is useful for investors and for what purpose management may use it " Presenting a reconciliation to the most directly reconcilable measure in the financial statements, for example EPS calculated in accordance with IAS 33 " Not excluding items from underlying EPS that could legitimately reoccur in the future, such as impairment losses on goodwill" The reduction in the net pension liability as a result of the employees being made redundant and no longer accruing pension benefits is a curtailment under IAS 19 Employee Benefits. "

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" Prior to the amendment, the accounting was not clear as IAS 19 implied that entities should not update the actuarial assumptions for the calculation of current service cost and net interest during the period, even if a plan amendment, curtailment or settlement had resulted in remeasurement of the net defined benefit liability. The IASB believes that by amending IAS 19 to require updated assumptions to be used, the resulting information will be more useful to users of accounts." " "

" " " " " " The incremental borrowing rate should be used to discount the revenue (IFRS 15) to be received over the period to present value terms and to find the financing component." Examples of use of fair values in IFRS include: "

- IAS 16 Property, Plant and Equipment allows revaluation through other comprehensive income, provided it is carried out regularly. "

- While IAS 40 Investment Property allows the option of measuring investment properties at -

fair value with corresponding changes in profit or loss, and this arguably reflects the business model of some property companies, many companies still use historical cost." IAS 38 Intangible Assets permits the measurement of intangible assets at fair value with corresponding changes in equity, but only if the assets can be measured reliably through the existence of an active market for them. " IFRS 9 Financial Instruments requires some financial assets and liabilities to be measured at amortised cost and others at fair value. The measurement basis is largely determined by the business model for that financial instrument. For financial instruments measured at fair value, depending on the category and the circumstances, gains or losses are recognised either in profit or loss or in other comprehensive income."

Shortcomings of IAS 37 IAS 37 is generally consistent with the Conceptual Framework. However there are some issues with IAS 37 that have led to it being criticised: " (i) IAS 37 requires that is more than 50% likely, that the obligation will result in an outflow of resources from the entity. This is for example Business Combinations and Financial Instruments which In addition, probability is not part of the Conceptual Framework definition of a liability nor part of the Conceptual Framework's recognition criteria. " (ii) There is as regards how they treat the cost of restructuring a business. US GAAP requires entities to while IAS 37 requires recognition of the total costs of restructuring when the entity announces or starts to implement a restructuring plan. " (iii) The measurement rules in IAS 37 are vague and unclear. In particular, 'best estimate' could mean a number of things: the most likely outcome, the weighted average of all possible outcomes or even the minimum/maximum amount in a range of possible outcomes. IAS 37 does not clarify which costs need to be included in the measurement of a liability, and in practice different entities include different costs. It is also unclear if 'settle' means 'cancel', 'transfer' or 'fulfil' the obligation. IAS 37 also requires provisions to be discounted to present value but gives no guidance on non-performance risk that is the entity's own credit risk. Non-performance risk can have a lead to a significant reduction in non-current liabilities." IAS 36 requires that the discount rate should appropriately reflect the current market assessment of the time value of money and the risks specific to the asset or cash-generating unit." Hot topic for the examiners : Accoun&ng for cryptocurrencies There are many issues that accountants may encounter in prac1ce for which no accoun1ng standard currently exists; one example is cryptocurrencies. For example, as no accoun1ng standard currently exists to explain how cryptocurrency should be accounted for, accountants have no alterna1ve but to refer to exis1ng accoun1ng standards. This ar1cle demonstrates to Strategic Business Repor1ng (SBR) candidates how this can be done using cryptocurrencies as an example. In any exam situa1on, it is expected that candidates will take a few minutes to reflect on each ques1on/ scenario and plan their answer – ie in this case, think about what accoun1ng standards might be applicable. This plan will then provide a structure for your answer. SBR candidates should note that it is perfectly acceptable to suggest a reasonable accoun1ng standard and then explain why that standard is not applicable; indeed, this ar1cle adopts a similar approach with Interna1onal Accoun1ng Standard (IAS®) 7, Statement of Cash Flows, IAS 32, Financial Instruments: Presenta7on and Interna1onal Financial Repor1ng Standard (IFRS®) 9, Financial Instruments

What is cryptocurrency?

What accoun&ng standards might be used to account for cryptocurrency? At first, it might appear that cryptocurrency should be accounted for as cash because it is a form of digital money. However, cryptocurrencies cannot be considered equivalent to cash (currency) as defined in IAS 7 and IAS 32 because they cannot readily be exchanged for any good or service. Although an increasing number of en11es are accep1ng digital currencies as payment, digital currencies are not yet widely accepted as a medium of exchange and do not represent legal tender. En11es may choose to accept digital currencies as a form of payment, but there is no requirement to do so.

Thus, cryptocurrencies cannot be classified as cash equivalents because they are subject to significant price vola1lity. Therefore, it does not appear that digital currencies represent cash or cash equivalents that can be accounted for in accordance with IAS 7. Intui1vely, it might appear that cryptocurrency should be accounted for as a financial asset at fair value through profit or loss (FVTPL) in accordance with IFRS 9. However, it does not seem to meet the defini1on of a financial instrument either because it does not represent cash, an equity interest in an en1ty, or a contract establishing a right or obliga1on to deliver or receive cash or another financial instrument. Cryptocurrency is not a debt security, nor an equity security (although a digital asset could be in the form of an equity security) because it does not represent an ownership interest in an en1ty. Therefore, it appears cryptocurrency should not be accounted for as a financial asset. However, digital currencies do appear to meet the defini1on of an intangible asset in accordance with IAS 38, Intangible Assets. This standard defines an intangible asset as an iden1fiable non-monetary asset without physical substance. IAS 38 states that an asset is iden1fiable if it is separable or arises from contractual or other legal rights. An asset is separable if it is capable of being separated or divided from the en1ty and sold, transferred, licensed, rented or exchanged, either individually or together with a related contract, iden1fiable asset or liability. This also corresponds with IAS 21, The Effects of Changes in Foreign Exchange Rates, which states that an essen1al feature of a non-monetary asset is the absence of a right to receive (or an obliga1on to deliver) a fixed or determinable number of units of currency.

Thus, it appears that cryptocurrency meets the defini1on of an intangible asset in IAS 38 as it is capable of being separated from the holder and sold or transferred individually and, in accordance with IAS 21, it does not give the holder a right to receive a fixed or determinable number of units of currency. Cryptocurrency holdings can be traded on an exchange and therefore, there is an expecta1on that the en1ty will receive an inflow of economic benefits. However, cryptocurrency is subject to major varia1ons in value and therefore it is non-monetary in nature. Cryptocurrencies are a form of digital money and do not have physical substance. Therefore, the most appropriate classifica1on is as an intangible asset. IAS 38 allows intangible assets to be measured at cost or revalua1on. Using the cost model, intangible assets are measured at cost on ini1al recogni1on and are subsequently measured at cost less accumulated amor1sa1on and impairment losses. Using the revalua1on model, intangible assets can be carried at a revalued amount if there is an ac1ve market for them; however, this may not be the case for all cryptocurrencies. The same measurement model should be used for all assets in a par1cular asset class. If there are assets for which there is not an ac1ve market in a class of assets measured using the revalua1on model, then these assets should be measured using the cost model. IAS 38 states that a revalua1on increase should be recognised in other comprehensive income and accumulated in equity. However, a revalua1on increase should be recognised in profit or loss to the extent that it reverses a revalua1on decrease of the same asset that was previously recognised in profit or loss. A revalua1on loss should be recognised in profit or loss. However, the decrease shall be recognised in other comprehensive income to the extent of any credit balance in the revalua1on surplus in respect of that asset. It is unusual for intangible assets to have ac1ve markets. However, cryptocurrencies are oPen traded on an exchange and therefore it may be possible to apply the revalua1on model. Where the revalua1on model can be applied, IFRS 13, Fair Value Measurement, should be used to determine the fair value of the cryptocurrency. IFRS 13 defines an ac1ve market, and judgement should be applied to determine whether an ac1ve market exists for par1cular cryptocurrencies. As there is daily trading of Bitcoin, it is easy to demonstrate that such a market exists. A quoted market price in an ac1ve market provides the most reliable evidence of fair value and is used without adjustment to measure fair value whenever available. In addi1on, the en1ty should determine the principal or most advantageous market for the cryptocurrencies. An en1ty will also need to assess whether the cryptocurrency’s useful life is finite or indefinite. An indefinite useful life is where there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the en1ty. It appears that cryptocurrencies should be considered as having an indefinite life for the purposes of IAS 38. An intangible asset with an indefinite useful life is not amor1sed but must be tested annually for impairment. In certain circumstances, and depending on an en1ty’s business model, it might be appropriate to account for cryptocurrencies in accordance with IAS 2, Inventories, because IAS 2 applies to inventories of intangible assets. • • •

For example, an en1ty may hold cryptocurrencies for sale in the ordinary course of business and, if that is the case, then cryptocurrency could be treated as inventory. Normally, this would mean the recogni1on of inventories at the lower of cost and net realisable value. However, if the en1ty acts as a broker-trader of cryptocurrencies, then IAS 2 states that their inventories should be valued at fair value less costs to sell. This type of inventory is principally acquired with the purpose of selling in the near future and genera1ng a profit from fluctua1ons in price or broker-traders’ margin. Thus, this measurement method could only be applied in very narrow circumstances where the business model is to sell cryptocurrency in the near future with the purpose of genera1ng a profit from fluctua1ons in price. As there is so much judgement and uncertainty involved in the recogni1on and measurement of cryptocurrencies, a certain amount of disclosure is required to inform users in their economic decisionmaking. IAS 1, Presenta7on of Financial Statements, requires an en1ty to disclose judgements that its management has made regarding its accoun1ng for holdings of assets, in this case cryptocurrencies, if those are part of the judgements that had the most significant effect on the amounts recognised in the financial statements. Also IAS 10, Events aEer the Repor7ng Period requires an en1ty to disclose any material non-adjus1ng events. This would include whether changes in the fair value of cryptocurrency aPer the repor1ng period are of such significance that non-disclosure could influence the economic decisions that users of financial statements make on the basis of the financial statements. So, accoun1ng for cryptocurrencies is not as simple as it might first appear. As no IFRS standard currently exists, reference must be made to exis1ng accoun1ng standards (and perhaps even the Conceptual Framework of Financial Repor1ng). SBR candidates should be prepared to adopt this approach in an exam situa1on because it allows them to substan1ate their conclusion which is an approach that will be expected by employers in prac1ce. Wri8en by a member of the Strategic Business Repor1ng examining team...