Domande per esame di ADVANCED FINANCIAL ACCOUNTING, Prove d'esame di Contabilità

Scarica Domande per esame di ADVANCED FINANCIAL ACCOUNTING e più Prove d'esame in PDF di Contabilità solo su Docsity! Modulo 1 Shareholders’ equity: Explain your treatment of: Provisions for litigation risks; Provisions for litigations risks: provisions are not to be considered, since they are not a component of Shareholders' Equity. In fact, they are related to potential liabilities (IAS 37: liabilities of incerta in timing or amount) Treasury Shares Treasury Shares are shares of the company owned by the company itself. Therefore, they are a negative component of Shareholders' Equity. Additional paid-in capital. Additional paid-in capital is additional cash requested to shareholders in a share capital increase. Therefore, it's a positive component of Shareholders' Equity The problem of reclassification adjustments (recycling) to Profit and Loss of values previously recognized in Other Comprehensive income The main reason for the adjustment is to avoid double counting of OCI items, there are 2 alternative ways. The first one is to present separately fair value changes and recycling effect in the OCI. The second one is to present only the result of the algebraic sum of fair value changes and recycling effects in the OCI and disclosing the information in the notes to the financial statement Explain shortly the treatment in a Statement of Cash Flows of the following possible cases: Conversion into ordinary shares of outstanding convertible bonds; Conversion of convertible bonds is a non-cash transaction (because cash was generated at the time when they were issued), not to be considered in the Statement of Cash Flows. Though important, it is a change influencing the Statement of Financial Position only, because Debt is converted to Equity. Provisions charged to the Statement of Income of the year for a specific risk. Provisions are a Non-cash expense, written in the Statement of Income (and consequently as an increase in a specific item in the Debt section of the Statement of Financial Position) because of future but still uncertain expected payments. Therefore, Provisions have to be adjusted with a positive-sign adjustment in the Operating Activities section of the Statement of Cash Flows. Gains on disposal of fixed assets The gain is the difference between the proceeds from the sale and the carrying amount shown on the company's books, so it’s yet included in the net profit. In addition, the cash transaction is included in the proceeds from sale of fixed assets. Increase in accounts receivable. Accounts receivable (AR) is the balance of money due to a firm for goods or services delivered or used but not yet paid for by customers. If they increase, the amount of money not received yet is higher and so, non-cash profit increased during the year. Cash and Cash equivalents in the Statement of Cash Flow according to IAS 7: can bank overdrafts be considered within Cash equivalents? Normally they are considered part of financing activities but in some cases they can be considered a negative component of cash equivalents, if they comply with all these characteristics: are repayable on demand, form an integral part of the entity’s cash management system and the bank balance fluctuates from positive to overdrawn during the period. Statement of Cash Flows according to IAS 7: IAS 7 prescribes how to present information in a statement of cash flows about how an entity’s cash and cash equivalents changed during the period. The statement classifies cash flows during a period into cash flows from operating, investing and financing activities. It can follow one between direct and indirect method. What kind of investments in financial assets can be considered cash equivalents? Investment complying with all these characteristics: short-term, highly liquid, readily convertible to known amounts of cash and subject to an insignificant amount of rick of changes in value. Why in preparing a statement of cash flow is used Profit before tax and not Net profit? Due to tax is cash outflows generated from operations and so it shall be deducted in operating activities Explain shortly the following issues related to the Statement of Cash Flows: Direct and indirect are the two different methods used for the preparation of the cash flow statement of the companies with the main difference relates to the cash flows from the operating activities, where in case of direct cash flow method changes in the cash receipts and the cash payments are reported in cash flows from the operating activities section whereas in case of indirect cash flow method changes in assets and liabilities accounts is adjusted in the net income to arrive cash flows from the operating activities. Indirect and direct methods: definition; Cash flow from operations for a time period can be determined using either the direct or indirect method. The statement of cash flows direct method uses actual cash inflows and outflows from the company's operations, instead of modifying the operating section from accrual accounting to a cash basis. It determines changes in cash receipts and payments, which are reported in the cash flow from the operations section. The indirect method takes the net income generated in a period and adds or subtracts changes in the asset and liability accounts to determine the implied cash flow. The direct method for the statement of cash flows provides more detail about the operating cash flow accounts, although it’s time consuming. Direct and indirect method to calculate Cash Flow from Operating activities. Cash flows from operating activities have to be reported using either (IAS 7.18): the direct method, whereby major classes of gross cash receipts and gross cash payments are disclosed; or the indirect method, whereby the entity’s profit or loss is adjusted in order to derive the cash flows from operating activities. Choice of using one of them; IFRS encourages the direct method, but it is rarely used for the reason that the information in it is difficult to assemble, companies simply do not collect and store information in the manner required for this format. The indirect method is very popular, because information required for is easily assembled from the accounts that a business normally maintains. Explain the main features of indirect method. The indirect method is simpler than the direct method to prepare because most companies keep their records on an accrual basis (transformation from accrual accounting to a cash basis). It takes the net income generated in a period and adds or subtracts changes in the asset and liability accounts to determine the implied cash flow Appunti items forming the working capital: like inventories, receivables, payables… Modulo 2 A company filing for its shares to be listed in a market is one of the cases in which, according to IAS 33, the inclusion of EPS in the Financial Statement becomes obligatory, because it is expected that the entity's Financial Statement will become a document with relevance for the public of investors. Therefore, for the company it is necessary to include EPS in Financial Statement; of course, it must disclose both year, for comparative reasons. The carrying amount is the recorded cost of an asset, net of any accumulated depreciation or accumulated impairment losses. What kind of costs should be considered in the cost of disposal? They should be incremental expense directly attributed to the disposal of an asset, contract, or cash- generating entity Cash Generating Unit: A cash generating unit is the smallest identifiable group of assets that generates cash flow independently from the cash inflows of other assets. Definition and assets which can be included in a CGU; Each asset that cannot generate cash inflows that are mostly independent of those from other assets In impairment procedures, is it frequently considered a CGU instead of a single fixed asset and why? Apart from very specific situations, applying impairment procedures to a single fixed asset is not possible and/or appropriate, because it is expensive and time consuming, and it is frequently hard to identify and to forecast the cash flows produced by a single asset. Therefore usually impairment analysis is carried out at Cash Generating Unit (CGU) level. CGU is the smallest identifiable group of assets able to generate cash flows that are largely independent from other groups of assets. The adjective largely is important, because it is rare to find CGUs producing cash flows totally independent from the rest of the entity's assets. Impairment loss: definition and accounting allocation. An impairment loss is the reduction of the carrying amount of the assets to its lower recoverable amount. Generally, it must be recognized immediately in profit or loss, for revalued asset only it must be treated as a revaluation decrease. In case of CGU first reduce the carrying amount of any goodwill and then reduce pro rata other assets. Impairment loss reversal: definition and when it is possible to account for it; are there limitations in the amount of the reversal which can be recognized? At the end of each reporting period we shall assess whether any prior impairment loss has declined. If it has declined or been eliminated, estimate the new recoverable amount of the assets and increase the carrying amount of the asset to match its recoverable amount. There is two big limitations, the first is that isn’t allow to reversal an impairment loss on a goodwill, the second one is the possibility to reversal till the carrying amount would have been without the prior impairment charge and net of any amortization or depreciation that would been recognized in absence of an impairment charge where shall the reversal be written in the Financial Statement? It will be recognized in profit and loss as soon as it occurs Definition of Value in Use Is the sum of discounted cashflows associated with an asset or CGU. In the calculation of Value in Use, what kind of discount rate should be used? oppure Impairment of fixed assets according to IAS 36. In measuring Value in Use, shall we use a risk-free rate for discounting estimated future cash flows? The discount rate should reflect the current assessment of: the time value of the money by the market for an investment similar to the asset under analysis and also the risk specific to the asset for which adjustment have not already been incorporated into the cashflow projections. Apart from very specific situations, applying impairment procedures to a single fixed asset is not possible and/or appropriate, because it is expensive and time consuming, and it is frequently hard to identify and to forecast the cash flows produced by a single asset. Therefore usually impairment analysis is carried out at Cash Generating Unit (CGU) level. Impairment of fixed assets. Asset impairment has occurred when the carrying amount of an assets is greater than its recoverable amount. The difference between the two values is equal to the impairment Explain the problems of estimating (Fair value – Cost of Disposal) It can be difficult to find such a situation that dovetails so perfectly with an in-house assets, so we shall use a similar product to compare that don’t yield such perfect information. Impairment of tangible and intangible fixed assets a) frequency of possible impairment assessment and indicators of possible impairment to be considered; b) level of detail at which impairment analysis has to be performed. There should be an assessment of impairment indicators at the end of each reporting period. If it appears the assets impairment may have taken place, estimate the recoverable amount of the impairment. Even if there is no indication of impairment, test an intangible asset for impairment if the asset has an indefinite useful life or if it is not yet available for use. Example of impairment indicators are: adverse effect, damage or obsolescence, change in discount rate, economic performance decline, market capitalization change, market value decline or usage change. ESEMPI A., showing a big loss because of a slowing down in production due to difficulties in receiving materials from suppliers for exceptionally bad weather: should the entity consider this situation relevant for a potential impairment? The big loss due to bad weather is not an immediate indication about the existence or not of impairment conditions and a further analysis should be conducted on the overall situation and perspectives of the factory and its logistic organization, because: - on one hand the exceptionality of the bad weather should indicate that there's no need for impairment, because these adverse conditions should not reasonably occur again (of course apart from climate changes); - on the other hand a further analysis should be conducted in order to assess the situation and perspectives of transport and infrastructures in the region after the execptional bad weather: will roads, bridges, railroads, airports, ports, phone lines, etc. be efficient again in a reasonably short time, or will it be necessary a long time for all that? B showing a big loss because of a serious decrease in sales which will lead to a relevant reduction in future production programs and in employment levels of the plant: should the entity consider this situation relevant for a potential impairment? Yes, because the serious decrease in sales is leading to a downsizing of the CGU analyses the CGU of C, which is going to be closed, due to a reorganization of the whole group. If: carrying amount = 25 CU; value in use 25 CU; fair value less cost of disposal 18. Is there an impairment loss, what is its value and why? Since the CGU is going to be closed, its assets will be sold or simply not used anymore: therefore Value in Use has no sense and cannot be considered. Consequently: - an Impairment Loss of 7 shall be written in the expenses of the Statement of Income; - the Carrying Amount of the CGU written in the fixed assets of the Statement of Financial Position shall be reduced to the impaired value of 18 CU. Smart Saddles Inc. is considering the value of its shareholding in subsidiary Stirrups Inc. written in its Statement of Financial Position: should it consider the fact that Stirrups Inc. has recorded operating profits much lower than expected in budgets as a possible impairment indicator for the valuation of its shareholding? Yes, because It assume a decline in cash inflows Modulo 4 Under IFRS 9, explain the following problems related to classification of financial assets in the At Amortized Cost class: a debt instrument issued in US Dollars receiving payments in Euros; SPPI condition is not respected, because there's a foreign exchange risk exposure of cash flows; a fixed interest bond receiving repayment at maturity linked to NASDAQ shares stock exchange index; SPPI condition is not respected, because there's a share prices risk exposure of cash flows; a Government bond with interest payments indexed to inflation. SPPI condition is respected, because the link to inflation is admitted by IFRS 9. Of course, it must be a no leveraged link. a debt instrument receiving interest payments linked to the market price of copper; SPPI condition not respected, because there's a raw materials market price risk exposure of cash flows; a Government bond with interest payments indexed 300% to inflation rate. SPPI condition not respected, because there's a leveraged link to inflation (300%), not admitted by IFRS 9. Under IFRS 9, explain the Business model requirement necessary to classify a security in the “At Amortized Cost” class of financial assets. It is necessary to evaluate if the asset is owned within a business model whose objective is held to collect contractual cash flows over the life of the instrument. This requirement cannot be applied to a single asset but it necessary applied to a group of financial asset. If Sales of portfolio’s asset are frequently, they can denied the first condition. Under IFRS 9, explain the requirements and conditions necessary to classify a security in the “At Amortized Cost” class of financial assets. It is necessary to evaluate if the asset is owned within a business model whose objective is held to collect contractual cash flows over the life of the instrument. This requirement cannot be applied to a single asset but it necessary applied to a group of financial asset. If Sales of portfolio’s asset are frequently, they can denied the first condition. The second condition is about contractual terms, those must be composed only by payments of principal and interest on the outstanding amount of debt and shall be made in the currency in which asset is issued. Furthermore the second condition impose that asset cannot be “leveraged” (linked to normal rate of inflation is admitted) if a debt instruments meets both “business model” and “contractual terms” conditions, should it be always classified and valued at amortized cost? No, in the first year it shall be recognized at fair value Modulo 5 Power over the investee in order to assess control for consolidation of Financial Statements according to IFRS: a) definition of power over the investee; The investor has existing rights that give it the ability to direct the relevant activities of the investee b) the problem of relevant activities; the activities that significantly affect the investee’s returns. Like product development, purchase and sale or financial management. c) situations in which voting power is relevant for control; are the situations in which parent has power because it owns the majority of voting power of an entity directly or indirectly through subsidiaries. d) situations in which voting power is less relevant and control can exist. In these cases, it is necessary a careful analysis of the investor’s contractual and non-contractual rights, and related parties relationships, considering situations like: Investee’s key management composed by current or previous employees of the investor; Investee’s operations are dependent on the investor; Significant portion