CH17

Reasons for investing

1] To earn a high rate of return.

2] To secure certain operating or financing arrangements with another company

Types of securities

 Debt security
 equity security

Types of debt security

 Held-to-maturity = long term bond 5 years or more.

 Trading = short term less than 1 year or equal 1 year.

 Available-for-sale = difference b/w trading and held maturity, I.e

(more than 1 year and less than 5 years.)

Equity method = is one line consolidation financial statement.

 Holding less than 20 % → Insignificant

 Holding between 20% and 50% → significant influence
 Holding more than 50% → Controller

How to report trading security and available for sale

 Trading security is reported in income statement specially non-operating section.

 Available for sale is reported in other comprehensive income(OCI).
 CH18

What’s IFRS 15?

• Specifies how and when an IFRS reporter will recognize revenue to provide users of
financial statements with more informative, relevant disclosures.

What’s the purpose of IFRS 15?

• Establishes the principles that an entity applies when reporting information about the
nature, amount, timing and uncertainty of revenue and cash flows from a contract with a
customer.

The five-step model framework Of IFRS 15

Step 1: Identify the contract with the customer

Step 2: Identify the performance obligations in the contract

Step 3: Determine the transaction price

Step 4: Allocate the transaction price to the performance obligations in the contracts

Step 5: Recognise revenue when (or as) the entity satisfies a performance obligation
 CH19

Temporary Difference is the difference between the tax basis of an asset or liability and its
reported (carrying or book) amount in the financial statements that will result in taxable amounts
or deductible amounts in future years.
Carrying amount : Original cost - Accumulated depreciation
Tax base : Original cost – Capital allowance
Deferred tax = difference between income tax payable and income tax expense.
Deferred Tax Liability: represents the increase in taxes payable in future years as a result of
taxable temporary differences existing at the end of the current year.
Deferred Tax Asset: represents the increase in taxes refundable (or saved) in future years as a
result of deductible temporary differences existing at the end of the current year.
Permanent differences: are caused by items that (1) enter into pretax financial income but never
into taxable income or (2) enter into taxable income but never into pretax financial income.
Loss Carryback
 Back 2 years and forward 20 years
 Losses must be applied to earliest year first
Loss Carryforward
 May elect to forgo loss carryback and
 Carryforward losses 20 years
Taxable income Accounting income
1. Income calculations According with tax rule[IRS]. 1. Prepared by using accounting rules [GAAP/IFRS].
2. Uses cash base 2. Uses accrual base
3. Income tax payable 3. Income tax expense

Differences between Future taxable and deductible amounts.

 Future taxable amounts: Increase taxable income and result in deferred tax liabilities.
 Future deductible amounts: Decrease taxable income and result in deferred tax assets
Differences between Income tax payable and Income tax expenses.
 Income tax payable: Tax liability that a business has not paid yet to the government.
 Income tax expense: Tax charged against taxable income in the current period.
 CH21

A lease is a contractual agreement between a lessor and a lessee.

A leaser is the one who owns the assets.
A lessee is the one who rents the asset.
A lease time is the period to use for lease.
Advantages of Leasing
1. 100% financing at fixed rates.
2. Protection against obsolescence.
3. Flexibility.
4. Less costly financing.
5. Tax advantages.
6. Off-balance-sheet financing.
Capital lease has four criteria . They are:-
1. Lease transfers ownership of the property to the lessee.
2. Lease contains a bargain-purchase option.
3. Lease term is equal to 75 percent or more of the estimated economic life of the leased
property.
4. The present value of the minimum lease payments equals or exceeds 90 percent of the
fair value of the leased property.
Difference between Capital and Operating/Financial lease.
Capital lease Operating lease
 Substance over form purchase / sell Through rental
 Capitalization for the lease asset Expense
 Benefit and risk transferred the owner of asset Benefit and risk do not transfer the owner of asset

Classification of Leases by the Lessor

1) Operating leases.
2) Direct-financing leases.
3) Sales-type leases
Benefits to the Lessor
1. Interest revenue.
2. Tax incentives.
3. High residual value

Special accounting problems

1. Residual values.
2. Sales-type leases (lessor).
3. Bargain-purchase options.
4. Initial direct costs.
5. Current versus noncurrent classification.
6. Disclosure.
Lessors that own properties fall into three categories. What are they?
1. Banks
2. Captive leasing companies.
3. Independents.