SOCPA Financial Accounting flashcards

32 cards. Read the term and the definition here. The deck at the top of this page is optional.

Fundamental qualitative characteristics

Relevance and faithful representation. Relevance covers predictive value, confirmatory value and materiality; faithful representation requires information to be complete, neutral and free from error.

Going concern assumption

Financial statements are prepared assuming the entity will continue operating for the foreseeable future. If liquidation is intended, a different basis is used and disclosed.

Accrual basis of accounting

Transactions are recognised when their economic effects occur, not when cash changes hands. This creates adjusting entries for accruals and deferrals at each reporting date.

Trial balance limitation

A balanced trial balance only shows total debits equal total credits. It cannot detect omitted transactions, wrong accounts, duplicate entries or offsetting errors.

Closing entries purpose

These entries transfer revenue and expense balances to retained earnings through an income summary and reset temporary accounts to zero at period end.

Five-step revenue model

Identify the contract, identify performance obligations, determine the transaction price, allocate it to obligations, and recognise revenue when each obligation is satisfied.

Variable consideration constraint

Variable consideration is included in the transaction price only to the extent a significant reversal of cumulative revenue is not highly probable when uncertainty resolves.

Expected credit loss allowance

Trade receivables are measured at transaction price less a lifetime expected credit loss allowance, estimated using a provision matrix based on historical loss experience.

Net realisable value

Estimated selling price in the ordinary course of business less estimated costs of completion and estimated costs necessary to make the sale.

Inventory cost exclusions

Abnormal waste, storage costs not required in production, administrative overheads and selling costs are excluded from inventory cost and expensed as incurred.

Normal capacity overhead absorption

Fixed production overheads are allocated using normal capacity. Unallocated overhead arising from low production or idle capacity is expensed rather than capitalised.

Revaluation surplus treatment

An increase in carrying amount above cost is recognised in other comprehensive income and accumulated in equity as a revaluation surplus, net of deferred tax.

Development cost capitalisation

Development costs are capitalised only when technical feasibility, intention and ability to complete, probable benefits, adequate resources and reliable measurement are all demonstrated.

Component depreciation

Each significant part of an item of property, plant and equipment with a cost significant relative to the total is depreciated separately over its own useful life.

Provision recognition criteria

Recognise a provision when a present obligation from a past event exists, an outflow of economic benefits is probable, and the amount can be reliably estimated.

Onerous contract provision

A contract in which unavoidable costs of meeting obligations exceed expected economic benefits. The provision equals the lower of exit cost and cost of fulfilment.

Contingent asset recognition

A possible asset is not recognised. It is disclosed when an inflow is probable and recognised only when the inflow is virtually certain.

Treasury share accounting

Repurchased own shares are deducted from equity at cost. No gain or loss arises on sale; differences on reissue go to share premium or retained earnings.

Bonus issue effect

A capitalisation issue converts reserves into share capital. Total equity, net assets and cash flows are unchanged; only the composition of equity changes.

Equity-settled payment measurement

Measured at fair value of the equity instruments at grant date and recognised over the vesting period, with a corresponding credit directly to equity.

Basic earnings per share

Profit or loss attributable to ordinary shareholders divided by the weighted average number of ordinary shares outstanding during the period, time-weighted for share issues.

Treasury stock method

Dilutive options add shares equal to options outstanding less the number of shares that could be bought at average market price with the exercise proceeds.

Lease liability initial measurement

Present value of unpaid lease payments at commencement, discounted using the interest rate implicit in the lease or, if not readily determinable, the lessee's incremental borrowing rate.

Short-term lease expedient

A lessee may expense leases of 12 months or less with no purchase option on a straight-line basis instead of recognising a right-of-use asset and liability.

SPPI contractual cash flow test

Cash flows must be solely payments of principal and interest on the principal outstanding. Passing this test is required for amortised cost or OCI classification.

Effective interest method

Interest income or expense is calculated by applying the rate that exactly discounts estimated future cash flows to the instrument's gross carrying amount.

Significant increase in credit risk

When credit risk rises substantially since initial recognition, the loss allowance changes from 12-month expected credit losses to lifetime expected credit losses.

Control of an investee

An investor controls an investee when it has power over relevant activities, exposure to variable returns, and the ability to use its power to affect those returns.

Goodwill calculation

Consideration transferred plus non-controlling interest plus fair value of previously held interest, minus the fair value of identifiable net assets acquired.

Unrealised profit elimination

Intragroup profits on inventory still held by the group are eliminated in full, adjusting group retained earnings and, for upstream sales, non-controlling interest.

DuPont ROE decomposition

Return on equity equals net profit margin multiplied by total asset turnover multiplied by the equity multiplier, isolating profitability, efficiency and leverage effects.

IAS 1 judgement disclosure

Entities disclose the judgements, apart from estimations, that management made in applying accounting policies and that have the most significant effect on the amounts recognised.