intermediate financial accounting study notes
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AASB 116: PPE (Purchase A Group of Assets)
Where an entity makes a single purchase of a group of assets not deemed a businesscombination, the acquirer should pro-ration the value of those assets according to theirFV.
AASB 3: Business Combinations
Business Combination: A transaction or other event in which an acquirer obtains controlof one or more businesses.
An asset is identifiable if it either:o Is separableo Arises from contractual or other legal rights
A business may be acquired by either (1) a direct acquisition or (2) an indirectacquisition.
Note: Acquisition related costs (e.g. finder’s fees, professional and consulting fees) shallbe accounted for as expenses in the periods in which they are incurred and the servicesare received (note an exception for costs associated with issuing debt or equitysecurities). *Different with PPE!
Consideration > FVNA Acquired → Goodwill (NCA) Consideration < FVNA Acquired → Gain on bargain purchase (Revenue) Direct Acquisition
Note: Recognize book value of gross receivables; raise provision for difference betweenGross & FV.
Note: Recognize FV of NCA, ignore any accumulated depreciation.
Date Details DR CR
Assets (Valued at their FV)
Goodwill on acquisitionLiabilitiesBank
(Acquisition of Net Assets)Acquisition Costs
Bank(Acquisition-related costs)
↑by 240
↑ by 40
↑ by 200
Indirect Acquisition
AASB 116: PPE (Measurement after Recognition)
Cost Model
Depreciation applied based on cost Subject to impairment test under AASB 136
Revaluation Model Revaluation > CA → Incremental Revaluation < CA → Decremental When an item of PPE is revalued, any accumulated depreciation at the date of
revaluation is treated in one of the following ways: (1) The gross method; (2) The netmethod.
Subject to impairment test under AASB 136
Accounting for the Increment (FV>CA) The Net Method
Gain on revaluation (Other comprehensive income)
The Gross Method
Date Details DR CR
Investment in Y LtdBank
(Acquisition of shares in Y Ltd)
Date Details DR CR
Accumulated DepreciationAsset (e.g. Equipment)
(Depreciation write back)Asset (e.g. Equipment)
Revaluation surplus(Incremental revaluation)
OLD NEW
Gross Amount 1200 1440
Acc Depreciation 200 240
Carrying Amount 1000 1200[1] Ratio of 1.2 to 1
[2] 1200*1.2
[3] 1440-1200
↓by 240
↓ by 40
↓ by 200
Gain on revaluation (Other comprehensive income)
Accounting for the Decrement (FV<CA) In line with PRUDENCE, recognise losses as soon as anticipated, recognise gains when
realized. The Net Method
**or Loss on Evaluation (P&L)
The Gross Method
Revaluation expense (P&L)
Date Details DR CR
Asset (e.g. Equipment) 240Accumulated Depreciation 40Revaluation surplus 200
(Incremental revaluation)
Date Details DR CR
Accumulated DepreciationAsset (e.g. Equipment)
(Depreciation write back)Revaluation expense **
Asset (e.g. Equipment)(Decremental revaluation)
OLD NEW
Gross Amount 1200 960
Acc Depreciation 200 160
Carrying Amount 1000 800
Date Details DR CR
Revaluation expense 200Accumulated Depreciation 40
Asset (e.g. Equipment) 240(Decremental revaluation)
[1] Ratio of 0.8 to 1
[2] 1200*0.8
[3] 960-800
↑by 640
↑ by 240
↑ by 400
Accounting for the Increment (FV>CA) After a Prior Revaluation Downwards If an asset’s CA is increased as a result of a revaluation, the increase shall be credited
directly to equity under the heading of revaluation surplus. However, the increase shallbe recognized in P&L to the extent that it reverses a revaluation decrease of the sameasset previously recognized in P&L.
E.g.Equipment 1600
Acc Depreciation 600
Carrying Amount 1000
FV=1400Prior revaluation downwards=100
The Net Method
** or Gain on Revaluation (P&L)
The Gross Method
Date Details DR CR
Accumulated Depreciation 600
Equipment 600(Depreciation write back)Equipment 400
Revaluation revenue** 100Revaluation surplus 300
(Incremental revaluation)
OLD NEW
Gross Amount 1600 2240
Acc Depreciation 600 840
Carrying Amount 1000 1400
Date Details DR CR
Asset (e.g. Equipment) 640Accumulated Depreciation 240Revaluation revenue 100Revaluation surplus 300
(Incremental revaluation)
[1] Ratio of 1.4 to 1
[2] 1600*1.4
[3] 2240-1400
↓by 640
↓ by 240
↓ by 400
Accounting for the Decrement (FV<CA) After a Prior Revaluation Upwards If an asset’s CA is decreased as a result of a revaluation, the decrease shall be
recognized in P&L. However, the decrease shall be recognized in other comprehensiveincome to the extent that any credit balance existing in the revaluation surplus inrespect of that asset. The decrease recognized in the other comprehensive incomereduces the amount accumulated in equity under the heading of revaluation surplus.
E.g.Equipment 1600
Acc Depreciation 600
Carrying Amount 1000
FV=600Prior revaluation upwards=100
The Net Method
The Gross Method
Date Details DR CRAccumulated Depreciation 600
Equipment 600(Depreciation write back)Revaluation surplus 100Revaluation expense 300
Equipment 400(Decremental revaluation)
OLD NEW
Gross Amount 1600 960
Acc Depreciation 600 360
Carrying Amount 1000 600
Date Details DR CR
Revaluation surplus 100Revaluation expense 300Accumulated Depreciation 240
Equipment 640(Decremental revaluation)
[1] Ratio of 0.6 to 1
[2] 1600*0.6
[3] 960-600
AASB 116: PPE (Derecognition of a Revalued Asset) Example 1: Land with CA of $400 is sold for $650
CA=$400; Proceeds=$650 → Profit on sale=$250 Example 2: Land was purchased for $400, revalued by $100
CA=$500; Proceeds=$650 → Profit on sale=$150 But $100 previously recognized as an unrealized gain (which has now been realized),
so GJ entry:DR Revaluation surplus 100
CR Retained earnings 100
AASB 136: Impairment of Assets Compare recoverable amounts (higher of net selling price and value in use) with
carrying amounts If RA<CA, an asset or cash-generating units (CGU) is identified as being impaired and an
impairment loss is recognized. Impairment test applies equally to PPE whether carried under the cost model or the
revaluation model! An impairment loss shall be recognized immediately in P&L, unless the asset is carried at
revalued amount in accordance with another Standard (e.g. in accordance with therevaluation model in AASB 116). Any impairment loss of a revalued asset shall betreated as a revaluation decrease in accordance with that other Standard.
Cost Method (1) To reduce the CA of any goodwill allocated to the unit.
(2) To the other assets of the unit pro-rata on the basis of the CA of each asset inthe unit
Revaluation Method (Net Method)
Date Details DR CR
Impairment lossAccumulated impairment loss
Date Details DR CR
Accumulated DepreciationEquipment
(Depreciation write back)Revaluation surplusRevaluation expense
Equipment(Decremental revaluation)
FV lessselling costs(If I sell it)
PV of future CFexpected toderived from anasset (If I use it)
Reversing an Impairment Loss
If RA>CA, the asset cannot be impaired upwards BUT a reversal of a previousimpairment loss can be recognized.
Exceptions: [1] Goodwill impairment cannot be reversed; [2] The new CA cannotexceed the CA that would have been determined had no previous impairmentloss been recognized (Check slide 48 of Lec 3)
E.g. A Ltd acquired some land in 2013 at a cost of $2.5 million. In 2014, RA=$2.0million. In 2015, FV=$2.8 million.
Date Details DR CR2014 Impairment Loss- Land 500000
Acc Impairment Loss- Land 5000002015 Land 300000
Acc Impairment Loss- Land 500000Reversal of Previous Impairment Loss- Land** 500000Revaluation Surplus 300000
** The above impairment reversal will be treated as part of income in 2015.
REVALUATION AND IMPAIRMENT
An asset can have 4 different values Carrying Amount (CA) Fair value (FV) Fair value less selling costs (FV*) Value in Use (ViU)
An asset is impaired if RA<CA
Under the cost model Revalue to RA if RA<CA
Under the revaluation model Revalue to FV But if RA<FV, asset is impaired So, always revalue to lower of FV and RA
Recoverable amount (RA)= higher of these two
AASB 112: Income Taxes
Tax liability= Taxable income * corporate tax rate (30%)
PERMANENT DIFFERENCE Income that is never assessable (e.g. some capital gains, royalty) Expenses that are never deductible (e.g. entertainment, goodwill impairment) Tax incentives
TEMPORARY DIFFERENCE Income Tax Assessment Act →substantiation rules (i.e. items are assessable/
deductible in the period when invoice is generated/received or when the associatedCF occurs)
GAAP → accrual accounting (recognize revenue and expenses when earned/ incurred) ∴Timing difference between recognition → reconcile/ offset over time
Deductible temporary differences Taxable temporary differencesResults in amounts that are deductible fromaccounting profit in determining taxableprofit of future periods when the CA of theasset is recovered or the CA of the liability issettled.
Results in taxable amounts (added toaccounting profit) in determining taxableprofit of future periods when the CA of theasset is recovered or the CA of the liability issettled.
E.g. Accrued expenses/ Provisions; Unearnedrevenue; LCR write down
E.g. Prepaid expenses; Accrued revenue
Deductible TD give rise to Deferred TaxAssets (DTAs) i.e. DTA = Deductible TD x 30%
Taxable TD give rise to Deferred TaxLiabilities (DTLs) i.e. DTL = Taxable TD x 30%
Deductible TD arises when: CA of an asset in BS < Tax base CA of a liability > Tax base
Taxable TD arises when: CA of an asset in BS > Tax base
CA > Tax base CA < Tax baseAssets DTL DTALiabilities DTA DTL (Not in IFA!!!)
Not the same asaccounting profit!!
REVALUATION OF NCA Asset revaluation represents an unrealized gain (or loss) that is not assessable (or
deductible) at the time of the revaluation. Revaluation ↑→ CA of asset> tax base → DTL Revaluation ↓→ CA of asset< tax base → DTA
Date Details DR CR
Asset 10Revaluation surplus 10
(Adj for upward revaluation)Revaluation surplus 3
DTL 3(Adj for DTL)
Accounting for Foreign Currency Transactions
AASB 121: The Effects of Changes in Foreign Exchange Rates
Problems arise when the spot rate is different to the invoice date spot rate!→ Exchange differences arising on settlement of monetary items (e.g. Receivables orpayables) shall be recognised in P&L (as gains or losses).
Credit Purchase of InventoryDate Details DR CR
InventoryForeign currency payable
(Credit purchase of inventory)Foreign Exchange Loss
Foreign currency payable(Adj for foreign exchange loss)
ORForeign currency payable
Foreign Exchange Gain(Adj for foreign exchange gain)Foreign currency payable
Bank(Settlement of account payable)
Credit Sale of Inventory
Credit Purchase of Qualifying Asset (AASB 121 Qualifying Assets): FC gains or losses relating to loans relating to loans or other payables associated with
qualifying assets are capitalized to the asset (same treatment as interest costs) Can only capitalize to the extent that the asset’s CA does not exceed its RA! (Or the
asset will be impaired after the capitalization of interest or exchange currencydifference)
Date Details DR CR
Foreign currency receivableSale
COGSInventory
(Credit sale of inventory)Foreign Exchange Loss
Foreign currency receivable(Adj for foreign exchange loss)
ORForeign currency receivable
Foreign Exchange Gain(Adj for foreign exchange gain)Bank
Foreign currency receivable(Settlement of account payable)
Date Details DR CR
NCAForeign currency payable
(Credit purchase of NCA)NCA
Foreign currency payable(Adj for foreign exchange loss)
ORForeign currency payable
NCA(Adj for foreign exchange gain)Foreign currency payable
Bank(Settlement of account payable)
HEDGED TRANSACTION[1] Hedging a Purchase To create certainty + anticipate depreciation of AUD A contract to hedge a purchase gives rise to: (i) a FIXED forward contract payable, and;
(ii) a VARIABLE forward contract receivable The payable from the underlying transaction will vary with spot rates (which will be
offset as...) the forward contract receivable and, therefore, the FV of the contract,varies with the forward rates
[2]
Date Details DR CR
InceptionDate
No entry – FV of contract=zero
TransactionDate
Hedging ReserveForward contract
(Change in FV of forward contract)Loss on Fwd K (Or Asset)
Hedging Reserve(Transfer of reserve to P&L)InventoryForeign currency payable
(Credit purchase of inventory)SettlementDate
Foreign Exchange LossForeign currency payable
(Adj for foreign exchange loss)
Forward ContractGain on Fwd K
(Change in FV of forward contract)Foreign currency payableForward ContractBank
(Settlement of account payable)
If Loss on Fwd K //FV of Fwd K ↓
Underlying Transaction
If Gain on Fwd K //FV of Fwd K ↑
Underlying Transaction
Hedging a Sale To create certainty + anticipate appreciation of AUD A contract to hedge a sale gives rise to: (i) a FIXED forward contract receivable , and;
(ii) a VARIABLE forward contract payable The receivable from the underlying transaction will vary with spot rates (which will be
offset as...) the forward contract payable and, therefore, the FV of the contract,varies with the forward rates
Accounting for Lease Transactions (Lessee perspective only)AASB: Leases Type of leases
Operating If it does not transfer substantially all the risks and rewards incidental to
ownership. Risks (Unsatisfactory economic returns; Losses from idle capacity; Loss in
FV over asset’s life) Rewards (Profitable operation over economic life of asset; Gain from
appreciation in value or Realization of residual value) Finance
If it transfers substantially all the risks and rewards incidental to ownership. Para 10: (individual or in combination of following situations)
Ownership of the asset is transferred to the lessee by the end of the leaseterm
At the start of the lease term, the lessee is reasonably certain to exercisean option to purchase the asset at a price significantly lower than its FV
The lease term is for a major part of the asset’s economic life At inception, PV of [minimum lease payments] amounts to at least
substantially all of the FV of the leased asset The leased asset is customized that only the lessee can use it without
major modifications Para 11: (individual or in combination of following situations)
The lease is non-cancellable (Or cancellable only if lessee bears the costsof cancellation)
Gains/ losses in FV of residual accrue to lessee Lessee has ability to lease for a secondary period at a rent substantially
lower than market rentComprise the payments over the lease termthat the lessee is or can be required to make Guaranteed residual value Bargain purchase option
Lessee Accounting for Operating Leases
OR
Lessee has possession and all benefits of ownership without recognition of anyasset or liability, hence “off balance sheet finance”!
Lessee Accounting for Finance LeasesInitial Recognition Record a lease asset and a lease liability at the lower of:
FV of the leased property, and PV of the minimum lease payments
Note: It would not be unusual for these to be equal! Initial direct costs (e.g. Legal costs) can be separately capitalized to the costs of the
asset BUT NOT TO THE LIABILITY (CR to bank or payables)
Subsequent Recognition Apportion the lease payments between the interest and principal [Slide 22]
If the lease payments include “executory costs: (e.g. Insurance, maintenance),then these are isolated and recorded separately as expenses.
Depreciation of the lease asset Depends on the reasonable certainty of acquisition at the end of lease term
Date Details DR CR
Lease expenseBank
Date Details DR CR
Prepaid leaseBank
Lease expensePrepaid lease
Intention to purchase No intention to purchaseDepreciation/Amortizationmethod
Consistent with policyused for other assets inthat class
Straight-line
Depreciationperiod
Useful life Shorter of lease term anduseful life
Residual value Estimated residual value(at end of useful life)
Guaranteed residual value(at end of lease term)
As each periodic payment is made
When lump sum payment is made
At each reporting date
Date Details DR CRLease asset
Lease liability(Commencement of finance lease)Lease liability
Bank(1st Lease payment)Lease interest expenseLease liability
Bank(2nd lease payment)Depreciation of lease asset
Acc Depreciation of lease asset(Adj for depreciation)
Journal entries at commencement
Journal entries at end of year 1
Accounting for GroupsAASB 10: Consolidated Financial Statements
PPE fair value increment
Company A invests in Company B by purchasing B’s shares If FVNA < FV of consideration
If FVNA > FV of consideration
Notes: (1) This entry repeated every subsequent reporting date while Coy A controls Coy B.(2) Gain on consolidation taken to consolidated P&L on first reporting date after
acquisition, recognized in Retained Profits thereafter
AASB 127: Consolidated Financial Statements
*check consolidation journal*
CONSOLIDATION JOURNALDate Details DR CR
PPEDTLRevaluation reserves
(Fair value increment at acquisition)
CONSOLIDATION JOURNALDate Details DR CR
Share capitalRetained earningsReserves (+ FV increment)Goodwill
Investment in Coy B(Elimination of investment in subsidiary)
CONSOLIDATION JOURNALDate Details DR CR
Share capitalRetained earningsReserves (+ FV increment)
Gain on bargain purchaseInvestment in Coy B
(Elimination of investment in subsidiary)
Accounting for Groups - NCI
AASB 10: Consolidated Financial Statements
Calculation of NCISub Ltd NCI
Opening Retained Profits From w/s
less Unrealized gain on sale of equipment (net of tax) Affect NP if current period sale
add Excess depreciation on equipment (net of tax) Excess depn (prior period)
Less Unrealized gain in opening inventory (net of tax) Unrealized gain (prior period)
Adjusted Opening Retained ProfitsNet Profit From w/s
Add Excess depreciation on equipment (net of tax) Excess depn (current period)
Add Unrealized gain in opening inventory (net of tax) from prior period unrealized gain
Less Unrealized gain in closing inventory (net of tax) Unrealized gain (current period)
Adjusted ProfitLess Dividends From w/s
Adjusted Closing Retained ProfitsShare Capital From w/s
Reserves (including FV increments on consolidation) W/s + increments
Total NCI
CONSOLIDATION JOURNALDate Details DR CR
PPE *100%
DTL *100%
Revaluation reserves *100%(Fair value increment at acquisition)Share capital *% shares
Retained earnings *% shares
Reserves (+ FV increment) *% shares
GoodwillInvestment
(Elimination of investment in subsidiary)*Elimination of unrealized gain on sale of PPE**Adj for excess depreciation and its associated tax effects**Elimination of unrealized gain in opening inventory**Elimination of unrealized gain in closing inventory*Dividends revenue *% shares
Dividends *% shares
(Elimination of intragroup dividend)Share CapitalReservesOpening Retained ProfitsProfit attributable to NCIDividendsEquity attributable to NCI
(Elimination of NCI)
Accounting for Investments in AssociatesAASB 128: Investments in Associates and Joint Ventures Associate in an entity over which the investor has significant influence (20%<x<50%)Note: Do the following entries if you only have significant influence in one company. You ARE NOTparent entity of other subsidiaries!
General Journal entry in books of INVESTORDate Details DR CR
Investment in associateBank
ORInvestment in associate
BankGain on bargain purchase
(Acquisition of investment in associate)Bank/ Dividend receivable
Investment in associate(Dividend received from associate)Investment in associate
Share of profit in associate [1]
ORShare of loss in associate [1]
Investment in associate(Recognizing share of profit/ loss of associate)Investment in associate
Revaluation surplus(Share of asset revaluation by associate)Impairment loss [2]
Investment in associate
Note:[1] Investee’s profit adjusted for:
After-tax unrealized gains in transactions between investor and associate(upstream and downstream) After-tax depreciation of acquisition-date FV increments
[2] Since goodwill is not separately recognized for associate, previous impairment lossescan be reversed (in P&L)
If there is goodwill (*Note: Do notseparately recognize goodwill!)
If FVNA> consideration
Do the following entries if you have significant influence in one entity + you are parent entity ofother subsidiaries!Need to convert the investment to the equity method upon consolidation!
Equity Method when Investor is a Parent Entity
General Journal entry in books of Parent LtdDate Details DR CRT=0 Investment in associate
Bank(Acquisition of investment in associate)Bank/ Dividend receivableDividends Revenue
(Dividend received from associate)
Consolidation Journal entry in books of Parent LtdDate Details DR CRT=0 Investment in associate
Dividends RevenueShare of profit
(Adj to recognize investment in associateunder equity method)
General Journal entry in books of Parent LtdDate Details DR CRT=1 Bank/ Dividend receivable
Dividends Revenue(Dividend received from associate)
Consolidation Journal entry in books of Parent LtdDate Details DR CRT=1 Investment in associate
Dividends RevenueOpening Retained ProfitShare of profitRevaluation Surplus
(Adj to recognize investment in associateunder equity method)
AASB 121: Foreign Currency Translation If the presentation currency differs from the entity’s functional currency, it translates its
results and financial position into the presentation currency.
Rules of ThumbRevenue & Expenses Average rateDividends declared Spot rate on date of declarationAssets & Liabilities Closing rate at reporting dateEquity accounts at acquisition Spot rate at date of acquisitionPost-acquisition movements in share capital& reserves
Spot rate on date of recognition
Post acquisition movements in retainedprofits
Profit at average rate each period lessdividends at spot rate
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