Intercompany Transactions and Piecemeal Acquisition
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Intercompany Transactions and Piecemeal Acquisition

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Questions and Answers

Which type of lease transfers substantially all risks and rewards incidental to ownership?

  • Operating Lease
  • Finance Lease (correct)
  • Rental Agreement
  • None of the above

    • Every lease agreement will have a lessee and a lessor.

    True

    What is required by IFRS 16 in terms of lease transactions?

    Entities must account for the economic substance rather than the legal form.

    In a finance lease, the substance of the transaction is that the lessor ______ the asset to the lessee.

    <p>sells</p> Signup and view all the answers

    Match the lease type with its characteristics:

    <p>Finance Lease = Transfers substantially all risks and rewards Operating Lease = Substance of transaction: rental agreement</p> Signup and view all the answers

    What is one of the two types of revenue represented by installments received in a finance lease?

    <p>Sales Income</p> Signup and view all the answers

    An operating lease involves transferring ownership of the asset to the lessee.

    <p>False</p> Signup and view all the answers

    What happens to the ownership of the asset in a finance lease when the final payment is made?

    <p>Ownership passes to the lessee.</p> Signup and view all the answers

    What percentage of ownership is considered to have significant influence under the equity method?

    <p>20% - 49%</p> Signup and view all the answers

    Investment in an associate can be classified directly as a subsidiary with an ownership of more than 50%.

    <p>True</p> Signup and view all the answers

    What is the first step in equity accounting when obtaining control of an entity?

    <p>Revalue previous interest to fair value</p> Signup and view all the answers

    If a company transfers funds to __________ reserves, it can affect the carrying amount of the investment in associates.

    <p>General</p> Signup and view all the answers

    Match the terms with their definitions:

    <p>Piecemeal Acquisition = Series of acquisitions to gain influence Goodwill = Excess of purchase price over fair value of net identifiable assets Dividends = Distributions of profits to shareholders Carrying Amount = Value at which an asset is recognized on balance sheet</p> Signup and view all the answers

    What does the net cash in/outflow represent during the disposal of a subsidiary?

    <p>Bank balance of subsidiary at disposal plus any gains from sale</p> Signup and view all the answers

    What is recognized as a finance income in lease receivable?

    <p>Finance income on lease receivable</p> Signup and view all the answers

    The indirect method of cash flow reporting begins with net income.

    <p>True</p> Signup and view all the answers

    What is the main purpose of calculating goodwill in relation to acquisition?

    <p>To measure the excess of purchase price over the fair value of identifiable net assets acquired.</p> Signup and view all the answers

    The gross method for finance leases always involves recognizing the asset sold as inventory.

    <p>False</p> Signup and view all the answers

    What costs should be capitalized in the initial measurement of a finance lease?

    <p>Initial direct costs</p> Signup and view all the answers

    During acquisition, the net cash in/outflow equals the bank balance of the subsidiary at acquisition minus the cash you paid to acquire it, resulting in a ______.

    <p>net cash outflow</p> Signup and view all the answers

    During subsequent measurement, unearned finance income is reduced by recognizing finance income on lease receivable which is the ___________ income.

    <p>finance</p> Signup and view all the answers

    Match the cash flow activity with its corresponding method:

    <p>Cash received from customers = Operating Activities (Direct Method) Purchase of Equipment = Investing Activities Proceeds from issue of Share Capital = Financing Activities Interest Paid = Operating Activities (Indirect Method)</p> Signup and view all the answers

    Match the types of measurements with their correct descriptions:

    <p>Initial Measurement = Recognize lease receivables and initial direct costs Subsequent Measurement = Account using amortised cost Gross Method = Recognizes gross investment and unearned finance income Net Method = Recognizes net investment and finance income</p> Signup and view all the answers

    To determine the percentage of shareholding at acquisition, which factor is crucial?

    <p>Total number of shares owned in relation to total shares outstanding</p> Signup and view all the answers

    Which aspect must be considered regarding advance payments in finance leases?

    <p>The present value of nil should be calculated using BGN mode.</p> Signup and view all the answers

    All cash received from disposals is considered when calculating net cash in/outflow.

    <p>False</p> Signup and view all the answers

    Manufacturers may inflate the selling price while deflating the interest rate in finance lease agreements.

    <p>True</p> Signup and view all the answers

    What is the significance of identifying cash flows from investing activities?

    <p>It provides insight into the company's investment in long-term assets and growth opportunities.</p> Signup and view all the answers

    Net cash in/outflow from financing activities includes proceeds from long-term borrowings and payment of ______.

    <p>capital element of finance lease liabilities</p> Signup and view all the answers

    What is the main difference between the gross method and net method in finance leases?

    <p>Recognition of gross investment versus net investment</p> Signup and view all the answers

    In the cash flows from operating activities section of the direct method, which of the following is NOT included?

    <p>Proceeds from long-term borrowings</p> Signup and view all the answers

    Which of the following statements is true regarding guaranteed residual values?

    <p>Guaranteed residual values are included in the GIL as a final payment.</p> Signup and view all the answers

    The income statement method for finance income includes lease installments as a separate line item.

    <p>True</p> Signup and view all the answers

    What is the formula to determine the CA at EOY for the net investment in finance lease?

    <p>CA at BOY + Net Investment in Lease - Lease payments received + Finance income earned</p> Signup and view all the answers

    The __________ consideration includes discounts, rebates, and performance bonuses.

    <p>Variable</p> Signup and view all the answers

    Match the following steps with their respective descriptions in revenue recognition:

    <p>Identify the contract = First step in the revenue recognition process. Identify performance obligations = Determine distinct goods/services. Determine the transaction price = Calculate cash and non-cash components. Allocate the transaction price = Distribute to performance obligations based on standalones.</p> Signup and view all the answers

    Which method is used to calculate variable consideration?

    <p>Expected value and most likely amount.</p> Signup and view all the answers

    Unguaranteed residual values are included in the measurement of net investment in lease.

    <p>False</p> Signup and view all the answers

    Name the final entry in the income statement method for finance income calculation.

    <p>Current Tax Liability/Asset</p> Signup and view all the answers

    Study Notes

    Intercompany Transactions

    • Intercompany transactions are transactions between companies within the same group, regardless of the direction of the transaction.
    • The investment in an associate may be analyzed by breaking down the carrying amount into attributable net assets at acquisition, goodwill, and the cost of the investment.
    • The carrying amount may also be analyzed by breaking down the cost of the investment into retained earnings at the beginning of the year, retained earnings for the current year, profit for the current year, dividends received, and transfer to general reserves.
    • The carrying amount may also be analyzed by breaking down the cost of the investment into land revaluation reserve, general reserve, and the cost of the investment.

    Piecemeal Acquisition

    • Piecemeal acquisition occurs when there is an existing interest in an entity, and then significant influence or control is obtained through a series of further acquisitions of shares.
    • When an entity's ownership interest increases from an investment to an associate to a subsidiary, the equity method should be used for a 20% to 49% ownership interest and consolidation should be used for a greater than 50% ownership interest.

    Obtaining Control

    • When obtaining control of a subsidiary, the previous interest should be revalued to fair value, and the investment should be adjusted to reflect the additional consideration paid.
    • In the worksheet, the consolidation should begin from the date significant influence or control was obtained.
    • Goodwill should be calculated as the difference between the consideration paid and the fair value of the net assets acquired.
    • Proceeds at acquisition or disposal should be determined and included in the net cash inflow or outflow.

    Consolidated Cash Flow Statements

    • The direct method of preparing a consolidated cash flow statement focuses on cash receipts and cash payments.
    • The indirect method of preparing a consolidated cash flow statement starts with profit before taxation and adjusts for non-cash items and changes in working capital.

    Notes to the Group Consolidated Statements

    • Notes to the group consolidated statements should provide details about the lease liability, including the carrying amount, finance costs, and payments made.
    • Lessor accounting involves accounting for the economic substance of the lease transaction, rather than the legal form.
    • This means that the lessor should recognize a finance lease receivable, with both sales income and interest income, when substantially all the risks and rewards of ownership are transferred.

    Lessor Accounting: Finance Lease

    • The initial measurement of a finance lease receivable equals the lower of the fair value of the leased asset and the present value of the lease payments.
    • Subsequent measurement involves recognizing finance income on the lease receivable and reducing the gross investment by the payments received.
    • The lessor can use either the gross method or the net method for recording the transaction.

    Lessor Accounting: Operating Lease

    • The lessor recognizes rental income on the operating lease agreement.
    • The operating lease agreement is considered a rental arrangement rather than a transfer of ownership rights.

    Lessor Accounting: Complexity

    • Advance payments made by the lessee should be accounted for using the BGN mode of calculation.
    • The selling price of the asset should be determined using a market rate of interest, if the lessor has artificially inflated the selling price and deflated the interest rate.
    • Guaranteed residual values are included in the gross investment as a final payment, while unguaranteed residual values are ignored.

    Lessor Accounting: Disclosure

    • Lessor disclosures should include the net investment in finance lease, maturity analysis of future lease payments, and a breakdown of the finance lease receivable into earned and unearned components.

    Revenue Recognition

    • Revenue recognition involves five key steps according to IFRS 15, which includes identifying the contract with the customer, identifying the performance obligations, determining the transaction price, allocating the transaction price to the performance obligations, and recognizing revenue when the performance obligation is satisfied.

    Transaction Price

    • The transaction price may be fixed or variable, and in case of variable consideration, the expected value or most likely amount should be used.

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    Description

    This quiz covers the intricacies of intercompany transactions and the concept of piecemeal acquisition. It explores how investments in associates are analyzed and the implications of acquiring control through multiple transactions. Test your understanding of these important accounting concepts.

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