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Lecture 12

RSM220H1 Lecture Notes - Lecture 12: Impaired Asset, Book Value

Rotman Commerce
Course Code
Xin Baohua

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Revenue Recognition
conceptual views
Earnings approach
Risk and rewards -> transferred
No continuing involvement -> defer regards timing and amount
performance based achievement
Measurability -> measurable to recognize
e.g. warranty expense, if not measurable, can't match to revenue
Collectivity -> reasonable assurance to be collectable
e.g. instalment sales customers -> creditability assessment
Asset-Liability approach
IFRS, contract based
contract set-up
separate and distinct performance obligations
when one of those deliverable is hard to identify, then group with others, but wait to
recognize until everything in this group is performed
transaction price
variable considerations
warranty, time of money
non-monetary transactions
how do we identify the transaction price
allocate prices to each obligations
dierent method applies to dierent scenario
impairment test
CGU/asset group
relative fair price approach
with some exceptions
recognize revenue to each obligation performed
complications / concessionary terms?
general rule (i.e at time of sale or delivery) may not apply
right of return
material ->
immaterial -> full amount
warranty along with product
service type of warranty
bill and hold
before delivery
or after delivery
principal agent relations
consignment sales
Cash and Receivables
cash discounts (purchase discount)
Gross method
Net method
journal entry
presentation of expense
other expense / operating expense
impairment of AR
NRV - net realizable value
estimate allowance for doubtful account AFDS
direct write-o
accept in GAAP, only if the AFDS is immaterial
allowance method
allowance procedure only
examine AR at the year end to determine what is AFDS and bad debt should be in this period
Beg.B End.B
mix of procedure
in between year, credit of sales to estimate bad debt directly
how to estimate
journal entries
how to record allowance
recovery of previous write-o of AR
derecognition: a secured borrowing vs. as sale
secured borrowing
disclose in the footnote to reveal collecterial
increase in cash and liability
sale of AR
record liability
who is responsible for the amounts
journal entries
losses (financial institution aspect: finance charge -> interest revenue)
note receivables
interest element
interest bearing
non-intereste bearing
eective (market) rate vs.
PV of the note
interest revenue
stated (coupon) rate
cash payment for interest
dierence between two rates
premium/discount, or at par
IFRS -> eective rate approach
ASPE -> either eective rate or straight line approach
journal entries
cost inclusion - what should be included?
is this cost necessary needed to bring the inventory to be ready for sale
e.g. tearing down the old building on new land -> depends on your initial purpose of using the land -
> part of land or new stu?
inventory system
cost flow assumption
COGS and ending inventory
applies item by item, or grouping
LC (low cost) or NRV
journal entries
impairment of inventory / COGS
separate account for impairment for easier future recovering
estimating inventory
gross profit method
gross margin - sales
mark up - COGS
inventory errors
if identified errors in periods, restate the FS
eects on FS -> over/understated items?
BI + net purchases - COGS = EI
cost inclusion -> expense / capitalization
At acquisition
everything related to make it available
capitalization -> if extent the useful life, to improve the production technology (eciency), help to
reduce costs and etc.
expense -> e.g. repair
non-monetary transaction
commercial substance
no -> BV
yes -> FV
overriding rule
cannot record the cost higher than its FV
contributed assets (e.g. government grant)
income approach
cost reduction
deferral income
measurement after initial recognition
ASPE -> cost model CM
revaluation model RM
regular PPE
if you can measure reliably
fair value model FVM
investment properties
if you can measure reliably
gains -> OCI in general, but if previously recognition of losses
losses -> IS directly in general, but if you have revaluation surplus on equity account means
past gain, then losses first go to surplus then income
cost allocation
partial year, revision of estimates
update NBV
cost recovery impairment model
two-step approach
comparing undiscounted future cash flow and carrying amount first
cannot do future recovery
rational entity
FV less cost to sell
use it in production
value in use
decide which action gives you more value
determine the recoverable amount -> higher of two
future recovery of impairment losses
journal entry
disposition -> remove from BS
gains / losses -> OCI
update NBV
related depreciation expense need to be up-tp-date -> operating expenses
journal entries
change of intent
derecognize from PPE -> other assets -> "held for sale"
update NBV
no more amortization
*always to update NBV*
in every model, the related depreciation expenses aect operating expenses and thus income
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