Financial Accounting Exam Notes PDF

lOMoARcPSD|21734490 Financial Accounting Exam Notes Accounting 3B (Nelson Mandela University) Scan to open on Studocu Studocu is not sponsored or endorsed by any college or university Downloaded by Asanda Khumalo ([email protected]) ...

lOMoARcPSD|21734490 Financial Accounting Exam Notes Accounting 3B (Nelson Mandela University) Scan to open on Studocu Studocu is not sponsored or endorsed by any college or university Downloaded by Asanda Khumalo ([email protected])  lOMoARcPSD|21734490 Financial Accounting Exam Notes CHAPTER 13: CONSOLIDATIONS: ACQUISITION DURING THE YEAR At Acquisition Equity: Equity @ BOY + Increase/Decrease up to date of Acquisition (P/L; Dividends; Transfers; Revaluation) We need to apportion the subsidiary’s profit for the year into: o Pre-Acquisition Period: Add to Opening RE for year then eliminate @ acquisition equity as normal o Post-Acquisition Period: Add Post-Acquisition Profit to consolidated SOCI and Worksheet (Sub) JOURNALS Pre-Acquisition Period DR Income CR Expense Retained Earnings Pro-Forma Journals We need to decrease the income/expense accounts with the portion of the pre-acquisition period and add it to retained earnings, to get a new RE at acquisition date: DR Income CR Expense Retained Earnings We also need to close pre-acquisition transfers and dividends off to equity before setting it off against the investment in subsidiary (i.e. take them out of the post-acq period) DR Retained Earnings CR Dividends Transfer from RE If there are other movements in equity (e.g. revaluation reserve, other reserves), relating to the pre-acquisition period, we need to adjust for those too Downloaded by Asanda Khumalo ([email protected])  lOMoARcPSD|21734490 CHAPTER 14: ASSOCIATES AND JOINT VENTURES IAS 28: ACCOUNTING FOR ASSOCIATES AND JOINT VENTURES ASSOCIATES: Entity over which investor has significant influence → power to participate in operating & financial policy decisions of investee (associate), but not control or joint control of policies. PRESUMED: Investor has 20% voting rights in investee (associate) → significant influence Investor has < 20% of voting rights in investee → no significant influence INDICATORS OF SIGNIFICANT INFLUENCE Representation on BoD Participation in policy making Material transactions Interchange of managerial personnel Essential technical information JOINT VENTURES: Two or more parties have joint control Where parties have rights to the net assets of the arrangement (a separate vehicle/entity) The investor shares control of the investee with other investors (can be 2 or more investors sharing control) Starts with investment in associate/joint venture at cost + Investor’s Share of Comprehensive Income (P/L or OCI) - Distributions Received/Accrued (dividends) = Carrying Amount of Investment @ Year End JOURNALS BY INVESTOR DR Investment in Associate CR Bank Downloaded by Asanda Khumalo ([email protected])  lOMoARcPSD|21734490 POST ACQUISITION DR Investment in Associate (SOFP) CR Share of Profit from Associate (SOPL) Share of OCI of Associate Retained Earnings (PY Increase) General Reserve (PY Increase) Share of Profit of Associate DR Transfer to GR CR General Reserve DR Dividends Received (H) CR Investment in Associate KEY DIFFERENCES FROM CONSOLIDATIONS: 1. Starting point: H Ltd (not H + S) 2. No NCI to allocate to. Rather, we need to record investor’s share of movement in post-acq reserves (equity) as pro-forma JE’s 3. Not recognize goodwill separately (part of investment) 4. Intercompany transactions – in AoE worksheet regardless of direction NOTE: INVESTMENT IN ASSOCIATE The carrying amount may be analyzed as follows: Attributable net assets @ Acquisition Goodwill _______________ Cost of Investment _______________ RE at the beginning of the year RE for the current year Profit for the current year Dividends received Transfer to General Reserves Land Revaluation Reserve General Reserve ______________ ______________ Downloaded by Asanda Khumalo ([email protected])  lOMoARcPSD|21734490 CHAPTER 15: STEP ACQUISITION PIECEMEAL ACQUISITION: when there is an existing interest in an entity, and then we obtain significant influence or control through a series of further acquisitions of shares. INVESTMENT → ASSOCIATE → SUBSIDIARY Equity Method: 20% - 49% Obtain Control: >50% How to equity account/consolidate: 1. Revalue previous interest to FV (if results in associate or subsidiary) 2. Investment = previous FV + additional consideration (purchase price) 3. Start the worksheet from the date significant influence or control was obtained 4. Equity account/consolidate as normal based on new ownership interest Goodwill = [purchase price (cost of investment) + NCI + Acquisition date FV of previous equity interest] less [Acquisition date identifiable net assets] PRO-FORMAS: DR Operating Profit CR Retained Earnings DR Share Capital Retained Earnings Goodwill CR NCI Investment in Subsidiary DR NCI Share of Profit CR NCI DR Investment in Subsidiary CR Gain on Investment REMEMBER TO INCLUDE CGT RATES IN DEFERRED TAX Deferred Tax = difference between fair value and cost of the investment Downloaded by Asanda Khumalo ([email protected])  lOMoARcPSD|21734490 What H would have processed in the PYs: DR Deferred Tax Expense (P&L) CR Deferred Tax (SOFP) Therefore we need to reverse this out (since the underlying investment is eliminated on consolidation) FAIR VALUE THROUGH OCI Financial asset measured at fair value through OCI PRO FORMA DR Deferred Tax (SOFP) CR Tax on OCI Downloaded by Asanda Khumalo ([email protected])  lOMoARcPSD|21734490 CHAPTER 16: SALE OF SHARES IN SUBSIDIARY OR ASSOCIATE Sale of Shares In H Ltd: Eliminate portion of investment sold Record proceeds Recognize profit/loss as difference For the Group: Eliminate portion of net assets sold Record proceeds Recognize profit/loss as difference → but not if S → S (Section 4) Profit for group purposes will be different to the profit recognized by H Ltd Portion of post-acquisition reserves (portion of S Ltd’s equity attributable to H Ltd) “sold” Realization of Reserves The selling price of the shares consists of: Payment for the original cost of the shares + any goodwill Payment for a part of the post acquisition reserves belonging to H Ltd Profit/loss on the sale Upon the sale, these post acquisition reserves now become earned (realized) by the cash received and is included in H Ltd through profit on sale The post acquisition reserves are therefore part of: Profit on sale in H Ltd Reserves in the group (through consolidating/equity accounting) and NOT profit on sale Reduce profit on sale as per H Ltd with the since reserves realized DR Profit on Sale CR Reserves Sell Full Portion of Subsidiary At the end of the year we do NOT consolidate We therefore do not have H + S at the end of the year But, we had a subsidiary for a portion of the year Bring in the income and expense accounts of S Ltd for portion of the year it was a subsidiary DR Investment in S CR Retained Earnings Asset Revaluation Reserve Downloaded by Asanda Khumalo ([email protected])  lOMoARcPSD|21734490 DR Investment in S Taxation CR Operating Profit DR NCI Share of Profit CR Investment in S GIVE NCI THEIR SHARE PROFIT ON SALE OF SHARES For H Ltd Cost – Proceeds = Profit Three methods: 1. Profit per H Ltd – since reserves realized Since per H Ltd TB (Since RE) (Since ARR) = Group Profit 2. CA of Net Assets Disposed NIA disposed GW disposed (portion attributable to parent) = Total Net Assets Disposed (Proceeds) = Group Profit 3. Compare wat is sold (Parent’s Interest) to the proceeds Identifiable Assets Goodwill (NCI) = Parent’s interest (Proceeds) = Group Profit Downloaded by Asanda Khumalo ([email protected])  lOMoARcPSD|21734490 PRO FORMAS DR Investment in S Ltd CR Retained Earnings Ordinary Reserves DR Investment in S Ltd Cost of Sales Operating Expenses Taxation CR Revenue DR Sales CR Cost of Sales DR NCI Share of Profit CR Investment in S Ltd DR Dividend Income CR Investment in S Ltd Dr Retained Earnings CR Other Reserves DR Profit on Sale CR Investment in S Ltd DR Ordinary Reserves CR Retained Earnings SALE OF SHARES Subsidiary → Investment IFRS 10 requires that the remaining investment be recognized at FV when control is lost The remaining investment can be classified ito IFRS 9 as either subsequently measured at: o FV through P&L or OCI The FV adjustment (in both cases above) is included in P&L on disposal of subsidiary The CA will then consist of: o NIA and Goodwill not disposed of o Any gain/loss to bring the investment to FV Downloaded by Asanda Khumalo ([email protected])  lOMoARcPSD|21734490 Subsidiary → Investment Do not add H + S trial balances, bring in the profit of S Ltd while it was still a subsidiary Measure the remaining interest at FV Equity method is applied after control is lost _________________________INVESTMENT IN S LTD_________________________ Acquisition NCI Share Retained Earnings Profit Asset Replacement Reserve Disposal Profit Balance __________ __________ Balance __________ __________ FV Adjustment Balance Share of Profit Balance of SOFP CONSOLIDATED PROFIT = Profit on cost model (Since RE sold) (Since ARR sold) Adjustment to FV = Consolidated profit DR Investment in S Ltd CR Share of Profit in A Downloaded by Asanda Khumalo ([email protected])  lOMoARcPSD|21734490 CHAPTER 21: CONSOLIDATED STATEMENT OF CASH FLOWS New Principles: Don’t split cash between NCI and parent Show cash flows between NCI and parent Intercompany transactions eliminated Acquisition and Disposal shown as single line items – Investing Activities Detailed note of assets/liabilities acquired/disposed of Assets and Liabilities of subsidiary excluded from working capital changes ______________________________Inventory____________________________ Opening Balance Increase Subsidiary Purchased Increase Closing Balance Cash purchased/disposed of not included Steps to prepare note: 1. Determine 100% FV of Assets/Liabilities @ Acquisition/Disposal 2. Determine the % of shareholding @ Acquisition/Disposal 3. Calculate Goodwill in relation to increase in % 4. Determine proceeds at acquisition (paid) or disposal (received) – noncash & cash 5. Net cash in/outflow as result of acquisition or disposal CHEAT Disposal: Net cash in/outflow = bank balance of sub @ disposal + any money you got on sale Acquisition: Net cash in/outflow = bank balance of sub @ acquisition – cash you paid to acquire Downloaded by Asanda Khumalo ([email protected])  lOMoARcPSD|21734490 CONSOLIDATED CASH FLOW STATEMENTS: DIRECT VS. INDIRECT METHOD DIRECT METHOD CASH FLOWS FROM OPERATING ACTIVITIES Cash received from customers Cash paid to suppliers and employees CASH GENERATED FROM OPERATIONS (note 1) Interest Received Interest Paid ( ) Dividends Received Dividends Paid ( ) Normal Tax Paid ( ) Secondary Tax on Companies Paid ( ) Net cash in/(out)flow from Operating Activities CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of Subsidiary (net of cash) (note 2) ( ) Purchase of Equipment (note 3) ( ) Replacement of Equipment ( ) Additions to Equipment ( ) Proceeds from Sale of Equipment Net cash in/(out)flow from Investing Activities CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issue of Share Capital Proceeds from Long-term Borrowings Payment of Capital Element of Finance Lease Liabilities ( ) Net cash in/(out)flow from Financing Activities Net Increase/(Decrease) in Cash and Cash Equivalents Cash and Cash Equivalents at Beginning of Year Cash and Cash Equivalents at End of Year Downloaded by Asanda Khumalo ([email protected])  lOMoARcPSD|21734490 INDIRECT METHOD Cash Flow from Operating Activities/Note Profit before Taxation Adjustments for: Depreciation Loss on Sale of Plant Foreign Exchange Loss Investment Income Interest Expense ( ) Operating Profit before Working Capital Changes (Increase)/Decrease in Inventory (Increase)/Decrease in Accounts Receivable Increase/(Decrease) in Accounts Payable Cash Generated from Operations Interest Received Interest Paid ( ) Dividends Received Dividends Paid ( ) Normal Tax Paid ( ) Secondary Tax on Companies Paid ( ) Net cash in/(out)flow from Operating Activities CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of Subsidiary (net of cash) (note 2) ( ) Purchase of Equipment (note 3) ( ) Replacement of Equipment ( ) Additions to Equipment ( ) Proceeds from Sale of Equipment Net cash in/(out)flow from Investing Activities CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issue of Share Capital Proceeds from Long-term Borrowings Payment of Capital Element of Finance Lease Liabilities ( ) Net cash in/(out)flow from Financing Activities Net Increase/(Decrease) in Cash and Cash Equivalents Cash and Cash Equivalents at Beginning of Year Cash and Cash Equivalents at End of Year Downloaded by Asanda Khumalo ([email protected])  lOMoARcPSD|21734490 NOTES TO THE GROUP CONSOLIDATED STATEMENTS 1. Acquisition of Subsidiary During the current financial year, the group acquitted a controlling interest in ABC Ltd. The fair value of the assets and liabilities at the date of acquisition were as follows: Property, Plant & Equipment Other Non-Current Assets Inventory Debtors Cash Deferred Tax ( ) Creditors ( ) = Net Identifiable Assets - Already Owned (x%) ( ) - NCI (y%) ( ) = Net Identifiable Assets Acquired Goodwill on Acquisition _________ = Purchase Consideration - Cash Purchased ( ) = Purchase Consideration Net of Cash Acquired - Shares Issued ( ) = Net cash in/(out)flow _________ Downloaded by Asanda Khumalo ([email protected])  lOMoARcPSD|21734490 2. Disposal of Subsidiary During the current financial year, the group disposed of x% of their interest in ABC Ltd. The carrying amount of assets and liabilities that were derecognized as a rest of this arrangement are as follows: Property, Plant and Equipment Other Non-Current Assets Inventory Debtors Cash Deferred Taxation ( ) Creditors ( ) = Net Assets - Non-controlling Interests @ y% ( ) - Investments Retained ( ) = Net Identifiable Assets Sold Goodwill Realized _________ = Total Assets Sold Profit on Disposal _________ = Proceeds on Disposal - Cash Disposed Of ( ) = Net Proceeds on Disposal _________ Downloaded by Asanda Khumalo ([email protected])  lOMoARcPSD|21734490 CONSOLIDATION ISSUES 1. We do NOT split cash generated by operations between those attributable to the parent and NCI 2. Movement of cash between the NCI and the group ARE reflected – affects the group’s cash resources (e.g. increase in capital of the subsidiary, or the payment of dividends by subsidiary to the NCI) 3. Intercompany cash movements are eliminated 4. Acquisition/disposal of subsidiary is shown as a single line under investing activities section 5. Cash purchased or sold as part of the net assets of subsidiary are not included in the statement of cash flows (netted off) 6. Acquisition/disposal of subsidiary is presented as a note 7. When acquiring (or disposing) of a subsidiary during the year – the movement in the total consolidated Assets and Liabilities now includes (excludes) the acquired (disposed) subsidiary’s Assets and Liabilities Downloaded by Asanda Khumalo ([email protected])  lOMoARcPSD|21734490 CHAPTER 16: LEASES – LESSEE DEFINITION: A contract, or part of a contract that conveys right to use an asset for a period in exchange for a consideration LESSEE LESSOR - Right of use asset - Owner of asset - Lease payments - Receives consideration from - Liable to pay lessor lessee in exchange for use of asset JOURNALS DR Right of Use Asset CR Lease Liability DR Right of Use Asset CR Bank DR Lease Liability CR Bank DR Interest Expense CR Lease Liability DR Depreciation CR Accumulated Depreciation DR Tax Expense (P/L) CR Deferred Taxation INCOME STATEMENT APPROACH Profit before Taxation Permanent Differences Temporary Differences ( ) - Deduction of payment ( ) - Interest Expense - Depreciation Expense - S11a Deduction ( ) TAXABLE INCOME 10 DR Taxation Expense 10 CR SARS 10 Downloaded by Asanda Khumalo ([email protected])  lOMoARcPSD|21734490 Simplified Approach o Low value: Standards o Short Term: < 12 months General Approach: Balance Sheet Initial Measurement o Lease Liability: PV of all lease payments/FV of assets @ commencement of lease o ROU Asset = sum of LL + interest cost + pre payments + incentives + future cost Subsequent Measurement: o Lease Liability: Amortized Cost o ROU Asset: Depreciate over time if ownership doesn’t transfer/useful life DISCLOSURE Right of Use Asset Balance: BOY Cost Accumulated Depreciation Additions Disposals Depreciation Balance: EOY Cost Accumulated Depreciation Maturity Analysis Lease Payments to be made: Due in 2021 2022 2023 2024 (Residual value) = Total future lease payments - Future Finance Expense = PV of lease liability Lease Liability ABC Ltd entered into a X year lease agreement for xxx on xx/xx/xxxx. Annual arrears/advance payments of Rxxxx will be made to XYZ Ltd with the first payment being made on xx/xx/xxxx. Ownership of the xxx will pass to ABC Ltd when the final payment is made on xx/xx/xxxx. Carrying Amount BOY Lease Liability during the year Finance Costs Payments Made Carrying Amount EOY Downloaded by Asanda Khumalo ([email protected])  lOMoARcPSD|21734490 LESSOR: 1. Operating Lease: Profit/Loss (Rental Income) 2. Finance Lease: 5 factors from the standards (you only need 1 to be present) Received Income Temp Difference Year 1 100 150 50 Year 2 150 150 Year 3 200 150 (50) 450 450 INCOME STATEMENT APPROACH + Depreciation + Interest Expense - Payment - Initial Direct Cost = TOTAL x 28% EVERY LEASE AGREEMENT WILL HAVE A LESSEE AND A LESSOR Downloaded by Asanda Khumalo ([email protected])  lOMoARcPSD|21734490 CHAPTER 17: LESSOR ACCOUNTING Types of Leases: 1. Finance Lease 2. Operating Lease Main principle: IFRS 16 requires entities to account for the economic substance rather than legal form of the lease transaction FINANCE LEASE OPERATING LEASE Transfers substantially all the risks Not substantially all risks and rewards and rewards incidental to ownership. transferred other than a finance lease Title may/may not eventually be Substance of transaction: a rental transferred agreement Substance of transaction: lessor sells asset to lessee and provides financing for transaction 1. Manufacturer/Dealer RECOGNITION An asset (finance lease receivable) The installments received represent 2 types of revenue: 1. Sales Income 2. Interest Income INTIAL MEASUREMENT Lease receivable o NIL/GIL Sales revenue raised at amount equal to the lower of: o FV of leased asset o PV of lease payment Derecognition of the asset: any costs incurred in negotiating the lease (initial direct costs) are expensed SUBSEQUENT MEASUREMENT Account for the lease receivable using amortised cost o Recognize finance income on lease receivable (reducing unearned finance income) o Reduce gross investment by the payment (instalment) received Downloaded by Asanda Khumalo ([email protected])  lOMoARcPSD|21734490 GROSS METHOD DR Inventory CR Bank DR Finance Lease Receivable (Gross Interest) CR Revenue Finance Lease Receivable (Unearned Finance Income) DR Cost of Sales CR Inventory DR Bank CR Finance Lease Receivable (Gross Investment) DR Finance Lease Receivable (Unearned Finance Income) CR Finance Income NET METHOD DR Inventory CR Bank DR Finance Lease Receivable (Net Investment) CR Revenue (Sale of Goods) DR Cost of Sales CR Inventory DR Bank CR Finance Lease Receivable (Net Investment) DR Finance Lease Receivable (Net Investment) CR Finance Income Downloaded by Asanda Khumalo ([email protected])  lOMoARcPSD|21734490 2. Finance House INITIAL MEASUREMENT Lease receivable (NIL/GIL) Derecognition of asset ‘sold’ (e.g. PPE) o Will not be to inventory o Rather: Credit Asset Account Any costs incurred in negotiating the lease (initial direct costs) are capitalized to the net finance lease receivable SUBSEQUENT MEASUREMENT Same as for manufacturer/dealer o Recognize finance income on lease receivable (reducing unearned finance income) o Reduce gross investment by the payment (instalment) received LESSOR FINANCE LEASE: Usually use gross method, unless specifically told otherwise in a question Complexity #1: Advance payments Same principle as for lessee PV of nil: Use BGN mode Set up amortization table with payments received at end of year. Be careful with dates when reporting disclosure at year end Complexity #2: Artificially low interest Manufacturers/dealers may structure finance leases by inflating the agreed ‘selling price’ and deflating the interest rate inherent in the lease. To boost profit in CY PROHIBITED: substance over form SP: to be determined using a market rate of interest Complexity #3: Residual Values Guaranteed residual values are included in the GIL as a final payment Guarantee can be from any party other than lessor Unguaranteed residual value: OUT OF SCOPE Downloaded by Asanda Khumalo ([email protected])  lOMoARcPSD|21734490 DISCLOSURE: 1. Net Investment in Finance Lease CA at BOY + Net Investment in Lease - Lease payments received + Finance income earned = CA at EOY 2. Finance Lease Receivable – Maturity Analysis of Future Payments Future lease payments expected to be received (Undiscounted) In 20x2 In 20x3 = Total future lease payments - Unearned finance charges = Net Investment in Lease (per amortization table) INCOME STATEMENT METHOD - Finance Income + Lease Instalments - W&T Allowance = TD movement for year x 28% = Current Tax Liab/Asset JOURNAL ENTRIES DR Tax Expense (P/L) CR Deferred Tax (SOFP) Downloaded by Asanda Khumalo ([email protected])  lOMoARcPSD|21734490 CHAPTER 4: REVENUE STEP 1: Recognition: Identify the contract with the customer (STANDARDS) STEP 2: Recognition: Identify the performance obligations in the contract – distinct good/service in agreement able to generate economic benefit on its own and separately identifiable STEP 3: Measurement: Determine the transaction price (cash and non-cash components) Fixed & Variable STEP 4: Allocate the transaction price to the PO’s STEP 5: Recognition: Recognize revenue when entity satisfies PO TRANSACTION PRICE: 1. Variable Consideration: Discounts, rebates, credits, price concessions, incentives, performance bonuses, penalties, contingent consideration. Types: 1.) EXPECTED VALUE: sum of probability – weighted amounts in range of possible consideration amounts 2.) MOST LIKELY AMOUNT: single most likely amount 2. Significant Financing Component: Discount rate and presentation JOURNALS DR Equipment CR Bank DR Finance Lease Receivable: Gross Investment in Lease CR Unearned Finance Income Equipment DR Bank CR Finance Lease Receivable: Gross Investment in Lease DR Unearned Finance Income CR Finance Income DR Income Tax Expense CR Current Tax Payable: Income Tax DR Income Tax Expense (P/L) CR Deferred Tax: Income Tax (SOFP) DR Bank CR Finance Lease Receivable: Gross Investment in Lease DR Unearned Finance Income Downloaded by Asanda Khumalo ([email protected])  lOMoARcPSD|21734490 CR Finance Income DR Income Tax Expense CR Current Tax Payable: Income Tax DR Income Tax Expense (P/L) CR Deferred Tax: Income Tax (SOFP) DR Bank CR Finance Lease Receivable: Gross Investment in Lease DR Unearned Finance Income CR Finance Income DR Bank CR Finance Lease Receivable: Gross Investment in Lease DR Income Tax Expense CR Current Tax Payable DR Income Tax (SOFP) CR Income Tax Expense Downloaded by Asanda Khumalo ([email protected])  lOMoARcPSD|21734490 SHARE BASED PAYMENTS An agreement between an entity and another party whereby the latter is entitled to receive: Equity instruments (shares/options) of the entity Cash/other assets of the entity for an amount based on value of equity instruments of the entity 1. EQUITY – share/share options 2. CASH SETTLED – payment for goods/services in the form of shares/payment of cash VESTING CONDITIONS: SERVICE BASED: o Must stay in company for a certain amount of time – complete certain number of years of service (IGNORE VESTING CONDITIONS) PERFORMANCE BASED: o NON-MARKET RELATED: e.g. increase in GP; increase in profit (e.g. conditions to directors) (IGNORE VESTING CONDITIONS) o MARKET RELATED: share price must reach a certain value (TAKE INTO ACCOUNT VESTING CONDITIONS) EQUITY SETTLED: Employees (less # left and # expected to leave) x # of instruments x FV x time lapsed Grant date value throughout CASH SETTLED: FV changes 20x1 DR Staff Costs CR Liability: SARs 20x2 DR Staff Costs CR Liability: SARs 20x3 DR Liability CR Bank DR Staff Cost CR Liability 20x4 DR Staff Costs Liability – SARs CR Bank Downloaded by Asanda Khumalo ([email protected])