The format of the standards tends to be similar within each of the three numbering sequences, but different between the sequences.

Size: px

Start display at page:

Download "The format of the standards tends to be similar within each of the three numbering sequences, but different between the sequences."

Bathsheba McKinney
5 years ago
Views:

1 Notes on reading accounting standards Knowing where to find information in accounting standards can be very valuable for students and practitioners of accounting. For students, being able to navigate the accounting standards handbook efficiently can be particularly useful in exams! This document is designed to help you familiarize yourself with the typical structures of accounting standards, to help you find and extract relevant information from them more efficiently. You will benefit even further by reviewing a number of accounting standards in conjunction with this document. Tagging of your accounting standards handbook and highlighting or underlining key requirements is also recommended. AASB numbering sequence: AASB Details 1 99 AASB equivalents of IFRSs issued by IASB since AASB equivalents of IASs issued by IASC (the precursor to IASB) before AASB standards for which there is no international equivalent The format of the standards tends to be similar within each of the three numbering sequences, but different between the sequences. Types of requirements in accounting standards: Note: Within an accounting standard, the requirements are usually listed in the order shown below Classification In what category an item should be included Recognition In what circumstances an item should be recorded in the balance sheet or income statement Measurement At what monetary amount an item should be recorded (when recognized, then subsequently) Presentation How an item should be shown in the financial statements or notes Disclosure What details must be made known about an item, either in the financial statements or the notes Definitions, often associated with classification, are located near the beginning of the standard (for the AASB sequence) or in Appendix A (for the other two sequences). Structure of a typical standard: Contents Preface (for recently issued standards, replaced by Compilation Details for older standards) o Reasons for issuing AASB New (this standard) o Main features of this standard = summary, including: Application date, first-time application and comparatives, main requirements, differences between AASB New and AASB Old Comparison of AASB New with international pronouncements Accounting Standard AASB New (formal requirements of the standard) o Objective o Application (which entities the standard applies to, from what date the standard applies, how materiality applies to the requirements of the standard) o Scope (exclusions from the requirements of the standard (eg particular kinds of transactions, assets, liabilities, categories of entities), interaction between this standard and other standards) o Definitions (for AASB , otherwise in Appendix A) o Operative paragraphs (requirements) Aus paragraphs = added to AASB standard, not in IASB standard See types of requirements section above for usual order of requirements Note that the requirements are sectionalised, with useful headings The main requirements in each standard are shown in bold, with additional explanation of these requirements provided afterwards in normal font Defined terms are shown in italics the first time they are referred to in the requirements of the standard o Appendices that are formally part of the standard Defined terms (for AASB 1 99 and , otherwise early in standard) Application guidance (explanation on how to apply requirements of the standard) Additional guidance on applying standard, including illustrative examples in some cases Differences between AASB New and AASB Old

2 Calculating Current Tax Liability STEP 1: Identify Items that require adjustment For example: Other income Depreciation Warranty costs Fines Unearned income (it should specify in the question the differences) STEP 2: Draw up Template Note: see Activity 4.1 for another template structure Accounting Profit/(Loss) before Income Tax X Plus: all non-deductible expenses Accounting Depreciation Goodwill Impairment/Impairment Writedowns Development Amortisation Annual Leave Expense Warranties Expense Doubtful Debts Expense Entertainment Expense Fines and Penalties Accounting Loss on sale of P&E Accrual for this year (will be deductible next year) (e.g. Comprehnsive activity) Imputation Gross up (Franked Dividends): Amount x Franking % x 30/70 Interest Expense (accounting) Plus: any assessable amounts not included Accounting Unearned Revenue (taxable when received) Tax gain on Sale of P&E (see activity 7) Interest Received (e.g. previous year's receivable assessable this year) Less: all non-assessable revenue Interest Receivable (this year's is assessable next year) Less any deductible amounts not included Tax Deductible depreciation Tax Deductible development costs

annual leave payments Warranty Costs incurred Bad debts written off Accrual at previous financial year (last years accrual is deductible this year) (e.g.

3 annual leave payments Warranty Costs incurred Bad debts written off Accrual at previous financial year (last years accrual is deductible this year) (e.g. Comprehensive activity) Interest Paid Taxable Income x Tax rate Equals net tax payable less tax offsets (Comprehensive activity) - Recognised Tax Losses (DTA from recognised (carry forward) tax loss/0.3) - Unrecognised Tax Losses (note: DTA s relating to temporary differences are not brought forward here) Equal CTL STEP 3: Calculate the adjustments required Calculating amount paid /incurred from provision Opening provision + expense in period - closing provision = amount paid during year

4 Calculating costs incurred (e.g. AL paid, warranty costs, bad debts) Opening on BS + expense in period - closing on BS = amount paid during year Bad debts = trade rec on BS Cost Tax (80) (60) written down value = tax accum. Deprec unearned income: add assessable amounts (cash received) during the year subtract unearned income amount in PY as non-assessable revenue (as it has been received in the CY/if received) If not received: Include current year amount in BS as unearned revenue (non assessable) Development expenditure determining costs incurred Closing balance opening balance (do not include acc amortisation) STEP 4: Prepare Journal Entry = tax allowable depreciation deduction Note: question might give you tax depreciation value. Journal Entry Date Description Dr CR xx Current Tax Expense X xx Current tax liability X Recording Current Tax Liability

If there is UNRECOGNISED TAX LOSSES or Share capital issue costs journal entry is: Deduction for Share issue costs * 30% = share capital DTA carried forward (full amount) Current tax liability = From

5 If there is UNRECOGNISED TAX LOSSES or Share capital issue costs journal entry is: Deduction for Share issue costs * 30% = share capital DTA carried forward (full amount) Current tax liability = From table above Note: IAS 12 para 61A requires the current tax in relation to the share issue costs to be recognised outside profit or loss where the tax relates to an item that is recognised outside profit or loss (e.g. share issue costs capitalised as part of share capital). Income tax expense = sum

6 Accounting for a finance lease Calculating PVMLP = worked example 12.2 Accounting for a finance lease = worked example 12.3 STEP 1: calculate the Present value of minimum lease payments (from the perspective of the Lessee). Step 1A: review the standard IAS requires that a lessee at the commencement of the lease term recognises a finance lease as an asset and liability in the statement of financial position at the lower of the: o Fair value of the leased asset and o PV of minimum lease payments (PVMLP) IAS 17.4 definition of MLP o Payments over the lease term that the lessee is required to make o Amounts guaranteed by the lessee or a party related to the lessee and o Payment to exercise a purchase option at the end of the lease where it is reasonably certain the option will be exercised. Step 1B: input the payments, PV factor and calculate the PV of future cash flows Year Date Payment PV Factor* PV cash flows 0 (start at zero if paid in advance) =payment * PV factor 1 (start at 1 if paid in arrears) 2 Total = PVMLP *Obtain from PV factor table or = PV = 1/(1+r)^n r = interest rate implicit in the lease n = the period (e.g. 1 = year 1 from table above) Step 1C: determine which is lower, the FV of the leased asset of the PVMLP Whichever is the lower will be recognised as the leased asset and lease liability in the statement of financial position (IAS 17.20), from the perspective of the lessee. Step 2: Calculate the PV of Minimum lease payments from the perspective of the lessor. Step 2A: review relevant standards IAS 17.4 PVMLP for the lessor not only includes any residual value guaranteed by the lessee or a party related to the lessee, but also any residual value guaranteed to the lessor

7 by an unrelated third party. (this would be included as a cash flow in the final year of the lease in the following calculations). Step 2B: input the payments, PV factor and calculate the PV of future cash flows for the Lessor. Year Date Payment PV Factor (from calculation above) 0 (start at zero if paid in advance) 1 (start at 1 if paid in arrears) 2 For example, if this was the final year, include the residual value guaranteed either by the lessor or a third party that they would receive. PV cash flows =payment * PV factor Total = PVMLP Step 3: prepare and compete the lease payment schedule for all payment dates. Payment date Opening liability (A) Lease payment (B) Liability reduction (C) Interest expense (D) Closing liability (E) Step 3A Step 3B Step 3C Step 3C =(A)-(C) (from step 1 or 2) Step 3A: Record the opening liability Lower of the PVMLP and the fair value of the asset (from step 1 or 2) Step 3B: Record the lease payment Cash flow as recorded in step 1 or 2 Step 3C: Split the lease payment between interest and reduction of the lease liability Note: for the first year there would be no interest arisen on the lease liability as the payments are made in advance. Therefore, for the first year the whole amount from (B) would be allocated as a liability reduction. (if payments are made at the end of the year, there would be an amount of interest accrued) For the following years: Calculate how much of the payment related to interest by: Interest expense = opening liability * implicit rate of interest Liability reduction = lease payment interest expense

8 Step 3: prepare and compete the lease receipt schedule for all payment dates. Note: would be the same as the lease payment schedule if there is no guaranteed or unguaranteed residual value Payment date Opening receivable (A) = Amount paid + direct costs (e.g. legal fees) OR PVMLP + PV of unguaranteed residual (from step 1 or 2) Interest income (B) Receivable reduction (C) Lease payment (D) Closing receivable (E) Step 3B Step 3C Step 3C =(A)-(C) Step 3B: Record the lease payment Cash flow as recorded in step 1 or 2 Step 3C: Split the lease payment between interest and reduction of the lease receivable Note: for the first year there would be no interest arisen on the lease liability as the payments are made in advance. Therefore, for the first year the whole amount from (B) would be allocated as a liability reduction. (if payments are made at the end of the year, there would be an amount of interest accrued) For the following years: Calculate how much of the payment related to interest by: Interest income = opening asset * implicit rate of interest Receivable reduction = lease payment interest income Step 4: prepare the journal entrees for the Lessee Types of journal entries for the lessee Year 1 Year 1 o Record Lease asset and lease liability o Record Lease payment in advance o Deferred tax Year 2 o Lease payment o Depreciation o Deferred tax

9 30 June 20XX PPE DR = (A) Finance lease liability To record the lease asset and lease liability 30 June 20XX Finance lease liability DR = (B) Cash To record the first lease payment made in advance on 30 June 20XX. 30 June 20XX Income tax expense DR* Deferred tax liability (DTL) To record the DTL arising on the upfront lease payment Note: upfront lease payments are deductible for tax purposes. A TTD gives rise to a DTL. CR = (A) CR = (B) CR Year 2 30 June 20X1 Finance lease liability DR = (C) Interest expense DR = (D) Cash CR (B) To record the lease payment made at 30 June 20X1 which is split between the interest and the liability thus reducing the outstanding lease liability 30 June 20X1 Depreciation expense DR Accumulated depreciation To record the depreciation of the leased asset over its useful life of X years. = Opening liability in year 1 / estimated useful life Note: if on straight line basis this entry will be the same every year. CR 30 June 20X1 DTL DR Income tax expenses CR To record the reduction in the DTL (the DTL is starting to reverse) ONLY THE MOVEMENT IS RECORDED = carrying amount of the lease (e.g. normal CA accumulated dep) Lease liability in next year = TTD = TTD*tax rate = DTL current year = DTL prior year DTL current year = DTL recorded in journal entry Step 5: prepare the journal entries for the lessor: Type of journal entries expected for a lessor: Year 1 Year 1 o Fair value and cost of inventory sold by the lessor o Lease receipt in advance Year 2 o Lease receipt 30 June 20X0 Lease receivable DR (from Step 2) Sales CR (from step 2) Cost of sales DR (given in

Contents Unit 2 Presentation of financial statements... 3

Contents Unit 2 Presentation of financial statements... 3 Preparing a statement of cash flows... 3 Preparing the reconciliation of operating cash flows... 4 Unit 4 Income taxes... 5 Calculating the current