Answering an ACC3009W Theory Question

Deferred Tax – Big Discussion Question

1) Intro – Deferred Tax should be recognised for all temporary differences arising from the treatment of assets and liabilities (IAS12:24), except where those temporary differences are exempt (IAS12:15).

2) Speak about the value on the accounting balance sheet and the tax base (speak about the SARS treatment and apply to why tax base is what it is) and hence the temporary difference that arises. Note W&T is a deduction for use and SARS does not revalue assets for tax purposes

3) Speak about how/when the temporary differences will reverse in the future and why they are not exempt

4) Speak about what will happen to future taxable income and accounting profit and whether we will or will not pay more tax and what type of temporary difference it is (taxable/deductible)

5) Speak about rate we use and why (method of recovery) and whether it is recognised in profit and loss or OCI (depends on underlying that bought about the DT)

6) Conclude and say what deferred tax balance of a particular amount can be recognised

7) Possibly speak about offsetting8) Reconciling items – What did the company expect to pay (and do calc)?

What do SARS charge (If CGT, say its because they aren’t a regular trader? Speak about if difference is permanent. Speak about tax expense and compare it to what was expected and based on this conclude whether or not there is a reconciling item and what it was due to

Non-Current Asset held for sale

1) Is the asset recovered principally through sale?2) List and apply all criteria

Available for sale in present condition – approval? Sale highly probable? – manangement commitment/ active

programme to locate buyer? Sale expected to be completed within a year? Exception = if events

beyond entity’s control and sufficient evidence of committed plan to sell that asset (IFRS5:9)

3) Mental Note : Method of recovery = sales, thus could potentially have a CGT component when calculating DT

4) Concludeo On a side note, a subsidiary which a parent decides to sell can also be

classified as NCAHFS if criteria are met.

Onerous Contracts

1) When an unavoidable loss is set to take place i.e. loss is inevitable2) Show alternatives and their losses i.e. that their costs (mention costs)

exceed their FEBs (mention FEBs, e.g. use etc)3) Conclude that there is an onerous contract and that a provision must be

recognised to the value of the lowest net cost of the alternatives and that the time value of money must be taken into account if material.

4) Note, if finance leased asset, can’t recognise a provision, as this would be double counting.

Leases

1) IAS 17 (IFRIC 4 only for things that legally aren’t leases but in substance may be) – Does it contain a lease? 4 Thing to look for – Don’t list, simply speak about whether criteria are met e.g. Carlisle has the use of a specific asset, no other parties take an insignificant amount of the output

Is there use of a specific asset? Are no other parties taking more than an insignificant amount of

the output? Is the price paid by the lessee not contractually fixed nor equal to

the current market price?2) Conclude that there is a lease3) Operating or finance? – Must meet IAS17:10 criteria. If operating simply

say it’s operating because none of these criteria are met and thus the payments will be treated as operating lease payments, measured on the straight line basis with the disclosure being split into 3 time periods given.

4) If meets ONE of criteria, finance lease – Asset included on the SOFP of lessee, recognise a liability, payments split between capital (SFP) and interest portion (SOCI), depreciation will occur and disclosure as per IAS 17 for finance leases will apply

Groups – Undervaluation of Subs Assets

1) At acquisition, the asset was undervalued. 2) Assets and liabilities of the sub should be measured at fair value of

acquisition and this is the cost to the group.3) The increase is the asset value results in an increase in the NAV of the

group and the acquisition date. Speak about impact on NCI (if measured at FV, no impact) Speak about the impact on goodwill – higher asset means lower

goodwill – due to higher cost of acquisition less NAV of sub4) Speak about DT

Temporary difference given rise to Not exempt as this is a business combination Is it depreciable? If not, recovered through sale, if not, speak about

method of recovery (likely to be use,) conclude on measurement and speak about how future tax consequences will be affected. You can also throw in the fact that they don’t regularly trade in the asset if its recovered through sale

Conclude on DT amount and how it will reverse in futureo (Similar, but not identical concept for associates, however the discussion

structure is the same, but the group just has a share of these increases and related deferred tax consequences.)

Groups- Intergroup transactions

Simply speak about the line items from the perspective of each individual entity, from the group perspective and compare

Conclude on the adjustment that therefore needs to be made in order to reflect the transactions at a group level

Groups – Investment property leased intergroup

1) Classification of the building is dependent on how FEB’s will be derived.2) This requires consideration of the nature of the business activities for

which the building is employed together with the entities occupying the building.

3) If different portions of the building can be sold separately, they can be accounted for separately. Speak about each portion of building and based

on that classify each portion (Note, only Investment property if operating lease – apply above theory. Finance leased asset is not recognised)

4) If leased to sub – first mention why they are a sub (i.e. own more than 50% of voting rights – if big question that is) and therefore 100% of these items will be recognised on group statements. If this is the case, owner occupied by virtue of the sub and thus meets definition of PPE

5) Leased to unrelated party means Investment Property

Revenue

IFRS 15

Start off with - In terms of IFRS 15, revenue should be recognised to depict the transfer of promised goods or services to a customer in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods and services.

Asset may not always be revenue e.g. if we are developing flats and keep some for ourselves, these flats are investment property.

Steps :1) Identify contract(s) - Only speak about in depth is there’s a fat

question in which case you simply apply IFRS15:9 criteria, however for a 10 marker or so, this most probably will not be the issue and thus will not even have to be touched on briefly (unless the question specifically asks if a contract exists, which generally won’t be the case.)

2) Identify separate performance obligation(s) – Each one should be a distinct good or service / a series of distinct goods/services i.e. benefits are separately identifiable e.g. sale of car and subsequent services, which customer can benefit from on their own and are separately specified in the contract. Note, if providing a product consists of multiple services e.g. building a house (tiling, painting etc.,) this is one performance obligation, as these services are interrelated and significantly integrated, thus not distinct goods/services. Also note that a machine and installation are not separate obligations, as the benefits of the machine cannot be enjoyed on its own i.e. without the installation.

3) Identify transaction price – Mention what it is (if significant financing component i.e. time value of money is considered

material – MENTION for payments earlier / later than pass of control, take out.) A special note – Interest is excluded from the scope of IFRS15, however this interest relates to the cost of time. In tut 22.3, The customer pays 9% interest a year after control is passed with a fair market interest rate of 11%. This 9% is included in the transaction price, as it is a payment relating to the asset and a ‘premium’ for paying late. This figure (including the 9%) will be discounted at 11% to get the transaction price. As time passes, the 11% is recognized separately as interest expense and not revenue, as this relates to the cost of time mentioned above. Thus interest for late payment is included in the transaction price and interest due to the unwinding of the discount at the fair market rate is excluded from the transaction price.

4) Allocate based on stand-alone selling prices – This will be given if a calculation is required. If not, just mention how the transaction price will be allocated based on these prices.

5) Identify when performance obligations are satisfied – This takes place when control passes. Control is the ability to direct the use of and obtain substantially the remaining benefits of the asset (give a scenario-related example of how customer can do so.) Mention when control is likely to pass (could be when risks and rewards of ownership pass etc.) If control appears to pass over time mention why i.e. which para 35 requirement it meets, thus revenue is recognised over time separately for each performance obligation, using an appropriate measure of progress.

Give a brief conclusion which is dependent on what the question is asking.

IAS 18

Identify the economic substance of the transaction i.e. how many forms of revenue arise from it.

List all the forms of revenue Discuss recognition of each type of revenue, as each form has its own

criteria. Mention date of recognition and why this is the correct e.g. sales – (This is where most marks are at.) For recognition of sales revenue (IAS18:14.) Service revenue deals with performance.

Discuss measurement for each period asked – fair value of consideration receivable = PV of consideration which will be received at a later stage less expected costs to cover the related services of the product. Make sure discounts are taken out.

Mention presentation and disclosure (SPLOCI and Note mentioning what revenue consists of.)

Be very careful however, question may only ask for recognition and measurement for example

Related Parties

Discuss if they are related and why. Simply turn to IAS24:9 and thus the related party can influence the entity(ies) to transact.

Disclosure1) Mention the relationship between the related parties.2) Transactions:

o Mention who the transaction occurred between

o Mention the nature of the transactions, their amounts, and any

change in selling price which occurred as a result of the related party relationship.

o Mention whether amounts are outstanding, where amounts have

been included and (if applicable – which will probably be the case) that the transaction was not at arm’s length.

Operating segments

Is the component of the entity an operating segment? – 1) Does it engage in business activity (where revenues are earned and

expenses are incurred?)2) Are its operating results regularly reviewed by the chief operating

decision maker of the entity? (not the component of the entity)3) Is the component’s discrete financial information available?

Can operating segments be aggregated i.e. combined?1) Do they have similar economic characteristics and2) Do they have similar

2.1) Nature of products and/or services2.2) Nature of production processes2.3) Types/ classes of customers2.4) Distribution methods

2.5) Regulatory environments Is the operating segment a reportable segment? – Do they meet one of the

quantitative thresholds?1) Is total segment revenue (internal + external) >= 10% of total entity

revenue or2) Is the absolute profit/loss of segment >= 10% of the greater of 1)

combined profit of all profitable segments or 2) absolute value of combined loss of all loss-making segments. First identify which is greater. or

3) Total Assets of segment >= 10% of Total Assets of entity If none of the quantitative thresholds are met and the segments do not

qualify as reportable segments, the segments that do not meet such thresholds may be lumped into a reportable segment called “all other segments.” In order for this to happen, these segments below the threshold must:

1) Have similar economic characteristics2) Meet the majority of the criteria listed in 2.1-2.5 i.e. 3 of these

General

Look at as many perspectives as possible Always look at big picture. “It depends” is usually the best answer Think recognition, measurement (initial and subsequent [i.e. transactions

and tax],) classification and disclosure Don’t list, simply speak about whether criteria are met and why e.g. “The

amount of revenue can be reliably measured as the transaction price of X is known.”

Impairment reversal – Asset cannot be recognised at an amount higher than if it had not been impaired i.e. CA if there had been no impairment less current CA. So be careful if depreciation occurs.

Acquisition of more of sub’s shares is effectively a transaction with the owner, thus gain/loss is directly recognised to equity

If we are dealing with an exception, speak about what usually would happen

Keep discussion as open as possible, especially if not enough info given, as this is often done deliberately.

Be very careful to only answer what question asks e.g. if recognition and measurement are asked to be discussed, don’t speak about presentation and disclosure.

If a big question, there are many marks for stating the obvious e.g. in an IFRS15 revenue question, speak about why there is a contract.

Decommissioning fund treatment depends on level of influence (Control – subisidiary, thus consolidate ; Significant influence – assosciate, thus equity account.)

Note: I didn’t put conceptual framework discussion, Biological Assets or intangibles expense capitalization on this document, as it was too much effort for questions I felt were not too important, but you may want to go look over that in your own capacity