Wednesday summary

Day 2: Wednesday.

 

R&D EXPEN

  • Stdds: IAS 38 Intan.Ass, SSAP13 Acctg for R&D
  • IAS 38: requires capitalisation of dev’t expen
  • SSAP13: optional capitalis’n
  • IAS 38: more stringent criteria – requirement to demonstrate future bens
  • SSAP13: reasonable expectation of future bens
  • SSAP13: can defer dev’t expen if 5 criteria met
  • Pure & Applied research costs – always w/off to P&L as incurred

 

SSAP13: CONDITIONS FOR DEFERMENT OF DEV’T EXPEN:

  1. Clearly defined project
  2. Separately identifiable expen
  3. Outcome assessed with reasonable certainty

–       technical feasibility

–       ultimate commercial viability (mkt conditions)

  1. Future sales/revenues expctd to exceed total dev’t costs (including prod’n / sales / admin)
  2. Adequate resources to complete project including rise in working capital

 

CONSTRUCTION CONTRACTS

  • Stdds: IAS 11 (Construction Contracts), SSAP 9 (Stocks & Lg-tm Contracts)
  • SSAP9 requires split b’t
    • Amts recoverable on contracts (DBTRS)
    • LG/tm contr bal (STOCKS)
  • IAS 11: can use % of completion method if outcome reliably estimable
  • SSAP9: only prudently calc’d prof if outcome reliably estimable
  • BOTH: Recgnise losses à P&L as soon as arise

 

EXPEMPTIONS FROM CONSOLIDATION

  • Stdds: IAS 27 (Consolidated & Septe Fin’l Stmts), FRS2 (Acctg for Subsdy undertakings)
  • FRS2: allows exclusion of subsidiary where severe long-term restrictions over
    • Ass
    • Mgemt
  • BOTH: Parent not need to prepare consolidated accts if it is a subsd’y of another entity preparing gp accts
  • CA only exemptions:
    • Subsd’y can be excluded if incl’n not mat’l to T&FV (aggregate if multiple)
    • If info à gp accts can’t be obtained w/o disproportionate expense or delay
    • T&FV override option

 

DEFINITION OF SUBSIDIARY

  • IAS 27 – consider existence of potential voting rights when assigning contl
  • IAS27: “Subsdy”= “Entity contlled by another entity”
  • CNTL = power to govern fin’l & operat’g policies à obtain bens fm actys
  • Where not 50% + rights, still have cntl where have power:
    • Over more than 50% by agreemt w other investors
    • To govern fin’l/operatg policies by statute/agreement
    • To appt/remove majy of BoD
    • To cast majy of votes @ BoD mtg
  • UK GAAP: only take Options into acct where exercised to give à 50%+

 

PROVISIONS

  • Liab’y of uncertain timing & amt

 

 

WHY ACCTG STDD NEEDED FOR PROVISIONS?

Previously/ w/o stdd:

  • Provisions recgsd on intention not oblig’n
  • Aggregate items à 1 lge provision as exceptional item (‘big bath’)
  • Inadequate disclosure.

Objective of stdd:

  • Rcgse & measure consistently
  • Disclosure à users understand nature / timing / amt  of provisions

 

RECOGNITION OF PROVISIONS: ONLY WHEN…

  • PRESENT oblig’n (Legal/constructive)
  • PROBABLE transfer of ec bens
  • RELIABLE estimate
  • NOT intention only

 

MEASUREMENT OF PROVISIONS:

  • Realistic estimate
  • Prudent estimate @ BS date
  • Discounted where effect is material
  • Methods:
    • Weighted avge of probably outcomes / probab’y
    • Consider range of possible outcomes

 

FAIR VALUE MEASUREMENT: SUBSIDIARIES

  • Stdds: IAS27 (Consolidated/Septe Fin’l Stmts), FRS7 (Fair vals in Acq’n Acctg)
  • Objectives of FV:
    • Ass/liabys of acq’d entity @acq’n date recorded @ FV
    • All changes after acq’n reported as post-acq’n perf’ce of gp
  • NOT appte to use cost of ass when acq’d by Subsdy but when enters Gp.

 

CONTINGENT ASS

  • CONTINGENT ASS: Possible ass arising fm past events confirmed by occurrence of uncertain future events not wholly w’in entity’s cntl
  • NOT recgse
  • DISCLOSE if probable inflow of ec bens
  • RECGSE if virtually certain

 

CONTINGENT LIABY’S

  • CONTINGENT LIABYS: Possible oblig’n fm past events confirmed by occurrence of uncertain future events not wholly w/in entity’s cntl.
  • PRESENT oblig’n fm past events but
    • Not PROBABLE transfer of ec bens
    • AMT cannot be sufficiently reliably estimated
  • NOT RECGSE
  • DISCLOSE unless transfer of ec bens is remote

 

WARRANTIES

  • Express (legal)
  • Implied (Constructive)
  • Set up Provision @ time of sale (Sale is past event à oblig’n)
  • Analyse past experience à estimate – no of claims & amt.
  • Deduct claims already paid out before yr-end

 

ONEROUS CONTRACTS

  • Unavoidable costs à Meet oblig’n exceed expected ec bens
  • Provision for expectd future cash outflow

 

ENVIRONMENTAL COSTS

  • Provision for future environmental costs if legal/constructive oblig’n
  • Discount to PV @ pre-tax market rate

 

FUTURE REPAIRS & REFURBISHMENTS

  • Prudence: must make provision for all known liabys @ BS date
  • NOT RECGSE unless meet liab’y definition
    • PRESENT oblig’n fm PAST EVENT
    • PROBABLE transfer (evidence)
    • POSSIBLE to estimate suffctly reliably
  • Future refurbishment is NOT a liability (even if required by law)
    • Capitalise @ time of refurb & depreciate over yrs benefitting

 

 

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