Module 1 - L1.4 - L1.6(part 1 1.6)

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Questions and Answers

According to the Conceptual Framework, what is the primary characteristic of an economic resource?

  • It is easily convertible into cash.
  • It is tangible and can be physically possessed.
  • It has the potential to produce economic benefits. (correct)
  • It is owned outright by the entity.

Which of the following is NOT a key component in the Conceptual Framework's definition of an asset?

  • It results from past events.
  • It has the potential to produce future economic benefits.
  • It is a present economic resource controlled by the entity.
  • It is legally owned by the entity. (correct)

What is the most common type of right that establishes an entity's access to an asset?

  • Rights arising from contractual agreements.
  • Rights arising from social consensus.
  • Rights arising from charitable contribution.
  • Rights arising from legal ownership. (correct)

According to the Conceptual Framework, if it's uncertain whether a right exists, what should happen?

<p>Do not recognize the asset until the uncertainty is resolved. (B)</p> Signup and view all the answers

Which of the following best describes the relationship between the definitions of assets and the other elements of financial statements?

<p>The definitions of the other elements flow from the definitions of assets and liabilities. (B)</p> Signup and view all the answers

An entity has developed a new technology that might give them a competitive advantage, however, it isn't protected by any patents. Which of the following is true?

<p>This cannot be an asset because it's not protected so other companies have the same access to it. (D)</p> Signup and view all the answers

What are the key decision areas in accounting for transactions and other events, according to the reference material?

<p>Definition, recognition, measurement, and disclosure. (B)</p> Signup and view all the answers

Which of the following rights should NOT be treated as assets by an entity, according to the reference material?

<p>Rights that everyone can access and use to generate economic benefits. (D)</p> Signup and view all the answers

Which of the following best describes how equity changes during a reporting period?

<p>Through an entity’s financial performance and its contributions from, and distributions to, holders of equity claims. (C)</p> Signup and view all the answers

According to the Conceptual Framework, what are the two essential characteristics of income?

<p>An increase in assets or a reduction in liabilities, and an increase in equity, other than from contributions from owners. (A)</p> Signup and view all the answers

Why does income not arise from an increase in assets if there is a corresponding increase in liabilities?

<p>Because the increase in liability cancels out the increase in assets, resulting in no change in equity. (C)</p> Signup and view all the answers

Which of the following describes the distinction between revenue and gains?

<p>Revenue arises in the course of ordinary activities, while gains may or may not arise in the course of ordinary activities. (C)</p> Signup and view all the answers

Which event represents an example of an expense?

<p>Paying wages to employees for services provided. (C)</p> Signup and view all the answers

According to the Conceptual Framework, what are the two essential characteristics of an expense?

<p>A decrease in assets or an increase in liabilities, and a decrease in equity, other than those arising from distributions to holders of equity claims. (C)</p> Signup and view all the answers

Under IFRS, where are revaluation gains on property, plant, and equipment (under the revaluation model) typically recognized, unless a prior downward revaluation is being reversed?

<p>In other comprehensive income (OCI) and accumulated in equity. (C)</p> Signup and view all the answers

What term describes the monetary amount at which an asset, liability, or equity is recognized in the statement of financial position?

<p>Carrying amount. (A)</p> Signup and view all the answers

According to the Conceptual Framework, when is the recognition of an item that meets the definition of an element of the financial statements considered appropriate?

<p>When it provides relevant information and a faithful representation of that element. (C)</p> Signup and view all the answers

According to the Conceptual Framework, when might an asset or liability not be recognized?

<p>If it is uncertain whether the element exists or if the probability of an inflow or outflow of economic benefits is low. (D)</p> Signup and view all the answers

What is the impact on the accounting equation (Assets = Liabilities + Equity) when an entity receives cash in advance of providing services?

<p>Assets increase, and liabilities increase. (C)</p> Signup and view all the answers

What is the effect of expense recognition on the statement of financial position?

<p>Expenses decrease assets or increase liabilities, leading to a decrease in equity. (A)</p> Signup and view all the answers

Why are gains not considered a separate element from revenue in the Conceptual Framework?

<p>Gains are not considered different in nature to revenue. (B)</p> Signup and view all the answers

When is information considered useful in financial statements, according to the Conceptual Framework?

<p>When it is relevant and faithfully represents what it is supposed to represent. (A)</p> Signup and view all the answers

Which action is an example of contributing to holders of equity claims?

<p>Paying dividends. (B)</p> Signup and view all the answers

Which of the following best describes 'reproduction cost' under the current cost concept?

<p>The current cost of replacing an existing asset with an identical one. (B)</p> Signup and view all the answers

Current replacement cost is an example of which type of valuation technique?

<p>Entry price (B)</p> Signup and view all the answers

Why might it be difficult to apply the current cost measurement basis to assets like computer equipment?

<p>Rapid technological advancements make it difficult to find replacement assets with equivalent capacity. (B)</p> Signup and view all the answers

Which of the following is a common criticism of the current cost measurement basis?

<p>It may not be relevant to decision-making, as it focuses on replacement cost rather than value received. (B)</p> Signup and view all the answers

Which International Financial Reporting Standard (IFRS) specifically addresses the use of the current cost measurement basis?

<p>IAS 29 Financial Reporting in Hyperinflationary Economies (B)</p> Signup and view all the answers

Under IAS 36, what is the definition of costs of disposal?

<p>Incremental costs directly attributable to the disposal of an asset, excluding finance costs and income tax expense (C)</p> Signup and view all the answers

What is the primary difference between fair value less costs of disposal and net realisable value?

<p>Fair value less costs of disposal measures what could be obtained from selling an asset in its current state, while net realisable value measures the benefits the entity expects to realize from the asset. (D)</p> Signup and view all the answers

Why might the net realisable value of work-in-progress inventory differ from its fair value less costs to sell?

<p>Work-in-progress inventory requires further completion before it can be sold. (C)</p> Signup and view all the answers

Which measurement basis is used for inventories according to IAS 2 Inventories?

<p>The lower of cost and net realisable value (C)</p> Signup and view all the answers

What factor can cause reliability problems when measuring current cost?

<p>It depends on management's strategies and intentions regarding asset use. (B)</p> Signup and view all the answers

Which element is excluded from the measurement of costs to sell according to IFRS 5?

<p>Finance costs (A)</p> Signup and view all the answers

Why would current cost be supplemented by additional rules?

<p>To ensure the amount represented by the current cost is recoverable (A)</p> Signup and view all the answers

Difficulties may arise with replacing an asset with one that provides equivalent capacity because:

<p>Advances in technology may mean that any available replacement asset would increase capacity (B)</p> Signup and view all the answers

Why is current cost not always relevant for decision making?

<p>It is not a measure of the value received but of the amount of the sacrifice that would be required to replace an asset (D)</p> Signup and view all the answers

What causes comparability problems with current cost?

<p>Management strategies and expectations with the assets concerned may change in response to changes in the business environment or over time (D)</p> Signup and view all the answers

Under IFRS 9, which method is used to carry certain financial liabilities and assets?

<p>Amortised cost method using the effective-interest-rate (C)</p> Signup and view all the answers

What is the primary basis for discount rates when a financial instrument is traded in an active market?

<p>A market-determined, risk-adjusted discount rate current at the date of issue. (C)</p> Signup and view all the answers

Which of the following standards requires lease liabilities to be initially recognized by discounting relevant cash flows using the interest rate implicit in the lease?

<p>IFRS 16 (D)</p> Signup and view all the answers

Which of the following rates is used to discount employer obligations arising from defined benefit plans under IAS 19?

<p>Market yields on high-quality corporate bonds with equivalent terms and currency. (D)</p> Signup and view all the answers

According to IAS 36, how should the discount rate used in determining value in use be determined?

<p>A pre-tax rate that reflects current market assessments and risks specific to the asset. (D)</p> Signup and view all the answers

According to IAS 37, what should the discount rate used in measuring provisions reflect?

<p>A pre-tax rate reflecting current market assessments and risks specific to the liability. (A)</p> Signup and view all the answers

Which of the following is a key objective of IFRS 16 Leases?

<p>To provide principles for the recognition, measurement, presentation, and disclosure of leases. (C)</p> Signup and view all the answers

Under IFRS 16, what is the definition of a 'lessee'?

<p>The entity that obtains the right to use the asset. (D)</p> Signup and view all the answers

Under IFRS 16, what might the ‘period of time’ in a lease contract be expressed as?

<p>The number of units produced by the underlying asset (A)</p> Signup and view all the answers

What is the main benefit of accounting standards?

<p>To provide consistency and understandability in financial reporting across different organizations. (C)</p> Signup and view all the answers

When should a contract be assessed to determine if it contains a lease under IFRS 16?

<p>Each time there is a change to the terms and conditions of the contract and at its commencement. (A)</p> Signup and view all the answers

Under which one of the standards listed is professional judgement required to determine if a lease exists?

<p>IFRS 16 (B)</p> Signup and view all the answers

What is the role of professional judgement under IFRS 16 with respect to option terms?

<p>Professional judgement should only be used in considering whether or not a lessee is 'reasonably certain' to exercise specific options that will impact the lease term and the measurement criteria. (C)</p> Signup and view all the answers

Which rate is employed to determine the present value of obligations related to defined benefit plans, according to IAS 19?

<p>Market yields on high-quality corporate bonds with equivalent terms and currency at the end of the reporting period. (B)</p> Signup and view all the answers

Under a mixed measurement model, what is the primary benefit of maintaining some degree of comparability in measurement through IFRSs?

<p>It provides a baseline for assessing the relative performance and financial position of different entities. (D)</p> Signup and view all the answers

What type of constraints might affect professional accountants in exercising autonomy and judgment?

<p>Social and political constraints (B)</p> Signup and view all the answers

Which of the following best describes the initial recognition measurement of assets and liabilities?

<p>Determining the historical cost at acquisition (A)</p> Signup and view all the answers

What is a potential consequence of varying measurement bases for assets and liabilities?

<p>Changes in reported income and expenses (C)</p> Signup and view all the answers

Which of the following is not a type of measurement base defined in the Conceptual Framework?

<p>Liquidation value (B)</p> Signup and view all the answers

Cost-based measures are generally based on which of the following?

<p>Entry prices at acquisition (D)</p> Signup and view all the answers

The Conceptual Framework distinguishes between which two main categories of measurement bases?

<p>Cost-based and value-based measures (A)</p> Signup and view all the answers

What is included in the definition of historical cost according to the Conceptual Framework?

<p>Consideration paid and transaction costs (C)</p> Signup and view all the answers

Which measurement basis may adjust for amortisation and depreciation?

<p>Cost-based measures (B)</p> Signup and view all the answers

Which of the following accurately describes the term 'fair value'?

<p>The amount an asset could be exchanged for in an orderly transaction between market participants (D)</p> Signup and view all the answers

What does net realisable value typically reflect?

<p>The estimated selling price minus the costs associated with selling (C)</p> Signup and view all the answers

Which of the following pairs represents measurement bases used in IASB standards?

<p>Cost-based and value-based measures (C)</p> Signup and view all the answers

What is the relevance of measuring both the historical cost and current value of an asset?

<p>To reflect the asset's value over time and economic changes (B)</p> Signup and view all the answers

What must be considered when selecting a measurement basis for an asset or liability?

<p>The entity's objective and situation (D)</p> Signup and view all the answers

What must be considered alongside measurement uncertainty when recognizing elements of financial statements?

<p>Cost constraint (B)</p> Signup and view all the answers

At what point is income recognized according to the Conceptual Framework?

<p>When an asset is initially recognized (A)</p> Signup and view all the answers

Which of the following is NOT a reason for derecognition of an asset?

<p>Fair value of the asset decreasing (B)</p> Signup and view all the answers

What might cause inconsistency in applying recognition criteria internationally?

<p>Economic constraints (A)</p> Signup and view all the answers

What does derecognition of a liability normally occur from?

<p>Absence of present obligation (B)</p> Signup and view all the answers

How does the recognition of expenses relate to assets and liabilities?

<p>It occurs concurrently with the initial recognition of a liability (C)</p> Signup and view all the answers

Which example illustrates recognition affecting equity?

<p>Issuance of shares to raise capital (B)</p> Signup and view all the answers

Why might standard setters deviate from a pure conceptual approach?

<p>Due to pressure from interest groups (A)</p> Signup and view all the answers

What should an entity do if it does not recognize an item satisfying the definition of an asset?

<p>Provide information in the notes (C)</p> Signup and view all the answers

What is a potential consequence of applying strict accounting standards?

<p>Decreased share prices for some entities (C)</p> Signup and view all the answers

What is the primary reason for recognizing the changes in equity?

<p>To reflect contributions or distributions to equity holders (B)</p> Signup and view all the answers

Which transaction might not lead to income or expense recognition even if assets or liabilities change?

<p>Purchase of inventory on credit (A)</p> Signup and view all the answers

What does the recognition of income and expenses depend on?

<p>The relationship to recognized assets and liabilities (D)</p> Signup and view all the answers

Which of the following statements is true regarding measurement uncertainty?

<p>It may impact the decision on whether to recognize an element. (A)</p> Signup and view all the answers

How are liabilities recorded under the historical cost basis?

<p>At the value of the consideration received minus transaction costs. (B)</p> Signup and view all the answers

Which of the following is NOT an advantage of the historical cost basis of accounting?

<p>Highly relevant for future predictive analysis. (C)</p> Signup and view all the answers

What limitation does historical cost impose on performance measurement?

<p>Old costs are associated with current revenues. (A)</p> Signup and view all the answers

One problem associated with historical cost is that it undermines faithful representation because:

<p>Values change only when a future transaction occurs. (C)</p> Signup and view all the answers

Which statement regarding historical cost and self-constructed assets is correct?

<p>Higher costs may mislead users about a company's efficiency. (C)</p> Signup and view all the answers

What is one of the consequences of using historical cost for assets acquired below fair value?

<p>It may misrepresent the true indicative value of the asset. (D)</p> Signup and view all the answers

How is amortised cost measured according to IFRS 9?

<p>Initial recognition minus principal repayments plus cumulative amortisation. (C)</p> Signup and view all the answers

What characterizes the effective interest method?

<p>It discounts future cash receipts or payments to present value. (D)</p> Signup and view all the answers

What is one limitation of the historical cost measurement basis?

<p>It can lead to poor long-term investment decisions. (C)</p> Signup and view all the answers

In terms of comparability, what issue arises with historical cost accounting?

<p>It may yield differing asset valuations based on company efficiency. (A)</p> Signup and view all the answers

What does the amortised cost of a financial asset or liability reflect?

<p>Estimates of future cash flows discounted at a rate (A)</p> Signup and view all the answers

How does historical cost relate to the actual transactions of a company?

<p>It reflects the actual transaction values without modification. (C)</p> Signup and view all the answers

What is fair value defined as in IFRS 13?

<p>The exit price for selling an asset (D)</p> Signup and view all the answers

Why is reliability a concern with historical cost accounting?

<p>Objectivity can be compromised when determining historical costs. (D)</p> Signup and view all the answers

Which level of inputs is characterized by quoted prices for identical assets in active markets?

<p>Level 1 inputs (D)</p> Signup and view all the answers

What aspect does amortised cost NOT consider in its measurement?

<p>Future changes in market conditions. (C)</p> Signup and view all the answers

What does the historical cost basis fail to provide regarding liabilities?

<p>A forward-looking assessment. (B)</p> Signup and view all the answers

What assumption is important for a fair value measurement?

<p>It assumes an orderly transaction (C)</p> Signup and view all the answers

Which of the following best describes Level 2 inputs?

<p>Market prices for similar but not identical assets (B)</p> Signup and view all the answers

What is a significant criticism of fair value accounting?

<p>It lacks relevance for held-to-maturity assets (D)</p> Signup and view all the answers

What does the current cost of an asset represent?

<p>The cost of an equivalent asset at measurement date (D)</p> Signup and view all the answers

How are fair value measurement inputs ranked?

<p>By the inputs' visibility in the market (C)</p> Signup and view all the answers

What process is used to determine the yield of the Alpha A preference shares?

<p>Reference to quoted prices and cash flow amounts (D)</p> Signup and view all the answers

What is an exit price in terms of fair value?

<p>The price received to sell an asset (B)</p> Signup and view all the answers

What challenge is often associated with Level 3 inputs in fair value measurements?

<p>They are developed with significant unobservable inputs (B)</p> Signup and view all the answers

Which input level would be used when there are no observable market transactions?

<p>Level 3 (D)</p> Signup and view all the answers

Which method could be used to calculate fair value when Level 1 inputs are not available?

<p>Valuation models with significant observable inputs (B)</p> Signup and view all the answers

What crucial aspect does an orderly transaction assumption imply?

<p>Adequate time for marketing before the sale (B)</p> Signup and view all the answers

According to the Conceptual Framework, what is the fundamental characteristic of a liability?

<p>A present obligation of the entity to transfer an economic resource as a result of past events. (D)</p> Signup and view all the answers

Which scenario best exemplifies how a present obligation may arise, even without a legal contract?

<p>A company has a long-standing practice of accepting returns of faulty goods beyond the warranty period to maintain customer relationships. (D)</p> Signup and view all the answers

Which of the following does NOT represent a typical settlement of a liability?

<p>Declaration of future dividends. (A)</p> Signup and view all the answers

An entity purchases equipment for $500,000 with payment due in 60 days. What accounting impact does this event create?

<p>An asset (equipment) and a liability (accounts payable) are recognized. (D)</p> Signup and view all the answers

What best describes 'equity' according to financial reporting principles?

<p>The residual interest in the assets of the entity after deducting all its liabilities. (B)</p> Signup and view all the answers

What condition does NOT need to be met for something to be classified as an asset?

<p>The item must be a physical asset. (A)</p> Signup and view all the answers

A company plans to purchase new machinery in the next fiscal year. How does this plan immediately impact the company's financial statements?

<p>It has no immediate impact on the balance sheet until the transaction occurs. (D)</p> Signup and view all the answers

A mining company reseals a private road on leased land at a cost of $3 million. How should this expenditure be treated?

<p>Capitalized as part of the road and depreciated over its useful life. (B)</p> Signup and view all the answers

A company receives a government grant in the form of machinery. When is the machinery considered an asset?

<p>When the machinery is received. (A)</p> Signup and view all the answers

What is the key factor in determining whether an entity controls an asset, according to IFRS 16 Leases?

<p>The entity's control of the benefits arising from using the asset. (A)</p> Signup and view all the answers

What is the economic substance of settling a debt by issuing shares to the debt-holders?

<p>The entity avoids an outflow of resources by discharging the debt obligation. (C)</p> Signup and view all the answers

Why is it important to distinguish between past events and transactions or events expected to occur in the future, when determining if an asset exists?

<p>Assets can only arise from past events. (B)</p> Signup and view all the answers

What are the key components when defining a liability?

<p>Present obligation, transfer of economic resources, and past events. (A)</p> Signup and view all the answers

Which of the following scenarios does NOT create an asset for the company?

<p>Signing a contract to purchase equipment next year. (B)</p> Signup and view all the answers

What is true regarding how the Conceptual Framework defines and relates assets, liabilities, and equity?

<p>Equity is derived based on the difference between assets and liabilities. (B)</p> Signup and view all the answers

What is the correct accounting treatment for the equity-settled share-based payment transaction for the CEO's bonus?

<p>Dr Bonus expense $50,000, Cr Equity $50,000 (D)</p> Signup and view all the answers

How should performance bonuses that are cash-settled be accounted for?

<p>As an increase in liabilities measured at fair value (D)</p> Signup and view all the answers

Which statement best describes the measurement of goods or services received in equity-settled transactions?

<p>Calculated based on the fair value of the goods or services received (A)</p> Signup and view all the answers

What is the appropriate action regarding liabilities in a cash-settled share-based payment transaction?

<p>Measure and remeasure the liability at fair value until settled (B)</p> Signup and view all the answers

When measuring share-based payment transactions, what occurs if the fair value of received goods or services cannot be reliably estimated?

<p>Use the fair value of equity instruments granted for measurement (D)</p> Signup and view all the answers

Which of the following reflects an increase in equity for share-based payment transactions?

<p>When employee services are received in equity-settled transactions (A)</p> Signup and view all the answers

What does the fair value of the goods or services acquired influence in equity-settled transactions?

<p>It drives the measurement of both equity and assets (C)</p> Signup and view all the answers

What is a key characteristic of cash-settled share-based payment transactions?

<p>They can be remeasured until the liability is settled (C)</p> Signup and view all the answers

What is a significant issue in using the present value technique related to cash flows?

<p>Future cash flows often involve uncertainty. (A)</p> Signup and view all the answers

How should the amount recognized as a provision be determined according to AS 37?

<p>As the best estimate of required expenditure to settle the obligation. (C)</p> Signup and view all the answers

What does the requirement in IAS 36 entail when determining recoverable amounts for assets?

<p>Determining recoverable amount for the cash-generating unit when individual assets cannot be assessed. (A)</p> Signup and view all the answers

Why is selecting an appropriate discount rate complex in present value calculations?

<p>The choice of discount rate significantly impacts the present value. (C)</p> Signup and view all the answers

What does systematic risk represent?

<p>Market risk due to economy-wide factors affecting all assets. (B)</p> Signup and view all the answers

How can investors mitigate unsystematic risk?

<p>Through diversification of their investment portfolio. (C)</p> Signup and view all the answers

When should producing entities accept projects based on net present value?

<p>When the cash flows are discounted at a rate adjusted for systematic risk and yield a positive net present value. (C)</p> Signup and view all the answers

What does IAS 19 state concerning discounting post-employment benefit obligations?

<p>Discount rates should reflect the market yields on high-quality corporate bonds. (B)</p> Signup and view all the answers

What might be a challenge in determining cash flows for present value calculations?

<p>Allocating cash flows to specific items may introduce subjectivity. (C)</p> Signup and view all the answers

What does using a risk-adjusted discount rate take into account?

<p>The systematic risk associated with an asset or group of assets. (D)</p> Signup and view all the answers

What is the role of uncertain future events in measurement according to AS 37?

<p>They must be included if there is sufficient objective evidence they will occur. (D)</p> Signup and view all the answers

What is a consideration when using historical rates for discounting cash flows?

<p>They reflect the interest rate implicit in the original contract. (D)</p> Signup and view all the answers

What is indicated about producing entities' ability to diversify their investment projects?

<p>It does not affect the value perceived by investors. (B)</p> Signup and view all the answers

What must be measured when the total risk of an asset is evaluated?

<p>Both systematic and unsystematic risks should be combined. (C)</p> Signup and view all the answers

What constitutes the lease term for a lessee in a lease agreement?

<p>The non-cancellable period plus any guaranteed extensions (D)</p> Signup and view all the answers

Which of the following best describes the initial measurement of a right-of-use asset?

<p>The cost of lease liability plus any initial direct costs (A)</p> Signup and view all the answers

What factors are considered in measuring the lease liability at the commencement date?

<p>Present value of future lease payments (B)</p> Signup and view all the answers

Under what condition can the option to extend a lease be included in the lease term?

<p>If the lessee is reasonably certain to exercise that option (A)</p> Signup and view all the answers

What is a condition for a lease to be classified as a low value lease?

<p>The asset can stand alone without dependency on other assets (C)</p> Signup and view all the answers

Which of the following defines the criteria for lease measurement post-commencement?

<p>The lessee continues using historical cost unless alternative models are applied (B)</p> Signup and view all the answers

How should a lessee recognize the right-of-use asset at the lease commencement date?

<p>At the cost of the right-of-use asset (A)</p> Signup and view all the answers

What is the treatment of lease payments made before the commencement date?

<p>They form part of the cost of the right-of-use asset (D)</p> Signup and view all the answers

What does the subsequent measurement of the lease liability include?

<p>Interest expense, lease payments, and remeasurement (B)</p> Signup and view all the answers

Which scenario qualifies for classification as a short-term lease?

<p>A lease of 10 months duration (A)</p> Signup and view all the answers

For which of the following reasons would a lessee NOT recognize a right-of-use asset?

<p>The lease is deemed short term (D)</p> Signup and view all the answers

What criterion indicates that a lessee might not exercise a termination option?

<p>Past patterns of operating leases (C)</p> Signup and view all the answers

Which measurement model can a lessee choose to apply for investment property?

<p>Fair value model in accordance with IAS 40 (A)</p> Signup and view all the answers

What constitutes a lease liability's future payments?

<p>Includes all possible penalties for termination (B)</p> Signup and view all the answers

What is the net realisable value of a second-hand car sold for $10,000 with nil estimated costs to make the sale?

<p>$10,000 (A)</p> Signup and view all the answers

In what scenario would an entity recognize a second-hand car at its fair value of $8,000?

<p>If the main business of the entity is not selling cars (C)</p> Signup and view all the answers

What does fulfilment value specifically include when determining the present value of a liability?

<p>Amounts owed to the counterparty and other parties to fulfill a liability (A)</p> Signup and view all the answers

What key difference separates fulfilment value from fair value regarding liabilities?

<p>Fulfilment value reflects entity-specific assumptions, while fair value is based on market assumptions (C)</p> Signup and view all the answers

Why might value in use be considered subjective in its measurement?

<p>It incorporates future cash flows estimated by management, which can vary widely (B)</p> Signup and view all the answers

What is the primary advantage of the value in use measurement basis?

<p>It reflects management's intentions and expectations regarding future cash flows (A)</p> Signup and view all the answers

What is a significant criticism of the value-in-use basis of measurement?

<p>It can be subjective and lack clarity on its basis (D)</p> Signup and view all the answers

How is present value utilized in financial reporting?

<p>It estimates other measurement bases through cash flow discounting (A)</p> Signup and view all the answers

What forms the basis for the discount rate applied in value in use calculations?

<p>The current market assessment of time value of money and risks (C)</p> Signup and view all the answers

What is the relationship between fulfilment value and market expectations?

<p>Fulfilment value can reflect both entity-specific and market expectations (D)</p> Signup and view all the answers

Which aspect of value in use may make it problematic to apply?

<p>It may involve arbitrary allocations of cash flows across assets (C)</p> Signup and view all the answers

What is a potential issue when determining value in use for assets that do not generate contractual cash flows?

<p>Determining cash flows may not be feasible or reliable (A)</p> Signup and view all the answers

Why is it important for management to be accountable against measurements reflecting entity-specific management objectives?

<p>To measure performance accurately based on management's expectations (A)</p> Signup and view all the answers

What does the term 'entity-specific value' refer to in the context of value in use?

<p>The present value of cash flows from asset usage and disposal specific to the entity (D)</p> Signup and view all the answers

How can fulfilment value be best described?

<p>As the present value of expected resource transfers to fulfill a liability (A)</p> Signup and view all the answers

Which situation is indicative of a finance lease?

<p>The lessee has the option to purchase the asset at a significantly lower price. (C)</p> Signup and view all the answers

What primary factor determines the classification of a lease?

<p>The transfer of risks and rewards of ownership. (C)</p> Signup and view all the answers

Which of the following is NOT a criterion for a lease to be classified as a finance lease?

<p>The lease is cancellable. (D)</p> Signup and view all the answers

What action must lessors of operating leases take regarding lease payments?

<p>Recognize lease payments on a straight-line or systematic basis. (A)</p> Signup and view all the answers

How should initial direct costs related to operating leases be treated?

<p>Added to the carrying amount and expensed over the lease term. (C)</p> Signup and view all the answers

When assessing leasing activities, lessors must disclose additional information based on what consideration?

<p>Whether the lease is classified as a finance or operating lease. (C)</p> Signup and view all the answers

What is the impact on the financial statements for lessees regarding right-of-use assets?

<p>They must be reported alongside lease liabilities separately. (A)</p> Signup and view all the answers

What does finance income represent for lessors in a finance lease?

<p>The amount recognized systematically over the lease term. (A)</p> Signup and view all the answers

What is one key distinction between the initial measurement of finance and operating leases from the lessor's perspective?

<p>Finance leases include fixed payments and potentially other receipts. (B)</p> Signup and view all the answers

Which of the following best describes employee benefits as per IAS 19?

<p>All financial benefits offered to employees or for termination of employment. (A)</p> Signup and view all the answers

Which statement about finance leases is true?

<p>Ownership of the asset is often transferred to the lessee over time. (A)</p> Signup and view all the answers

What is true about the treatment of lease liabilities for lessees?

<p>They must be reported alongside corresponding right-of-use assets. (A)</p> Signup and view all the answers

Which of the following factors would NOT suggest a finance lease?

<p>The lessee can cancel the lease agreement at any time. (D)</p> Signup and view all the answers

What is the main role of the interest rate implicit in a lease?

<p>To measure the lessor's net investment in the lease. (B)</p> Signup and view all the answers

What is the basis for recognizing a liability or expense according to IAS 19?

<p>When employees provide services that result in entitlements (A)</p> Signup and view all the answers

How is the amount of liability for long-term employee benefits measured?

<p>Net present value of obligations minus fair value of plan assets (B)</p> Signup and view all the answers

What method is primarily used to determine the accumulation of LSL entitlements?

<p>Projected Unit Credit Method (D)</p> Signup and view all the answers

Which factor is essential for estimating future LSL payments?

<p>Projected salary levels, including inflation and promotions (D)</p> Signup and view all the answers

What discount rate should be used to measure LSL liabilities according to IAS 19?

<p>Current market yields on high-quality corporate bonds (A)</p> Signup and view all the answers

What type of asset components are included in employee benefit plan assets according to TAS 19?

<p>Plan assets and qualifying insurance policies (B)</p> Signup and view all the answers

When is a share-based payment transaction recognized?

<p>When the goods are obtained or services are received (B)</p> Signup and view all the answers

What distinguishes cash-settled share-based payment transactions from equity-settled transactions?

<p>The existence of a liability for cash transfer (C)</p> Signup and view all the answers

What future cash flow characteristic is necessary to determine LSL obligations?

<p>Projected annual salary levels (D)</p> Signup and view all the answers

What must be assessed to estimate how many employees may qualify for LSL?

<p>The probability of employee qualification for future payments (D)</p> Signup and view all the answers

How should an entity account for an equity-settled share-based payment?

<p>By recognizing an increase in equity (D)</p> Signup and view all the answers

What is a primary challenge of fair value measurement in share-based payments?

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What type of obligation does a cash-settled share-based payment represent?

<p>A liability to transfer cash or other assets (B)</p> Signup and view all the answers

Which factor can significantly influence the measurement of an employer's obligation for LSL?

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What qualifies as a short-term employee benefit?

<p>Benefits expected to be settled within 12 months (C)</p> Signup and view all the answers

How should the liability for short-term benefits be measured?

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Which of the following benefits would be classified as a non-monetary short-term employee benefit?

<p>Medical care (A)</p> Signup and view all the answers

What is the key difference between accumulating and non-accumulating compensated absences?

<p>Accumulating absences can be carried forward to future periods (B)</p> Signup and view all the answers

When should a liability for non-vesting compensated absences be recognized?

<p>Only when the absence is taken (B)</p> Signup and view all the answers

What characterizes a vesting benefit in terms of compensated absences?

<p>Unused benefits are paid upon employment termination (D)</p> Signup and view all the answers

What is a major consideration when measuring the liability for accumulating non-vesting compensated absences?

<p>The probability that the leave will be taken (B)</p> Signup and view all the answers

Which of the following statements is true regarding long service leave (LSL)?

<p>LSL is an entitlement accrued with years of service (A)</p> Signup and view all the answers

In instances of accumulating compensated absences, when is a liability recognized?

<p>As employees render services increasing their entitlement (D)</p> Signup and view all the answers

How should an entity measure the expected cost of accumulating paid absences at year-end?

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Which definition aligns with accumulating compensated absences?

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What distinguishes a non-accumulating compensated absence from an accumulating one?

<p>Non-accumulating benefits cannot be carried forward (A)</p> Signup and view all the answers

When should a liability for long-term employee benefits typically be recognized?

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For a liability related to long service leave to be recognized, what must be satisfied?

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Flashcards

Elements of Financial Statements

The key components defining financial statements: assets, liabilities, equity, income, and expenses.

Asset

An asset is a present economic resource controlled by an entity, generated from past events.

Three key components of an asset

  1. A right; 2. Potential for future economic benefits; 3. Control by the entity.

Recognition of Assets

Determining if an item meets the definition to be included in financial statements.

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Economic Resource

A right that can potentially produce economic benefits for an entity.

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Control of an Asset

An entity must have rights established by contract or legislation over an asset.

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Identifying Rights

Establishing whether a right exists can determine if an asset is present.

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Future Economic Benefits

Only rights that can generate economic benefits beyond those available to others are counted as assets.

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Right-of-Use Asset

An asset recognized under IFRS 16 for leased items, showing controlled benefits.

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Capitalisation of Expenditure

Process of recording costs on an asset rather than as an expense immediately.

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Useful Life

The period over which an asset is expected to generate economic benefits.

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Intangible Assets

Non-physical assets like patents that provide future economic benefits.

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Liability

A present obligation to transfer resources due to past events.

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Present Obligation

Current duty to transfer resources stemming from past events.

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Settlement of Liability

The process of fulfilling a liability through a transfer of economic resources.

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Equity

Residual interest in assets after deducting liabilities; net worth of an entity.

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Past Event

An occurrence that gives rise to the recognition of an asset or liability.

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Management Decision

A choice made by management that does not, by itself, create a liability.

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Government Grant

Funds provided by the government that can lead to the recognition of an asset.

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Depreciation

The allocation of the cost of an asset over its useful life.

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Transfer of Economic Resources

The method by which a liability is settled through cash, services, or other assets.

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Conversion to Equity

Changing a liability into equity, such as issuing shares to settle debts.

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Measurement Uncertainty

Lack of precision in the financial statement elements' recognition.

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Faithful Representation

Accurate depiction of financial statement elements as intended.

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Cost Constraint

Recognition depends on whether benefits justify costs.

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Derecognition

Removal of an asset or liability from financial statements.

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Changes in Equity

Tracked when asset changes do not match liability changes.

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Income Recognition

Occurs simultaneously with an asset's or liability's recognition.

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Expense Recognition

Occurs when liability or asset changes impact expenses requested.

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Conceptual Framework

Guidelines establishing the criteria for recognizing financial elements.

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Professional Judgment

Accountants must apply judgment considering complex situations.

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Inconsistency in Standards

Variations in applying accounting standards across regions.

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Economic Consequences

Impact of accounting decisions on financial performance perception.

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Recognition Criteria

Principles dictating when to recognize assets, liabilities, income, and expenses.

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Accounting Standard Setting

Process to develop and adjust accounting standards considering various interests.

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Social Constraints

Limitations on professional autonomy due to social expectations.

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Political Constraints

Restrictions imposed by regulators on reporting practices.

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Human Resources Constraints

Limitations stemming from inadequate time and funding.

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Measurement of Financial Elements

Determining how to quantify financial statement items.

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Initial Recognition Measurement

How an asset or liability is measured when first recorded.

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Subsequent Measurement

Ongoing measurement of an asset or liability after initial recognition.

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Measurement Bases

Criteria for evaluating the value of assets and liabilities.

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Historical Cost

The initial purchase price of an asset over time.

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Current Value

The value of an asset based on its present market conditions.

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Cost-Based Measures

Valuation methods focusing on entry prices paid for assets.

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Value-Based Measures

Valuation approaches that require valuation techniques.

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Net Realisable Value

The value expected when an asset is sold minus costs to sell.

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Fair Value

The price an asset would sell for in an orderly transaction.

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Amortisation and Depreciation

Allocating the cost of an asset over its useful life.

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Measurement Techniques

Methods used to calculate various values in reporting.

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Equity definition

Equity is the residual interest in the assets of an entity after deducting liabilities.

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Recognition of elements

Recognition involves capturing items in financial statements that meet specific definitions.

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Liabilities Measurement

Liabilities are recorded at the value of consideration received to incur the liability.

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Statement of financial position

A financial report showing assets, liabilities, and equity at a specific date.

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Mixed Measurement Accounting

An accounting model that incorporates various measurement bases, not just historical cost.

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Advantages of Historical Cost

Historical cost is easily understood, reliable, and inexpensive to implement.

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Income definition

Income is increases in assets or decreases in liabilities that raise equity, not from owner contributions.

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Essential characteristics of income

Income must either increase assets or decrease liabilities and increase equity.

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Limited Relevance

Historical cost provides minimal predictive value as it records past events, not future expectations.

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Performance Measurement Distortion

Current revenues may be distorted by associating them with historical costs.

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Revenue vs. Gains

Revenue arises from normal activities, while gains occur from non-ordinary events.

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Expense definition

Expenses are decreases in assets or increases in liabilities that lower equity, not from distributions.

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Recoverable Amount

The future economic benefits an entity expects from an asset must not exceed its carrying amount.

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Characteristics of expenses

An expense results in reducing assets or increasing liabilities, decreasing equity.

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Arbitrary Allocations

Costs may be allocated to assets in a way that doesn't reflect true economic value.

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Recognizing profit/loss

Profit or loss is determined by subtracting expenses from income.

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Carrying amount

The monetary amount at which an asset, liability, or equity is recognized in financial records.

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Comparability Issues

Historical costs can undermine comparability between companies due to varying efficiencies in asset construction.

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Useful information criteria

Recognition of an item is useful if it offers relevant data and faithfully represents its value.

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Problems with Reliability

Determining historical cost can be difficult, especially for fair value assessments.

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Amortised Cost

A measure for financial assets and liabilities reflecting initial recognition minus repayments, plus amortisation.

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Recognition appropriateness

An item is recognized if it provides relevant and faithful representation.

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Effective Interest Method

Allocates interest income or expense over the effective life using the effective interest rate.

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Probability of economic benefits

An element may not be recognized if its economic benefit inflow or outflow probability is low.

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Comprehensive Income

Includes all changes in equity, except those from owner contributions or distributions.

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Future Cash Flows

Estimated future cash receipts or payments that are discounted to arrive at net carrying amounts.

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Financial Instruments

Assets and liabilities that exist in financial context and can be measured at amortised cost under IFRS.

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Reporting period changes

Equity changes during the period due to financial performance and equity holder transactions.

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Fulfilment Value

The present value of cash or resources expected to be transferred to settle a liability.

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Value in Use

The present value of expected future cash flows from an asset's use.

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Present Value Technique

A method for valuing assets by discounting future cash flows.

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Market Participant Assumptions

Assumptions made by entities in the market for fair value measurements.

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Entity-Specific Assumptions

Assumptions reflecting an entity's unique circumstances when measuring fulfilment value.

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Discount Rate

The interest rate used in present value calculations to adjust future cash flows.

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Subjectivity in Value Measurements

The reliance on management's estimates in determining an asset's value.

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Internal Resources to Settle Liability

Resources an entity can use to fulfill its obligations without external assistance.

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Cash-Generating Units

Groups of assets that generate cash inflows to measure value in use.

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Accounting for Liabilities

Reflects the expected cash flows needed to settle commitments.

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Management Accountability

The obligation of management to justify and explain their estimates in financial reporting.

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Reliability Problems

Issues arising from subjective value estimation that cannot be easily verified.

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Current Cost

The consideration received for a liability minus transaction costs at the measurement date.

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Reproduction Cost

The current cost of replacing an existing asset with an identical one.

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Replacement Cost

The current cost of replacing an existing asset with one of equivalent capacity.

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Entry Price Valuation

A valuation technique based on current replacement cost.

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Limitations of Current Cost

Current cost may lack relevance, reliability, and comparability for decision-making.

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Fair Value Less Costs of Disposal

Fair value of an asset minus incremental costs directly tied to its disposal.

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Inventories

Items held for sale in the ordinary course of business measured at lower of cost or net realisable value.

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Work-in-Progress Inventory

Inventory that is not yet complete and requires evaluation for net realisable value.

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Costs of Disposal

Incremental costs directly associated with selling an asset, excluding finance and tax costs.

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Entity-Specific Measure

A measurement depending on management's strategies and asset utilization.

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Impairment of Assets

Assessing if an asset's carrying value exceeds its recoverable amount.

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Financial Reporting in Hyperinflationary Economies

A standard (IAS 29) addressing current cost amidst extreme inflation.

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Orderly Transaction

A transaction that is not forced, allowing for usual marketing activities before the sale.

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Exit Price

The amount received to sell an asset or paid to transfer a liability, regarded in fair value measurements.

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Entry Price

The price paid to acquire an asset or received to assume a liability in an exchange transaction.

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Fair Value Hierarchy

A ranking system for inputs in fair value measurements based on their reliability.

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Level 1 Inputs

Quoted prices for identical assets in active markets.

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Level 2 Inputs

Valuation techniques using observable inputs for similar assets but not identical.

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Level 3 Inputs

Unobservable inputs used when no market data is available, based on assumptions.

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Relevance of Fair Value

Fair value is more pertinent for assets actively traded versus those held to maturity.

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Reliability of Fair Value

Concerns around how trustworthy fair value can be for assets not traded openly.

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Estimating Fair Value

The process of determining the fair value of an asset or liability using market data or models.

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Cash Flows

The net amount of cash being transferred into and out of a business.

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Market-determined discount rate

Discount rate based on market conditions at the time of issue.

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Effective-interest-rate method

A method to calculate the amortised cost and interest expense based on the effective interest rate.

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Historical rates

Rates used based on past transactions rather than current market conditions.

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Current rates

Discount rates relevant at the end of the reporting period, often adjusted for risks.

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Present value (PV)

The current worth of future cash flows, discounted at the appropriate rate.

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Fair value approach

Valuation method reflecting market conditions to measure assets and liabilities.

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IAS 19 Employee Benefits

Standard measuring employer obligations for employee benefits at present value.

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IAS 36 Impairment of Assets

Standard requiring discount rates that reflect current market assessments for asset values.

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IAS 37 Provisions

Requires provisions to be measured at present value using current market discount rates.

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IFRS 16 Leases

Standard outlining recognition and measurement of lease obligations in financial statements.

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Lease existence determination

Process of assessing whether a contract contains a lease under IFRS 16.

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Professional judgment in accounting

Using discretion to assess complex situations in financial reporting.

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Significance of accounting standards

Provide consistency and understanding to financial reporting across organizations.

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Mixed measurement model

Accounting approach allowing for different measurement bases to be applied across standards.

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Uncertainty of Future Cash Flows

The unpredictability of expected incoming cash streams over time.

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Best Estimate in Provisions

The amount recognized as a provision must reflect the most accurate prediction of future costs.

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Time Value of Money

The concept that a sum of money has a different value today than in the future due to potential earning capacity.

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Systematic Risk

Market risk that affects all investments, influenced by economic factors.

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Unsystematic Risk

Risk specific to an individual asset that can be minimized through diversification.

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Net Present Value (NPV)

The calculation of present value of cash inflows minus present value of cash outflows.

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Risk-Adjusted Rate

A discount rate reflecting the risk level of an asset or project.

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Historical Interest Rate

The rate implicit in a financial contract at the time of issuance.

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Objective Evidence

The factual basis that supports the predictability of future events affecting cash flows.

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Short-term Employee Benefits

Benefits expected to be settled within twelve months after services are rendered.

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Examples of Short-term Benefits

Includes wages, bonuses, medical care, and annual leave.

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Liability Measurement for Short-term Benefits

Measured at the undiscounted amount expected to be paid.

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Compensated Absences

Employee benefits like annual leave or sick leave compensated by the employer.

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Accumulating vs. Non-Accumulating Benefits

Accumulating can carry over; non-accumulating lapse if unused.

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Vesting Benefits

Obligations to pay any unused benefits when an employee leaves.

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Non-vesting Benefits

Benefits lapse if not used within the current period.

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Recognition of Liability

Liability for accumulating, non-vesting benefits depends on payment probability.

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Long Service Leave (LSL)

Entitlement that accrues with years of service, often payable after ten years.

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Measuring Long-term Employee Benefits

Certain benefits like superannuation settle after employment ends.

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Legal Rights for LSL

Employees get legal entitlement to LSL after a set period of service.

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Recognition of LSL Liability

Recognize liability once the conditions for a liability are met.

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Additional Costs for Compensated Absences

Measure expected costs as the unused entitlement accumulates at period's end.

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Probabilities in Liability Recognition

Recognize liability based on the probability of payments being made.

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Compensated Absences Expense Recognition

Costs for non-vesting compensated absences recognized when leave is taken.

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Performance Bonuses

Incentives for executives based on meeting performance goals.

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Equity-Settled Payments

Share-based transactions measured at fair value of services received.

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Cash-Settled Payments

Payments made in cash that increase liabilities when services are received.

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Measurement of Share-Based Payments

Assessment of payment value in share transactions, either directly or indirectly.

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Bonus Expense Recognition

A charge recorded at the time services are received for bonuses.

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Fair Value Measurement

Determining the price an asset would sell for in an orderly transaction.

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Liability Remeasurement

Adjusting cash-settled liabilities at each reporting period until settled.

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Performance Hurdles

Conditions set to achieve bonuses, e.g., return on equity target.

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Equity Instruments

Financial tools representing ownership in a company.

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Service Received Recognition

Recording transactions when the employee's service is performed.

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Projected Unit Credit Method

A method that calculates accumulated employee benefits based on service time relative to total required service.

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Cash-Settled Share-based Payment

A transaction where services are paid for in cash based on equity value, not shares themselves.

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Equity-Settled Share-based Payment

A transaction where services are exchanged for the entity's equity instruments, like shares.

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Eligibility for LSL

Determining which employees may eventually qualify for long service leave benefits.

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Plan Assets

Assets held within an employee benefit plan that are used to settle LSL obligations.

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Actuarial Assessment

A professional evaluation to estimate future payments and liabilities for employee benefits.

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Recognition of Share-based Payments

The process of recording payments received from goods or services as a liability or increase in equity.

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Timing of Cash Flows

The decision-making process regarding when future cash payments for LSL will be made.

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Estimate of LSL Payments

Calculating the expected future payments for long service leave using projected salary levels.

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Lease Term

The duration covered by a lease, including non-cancellable periods and options.

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Non-Cancellable Period

The duration in which a lease cannot be terminated by the lessee.

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Initial Measurement of Right-of-Use Asset

Includes lease liability amount, lease payments made, and direct costs incurred.

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Lease Liability

The obligation recognized for future lease payments, discounted to present value.

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Fixed Lease Payments

Payments that are predetermined and do not change over the term of the lease.

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Variable Lease Payments

Payments that may fluctuate based on usage or other factors.

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Short-Term Lease

A lease that lasts no more than 12 months.

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Low Value Lease

Leases involving assets considered low value, typically $5000 or less.

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Recognition Exemptions

Exemptions for lessees, applicable to short-term or low-value leases.

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Present Value of Lease Payments

Current valuation of future lease payments, discounted for interest.

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Interest Rate Implicit in the Lease

The interest rate that reflects the total lease payments over the duration.

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Dismantling Costs

Costs estimated for removing and restoring leased assets to original condition.

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Remeasurement

Adjusting the carrying amount of a lease liability based on changes or modifications.

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Finance Lease

A lease transferring substantial risks and rewards of ownership.

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Operating Lease

A lease that does not transfer substantial risks and rewards of ownership.

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Ownership Transfer in Lease

Key condition for finance lease classification, where ownership passes to lessee.

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Economic Life of Asset

The majority of the asset's usable life determines lease type classification.

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Specialised Asset Criteria

Finance lease if it requires major modifications for others to use.

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Cancellable Lease

If lessor bears losses of lease cancellations, it indicates risk transfer.

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Gains from Fair Value Changes

Lessee accrues gains or losses from the asset's residual fair value changes.

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Lease Payments Recognition

Lessors recognize operating lease payments as income systematically.

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Depreciation for Operating Leases

Recognized based on IAS 16, considering asset usage over time.

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Initial Direct Costs for Leases

Costs incurred by lessors upfront recognized for finance lease initial measurement.

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Presentation of Lease Liabilities

Lessee must report right-of-use assets and lease liabilities clearly.

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Employee Benefits Definition

Compensation given by an entity for services rendered or employment termination.

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Short-term vs. Long-term Benefits

Employee benefits can be classified based on time duration as short or long-term.

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Study Notes

Elements of Financial Statements

  • Financial statements comprise assets, liabilities, equity, income, and expenses.
  • Key decisions regarding these elements include definition, recognition, measurement, and disclosure.

Defining Assets

  • An asset is a present economic resource controlled by the entity as a result of past events.
  • Key components of the definition:
    • It's a right.
    • It has the potential to generate future economic benefits.
    • The entity controls the resource.
  • Rights arise from contracts, legislation, or other means. Related rights are treated as a single asset.
  • Only rights generating future economic benefits beyond those available to others are assets.
  • Control, not ownership, is crucial. (e.g., a leased asset is a right-of-use asset).
  • Assets stem from past events (purchase, production, or gift).
  • Intangible assets (patents, copyrights) also qualify.

Defining Liabilities

  • A liability is a present obligation of the entity to transfer an economic resource as a result of past events.
  • Key components of the definition:
    • The entity has a present obligation.
    • The obligation is to transfer an economic resource.
    • The obligation stems from a past event.
  • Obligations can be legal or based on business practice.
  • Liability settlement involves transferring economic resources.

Defining Equity

  • Equity is the residual interest in the entity's assets after deducting liabilities.
  • Equity changes due to financial performance and contributions/distributions to equity holders.

Defining Income

  • Income is an increase in assets or decrease in liabilities resulting in an increase in equity (excluding owner contributions).
  • Essential characteristics:
    • An increase in assets or a decrease in liabilities.
    • An increase in equity (excluding owner contributions).
  • Income includes revenue (ordinary activities) and gains (may not be ordinary activities).

Defining Expenses

  • Expenses are decreases in assets or increases in liabilities resulting in decreases in equity (excluding owner distributions).
  • Essential characteristics:
    • A decrease in assets or an increase in liabilities.
    • A decrease in equity (excluding owner distributions).
  • Expenses are the opposite of income. (e.g., wages, depreciation, electricity).

Recognizing Elements

  • Recognition involves capturing items meeting the definition of an asset, liability, equity, income, or expense.
  • Recognition criteria:
    • Relevance and faithful representation are essential for useful information.
    • Uncertainty about existence, low probability of inflows/outflows, or measurement uncertainty can impede recognition.
    • The cost constraint must also be considered; benefits of recognition should outweigh the costs.
  • Income/expenses are recognized concomitantly with changes in assets and liabilities— adjustments for contributions/distributions from equity are excluded.

Derecognition of Assets and Liabilities

  • Derecognition occurs when an asset or liability no longer meets its definition.
  • For assets, this usually pertains to loss of control; for liabilities, it's the absence of obligation.
  • Derecognition information must faithfully represent the retained assets/liabilities and resulting changes.

Constraints on Recognition

  • Business, legal, social, and political environments can constrain the consistent application of recognition criteria globally.
  • Accounting standards may need adjustments to account for economic and social constraints alongside professional judgment.
  • Constraints can also arise from human resources and cost.

Measurement of Elements

  • Measurement decisions occur at initial recognition and subsequently to it.
  • Different measurement bases (e.g., historical cost, current value, fair value) can be used; choice depends on factors considered.
  • Accounting standards may specify the measurement basis for specific items (IAS 2 inventory, IAS 16 PPE).

Measurement Bases

  • Cost-based:
    • Historical cost: The value initially given. Easily understood and readily available but lacks predictive value.
    • Amortized cost: Historical cost adjustments for amortisation, depreciation, or interest.
  • Value-based:
    • Fair value: Price paid or received in an orderly market transaction. More relevant but less reliable for all assets, and especially problematic for illiquid assets.
    • Current cost: Economic cost to replace in present time. Relevant for some assets if intending to replace, but has reliability and comparability issues.
    • Fair value less costs of disposal: Fair value less costs of selling.
    • Net realisable value: Estimated selling price less completion and selling costs. Often used for inventory.
    • Fulfilment value: Present value of cash to fulfil a liability.
    • Value in use:Present value of future cash from the asset. Encompasses entity-specific considerations.

Present Value as a Technique

  • Present value discounting future cash flows to address the time value of money.
  • Issues include uncertain future cash flows and discount rate selection.
  • Discount rates must be appropriate to risks involved.

Application of Measurement Principles in IFRSs

  • IFRSs provide practical mechanisms for achieving the objectives of financial reporting.
  • Different organizations gain greater consistency and understandability than individual judgmental reporting. Limited scope for abuse.

Specific IFRS examples (Leases, Employee Benefits, Share-Based Payments)

  • IFRS 16 Leases defines lease recognition and measurement criteria for lessees and lessors, including short-term and low-value lease exemptions.
  • IAS 19 Employee Benefits addresses short-term and long-term employee benefits like salaries, profit-sharing, bonuses, compensated absences (long-service leave).
  • IFRS 2 Share-Based Payments discusses the measurement of share-based payment transactions (equity-settled vs cash-settled).

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