Intermediate Financial ing Study Notes 6j3r2c

AASB 116: PPE (Purchase A Group of Assets) 

Where an entity makes a single purchase of a group of assets not deemed a business combination, the acquirer should pro-ration the value of those assets according to their FV.

AASB 3: Business Combinations  

 

  

Business Combination: A transaction or other event in which an acquirer obtains control of one or more businesses. An asset is identifiable if it either: o Is separable o Arises from contractual or other legal rights A business may be acquired by either (1) a direct acquisition or (2) an indirect acquisition. Note: Acquisition related costs (e.g. finder’s fees, professional and consulting fees) shall be ed for as expenses in the periods in which they are incurred and the services are received (note an exception for costs associated with issuing debt or equity securities). *Different with PPE! Consideration > FVNA Acquired → Goodwill (NCA) Consideration < FVNA Acquired → Gain on bargain purchase (Revenue) Direct Acquisition Date

Details

DR

CR

Assets (Valued at their FV) Goodwill on acquisition Liabilities Bank (Acquisition of Net Assets) Acquisition Costs Bank (Acquisition-related costs)  

Note: Recognize book value of gross receivables; raise provision for difference between Gross & FV. Note: Recognize FV of NCA, ignore any accumulated depreciation.



Indirect Acquisition Date

Details

DR

CR

Investment in Y Ltd Bank (Acquisition of shares in Y Ltd)

AASB 116: PPE (Measurement after Recognition) Cost Model  

Depreciation applied based on cost Subject to impairment test under AASB 136

Revaluation Model  Revaluation > CA → Incremental  Revaluation < CA → Decremental  When an item of PPE is revalued, any accumulated depreciation at the date of revaluation is treated in one of the following ways: (1) The gross method; (2) The net method.  Subject to impairment test under AASB 136

ing for the Increment (FV>CA) 

The Net Method Date Details

DR

CR

Accumulated Depreciation Asset (e.g. Equipment) (Depreciation write back) Asset (e.g. Equipment) Revaluation surplus (Incremental revaluation)  

Gain on revaluation (Other comprehensive income)

The Gross Method 

OLD

Gross Amount

1200

Acc Depreciation

200

Carrying Amount

1000

NEW [2] 1200*1.2

1440 ↑ by 240

[3] 1440-1200

240 ↑ by 40

[1] Ratio of 1.2 to 1

1200 ↑ by 200





Date

Details

DR

Asset (e.g. Equipment) Accumulated Depreciation Revaluation surplus (Incremental revaluation)

240

CR 40 200

Gain on revaluation (Other comprehensive income)

ing for the Decrement (FV
In line with PRUDENCE, recognise losses as soon as anticipated, recognise gains when realized. The Net Method Date Details DR CR Accumulated Depreciation Asset (e.g. Equipment) (Depreciation write back) Revaluation expense ** Asset (e.g. Equipment) (Decremental revaluation) 



**or Loss on Evaluation (P&L)

The Gross Method 





OLD

Gross Amount

1200

Acc Depreciation

200

Carrying Amount

1000

Date

NEW [2] 1200*0.8

960 ↓ by 240

[3] 960-800

160 ↓ by 40

[1] Ratio of 0.8 to 1

Details

DR

Revaluation expense Accumulated Depreciation Asset (e.g. Equipment) (Decremental revaluation)

200 40

Revaluation expense (P&L)

800 ↓ by 200

CR

240

ing for the Increment (FV>CA) After a Prior Revaluation Downwards 





If an asset’s CA is increased as a result of a revaluation, the increase shall be credited directly to equity under the heading of revaluation surplus. However, the increase shall be recognized in P&L to the extent that it reverses a revaluation decrease of the same asset previously recognized in P&L. E.g. Equipment 1600 Acc Depreciation

600

Carrying Amount

1000

FV=1400 Prior revaluation downwards=100 The Net Method Date Details Accumulated Depreciation

DR

CR

600

Equipment

600

(Depreciation write back) Equipment Revaluation revenue** Revaluation surplus (Incremental revaluation)  

100 300

** or Gain on Revaluation (P&L)

The Gross Method 



400

OLD

Gross Amount

1600

Acc Depreciation

600

Carrying Amount

1000

Date

NEW [2] 1600*1.4

2240 ↑ by 640

[3] 2240-1400

840 ↑ by 240

[1] Ratio of 1.4 to 1

Details

DR

Asset (e.g. Equipment) Accumulated Depreciation Revaluation revenue Revaluation surplus (Incremental revaluation)

640

1400 ↑ by 400

CR 240 100 300

ing for the Decrement (FV




If an asset’s CA is decreased as a result of a revaluation, the decrease shall be recognized in P&L. However, the decrease shall be recognized in other comprehensive income to the extent that any credit balance existing in the revaluation surplus in respect of that asset. The decrease recognized in the other comprehensive income reduces the amount accumulated in equity under the heading of revaluation surplus. E.g. Equipment 1600 Acc Depreciation

600

Carrying Amount

1000

FV=600 Prior revaluation upwards=100 The Net Method Date



Details

DR

Accumulated Depreciation Equipment (Depreciation write back) Revaluation surplus Revaluation expense Equipment (Decremental revaluation)

600

The Gross Method 

600 100 300 400

OLD

Gross Amount

1600

Acc Depreciation

600

Carrying Amount

1000

Date

CR

NEW [2] 1600*0.6

960 ↓ by 640

[3] 960-600

360 ↓ by 240

[1] Ratio of 0.6 to 1

Details

DR

Revaluation surplus Revaluation expense Accumulated Depreciation Equipment (Decremental revaluation)

100 300 240

600 ↓ by 400 CR

640

AASB 116: PPE (Derecognition of a Revalued Asset)  

Example 1: Land with CA of $400 is sold for $650 CA=$400; Proceeds=$650 → Profit on sale=$250 Example 2: Land was purchased for $400, revalued by $100  CA=$500; Proceeds=$650 → Profit on sale=$150  But $100 previously recognized as an unrealized gain (which has now been realized), so GJ entry: DR Revaluation surplus 100 CR

Retained earnings

100

AASB 136: Impairment of Assets    



FV less selling costs (If I sell it)

PV of future CF expected to derived from an asset (If I use it)

Compare recoverable amounts (higher of net selling price and value in use) with carrying amounts If RA


Revaluation Method (Net Method)  Date Details Accumulated Depreciation Equipment (Depreciation write back) Revaluation surplus Revaluation expense Equipment (Decremental revaluation)

DR

CR



Reversing an Impairment Loss  If RA>CA, the asset cannot be impaired upwards BUT a reversal of a previous impairment loss can be recognized.  Exceptions: [1] Goodwill impairment cannot be reversed; [2] The new CA cannot exceed the CA that would have been determined had no previous impairment loss been recognized (Check slide 48 of Lec 3)  E.g. A Ltd acquired some land in 2013 at a cost of $2.5 million. In 2014, RA=$2.0 million. In 2015, FV=$2.8 million. Date Details DR CR 2014 Impairment Loss- Land 500000 Acc Impairment Loss- Land 500000 2015 Land 300000 Acc Impairment Loss- Land 500000 Reversal of Previous Impairment Loss- Land** 500000 Revaluation Surplus 300000 ** The above impairment reversal will be treated as part of income in 2015.

REVALUATION AND IMPAIRMENT 

An asset can have 4 different values  Carrying Amount (CA)  Fair value (FV)  Fair value less selling costs (FV*)  Value in Use (ViU)

Recoverable amount (RA) = higher of these two

 An asset is impaired if RA
Under the cost model  Revalue to RA if RA



Under the revaluation model  Revalue to FV  But if RA
AASB 112: Income Taxes 

Tax liability= Taxable income * corporate tax rate (30%) Not the same as ing profit!!





PERMANENT DIFFERENCE  Income that is never assessable (e.g. some capital gains, royalty)  Expenses that are never deductible (e.g. entertainment, goodwill impairment)  Tax incentives TEMPORARY DIFFERENCE  Income Tax Assessment Act →substantiation rules (i.e. items are assessable/ deductible in the period when invoice is generated/received or when the associated CF occurs)  GAAP → accrual ing (recognize revenue and expenses when earned/ incurred)  ∴Timing difference between recognition → reconcile/ offset over time

Deductible temporary differences

Taxable temporary differences

Results in amounts that are deductible from ing profit in determining taxable profit of future periods when the CA of the asset is recovered or the CA of the liability is settled. E.g. Accrued expenses/ Provisions; Unearned revenue; LCR write down Deductible TD give rise to Deferred Tax Assets (DTAs) i.e. DTA = Deductible TD x 30%

Results in taxable amounts (added to ing profit) in determining taxable profit of future periods when the CA of the asset is recovered or the CA of the liability is settled. E.g. Prepaid expenses; Accrued revenue

Deductible TD arises when:  CA of an asset in BS < Tax base  CA of a liability > Tax base

Assets Liabilities

CA > Tax base DTL DTA

Taxable TD give rise to Deferred Tax Liabilities (DTLs) i.e. DTL = Taxable TD x 30% Taxable TD arises when:  CA of an asset in BS > Tax base

CA < Tax base DTA DTL (Not in IFA!!!)

REVALUATION OF NCA  Asset revaluation represents an unrealized gain (or loss) that is not assessable (or deductible) at the time of the revaluation.  Revaluation ↑ → CA of asset> tax base → DTL  Revaluation ↓ → CA of asset< tax base → DTA Date

Details

DR

Asset Revaluation surplus (Adj for upward revaluation) Revaluation surplus DTL (Adj for DTL)

10

CR 10

3 3

ing for Foreign Currency Transactions AASB 121: The Effects of Changes in Foreign Exchange Rates Problems arise when the spot rate is different to the invoice date spot rate! → Exchange differences arising on settlement of monetary items (e.g. Receivables or payables) shall be recognised in P&L (as gains or losses).

Credit Purchase of Inventory Date

Details Inventory Foreign currency payable (Credit purchase of inventory) Foreign Exchange Loss Foreign currency payable (Adj for foreign exchange loss) OR Foreign currency payable Foreign Exchange Gain (Adj for foreign exchange gain) Foreign currency payable Bank (Settlement of payable)

DR

CR

Credit Sale of Inventory Date

Details

DR

CR

Foreign currency receivable Sale COGS Inventory (Credit sale of inventory) Foreign Exchange Loss Foreign currency receivable (Adj for foreign exchange loss) OR Foreign currency receivable Foreign Exchange Gain (Adj for foreign exchange gain) Bank Foreign currency receivable (Settlement of payable)

Credit Purchase of Qualifying Asset (AASB 121 Qualifying Assets):  

FC gains or losses relating to loans relating to loans or other payables associated with qualifying assets are capitalized to the asset (same treatment as interest costs) Can only capitalize to the extent that the asset’s CA does not exceed its RA! (Or the asset will be impaired after the capitalization of interest or exchange currency difference) Date

Details NCA Foreign currency payable (Credit purchase of NCA) NCA Foreign currency payable (Adj for foreign exchange loss) OR Foreign currency payable NCA (Adj for foreign exchange gain) Foreign currency payable Bank (Settlement of payable)

DR

CR

HEDGED TRANSACTION [1] Hedging a Purchase  To create certainty + anticipate depreciation of AUD  A contract to hedge a purchase gives rise to: (i) a FIXED forward contract payable, and; (ii) a VARIABLE forward contract receivable  The payable from the underlying transaction will vary with spot rates (which will be offset as...) the forward contract receivable and, therefore, the FV of the contract, varies with the forward rates

Date

Details

Inception Date Transaction Date

No entry – FV of contract=zero

Settlement Date

Hedging Reserve Forward contract (Change in FV of forward contract) Loss on Fwd K (Or Asset) Hedging Reserve (Transfer of reserve to P&L) Inventory Foreign currency payable (Credit purchase of inventory) Foreign Exchange Loss Foreign currency payable (Adj for foreign exchange loss) Forward Contract Gain on Fwd K (Change in FV of forward contract) Foreign currency payable Forward Contract Bank (Settlement of payable)

DR

CR

If Loss on Fwd K // FV of Fwd K ↓

Underlying Transaction

Underlying Transaction

If Gain on Fwd K // FV of Fwd K ↑

[2]

Hedging a Sale  To create certainty + anticipate appreciation of AUD  A contract to hedge a sale gives rise to: (i) a FIXED forward contract receivable , and; (ii) a VARIABLE forward contract payable  The receivable from the underlying transaction will vary with spot rates (which will be offset as...) the forward contract payable and, therefore, the FV of the contract, varies with the forward rates

ing for Lease Transactions (Lessee perspective only) AASB: Leases 

Type of leases  Operating  If it does not transfer substantially all the risks and rewards incidental to ownership.  Risks (Unsatisfactory economic returns; Losses from idle capacity; Loss in FV over asset’s life)  Rewards (Profitable operation over economic life of asset; Gain from appreciation in value or Realization of residual value)  Finance  If it transfers substantially all the risks and rewards incidental to ownership.  Para 10: (individual or in combination of following situations)  Ownership of the asset is transferred to the lessee by the end of the lease term  At the start of the lease term, the lessee is reasonably certain to exercise an option to purchase the asset at a price significantly lower than its FV  The lease term is for a major part of the asset’s economic life  At inception, PV of [minimum lease payments] amounts to at least substantially all of the FV of the leased asset  The leased asset is customized that only the lessee can use it without major modifications  Para 11: (individual or in combination of following situations)  The lease is non-cancellable (Or cancellable only if lessee bears the costs of cancellation)  Gains/ losses in FV of residual accrue to lessee  Lessee has ability to lease for a secondary period at a rent substantially lower than market rent Comprise the payments over the lease term that the lessee is or can be required to make  Guaranteed residual value  Bargain purchase option



Lessee ing for Operating Leases Date

Details

DR

Lease expense Bank

CR

As each periodic payment is made

OR Date

Details Prepaid lease Bank Lease expense Prepaid lease

DR

CR

When lump sum payment is made At each reporting date

 Lessee has possession and all benefits of ownership without recognition of any asset or liability, hence “off balance sheet finance”! 

Lessee ing for Finance Leases Initial Recognition  Record a lease asset and a lease liability at the lower of:  FV of the leased property, and  PV of the minimum lease payments  Note: It would not be unusual for these to be equal!  Initial direct costs (e.g. Legal costs) can be separately capitalized to the costs of the asset BUT NOT TO THE LIABILITY (CR to bank or payables) Subsequent Recognition  Apportion the lease payments between the interest and principal [Slide 22]  If the lease payments include “executory costs: (e.g. Insurance, maintenance), then these are isolated and recorded separately as expenses.  Depreciation of the lease asset  Depends on the reasonable certainty of acquisition at the end of lease term  Intention to purchase No intention to purchase Depreciation/ Amortization method Depreciation period Residual value

Consistent with policy used for other assets in that class Useful life Estimated residual value (at end of useful life)

Straight-line

Shorter of lease term and useful life Guaranteed residual value (at end of lease term)

Date

Details Lease asset Lease liability (Commencement of finance lease) Lease liability Bank (1st Lease payment) Lease interest expense Lease liability Bank nd (2 lease payment) Depreciation of lease asset Acc Depreciation of lease asset (Adj for depreciation)

DR

CR

Journal entries at commencement

Journal entries at end of year 1

ing for Groups AASB 10: Consolidated Financial Statements 



PPE fair value increment CONSOLIDATION JOURNAL Date Details PPE DTL Revaluation reserves (Fair value increment at acquisition)

DR

Company A invests in Company B by purchasing B’s shares  If FVNA < FV of consideration CONSOLIDATION JOURNAL Date Details DR Share capital Retained earnings Reserves (+ FV increment) Goodwill Investment in Coy B (Elimination of investment in subsidiary)  If FVNA > FV of consideration CONSOLIDATION JOURNAL Date Details Share capital Retained earnings Reserves (+ FV increment) Gain on bargain purchase Investment in Coy B (Elimination of investment in subsidiary)

DR

CR

CR

CR

Notes: (1) This entry repeated every subsequent reporting date while Coy A controls Coy B. (2) Gain on consolidation taken to consolidated P&L on first reporting date after acquisition, recognized in Retained Profits thereafter AASB 127: Consolidated Financial Statements *check consolidation journal*

ing for Groups - NCI AASB 10: Consolidated Financial Statements CONSOLIDATION JOURNAL Date Details PPE *100% DTL *100% Revaluation reserves *100% (Fair value increment at acquisition) Share capital *% shares Retained earnings *% shares Reserves (+ FV increment) *% shares Goodwill Investment (Elimination of investment in subsidiary) *Elimination of unrealized gain on sale of PPE* *Adj for excess depreciation and its associated tax effects* *Elimination of unrealized gain in opening inventory* *Elimination of unrealized gain in closing inventory* Dividends revenue *% shares Dividends *% shares (Elimination of intragroup dividend) Share Capital Reserves Opening Retained Profits Profit attributable to NCI Dividends Equity attributable to NCI (Elimination of NCI)

DR

CR

Calculation of NCI Sub Ltd Opening Retained Profits less Unrealized gain on sale of equipment (net of tax) add Excess depreciation on equipment (net of tax) Less Unrealized gain in opening inventory (net of tax) Adjusted Opening Retained Profits Net Profit Add Excess depreciation on equipment (net of tax) Add Unrealized gain in opening inventory (net of tax) Less Unrealized gain in closing inventory (net of tax) Adjusted Profit Less Dividends Adjusted Closing Retained Profits Share Capital Reserves (including FV increments on consolidation) Total NCI

From w/s Affect NP if current period sale Excess depn (prior period) Unrealized gain (prior period) From w/s Excess depn (current period) from prior period unrealized gain Unrealized gain (current period) From w/s From w/s W/s + increments

NCI

ing for Investments in Associates AASB 128: Investments in Associates and t Ventures  Associate in an entity over which the investor has significant influence (20%<x<50%) Note: Do the following entries if you only have significant influence in one company. You ARE NOT parent entity of other subsidiaries!

General Journal entry in books of INVESTOR Date Details DR CR Investment in associate If there is goodwill (*Note: Do not Bank separately recognize goodwill!) OR Investment in associate If FVNA> consideration Bank Gain on bargain purchase (Acquisition of investment in associate) Bank/ Dividend receivable Investment in associate (Dividend received from associate) Investment in associate Share of profit in associate [1] OR Share of loss in associate [1] Investment in associate (Recognizing share of profit/ loss of associate) Investment in associate Revaluation surplus (Share of asset revaluation by associate) Impairment loss [2] Investment in associate 

Note: [1] Investee’s profit adjusted for:  After-tax unrealized gains in transactions between investor and associate (upstream and downstream)  After-tax depreciation of acquisition-date FV increments [2] Since goodwill is not separately recognized for associate, previous impairment losses can be reversed (in P&L)

Do the following entries if you have significant influence in one entity + you are parent entity of other subsidiaries!

Need to convert the investment to the equity method upon consolidation! Equity Method when Investor is a Parent Entity

General Journal entry in books of Parent Ltd Date Details T=0 Investment in associate Bank (Acquisition of investment in associate) Bank/ Dividend receivable Dividends Revenue (Dividend received from associate) Consolidation Journal entry in books of Parent Ltd Date Details T=0 Investment in associate Dividends Revenue Share of profit (Adj to recognize investment in associate under equity method) General Journal entry in books of Parent Ltd Date Details T=1 Bank/ Dividend receivable Dividends Revenue (Dividend received from associate)

Consolidation Journal entry in books of Parent Ltd Date Details T=1 Investment in associate Dividends Revenue Opening Retained Profit Share of profit Revaluation Surplus (Adj to recognize investment in associate under equity method)

DR

CR

DR

CR

DR

CR

DR

CR

AASB 121: Foreign Currency Translation  If the presentation currency differs from the entity’s functional currency, it translates its results and financial position into the presentation currency.

Rules of Thumb Revenue & Expenses Dividends declared Assets & Liabilities Equity s at acquisition Post-acquisition movements in share capital & reserves Post acquisition movements in retained profits

Average rate Spot rate on date of declaration Closing rate at reporting date Spot rate at date of acquisition Spot rate on date of recognition Profit at average rate each period less dividends at spot rate