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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.
Indirect Acquisition Date Details Investment in Y Ltd Bank (Acquisition of shares in Y Ltd) DR CR
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
Date
Details Asset (e.g. Equipment) Accumulated Depreciation Revaluation surplus (Incremental revaluation)
DR 240
CR 40 200
Date
Details Revaluation expense Accumulated Depreciation Asset (e.g. Equipment) (Decremental revaluation)
DR 200 40
CR
240
FV=1400 Prior revaluation downwards=100 The Net Method Date Details Accumulated Depreciation Equipment (Depreciation write back) Equipment Revaluation revenue** Revaluation surplus (Incremental revaluation) ** or Gain on Revaluation (P&L)
DR 600
CR
Date
Details Asset (e.g. Equipment) Accumulated Depreciation Revaluation revenue Revaluation surplus (Incremental revaluation)
DR 640
FV=600 Prior revaluation upwards=100 The Net Method Date Details Accumulated Depreciation Equipment (Depreciation write back) Revaluation surplus Revaluation expense Equipment (Decremental revaluation) DR 600 600 100 300 400 CR
Date
Details Revaluation surplus Revaluation expense Accumulated Depreciation Equipment (Decremental revaluation)
640
Compare recoverable amounts (higher of net selling price and value in use) with carrying amounts If RA<CA, an asset or cash-generating units (CGU) is identified as being impaired and an impairment loss is recognized. Impairment test applies equally to PPE whether carried under the cost model or the revaluation model! An impairment loss shall be recognized immediately in P&L, unless the asset is carried at revalued amount in accordance with another Standard (e.g. in accordance with the revaluation model in AASB 116). Any impairment loss of a revalued asset shall be treated as a revaluation decrease in accordance with that other Standard. Cost Method (1) To reduce the CA of any goodwill allocated to the unit. (2) To the other assets of the unit pro-rata on the basis of the CA of each asset in the unit Date Details DR CR Impairment loss Accumulated impairment loss
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.
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 accounting (recognize revenue and expenses when earned/ incurred) Timing difference between recognition reconcile/ offset over time Taxable temporary differences Results in taxable amounts (added to accounting 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 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
Deductible temporary differences Results in amounts that are deductible from accounting 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% Deductible TD arises when: CA of an asset in BS < Tax base CA of a liability > Tax base CA > Tax base DTL DTA
Assets Liabilities
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 Asset Revaluation surplus (Adj for upward revaluation) Revaluation surplus DTL (Adj for DTL) DR 10 10 3 3 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
Details No entry FV of contract=zero 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 account payable)
DR
CR
Underlying Transaction
Settlement Date
Underlying Transaction
[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
Lessee has possession and all benefits of ownership without recognition of any asset or liability, hence off balance sheet finance!
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
DR
CR
Company A invests in Company B by purchasing Bs 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)
CR
DR
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*
DR
CR
NCI
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] Investees 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!
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)
DR
CR
DR
CR
DR
CR
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
AASB 121: Foreign Currency Translation If the presentation currency differs from the entitys functional currency, it translates its results and financial position into the presentation currency.
Rules of Thumb
Revenue & Expenses Dividends declared Assets & Liabilities Equity accounts 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