Financial Accounting Level 3: Consolidation & Analysis Worked examples: Consolidation, ROU assets, liquidity and profitability ratios Meta Summary: Advanced reporting under IFRS: IFRS 10 control, business combinations, consolidated statements, IFRS 16 lessee accounting with ROU asset and lease liability, financial ratio analysis, and IESBA Code of Ethics. Complete calculations included. Table of Contents Chapter 1: IFRS 10 Control & Business Combinations Chapter 2: Consolidated Financial Statements - Worked Example Chapter 3: IFRS 16 Leases - ROU Asset & Liability Chapter 4: Financial Statement Analysis - Ratio Calculations Chapter 5: IESBA Code of Ethics for Accountants FAQ References Related Topics Chapter 1: IFRS 10 Control & Business Combinations 1.1 Definition of Cont...
Financial Accounting Level 2: PPE, Intangibles & Liabilities
Meta Summary: Master long-term assets and liabilities: PPE depreciation methods, component depreciation, intangible assets, goodwill impairment, current/contingent liabilities, bonds payable at premium/discount with full amortization schedules. IFRS-aligned.
Table of Contents
Chapter 1: PPE Recognition & Depreciation
1.1 Initial Recognition & Component Depreciation
PPE Initial Cost: Purchase price + import duties + site preparation + installation + testing + professional fees - trade discounts. Include future dismantling costs if obligation exists.
Component Depreciation: Under IFRS, each significant part with different useful life is depreciated separately. Example: Aircraft = airframe 20 years, engines 8 years, interior 5 years.
Subsequent Costs: Day-to-day servicing = expense. Replacement parts = capitalize if future benefits increase.
Chapter 2: Depreciation Methods - Worked Examples
2.1 Straight-Line vs Declining Balance - Side by Side
Data: Machine cost $50,000, salvage $5,000, useful life 5 years.
Straight-Line Method
Depreciable base = 50,000 - 5,000 = 45,000
Annual expense = 45,000 / 5 = 9,000
Year 1: Dr Depreciation Expense 9,000, Cr Accum Depreciation 9,000
Year 2: Dr Depreciation Expense 9,000, Cr Accum Depreciation 9,000
Years 3-5: 9,000 each year
Book value Year 5: 50,000 - 45,000 = 5,000 = salvage
Double-Declining Balance
Rate = 2 × (100% / 5) = 40%. Apply to book value, ignore salvage until last year.
Year 1: 50,000 × 40% = 20,000. Book value = 30,000
Year 2: 30,000 × 40% = 12,000. Book value = 18,000
Year 3: 18,000 × 40% = 7,200. Book value = 10,800
Year 4: 10,800 × 40% = 4,320. Book value = 6,480
Year 5: Plug to salvage = 6,480 - 5,000 = 1,480
Entry Year 1: Dr Depreciation Expense 20,000, Cr Accum Depreciation 20,000
2.2 Units-of-Production & Disposal
Units-of-Production: Truck cost $60,000, salvage $10,000, expected 200,000 km. Year 1 driven 30,000 km.
Rate = (60,000 - 10,000) / 200,000 = $0.25/km
Year 1 expense = 30,000 × 0.25 = 7,500
Dr Depreciation Expense 7,500, Cr Accum Depreciation 7,500
Disposal Example: Equipment cost $20,000, accumulated depreciation $16,000, sold for $5,000 cash.
Book value = 20,000 - 16,000 = 4,000. Gain = 5,000 - 4,000 = 1,000
Dr Cash 5,000, Dr Accum Depreciation 16,000, Cr Equipment 20,000, Cr Gain on Disposal 1,000
Chapter 3: Intangible Assets & Goodwill
3.1 Finite vs Indefinite Life
Finite Life: Patents, copyrights, licenses. Amortize over useful life. Straight-line method typical.
Indefinite Life: Trademarks, goodwill. Do not amortize. Test for impairment annually.
Example: Patent $90,000, legal life 15 years, useful life 9 years. Annual amortization = 90,000 / 9 = 10,000
Dr Amortization Expense 10,000, Cr Patent 10,000
3.2 Goodwill Impairment Test
Goodwill arises in business combinations. Test for impairment if indicators exist.
Example: Cash-generating unit carrying amount $1,000,000 including goodwill $200,000. Recoverable amount $850,000.
Impairment = 1,000,000 - 850,000 = 150,000. Allocate to goodwill first.
Dr Impairment Loss 150,000, Cr Goodwill 150,000
New goodwill = 50,000. Impairment losses on goodwill cannot be reversed.
Chapter 4: Current & Contingent Liabilities
4.1 Known Current Liabilities
Sales Tax Payable: Collected from customers, remitted to government.
Sales $10,000 + 8% tax. Dr Cash 10,800, Cr Sales Revenue 10,000, Cr Sales Tax Payable 800
Payroll: Gross wages $50,000. Deductions: Income tax 10,000, Pension 3,000, Union 500.
Dr Wages Expense 50,000, Cr Income Tax Payable 10,000, Cr Pension Payable 3,000, Cr Union Dues Payable 500, Cr Wages Payable 36,500
Unearned Revenue: $12,000 received for 12-month magazine subscription. Each month:
Dr Unearned Revenue 1,000, Cr Subscription Revenue 1,000
4.2 Contingent Liabilities - IAS 37
Recognize provision if: 1. Present obligation, 2. Probable outflow, 3. Reliable estimate.
Example - Warranty: Sales $1,000,000. Estimated warranty 2%. Record:
Dr Warranty Expense 20,000, Cr Warranty Liability 20,000
When repair costs $3,000 incurred: Dr Warranty Liability 3,000, Cr Cash/Inventory 3,000
Disclosure only if: Possible but not probable. Do nothing if: Remote.
Chapter 5: Bonds Payable - Premium/Discount Amortization
5.1 Bond Issued at Discount - Effective Interest
Data: $100,000 face value, 8% coupon, 5-year term, issued when market rate 10%. Issued at $92,278.
Year 1 Amortization Schedule
Interest Paid = 100,000 × 8% = 8,000
Interest Expense = 92,278 × 10% = 9,228
Discount Amortized = 9,228 - 8,000 = 1,228
Carrying Value End Year 1 = 92,278 + 1,228 = 93,506
Entry: Dr Interest Expense 9,228, Cr Discount on Bonds 1,228, Cr Cash 8,000
Discount increases interest expense above cash paid. Carrying value approaches face value.
5.2 Bond Issued at Premium & Retirement
Premium Example: Same bond, market rate 6%. Issued at $108,425.
Year 1: Interest Paid 8,000, Interest Expense = 108,425 × 6% = 6,506, Premium Amortized = 1,494
Dr Interest Expense 6,506, Dr Premium on Bonds 1,494, Cr Cash 8,000
Early Retirement: Bond carrying value $98,000, retired for $97,000 cash.
Gain = 98,000 - 97,000 = 1,000
Dr Bonds Payable 100,000, Cr Discount on Bonds 2,000, Cr Cash 97,000, Cr Gain on Retirement 1,000
FAQ
When do I use straight-line vs accelerated depreciation?
Use straight-line if asset benefits consumed evenly. Use declining balance or units-of-production if asset more productive early or usage varies. Method must reflect pattern of economic benefits. IFRS allows choice; be consistent.
Why does bond discount increase interest expense?
Discount means you borrowed less cash than face value but must repay face value. The discount amortized each period is additional interest cost. Effective interest method matches cost to carrying value.
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