Accounting

This category contains 25 posts

How Venture Capitalists (VCs) Mark-to-Market

A recent WSJ article titled Andreessen Horowitz’s Returns Trail Venture-Capital Elite triggered a swift response from Scott Kupor, the managing partner at Andreessen Horowitz, and Damodaran also chimed in on the issue with a follow-on article. The articles carry some good nuggets of information, namely on how VCs “mark-to-market”. VC Marks Are Not a Measure of Performance Scott … Continue reading

Primer on Auditing

Objectives Obtain reasonable assurance that the financial statements are free from material misstatements. Financial statements are prepared in accordance with the applicable GAAP. Responsibilities of Auditors Responsible to the company, and to its shareholders as a class for the purpose of providing information relevant to making their decisions as owners of the company. Not responsible … Continue reading

Calculating and Reporting Earnings Per Share (EPS) in Financial Statements (IAS 33)

Applicable Standard IAS 33: Earnings Per Share Basic Earnings Per Share (EPS) Formula Earnings Per Share (EPS) = Profit / (loss) attributable to ordinary shareholders / Weighted average number of shares outstanding over the period For Consolidated accounts, EPS is calculated based on the profits attributable to the owners of the Parent (i.e. excludes earnings … Continue reading

Accounting for Capital Reconstruction

Rationale for Capital Reconstruction To eliminate 3 issues that prevent a distressed company from recovering Negative retained earnings Companies with accumulated losses are not allowed to pay dividends. One reason is that it prevents the shareholders from withdrawing money and leaving the debt holders high and dry. This discourages potential investors from investing in the … Continue reading

First Time Adoption of IFRS (IFRS 1)

Applicable Standard IFRS 1: First-Time Adoption of International Financial Reporting Standards Overview Must comply with all IFRS. Partial compliance or a reconciliation from local GAAP to IFRS is not sufficient. Prepared on the basis as though the entity had always applied IFRS. Key Dates First reporting date Reporting date of the financial statements for the … Continue reading

Accounting for Inventories (IAS 2)

Applicable Standard IAS 2: Inventories Types of Inventories Finished goods Work-in-progress Raw materials Valuation of Inventories Inventories are valued at lower of Cost; and Cost = Cost of purchase + cost of conversion + other costs to bring the inventories to their present location and condition Cost of purchase = Cost of purchase – trade … Continue reading

Accounting for Taxes (IAS 12)

Applicable Standard IAS 12: Income Taxes Basics of Current Tax and Deferred Tax Current Tax Difference between Tax Expense in Income Statement and Tax Payable on Balance Sheet The Tax Payable (Balance Sheet account) shows the provision made by the company for taxes, and is estimated based on the year’s profit. The actual cash tax charge … Continue reading

Accounting for Financial Instruments and Derivatives, and Hedge Accounting (IAS 32, 39, IFRS 7, 9)

Applicable Standards IAS 32 – Financial Instruments: Presentation IAS 39 – Financial Instruments: Recognition and Measurement IFRS 9 – Financial Instruments IFRS 7 – Financial Instruments: Disclosures IAS 32 – Financial Instruments: Presentation Liability vs. Equity Definitions A Financial Liability is any liability where the issuer has a contractual obligation: to deliver cash or another financial … Continue reading

Accounting for Share Option Plans, Performance Share Plans, and Restricted Share Plans (IFRS 2)

Applicable Standard IFRS 2: Share-Based Payment TYPES OF SHARE-BASED PAYMENT TRANSACTIONS Basic Principle Need to recognise the FV of the goods or services received by the company from the employees that are getting the share-based payment). If the goods or services cannot be measured reliably (which is most of the time duh!), the amount recognised is the FV of the … Continue reading

Accounting for Plant, Property & Equipment, and Intangible Assets (IAS 16, 20, 23, 36, 38, 40, IFRS 5)

Applicable Standards IAS 16: Property, Plant and Equipment IAS 23: Borrowing Costs IAS 20: Accounting for Government Grants and Disclosure of Government Assistance IFRS 5: Non-Current Assets Held for Sale and Discontinued Operations IAS 40: Investment Property IAS 38: Intangible Assets IAS 36: Impairment of Assets IAS 16: Property, Plant and Equipment Initial Measurement Recorded … Continue reading

Accounting for Pensions and Employee Benefits (IAS 19)

Applicable Standard IAS 19: Employee Benefits SHORT-TERM EMPLOYEE BENEFITS Requirement Recognise a Liability for employee benefits to be paid in the future for work already done Recognise an Expense when the employees’ services are used Accounting Treatment Dr Employment Cost (e.g. wages) in Income Statement Cr Liability (e.g. accrued wages) in Balance Sheet POST-EMPLOYMENT EMPLOYEE … Continue reading

Accounting for Finance Leases and Operating Leases (IAS 17)

Applicable Standard IAS 17: Leases Classification of Leases Finance leases (substantially all of the risks and rewards of ownership are transferred to the lessee) Operating leases (otherwise) Note that because Land has indefinite useful life, it is typically classified as an operating lease Calculating Total Finance Charge over Lease Term Total minimum lease  payments (cash) … Continue reading

Accounting for Provisions, Contingent Liabilities and Contingent Assets (IAS 37)

Applicable Standard IAS 37: Provisions, Contingent Liabilities and Contingent Assets Provisions Definitions Liability Present obligation as a result of past events Expected to result in an outflow of economic benefits Reliable estimate can be made of the amount Provision Liability of uncertain timing or amount Recognition Criteria for a Provision Present obligation (legal or constructive) … Continue reading

Disclosure Requirements for Related Party Transactions in Accounting (IAS 24)

Applicable Standards IAS 24: Related Party Disclosure Related Party Transaction A related party transaction is a transfer of resources, services or obligations between a reporting entity and a related party, regardless of whether a price is charged. Related Party A party is related to an entity if The party controls the entity, or is controlled by it. … Continue reading

Accounting for Events After Reporting Period But Before Financial Statements Finalization

Applicable Standard IAS 10: Events After the Reporting Period Scope This standard deals with events that occur between the end of the reporting period, and the date when the financial statements are authorised for issue. Definitions Adjusting Events Events that provide additional evidence relating to conditions existing at the reporting date. Such events cast doubt … Continue reading

Preparing and Understanding The Statement of Cash Flows (IAS 7)

SEPARATE STATEMENTS OF CASH FLOWS Applicable Standards IAS 7: Statements of Cash Flow Cash Flows from Operating Activities Note Cash Flows from Operating Activities have a sub-total for Cash Generated from Operations. This sub-total is followed by interest payments and income tax payments before arriving at Net cash from Operating Activities. The Direct Method can be … Continue reading

Accounting for Foreign Currency Transactions and Foreign Operations (IAS 21)

FOREIGN CURRENCY TRANSLATION Applicable Standards IAS 21: The effects of changes in foreign exchange rates Transactions in Foreign Currency Lifecycle of a foreign currency transaction Initial recognition Translate the foreign currency amount into the functional currency at the spot exchange rate on the transaction date. E.g. Dr Receivables, Cr Sales with Yen(US$100 * 100) Reporting … Continue reading

Accounting for Groups, Subsidiaries, Associates and Minority Interest (IAS 27, 28 and IFRS 3)

Applicable Standards IFRS 3: Business Combinations IAS 27: Consolidated and Separate Financial Statements IAS 28: Investments in Associates GROUP ACCOUNTING Note that the following applies to international accounting standards (IFRS and IAS). Terminology FV = Fair value NCI = Non-controlling interest URP = Unrealized profit COGS = Cost of Goods Sold / Cost of Sales … Continue reading

Accounting for Hedges

Covered by IAS 39 – Financial Instruments: Recognition and Measurement, and FAS 133 – Accounting for Derivative Instruments and Hedging Activities. Three types of hedge: Fair value hedge – Hedge exposure to the changes in fair value of a recognized asset or liability, or unrecognized firm commitment (e.g. a swap to hedge against a fixed … Continue reading

Pension Accounting Terminology

Some notes about pension accounting: Periodic pension cost recorded in the income statement (pension expense) = Service cost + Interest cost + Amortization of prior service cost – Expected return on plan assets – actuarial gains/(losses) Service cost is the present value of projected benefits earned by employees in the current accounting period, i.e. the … Continue reading

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