22420 ACCOUNTING STANDARDS &
REGULATIONS SUBJECT NOTES
TABLE OF CONTENTS
MODULE 1: A FRAMEWORK FOR FINANCIAL REPORTING ... 2
MODULE 2: REPORTING PERFORMANCE... 5
MODULE 3: INTRODUCTION TO ASSETS; INVENTORY AND PPE ... 7
MODULE 4: INTANGIBLE ASSETS ... 12
MODULE 5: NATURAL RESOURCES ... 14
MODULE 6: LIABILITIES ... 17
MODULE 7: LEASES ... 20
MODULE 8: FOREIGN CURRENCY ... 22
MODULE 9: FINANCIAL INSTRUMENTS 1 ... 24
MODULE 10: FINANCIAL INSTRUMENTS 2 ... 26
MODULE 11: ACCOUNTING FOR TAX ... 28
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MODULE 3: INTRODUCTION TO ASSETS; INVENTORY AND PPE
• Information content of assets: association between asset revaluations and stock market returns (market values of assets vs historical cost)
• Incentives to “adjust” assets for reasons including:
o Debt covenants – firms with higher leverage more likely to boost asset values
o Bonus targets – eg. adjusting ROA to look profitable
o Reasons to increase revenue – classifying spending as asset, impairments in short term decrease profitability but can have positive impact in longer term
1. Definition of Asset – economic resource controlled by entity that produces a right (eg. purchase contract) to future economic benefits
2. Recognition criteria of asset – probability of economic benefits is >50%, cost can be reliably measured with low uncertainty
• AASB102 Inventories:
o Finished goods held for sale in ordinary course of business, goods held in production process, materials for production
2. Recognition & measurement –
▪ Initially recorded at cost – all costs of purchase, conversion and other costs incurred in bringing inventories to present location and condition
▪ Subsequently measured at Lower of cost and NRV (NRV = disposal price – costs of sale) → Cost is periodically compared to NRV to determine if sale will recover at least the cost
▪ Items not interchangeable = use specific ID eg. Ferarri
▪ Other items = use FIFO or WAC 3. Recognised as an expense when:
▪ Sold in the period revenue is recognised → record COGS at amount of cost (cost formulas – FIFO, WAC)
▪ Written down → when NRV declined below < Cost, record COGS at NRV and move remainder to Inventory Write Down Expense
o Doing a write-down –
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• Dr Loss due to Inventory Write-down, Cr Inventory
• or Dr Inventory Write-down Expense
o Reversal of write-down – if circumstances that caused write-down have lifted
• Dr Inventory, Cr COGS
• Max amount of reversal only up to original write-down 4. Disclosures: Policies adopted, carrying amounts of inventory, amount of
inventory expensed during the period, amount of write-downs & reversals of write-downs
• AASB116 Property, Plant and Equipment:
o Tangible items held for use in production or supply of goods/services, rental to others, or admin purposes, and expected use > 1 period
1. Initial Recognition & Measurement – capitalising on expenses if recognition criteria is met, then measured at cost
o Cost:
▪ Cash/equivalents paid or fair value of other consideration (eg. a car) given to acquire asset
▪ Elements – purchase price (incl. taxes, but not GST), costs of bringing asset to location & condition (incl. borrowing costs), dismantling/removing item
▪ Initial and Subsequent costs (after purchase that increase future benefits)
2. Subsequent Measurement:
▪ Depreciation – each part of an item with significant cost in relation to total cost must be depreciated separately eg. planes – engines, body
▪ Dr Dep. Expense, Cr Accum. Dep.
▪ Depreciable amount = [Cost – Residual Value] ÷ Useful life
• Residual value – estimated amount from disposal of asset
• Useful life – period available for use or units of production to be obtained
▪ Carrying Amount (CA) = Asset at cost – Acc. Dep. – Acc. Imp. Losses
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MODULE 7: LEASES
• Leases – contract that conveys the right to use an asset for a period of time in exchange for consideration eg. rental car, aircraft
• AASB117 Operating lease NOT LIAB – asset is at cost, small lease payments, small lease term, always returned, less risk/rewards for lessee (eg. cancellable)
• AASB16 Leases:
o Finance lease LIAB –
▪ asset is at FV,
▪ transferring substantially all risks/rewards of ownership of asset to lessee,
▪ lease term = major part of economic life, PVLP = substantially all of FV,
▪ lessee may own asset at end, non-cancellable (commitment/present obligation)
o Lessee (borrower) must have right to obtain all economic benefits & to direct use of asset
• LESSEE’S PERSPECTIVE:
1. Initial measurement –
• Liability:
o = PV of lease payments that are unpaid at commencement o Lease payments → required periodic payments, guaranteed RV
(added to last payment, then PVed), bargain purchase option, lease termination penalties, EXCLUDE period 0 payments in advance & insurance/maintenance costs
• Asset (ROU asset):
o = PV of lease payments + any lease payments made before commencement + initial direct costs + removal costs
▪ Dr ROU asset, Cr Lease liability 2. Subsequent measurement –
• Liability: