Accounting (Subject) / Accounting I (Lesson)

Accounting

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• 4 forces that shape national Accounting Taxation Legal System Providers of Finance History and Culture
• EU Directives that harmonise national accounting systems 4th EU directive (1978): Individual Accounts 7th EU directive (1983): Group Accounts 8th EU directive (1984): Audit of accounts (4th and 7th got replaced and modernised by single Directive in 06/2013, not compatible with Full IFRS nor IFRS for SMEs...) (2013/34/EU)-> but member state option to adopt Full IFRS without modification-> if member state wants to adopt IFRS for SMEs as Local GAAP it needs to modify it to be conform with the new directive -> into German Law via Bilanzrichtlinien-Umsetzungsgesetz (BilRUG)
• IFRS (company law) to German GAAP by... Bilanzrechtsreformgesetz (2005) (BilReG) implements the EU Regulation 1606/2002, effective 2005 (Implementation of IFRS as common accounting Standards in Europe), 2 year transition period -> IFRS mandatory for group accounts of capital market oriented companies, voluntary for non capital market oriented group accounts, choice of discosure for single accounts
• IFRS (Capital Market Law) to German GAAP by... EU Transparency Directive (2004) -> transformed into national law by Transparenzrichtlinie-Umsetzungsgesetz (TUG) (2007) -> Harmonisation of reporting requirements - Annual Financial reporting (audited financial statement, management report, responsibility statement) - Half yearly financial report (shorted financial statements, interim management report, responsibility statement)  
• IASB / IFRS history 1973: foundation of International Accounting Standard Committee (IASC) 2001: renaming into International Accounting Standard Board (IASB) 2010: renaming into IFRS Foundation
• IFRS structure International Accounting Standard Board:develops exposure drafts and approves IFRS and interpretation, 14 members IFRS Interpretations Committee:interprets Full IFRS, 14 members IFRS Foundation Trustees:responsible for governance and oversight of IASB22 members IFRS Advisory Council: advises the members of the IASB (Standard Board) and the Trustees of the Foundation; 50 members (auditors, academics...) Accounting Standards Advisory Forum: 12 national standard-setters and regional bodies with an interest in IFRS IFRS Foundation Monitoring Board:appoints and monitors trustees; link between trustees and authorities-> in order to achieve convergence the IASB receives advice from various interested parties
• IASB Due Process Research -> [Agenda Decision] -> (Discussion Paper optional) -> Public consultation -> (Exposure Draft) -> Public consultation -> [Jurisdictional Adoption Process] -> [IASB 2 year post implementation review]
• IFRS characteristics - follow Anglo-American tradition- provide useful information for economic decisions ("true and fair view")- do not differentiate between individual and group accounts (few exceptions)- requirements do not depend on legal form, size and industry- no rules regarding the preparation, audit and disclosure of financial statements- mainly for investors (not creditors) - Fair presentation as an overriding principle (can be different from a Standard if it increases the fair presentation) IAS 1
• Endorsement / Enforcement IASB <-> EFRAG (European Financial Reporting Advisory Group)-EU-Commission preperates endorsement advice-Accounting Regulatory Committee (ARC) comments and can reject with 3/4 majority EU-Council and EU-Parliament examines it and can accept or reject (again the cycle) Enforcement: in Germany: FREP (Financial Reporting Enforcement Panel)
• Conceptual Framework 2010 (Definitions) - a constitution of fundamentals and objectives that can lead to consistent standards and that prescribe the nature, function and limits of financial accounting - defines the objective (useful information) and basic concepts of financial reporting under IFRS:Objective: providing Useful Information to investors and creditors (Decision Usefulness), Stewardship (control of the management) -> The financial statements must "present fairly" the financial position, financial performance and cash flows of an entity. Qualitative Characteristics of useful information: Relevance etcAccounting principles: underlying assumptions: going concern, accrual principle (also IAS 1) Elements (assets, liabilities, equity, income, expenses)Recognition (process of incorporating an item in the balance sheet or income statement (item meets definition; future economic benefits are probable; value can be measured reliably)) Measurement (process of determining the monetary amount (different measurements)) Historical cost, Current cost, Net realisable (settlement) value, Present value (discounted) -> different measurement bases (mixed model)- helps the IASB in developing future standards- in reviewing existing ones- its no standard itself (does not override any IFRS)- helps preparers of financial statements- helps auditors and users of financial statements- in the absence of an IFRS the Conceptual Framework is considered to find solutions- Stewardship  (how efficient works management)
• Underlying assumption of IFRS IAS 1 & Conceptual Framework - Going concern (at least 1 year), otherwise series of disclosures (uncertainties etc) - In addition: accrual principle (effects of transactions are recognized when they occur and not when cash is received- profit measurement: revenues -> realisation principle (but rather weak sometimes: PoC), expenses -> matching principle (developement costs)
• Characteristics of useful information Conceptual FrameworkFundamental characteristics- Relevance (capable of making a difference in the decisions made by users; materiality) - Faithful representation (neutral, complete, free from errors) Enhancing characteristics- Comparability (similar things must look alike, no change of cost formulas i.e.)- Verifiability (Nachweisbarkeit; different knowledgeable and independent observers could reach consensus)- Timeliness (information is available to decision-makers in time to be capable of influencing their decisions)- Understandability Cost Constraints:Reporting such information imposes costs and those costs should be justified by the benefits of reporting that information. The IASB assesses costs and benefits in relation to financial reporting generally, and not solely in relation to individual reporting entities. The IASB will consider whether different sizes of entities and other factors justify different reporting requirements in certain situations.
• Financial Reports Financial Statements- Statement of Cash Flow- Statement of Financial Position- Statement of Profit or Loss and other comprehensive income- Statement of Changes in equity- Notes Management Commentary- non binding Practice Statement
• Current asset, current liability IAS 1 - current, if one of the following fits Current asset:- to sell or consume it in the normal operating cycle- primarily held for the use of trading- realise the asset within twelve months- Cash or cash equivalentCurrent liabilty:- expected to be settled in the operating cycle- primarily held for the use of trading- settled within twelve months- the entity does not have the right to defer the liability for at least 12 months
• Profit or loss statement (approaches, formats; OCI) IAS 1 - summarizes income and expenses- presents information about an entity's performance- OCI needs to seperate "recycling" (will be reclassified to P/L) and "non-recycling"(will not) One statement approach (preferred): One statement of comprehensive income including P&L and OCI sectionTwo statement approach: One statement of P&L, one statement of comprehensive income (P&L as starting point, other comprehensive income)nature of expense method:- expenses are classified according to resources consumed (Bestandsveränderung)Revenue+- Changes in Inventory= Total Revenues+ Other Income- Raw Materials expense- Personell expense- Depreciation expense- Other expense= Profit (from operating activities) before Tax(no functional reclassification -> simpler)function of expense method:- expenses are classified according to functional areas where they occurRevenue- Costs of Sales= Gross Profit+ Other Income- Distribution Costs (Vertriebskosten)- Administrative Expense (Verwaltungskosten)- Other expense= Profit (from operating activities) before Tax- popular in anglo-america- depreciation and personell expenses should be disclosedfor both (financial and tax result):- finance costs+ income from associates- tax expense= Profit for the year from continuing operations+- Gains/Loss from discontinued operations= Profit for the Yearof which: Parent (HochTief Group)of which: Minority Interest OCI (recycled and non-recycled items must be shown seperated)+- Available for Sale financial assets+- Actuarial gains on defined benefit pension plans+- gains on property revaluation+- Share of other comprehensive income from associates directly to equity (also in P/L)+- Income tax relating to OCI= Total comprehensive Incomeof which: Parent (HochTief Group)of which: Minority Interest Total comprehensive income is defined as "the change in equity during a period resulting from transactions and other events, other than those changes resulting from transactions with owners in their capacity as owners".
• Statement of Cash Flow (Cash Flows, purposes, structure) IAS 7 Cash Flows are inflows and outflows of Cash and Cash Equivalents (short-term, highly liquid investments that are ready to convert and subject to insignificant risk of changes in value) - useful for users in order to assess the ability to generate cash, pay dividends, and to meet obligations- serves a basis to predict future Cash Flows Operating activities- principal revenue-producing activities of an entity- can be presented via direct method (operating cash payments and cash receipts) and indirect method (P/L is adjusted for the effect of transactions of a non-cash nature)- If you consider EBIT -> substract Tax and interest expensesInvesting activites- acquisition and disposal (separate!!) of long-term assets and other investments not included in cash equivalentsFinancing activities- activities that result in changes in size and composition of the equity capital and the borrowings
• Costs of Conversion - IAS 2 does not entail a detailed format to calculate the costs of conversion- full cost approachexcluded are:- abnormal amounts of wasted material, labour or other production costs (no costs of correcting an error)- storage costs (unless it's necessary in the production process)- selling costs- costs of idle capacity- administrative overheads unrelated to production- interest costs - the allocation of fixed production overheads is based on the normal capacity Direct labor and related benefits and payroll taxesFixed production overheads (rent of factory) and variable production overheads (depreciation)Equipment depreciationEquipment maintenanceFactory rentFactory suppliesFactory insuranceMachiningInspectionProduction utilitiesProduction supervisionSmall tools charged to expense
• Fair Value (purpose, definition, 3 levels, methods) IFRS 13 Replaces fair value guidance within individual IFRS (single source, clear definition, enhance disclosure about fair value to better inform users) Definition:the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (IFRS 13)-> arm's length transactionLevel 1: Quoted prices in active markets for identical assets or liabilities at the measurement dateLevel 2: prices that are directly or indirectly observable (prices of similar goods at the measurement date or prices of the same goods at different date (non-active markets))Level 3: unobservable inputs (DCF-model) -> for non-financial assets the fair value measurement takes into account the highest and best use (I could rent out building) Methodsrevaluation model: fair value (increase goes to OCI) incl. depreciation/amortization and impairment charges (revalued only every 3-5 years)  -> PPE and Intangible Assetsfair value through P/L: fair value (increase goes to P/L) no depreciation/amortization and "impairment charges" (financial expense) (revalued every year) -> Investment Properties
• Impairment of asset (Subject) - IAS 36 - triggering event (is there sufficient evidence due to internal (obsolescence or physical damage of the asset; worse than expected economic performance of the asset) or external (decline in market value; increase in market interest rates; changes in environment) sources), Materiality must be taken into account- carrying amount vs recoverable amount (for single asset if possible or CGU)- recoverable amount is the higher of value in use (firm specific) and fair value minus costs of disposal (excluding finance costs and income tax expense) (market specific) Value in use- Estimation of future Cash Flows from an asset or CGU (Budget, Forecast, not more than 5 years)- Discount rate (the pre-tax rate that reflects current market assessments of the time value of money (risk free) and the risks specific to the asset because of bearing the uncertainty (risk premium) - For goodwill (acquired in a business combination) and certain intangible assets an annual impairment test is required, but indications for impairment should be reviewed in each accounting period for all assets (also for revearsal of impairment) Reversal of an impairment loss is recognised in the profit or loss unless it relates to a revalued asset - Reversal of an impairment just up to the amount that would be shown if no prior impairment had occured (just as if annual regular depreciation had occured) IAS 36 applies to (among other assets):- PPE- investment property carried at cost- intangible assets- goodwill- investments in subsidiaries, associates, and joint ventures carried at cost- assets carried at revalued amounts under IAS 16 and IAS 38but not for:- inventories- construction contracts- deferred tax assets - financial assets - investment property carried at fair value - Impairment loss goes to P/L except for revaluation surplus
• Cash Generating Units (general info; calculation (impairment, write up); Goodwill) IAS 36 Recoverable amount should be determined for the individual asset, if possible. - requires judgement and discretion- if an active market exists, the smallest group of assests constitutes a CGU, even if some of the output could be sold externally- depends on how management monitors the entity's operations (by product lines, regional areas, businesses) - CGUs must be identified consistently from period to period for the same group of assets- segments are the maximum sizes-> Goodwill should be allocated to each of the acquirer's CGUs that benefit from the synergies of the combination CalculationImpairment loss is allocated on a pro rata basis on the carrying amount of each non-current asset, but should not be decreased below the - fair value minus cost of disposal- value in use- 0, because it would create hidden reserves-> in these cases, this part is allocated across the other non-current assets in the CGU on pro rata basis-> normal impairment test, write up is mandatory (exception: Goodwill)- the write-up is recognised in the P/L or in OCI (revaluation surplus) depending on the prior treatment of the impairment loss.- the reversal of impairment loss is allocated pro rata with the carrying amount of those assetsThe carrying amount of an individual asset cannot be increased above the lower of- its recoverable amount (if determinable)- the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior periods.- a remaining amount is then allocated on a pro rata basis to the other non-current assets of the CGU.- if there is a goodwill: carrying amount (CGU+Goodwill) vs. recoverable amount -> first reduce Goodwill Goodwill - To test for impairment, goodwill must be allocated to each of the acquirer's cash-generating units.- A cash-generating unit to which goodwill has been allocated shall be tested for impairment at least annually by comparing the carrying amount of the unit, including the goodwill, with the recoverable amount of the unit: - first, reduce the carrying amount of any goodwill allocated to the cash-generating unit (group of units); and then, reduce the carrying amounts of the other assets of the unit (group of units) pro rata on the basis.- Reversal of an impairment loss for goodwill is prohibited.
• Definition Asset, Liability, Income, Expense (contingent liability) Conceptual Framework Asset Definition- controlled by the entity- result of past events- future economic benefits are expected to flow to the entityRecognition Criteria (sometimes different IAS38)- probable, that future economic benefits flow to the entity- costs or value of the assets can be measured reliably Liability  (financial liabilities (certain outflow), accruals, provisions)- present obligation- from past events- outflow from the entity (to third party)Recognition Criteria- probable outflow from the entity (to third party)- settlement amount can be measured reliablyContingent Liability- a present obligation but likelihood of payment is not probable or the amount cannot be measured reliably (Likelihood of outflow)- a possible obligation depending on whether some uncertain future event occurs (Likelihood of obligation) IncomeIncome is increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions to equity participants. (Revenues: ordinary activities; Gains: Other Income)Recognition Criteria- inflow is probable- can be measured reliably- net profit = net income ExpenseExpense is decrease in economic benefits during the accounting period in the form of outflows or decreases of assets or enhancements of liabilities that result in decreases in equity, other than those relating to distributions to equity participants. (Expenses: ordinary activities; Losses: Other expenses)Recognition Criteria- outflow is probable- can be measured reliably
• Revenue (definition, recognition, measurement) IAS 18 Definition- gross inflow of economic benefits during the period due to ordinary activities when those inflows result in increases in equity, other than increases relating to contributions from equity participantsRecognition- accrual principle: recognised when the event occurs and not when cash is received Recognition, as defined in the IASB Framework, means incorporating an item that meets the definition of revenue (above) in the income statement when it meets the following criteria:- it is probable that any future economic benefit associated with the item of revenue will flow to the entity, and- the amount of revenue can be measured with reliability Sales of Goods: revenue recognition when the control and risks have passed to the customer (INCO Terms); costs and revenues must be measured reliably, probable that benefits flow to the enterpriseRendering of Services: revenue recognition according to stage of completion (weak realisation principle). Outcome must be estimated reliably (revenue can be measured reliably, probable that economic benefits flow to the enterprise, stage of completion can be measured reliably, costs incurred and costs to complete the transaction can be measured reliably)Construction Contracts (IAS 11): revenue recognition according to stage of completion. Outcome must be estimated reliably (revenue can be measured reliably, probable that economic benefits flow to the enterprise, stage of completion can be measured reliably, costs incurred and costs to complete the transaction can be measured reliably)-> if criteria cannot be met then Modified completed contract methodDividends: when the shareholder's right to receive the payment is establishedMultiple Element agreements: Lack of specific rulesRevenue measurement with the fair value:- Price discounts must be taken into account- In case that cash will be received in the future, you have to discount all future receipts to get the fair value (interest income in the future)-> soon IFRS 15
• Deferred Taxes (concepts, examples temporary and other differences) Timing Concept- focusses on Income Statement-> correct tax expenses and profit after tax-> correct differences between profits in commercial and tax accounts Temporary Concept- focusses on Balance SheetTemporary difference = Carrying amount - Tax baseDeferred tax asset or liability = Temporary difference x Tax rate-> correct tax assets and tax liabilities-> correct differences between assets and liabilities in commercial and tax accounts- temporary differences (reversal of differences in the future due to accounting rules)- other differences (no reversal in future periods because a transaction is only recognized in the commercial account or in the tax account)Example temporary difference- different amount of depreciation- different amount of provision (postponed maintenance in tax accounts or pension provision (IFRS take future salary developement into consideration)- capitilisation of development costs under IFRS- construction contracts under IFRS (PoC Method)- revaluation of assets under IFRSExamples other differences- remuneration of supervisory board members- tax-free subsidies
• Deferred Taxes (recognition, method) IAS 12 - considered if there is a temporary difference and the future tax benefit is probable and can be measured reliably (in case of a deferred tax asset)- satisfies accrual concept- exceptions: initial goodwill, especially in investments of subsidiaries, associates etc, even though it leads to a temporary difference -> but deferred tax liability on hidden reserves (haben wir aber nicht so gerechnet, bei PPA) - Accounting for the deferred tax of a transaction is consistent with the accounting for the transaction itself (P/L vs OCI) (revaluation model -> OCI // def tax lia) Liability Method (Temporary Concept)- recognition of future economic benefit (asset -> receivable) or future economic outflow (liability -> liability) of resources that result from past events (temporary differences)- measurement of deferred taxes with expected tax rate of the period in which the temporary difference is reversed (IAS12) (uncertainty -> current tax rate)Deferral Method (Timing Concept)
• Deferred Taxes (subsequent measurement, presentation) only for deferred tax assets- the carrying amount of deferred tax assets shall be reviewed at each balance sheet date- impairment is mandatory to the amount that is no longer probable that sufficient taxable profit will be available to make use of the deferred tax asset- a reversal of the impairment is mandatory to the extent that it becomes probable that sufficient taxable profit will be available (write-up) - presentation as non-current assets/liability- several disclosures in the notes- deferred tax assets and deferred tax liabilities must not be offset unless it has the right to do so and its the same tax authority- aren't discounted
• Intangible Assets (definition, recognition criteria and counterexamples, research vs development) IAS 38 "An intangible asset is an identifiable non-monetary asset without physical substance"-> but no deferred tax, no employee benefits, no financial instruments-> machine software meets the definition but is part of PPE (integral part of hardware) Recognition if:Definition: Identifiability (separable from the entity and sold or licensed) ; Control ; Future Economic BenefitsRecognition: Benefits are probable ; Cost can be measured reliably (separate acquisition: probability criterium always meets; business combination: probability and reliable measurement criterium are always met, if parts of purchase price do not meet definition, then Goodwill)- Recognition doesn't have anything to do with whether it internally generated or acquired (only the recognition criteria are harder to meet)- self-developed software should meet that criteriano Recognition of:- intangible assets arising from research (from development yes, if they can demonstrate certain things: - technical feasibility of completing and intention to complete and use or sell, ability to use or sell- future benefits (withing the company or due to sell) are expected- ability to measure expenditures during its development reliably (RARE)- sufficient technical and financial resources available to complete, sell or use the intangible asset- internally generated generated goodwill, brands (need product), titles, customer lists (can not be measured reliably)- expenditures on start-activities, training activities, advertising activities Research Phase:- costs incurred for investigations to gain new scientific or technical knowledgeDevelopment Phase:- costs for application of research findings to plan or design for the production of a new product - purchase of a single intangible asset: Easy to recoginze- purchase of intangible assets after business combination: not so easy, some things that are not separable go to Goodwill. If they can be seperated then Fair Values must be determined (usually level 3 DCF)- subsequent measurement as of self developed intangible assets - Subsequent expenditures can theoretically recognized in the carrying amount if they meet the definition
• Intangibles Assets (measurement, useful life) IAS 38 Initial measurement: at costs (or fair value if acquired in a business combination)Subsequent measurement: for each class the choice between Cost Model and Revaluation Model Cost Model:- carried at historical costs minus amortization over useful life and impairment charges (IAS 36)- The amortisation method should reflect the pattern of benefit consumption. (mostly straight line) Revaluation Model:- carried at fair value (determined at an active market: brands, patents etc. cannot be measured at fair value), regular revaluations (3-5 years) for all assets in one class, amortisation, impairment charges -> revaluation increase is recognized in OCI- revaluation decrease is recognized in OCI until revaluation surplus is zero -> then expense (P/L)- if revaluation increase represents the reversal of a revaluation decrease of the same asset previously recognised as an expense, in which case it should be recognised in profit or loss.-> revaluation surplus may be transferred to retained earnings progressively in proportion to the amortization of the asset or when the surplus is realised on the date of disposal-> recycling does not go to P/L but directly to Equity (Retained earnings)-> Revaluation model not common (no active market for fair value)Useful Life:- finite: depends on product life cycles, stability of the industry, legal limits etc. -> amortization over its useful life (with a residual value of mostly 0), begins when it's ready for use- indefinite: no foreseeable limit of time over which the asset generates cash inflows ->  annual impairment and when there is indication. Useful life must be reviewed each period- useful life assessed on circumstances now (If I plan to run a huge project to extent the useful life of my brand it is not considered now)Presentation- as non-current assets- several disclosures in the notes Derecognitionon disposal or when an entity does not expect future economic benefits from its use or disposal
• PPE (definition; recognition; measurement) Definition:- tangible (no Goodwill, brand etc.) items that are held in the production or supply for goods and services, for rental to others or for administration purposes and expected to be used during more than one period-> Assets that are held for sale or held for investment do not fall under this defintionRecognition:- must meet the definition- probable that future economic benefits flow to the company- costs can be measured reliablyMeasurement:initially: at costs (Purchase price and Cost of conversion)- as in IAS2 purchase price (no general overheads, only what is directly attributable)- If payment for an item of property, plant, and equipment is deferred (disposal of an power plant in the future), interest at a market rate must be recognised and discounted.- when the item is in the location and condition necessary for it to be capable of operating in the manner intended by the management, costs are no more capitalized and depreciation startssubsequently: Cost Model vs Revaluation ModelCost Model:- historical cost with depreciation and impairment charges, writeups not higher than if it was depreciated- The depreciation method should reflect the pattern of benefit consumptionRevaluation Model:- carried at fair value, regular revaluations (3-5 years) of all assets in one class (no cherry-picking), depreciation, impairment charges- revaluation increase goes to OCI- revaluation decrease goes to OCI until revaluation surplus is 0 -> then P/L expense- if revaluation increase represents the reversal of a revaluation decrease of the same asset previously recognised as an expense, in which case it should be recognised in profit or loss.- revaluation surplus may be transferred to retained earnings progressively in proportion of depreciation of the asset or may be transferred to retained earnings when the surplus is realised on the disposal of the asset-> non-recycling -> does not go to P/L but directly to Equity (Retained earnings)- depreciation starts when it is ready for use as intended by the management and ends when it is held for sale- if the asset is sold, the difference between selling price and carrying amount is a profit on disposal and OCI goes completely to retained earnings Ordinary repairs are performed to maintain fixed assets in operating condition. Ordinary repairs usually benefit only one period. As the result, ordinary repairs are expensed in the period incurred. Examples of ordinary maintenance and repair activities include painting, repairing plumbing, adjusting and cleaning equipment. Major and extraordinary repairs are the repairs that benefit more than one year or operating cycle, whichever is longer. Extraordinary repairs increase the economic life of the asset or improve it. Because major and extraordinary repairs benefit multiple future periods, they are accounted for as additions, improvements, or replacements. Hence, such repairs may be capitalized (if the recognition criteria are satisfied)-> old carrying amounts (if > 0) are derecognized after the replacement Derecognitionif its on disposal or when no future benefits are expected from its use or disposal
• PPE (useful life, components approach, depreciation method) IAS 16 Useful Life:- depends on management policy of the entity, matter of judgement- after a specific time- after a specific consumption of the future economic benefits -> can be shorter than economic life- must be reviewed each financial year- factors are: expected usage, expected wear and tear (Abnutzung), technical and commercial obsolescence (Überalterung), legal or similar limits- physical life (how long theoretically usable), technical life (until there is a newer machine), commercial life (until demand goes to zero)Depreciation - The residual value, the depreciation method and the useful life of an asset should be reviewed at least at each financial year-end- The depreciation method used should reflect the pattern in which the asset's economic benefits are consumed by the entity- the depreciation is usually an expense unless the building is hold for a developement project -> developement costs (B/S account) // PPE Components Approach:- if the costs of a part of an item is significant (>5%) in relation to the total cost then it should be depreciated seperately; significant parts with the same useful life can be grouped- if the component is completly depreciated it has to be repurchased and capitalised(- if I don't use the components approach then its maintenance expense (no new feature))- begins when it is available for use
• Investment Properties (definition; measurement) IAS 40 Investment Properties:- land, building, or part of building held by the owner to earn rentals or for capital appreciation or both rather then(a) the use in the production or supply of goods or services or for the administrative purposes; or(b) sale in the ordinary course of business (Inventory -> Immobilienhändler)- if it is partly own used then it can be accounted for separately (if possible) -> if not -> owner used- if I still make security or maintenance on the property it's still investment property unless it is significant (self-managed hotel) Inital measurement: at cost Subsequent measurement: Choice for all investment properties (only one model) between - measurement at cost and disclosure of the fair value in the notes or- measurement at fair value and recognition of fair value changes in P/L (financial income / expense) (only if the entity is able to determine continuous fair values) (even at this model measured at costs until the investment property is completed) recognition as in IAS 16 property, plants, equipmentreclassification if it becomes owner occupied or  sale in the ordinary course of business, fair value is initial measurement even in the new class (if fair value model was used)derecognition if it is on disposal or when no more future economic benefits are expected from use or disposal
• Inventories (definition, recognition) IAS 2 Definition:Inventories are assets that are- held for sale in the ordinary course of business- in the process of production for such sale, or- in the form of materials or supplies to be consumed in the production service(raw materials, work-in-process goods, completely finished goods)Excluding:- work in process under construction contracts is IAS 11- financial assets IAS 39 Recognition- item meets definition of inventories- it is probable that future economic benefits associated with the item flow to the entity- the cost of the item can be measured reliably
• Inventories (measurement, disclosure) IAS 2Measurement- Lower of historical cost and net realisable valueCost: Cost should include all costs of purchase and costs of conversion (costs neccesary to convert raw materials into products) and other costs to bring inventory in the right position and condition- Items that are not interchangable are measured at their individual costs- For items that are interchangeable, FIFO or Weighted Average Cost Formula is allowed, depending on nature of inventory, LIFO only if it reflects pattern of movement of the inventoryNRV: selling price in the ordinary course of business - costs of selling - cost of completion - (firm-specific) unlike fair value minus costs of disposal- estimates must be performed: expected selling price, estimated costs of completion, estimated selling costs- Write down to NRV usually on an item-by-item basis as an expense- Write down to NRV (under cost) unless the materials and other supplies go to a product that is expected to be sold at or above cost- Write up mandatoryDisclosure- cost formulas, appropriate classificationPurchase CostsPurchase Price+ costs directly attributable to bringing the asset to the intended location or condition (also insurance, but no marketing)- purchase price reductions + borrowing costs (qualifying asset)+ other costs (removing the asset (nuclear plant) and restoring the site) -> discount and set up provision(no Treueprämie)
• Construction Contracts (definition, measurement, outcome estimate) IAS 11 -> IFRS 15 Definition:"A construction contract is a contract specifically negotiated for the construction of an asset (or a group of assets = complex industry factories) that are closely interrelated or independent in terms of its design, technology and function."- it takes typically a number of accounting periods to complete- separate assets should be treated as a separate construction contract, if negotiated separatelyMeasurement:Percentage of Completion Method (if reliable estimate of the outcome possible, even if its in the middle of the construction -> switch to PoC):- Revenues (and costs) are recognized by reference to the stage of completionModified Completed Contract Method (if not):- Revenue is recognized only to the extent of contract costs incurred (zero profit) every period sales and costs the same. Contract costs are recognized as an expense; if no revenue is expected then (other operating expense // Cash)- under HGB Completed-Contract Method, (total cost approach, step-by-step completion): stricter realisation principle- PoC asset if costs+profit > the sum of billings- PoC liability if costs+profit < the sum of billings Reliable estimate of the outcome:Fixed Price Contract (fixed contract price)- total contract revenue can be measured reliably- probable that economic benefits flow to the enterprise (if loss is expected: Revenue on PoC and Costs are balancing figure to produce the loss)- contract costs to complete the contract and stage of contract completion can be measured reliably- contract costs attributable to the contract can be cleary identified and measured reliablyCost Plus Contract (Price = Costs + profit margin)- probable that economic benefits flow to the enterprise (if loss is expected: Revenue on PoC and Costs are balancing figure to produce the loss)- contract costs attributable to the contract can be cleary identified and measured reliably
• Construction Contracts (Methods for Stage of completion) IAS 11 Input Based MethodsStage of completion is estimated based on:- performed work hours, machine hours, material consumption, contract costs incurred to date (Cost to Cost Method)-> requires constant relationship between input and outputOutput Based MethodsStage of contract completion is estimated based on:- the output like the completion of a physical proportion of the contract work-> requires linear relationship between the different output measures
• Financial Instruments (Definition, Exceptions) IAS 32 (Presentation)IAS 39 (Recognition and Measurement) -> IFRS 9 (Financial Instruments)IFRS 7 (Disclosures)Definition (IAS 32)"A financial instrument is any contract that gives rise ("that leads") to a financial asset of one entity and a financial liability or equity instrument of another entityFinancial Assets- Cash- An equity instrument of another entity (Share)- A contractual right to receive cash or another financial asset from another entityFinancial Liabilities- contractual obligation to deliver cash or another financial asset to another entity (Loan)Equity Instrument- Contract that evidences (bescheinigt) a residual interest in the assets of an entity after deducting all of its liabilities Exceptions:- interests in subsidiaries, associates and joint ventures (IAS 28)- rights and obligations under leases (IAS 17)- employer's rights and obligations under employee benefit plan (IAS 19)- insurance contracts (IFRS 4) - financial instruments issued by the entity that meet the defintion of an equity instrument in IAS 32 (IAS 39)
• Financial Instruments (Recognition, Measurement, Categories, ) IAS 39Recognition- when the entity becomes a party to the contractual provisions of the instrument- for each catergory of financial instruments the entity may choose between the trade day (when bet is placed) and the settlement day for recognition Measurement- initial measurement: fair value (1) (transaction cost is expense) or fair value plus transaction costs directly attributable (fee) (2) (3) (4) (5) (almost always the transaction price unless the enterprise needs to sell it below market price (under pressure) Subsequent measurement:depends on the classification:- amortized costs: 2, 3 and 5 (recognized in P/L) -> effective interest method (yearly interest payment = face value * interest rate)- fair value (P/L): 1 (recognized in P/L) -> deferred taxes - fair value (OCI): 4 (recycled to P/L when asset is derecognized) -> deferred taxesCategories of assets- at fair value through profit and loss (held-for-trading (i.e. derivatives); or designated) 1- Held-to-maturity investments (financial assets with fixed or determinable payment and fixed maturity; entity hast the intention and ability to hold the financial asset to maturity) 2- Loans and receivables (financial assets with fixed or determinable payments that are not quoted in an active market) 3- Available for sale (financial assets that are designated as available for sale and do not fall into any of the above three categories, no derivatives) 4Categories of Liabilities- "at fair value through profit and loss" 1- other financial liabilites 5
• Financial Instruments (Presentation, Disclosure) IFRS 7 (Disclosure) Presentation depends on both the classification to one of the five categories and the classification as a current or non-current asset or liability (IAS 1 (current, non-current))Standard requires a comprehensive set of disclosure (very demanding) about- the nature of financial instruments- the recognition and measurement methods- the financial risk- the fair values of financial instruments that are not measured at fair value
• Provisions and Contingent Liabilities (Definition, Recognition) IAS 37 Definition"A provision is a liability of uncertain timing or amount" (must meet definition of liablity)present obligation: there is no alternative but to sacrifice resources to settle the obligation- legal obligation (legally enforceable) vs. constructive obligation (warranty provisions -> past practice creates a valid expectation for the third party)- excluding obligations that fall under - IAS 39 Financial Instruments- IAS 11 Construction Contracts- IAS 12 Income Taxes- IAS 17 Employee BenefitsRecognitionmust be recognized if an entity has a present obligation (legal or constructive) as a result from past events, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount recognized if likelihood of resource outflow >50% and if likelihood of obligation is >50%-> if one is between 10% and 50% (possible) -> Contingent liability (not recognized, disclosed in notes) (continual assessment required)-> if likelihood of outflow <10% (remote) -> do nothingExceptions: Maintenance provision (obligation against yourself), restructuring provision (only with a detailed formal plan), no provision for future losses (triggering event for impairment) Contingent Liability- a present obligation but likelihood of payment is not probable or the amount cannot be measured reliably (Likelihood of outflow)- a possible obligation depending on whether some uncertain future event occurs (Likelihood of obligation) A constructive obligation arises if past practice creates a valid expectation on the part of a third party, for example, a retail store that has a long-standing policy of allowing customers to return merchandise within, say, a 30-day period. Note: IFRS considers provision on contingent losses if production costs increase and when the entity is already committed to a sale (contract) -> provision of the amount of the loss you expect- no provision for Major overhaul or repairs or future losses
• Provisions and Contingent Liabilities (Measurement, Presentation and Disclosure) IAS 37 (Provisions, Contingent Liabilities and Contingent Assets)MeasurementThe amount recognized as a provision should be the best estimate of the expenditure required to settle the present obligation at the balance sheet day-single obligation (one-off event) (law suit): individual most likely outcome (unless the value is at one side of all outcomes, or average if 50/50 probability)-large population of events (product warranty): expected value - Judgement is needed (amount, timing, probability)- Caution is needed in making judgements under uncertainty- Provisions are required to be discounted to present value if it has material effect, with the discount rate that reflects current market assessment (time value of money and specific risk of the liability) Subsequent Measurement- Review and adjust provisions at each balance sheet date - If an outflow no longer probable, provision is reversed. Presentation- presentation as current or non-current liability
• Pension Provision (different plans; definitions, calculation) IAS 19 -> Employee BenefitsPost employment benefits Defined Contribution Plan- Obligation to pay a fixed contribution into a seperate entity (external pension fund)- Pension is paid by the fund- Amount depends on the performance of the fund- employee bears the risk (actuarial risk)- Measurement: -> contributions are recognized as an expense Defined Benefit Plan- Obligation to pay a fixed pension- Pension is paid by company (pension provision, money from the salary is put aside) or pension fund (only purpose of fund is to save money)- Amount is fixed- employer bears the investment risk and actuarial riskDefinitions- Defined Benefit Obligation (DBO): amount of money a company must pay into a defined-benefit pension plan to satisfy all pension entitlements that have been earned by employees up to that date ;  present value of the benefit plan- Plan Assets (PA): what they have already put aside- Present Value of DBO minus Fair Value of Plan Assets = Defined-benefit liabilityCalculate1) Estimate Pension Payments (depend on last salary of people and death of people beforehand -> demographic and financial assumptions)2) Discount them to the date of retirement with the pre tax interest rate of a high quality corporate bond (>AA) with the same currency and same term as the post-employment benefit obligation3) Present Value of future payments attributed to the periods of service, projected unit credit method: present value is divided into past service period and future service period, the present value of the first part is the DBO at the reporting date projected unit credit method: sees each period of service as giving rise to an additional unit of benefit entitlement and measures each unit separately in building up the final obligation. This requires an entity to attribute benefit to the current period (to determine current service cost) and the current and prior periods (to determine the present value of defined benefit obligations).  The fair value of any plan assets is deducted from the present value of the defined benefit obligation in determining the net deficit or surplus. Defined-benefit expense: - interest costs: you are now 1 period closer, expense rises- past service costs: if you give your employee a pension increase, all amounts of past periods must be adjusted- current service cost: actuarial gains/losses: - occur when the future salary increases unexpectedly, or if plan asset generate more interest then expected (mostly OCI)  (OCI // Defined benefit obligation)
• Equity (Instrument) (Definition; Elements, Presentation and Disclosure) IAS 32 (Main purpose to differentiate between Financial liabilities and Equity Intrument) DefinitionConceptual Framework: "Equity is the residual interest in the assets of the enterprise after deducting all its liabilities"IAS 32: "An equity instrument is any contract that evidences ("begründen") a residual (pro rata share of) interest in the assets of an entity after deducting all of its liabilities." -> it requires that the issuer has no contractual obligation to deliver cash or another financial asset, but the issuer (not the holder) can have the right to redeem the cash for the equity instrument (preferred shares are liability)-> IAS 32 defines exceptions: Contractual obligation possible for certain puttable financial instruments (Kommanditgesellschaft, Genossenschaft); obligation to redeem the instrument for cash; expected cash flows for the instrument are based on profit or loss-> changes are presented in the Statement of Changes in Equity (transaction with owners, Total comprehensive Income)ElementsContributed Equity: Share Capital (Issued capital) and Share PremiumReserves (self generated): Retained Earnings, Accumulated OCI (revalution surplus IAS16/38; fair value differences IAS39; actuarial gains/losses IAS19) Presentation and Disclosure-> share capital, reserves must be presented -> number of shares, description of reserves and dividend payments must be disclosed
• Consolidated Financial Statements (Steps, Requirements, Standardization, Methods) IFRS 10: Consolidated Financial Statements IFRS 11: Joint ArrangementsIFRS 12: Disclosure of Interests in Other EntitiesIAS 27: Separate Financial StatementsIAS 28: Investment in Associates and Joint VenturesIFRS 3: Business Combination Steps:Consolidation of Subsidiaries1) Defining the scope of the consolidation2) Preparing individual financial statements3) Aggregation of individual financial statements (100% no matter how much I acquire -> minority interest)4) Adjustments (Full Consoldation for subsidiaries (consolidation of intragroup balances and transactions); Equity Method for associates) (IFRS3)5) Consolidated financial statements Requirements:- Companies with limited liability (or Sales above certain treshold) located in Germany if a parent-subsidiary-relationship exists (also subgroups)- the company is not itself a wholly owned subsidiary- Only mandatory to report according to IFRS if the company is capital-market oriented (otherwise IFRS optional)- Consolidated accounts are required in addition to the individual financial statements and should be presented as those of a single economic entity- a complete set of financial statement is required- consolidated statement should include all kinds of subsidiaries and independent of their location (HGB only certain kinds of subsidiaries)Control (IFRS 10)- An investor controls an investee if it is exposed or has the rights to variable returns and the ability to affect thoseControl includes- Power (to direct the activities that affect returns, i.e. voting rights >50%, or power to rule the financial or operating policies, or power to appoint the majority of board members)- Returns (Exposure or right to variable returns, returns have potential to vary due to performance)- Link between Power and Returns (use power to affect the amount of returns) Standardisation Standardisation of the reporting date (IFRS 10)- If the reporting dates of the parent and its subsidiary differ, the subsidiary needs to prepare additional financial statements as of the same date as those of the parent unless it's impracticable. Difference no longer than 3 months in any case Standardisation of recognition and measurement (IFRS 10)- Uniform accounting policies. If they differ (IFRS vs national GAAP) -> appropriate adjustments Standardisation of the currency (IAS 21) Methods- Subsidiary (IFRS 10) (control, voting power >50%) consolidated via Full consolidation (Full Goodwill Method, Purchase Method, Pooling of Interest Method)- Joint Ventures (IAS 28) (joint control, voting power 50%) and Associates (IAS 28) (significant influence, voting power >20%) consolidated via Equity Method,- Investments (IAS 39) (no significant influence, voting power <20%) via Fair Value
• Management Commentary Scope:- entities preparing financial statements under IFRSUsers:- existing and potential capital providersPrinciples:- management's view Qualitative Characteristics:- same as in Conceptual Framework (Relevance etc) Content Elements:- Nature of business - Objectives and strategies- Resources, risks and relationships- Results and prospects- Performance measures and indicators -> it's up to national jurisdiction to decide which firms have to prepare one and which elements it should include-> no implication for German companies
• Consolidated Financial Statements (Acquisition Method; ROCE) IFRS 3 -> Business Combinations (only for Subsidiaries) Acquisition Method- Identifying the acquirer- Determining the acquisition date (when acquirer obtains control)- Purchase Price Allocation (PPA) (assets and liabilities at FV): The purchase price contains the fair value of equity (acquirere's interest) - FV of unrealized assets (intangible assets not realized, because the fulfil definition of asset), - hidden reserves (hidden liabilities), - equity book value and the rest is Goodwill (Goodwill should be allocated to each of the acquirer's CGUs that benefit from the synergies of the combination) (Badwill is income for parent)- eliminating hidden reserves (assets and equity go up) (OCI)- consolidation of investment (investment goes down to zero and Equity (of subsidiary (Ordinary Share Capital and Retained Earnings)) goes down and Goodwill is recognized)- Minority interest in equity (equity // minority interest)- Elimination of intra group debt (loan or advances received/paid)- Subsequent consolidation:-> Impairment of Goodwill  -> Impairment expense // Goodwill (Impairment test compares the book value of equity (incl. Goodwill) with the recoverable amount of the CGU) -> impairment first allocated to Goodwill (Sometimes the aquired company is one CGU which the Goodwill can be allocated to, if no other CGU benefits, but sometimes it's partly allocated to other CGUs)-> annual depreciation of hidden reserves -> depreciation // PPE -> seperately what affects minority interest -> minority interest // minority interest in P/L -> profit that goes to minority -> minority interest in P/L // minority interestPurchase Method: Minority interest is only a proportionate share of net assets excluding GoodwillFull Goodwill Method: Goodwill attributable to minorities is recognised and increases the minority interest (Goodwill // minority interest). Minority interest is a proportionate share of net assets and goodwill. - after acquisition method you need to eliminate other intragroup transactions (profits etc) Pooling of Interest Method:- no recognition of Goodwill or hidden reserves- Purchase price will be offset with the equity of the other entity, less equity, no goodwill- not allowed under IFRS ROCEEBIT: higher on Purchase or Full Goodwill Method, because of possible impairment and depreciation of hidden reservesCapital employed: significantly lower with Pooling-of-Interest Method; no recognition of GW, instead offset with Equity; Purchase and Full Goodwill Methods write up assets (hidden reserves) and recognize Goodwill (incl. minority GW on Full Goodwill approach)Pooling of Interest: Merger of Equals (no acquisition)
• Investment in Associates and Joint Ventures (indicator for associate; Method Indicator for associate (IAS 28):- significant influence is required (The power to participate in the financial and operating policy decisions of the investee but is not control or joint control of those policies)-> Investor holds directly or indirectly 20% or more of the voting power of the investee (Disprovable Presumption -> unless it is proven that there is no significant influence)The existence of significant influence by an entity is usually evidenced in one or more of the following ways:- representation on the board of directors or equivalent governing body of the investee- participation in policy-making processes (decision about dividends)- material transaction between investor and investee- provision of essential technical information Equity Method (IAS 28):- no historical costs nor fair value but Equity Method- standardization of statements (as in IFRS 10)- Carrying amount of the investment is initially measured at cost (Investment in associates // Cash) (takes into account everything that concerns the purchase (regristration costs etc.))- Purchase Price Allocation as for Full consolidation (Goodwill might appear if I pay more than the share of Fair Value of net assets (Equity book value (share capital + share premium + unappropriate profit) + hidden reserves + unrealized assets) -> Goodwill is not separately shown unless it's negative (profit) Subsequent measurement:- you have to add the investor's share of profit or loss (after the date of acquisition)- you have to deduct the dividends received from the associate (but at the same time Cash // dividend income)- you have to deduct the annual depreciation of the hidden reserves (since it reduces the equity) (changes in the investor's proportionate interest in the associate -> changes in associate's OCI)- you have to deduct impairment of the investment-> Investment in associates // Income from associates (if carrying amount goes up) - Investments in associates are subject to impairment tests. An impairment loss is first allocated to the Goodwill. As the amortization of the Goodwill affects the Equity, the carrying amount of the investment is reduced as well. Usually: 1 associate = 1 CGU unless it cannot generate Cashflow- Associates and Joint Ventures are accounted in seperate statements (IAS 27) -> No Consolidation - presented as a non-current asset
• Consolidated Financial Statements (preparation (standardization); consolidation of subsidiaries Standardisation Standardisation of the reporting date (IFRS 10)- If the reporting dates of the parent and its subsidiary differ, the subsidiary needs to prepare additional financial statements as of the same date as those of the parent unless it's impracticable. Difference no longer than 3 months in any case. Adjustment must be made during the time differences. Standardisation of recognition and measurement (IFRS 10)- Uniform accounting policies. If they differ (IFRS vs national GAAP) -> appropriate adjustments (all need FIFO, if some have WACF) (Standardisation of the currency (IAS 21)) Consolidation of Subsidiaries1) Defining the scope of the consolidation2) Preparing individual financial statements3) Aggregation of individual financial statements4) Adjustments (Full Consoldation)5) Consolidated financial statements (- consolidation of capital: Interest in the subsidiary (in the individual account of the parent company) and proportionate equity of the subsidiary (in the individual accounts of the subsidiary) must be offset)-> is already done within acquisition methods
• IFRS 15 (objective; 5 step model) "To clarify the principles for recognising revenue from contracts with customers" -To provide a single revenue recognition model which will improve comparability over a range of industries, companies and geographical boundaries- To simplify the preparation of financial statements by reducing the number of requirements to which preparers must refer. 1) Identify contracts with customers- Contract2) Identify seperate performance obligations- PO 1, PO 2, PO 33) Determine the transaction price- Transaction Price4) Allocate the transaction price- Transaction Price PO 1, Transaction Price PO 25) Recognise revenue when performed obligation is satisfied- Revenue Recognition PO 1, Revenue Recognition PO 2

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