FIU-E Lecture nd topic OBJECTOFACCOUNTING: ASSETS, EQUITYANDOTHERLIABILITIES

Transcription

1 FIU-E Lecture nd topic OBJECTOFACCOUNTING: ASSETS, EQUITYANDOTHERLIABILITIES

2 OBJECT OF ACCOUNTING: ASSETS AND LIABILITIES Part 1 ASSETS a) definition, general classification b) Fixed assets c) Current assets Key terms Asset, fixed and current assets, intangible and tangible assets, financial assets,inventory, depreciation/amortization policy, other assets.

3 Definitionofassets The economic resourcesof the accounting entity as a result of past events that are controlledby an entity which cost (or fair value) at the time of acquisition could be reliably measured, and from whichfuture economic benefits are expected to flow to the entity. Definition according to meaning of Framework for the Preparation and Presentation of Financial Statements relating to International financial reporting standards (IFRS)

4 Basic structure of assets Assets consist from following separated segments: A Receivables for subscription B Fixed assets B1 Intangible fixed assets B2 Tangible fixed assets B3 Financial investments C Current assets C1 Inventories C2 Receivables C3 Short-term financial assets D Other assets accruals (prepayments and accrued income) Deferred expenses, accrued revenues.

5 A. RECEIVABLES FOR SUBSCRIPTION

6 Receivables for subscription A Receivables for subscription Receivables of accounting unit against owners for subscribed unpaid capital. CASE: Two owners of Limited Liability Company have subscribed their investment in total amount 8,000. They pay 50 %ascompany s cash in bank, remaining amount they will pay within next 5 years. Structure of the assets in thecompanyas ofthismoment: Cash in bank, 4,000 Receivables for subscription unpaid capital, 4,000

7 B. FIXED ASSETS

8 Fixedassets B Fixed assets =assets that are acquired in order to use them to produce goods and services that will generate future benefits (cash inflows). General conditions for recognition: a) their acquisition costis high (according to the importance of such assets from the point of view of the business or to national law), and b) usage of them (their economic lifetime) > one year.

9 Classification of fixed assets B1 Intangible fixed assets Formation (incorporation) expenses, cost of R&D, concessions, patents, licences, trade marks, SW, goodwill. B2 Tangible fixed assets Land and buildings, plant and machinery, other fixtures and fittings, tools and equipment. B3 Financial investments Shares and ownership interests (long-term, purchased), intercompany loans (long-term), bonds (long-term, purchased).

10 Intangibles B1 Intangible fixed assets Formation (incorporation) expenses expenses connected with the setting up of a new enterprise, if their total exceeds certain amount. (e.g. court expenses, notary fees and other fees, travelling expenses, wages, commissions, rents) Acquisition of fixed assets or inventory shall not qualify as formation expenses! Research and development They shall be such results of successfully completed projectswork not falling under intangible industrial and other valuable rights. They have been acquired separately or they have been developed by the accounting unit for the purpose of sale.

11 Software Intangibles It has to be acquired as a separate item, i.e. it is not part of the acquired hardware and included in its valuation; or it has been produced internally for the purpose of sale, but it is notswmadetoorderorpartofthedeliveryofhw. Valuable rights production and technical know-how, licences, intangible industrial rights and other results of intellectual creative activities that may constitute valuable rights both acquired from, and provided to, other parties. Goodwill When the accounting unit buys another company and pays more than the fair value of its individual assets. Value of goodwill is the amount by which the purchase price exceeds the net-book-value of these assets. It is representing the value of the name, reputation, clientele, or similar intangible resources of the purchased company.

12 Tangibles B2 Tangible fixed assets B21 Depreciable tangible fixed assets a) Unmovable: buildings, halls, structures b) Movable:cars, treasures, PC s,individual movable assets and sets of movable assets, perennial crops, breeding and draught animals B22 Non-depreciable tangible fixed assets Land Works of art and collections works of the visual and plastic arts and other works of art in the meaning of the Copyright Act if such works of art are parts of buildings or if they are financial investments; or collections, e.g. a set of objects depicting historic or technical progress in business activities, movable cultural antiquities and objects - articles having a cultural value, unless they are financial investments.

13 Fixed assets ad c) Depreciation / amortization of fixed assets Fixed asset is depreciated / amortized according to the depreciation/ amortization policy; depreciation / amortization is accounted for in accordance with the rules which are set by the accounting unit. Depreciation/ amortization is calculated from the cost at which the asset is valued in the accounting records; it may not exceed that amount. The depreciation rates are set by the accounting unit with regard to useful economic lifetime, or with regard to capacity. The net book value of the asset is determined by making use of the accumulated depreciation / amortization of TIFA calculated in accordance with the depreciation / amortization policy: Net book value = historical (acquisition) cost of TIFA accumulated depreciation/ amortization

14 STUDY CASE: AMORTIZATION POLICY The company acquires new economic software. Acquisition cost is CZK 96,000, company decides to use it 4years. It prepares following amortization policy: Description of the asset: amortization yearly = acquisition cost / time of usage = 96,000 / 4 = 24,000 amortization monthly = one year amortization / 12 = 2,000 Year Acquisition cost Amortization / yearly Net book value 200X 96,000 24,000 72, X+1 X 24,000 48, X+2 X 24,000 24, X+3 X 24,000 0 total X 96,000 X

15 Financialinvestments B3 Long-term financial assets (financial investments) accounting unit has invested into another accounting unit in theformof: investment securities and ownership interests held by the acc. unit for longer than one year, i.e. participation certificates and ownership interests in enterprises in which the accounting unit has a controlling influence (more than 50 %) or substantial influence(20-50%) or minority interest, other investment securities and participations, such as bonds/debentures, treasury bills, certificates of deposit and term deposits, which mature after one year.

16 C. CURRENT ASSETS

17 Currentassets C. Current assets Assets with low acquisition costand/or usage of them < one year. (in accordance with Czech income tax legislation it means < or = CZK 40,000) C1 Inventories C11 Materials C12 Internally produced inventory (work-in-process, semi-finished products, finished products) C13 Merchandise (goods for re-sale)

18 C2 Receivables Currentassets trade receivables, receivables against partners and participants in an association, receivables from employees, tax receivables, state subsidy C3 Financial assets(short-term) C31 Cashonhand C32 Cash in bank(bank account) C33 Short-term financial assets ( marketable shares and bonds, i.e. prepared for sale)

19 C1 Inventories Inventories Inventory consists of: purchased inventory (materials in store and merchandise in store), internally produced inventory(work-inprocess, semi-finished products, finished products and animals).

20 Purchased inventories Materials are raw materials, auxiliary and operating materials, spare parts, packing materials, etc., defined as follows: raw materials are those which, during the production process, are fully or partially converted into products, and form their substance; auxiliary materials are materials which are also directly converted into a product, but which do not form its substance(e.g. paints and dyes); operating materials are materials which are needed for the on-going operations of the organization as a whole (e.g. lubricants, fuels, cleaning materials); spare parts are objects used to restore tangible fixed assets to their original condition;

21 packing materials Purchased inventories are used for the protection and transportation of purchased material, merchandise and own products. Non-returnable packing materials are delivered to a customer, or delivered internally within the accounting unit, together with their contents; small tangible assets that accounting unit does not consider to be fixed assets for the low acqusition cost; movable assets whose useful economic lifetime does not exceed one year, regardless of acquisition cost. Merchandise(goods for re-sale) is everything that the organization purchases for the purpose of sale, as well as own products that have been capitalized and transferred to own retail shop.

22 Internally produced inventories Work-in-process represents products that have gone through one or more stages of production and are no longer raw materials but are not yet finished products. Work-in-process also includes other unfinished activities (i.e. non-production, such as services), where no tangible products are created. Semi-finished products are separately stored products that have not yet gone through all the stages of production and have still to be finished by a further production process of the accounting unit. Products are internally-produced objects designated for sale outside the accounting unit.

23 EXERCISE 2.1 Mark the correct answer by the cross. Define the appropriate item in detail Item Fixed Assets Current Assets Other Assets Material Buildings Purchased licence Semi-finished products Bonds with 2 years maturity Motor vehicles Receivables to customers Bank account Work-in-progress Ownership interests Software (a.c. = CZK) Finished products Shares for sale

24 EXERCISE 2.1 Receivables for subscription Bills of exchange to be collected Cash on hand Deferred expenses Valuable rights Advance payments made Merchandise in store Receivables to employees Accrued revenue Land PC (a. c. = ,- CZK) PC (a. c. = ,- CZK) Accumulated depreciationbuildings Stamps and vouchers Research and development

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26 OBJECT OF ACCOUNTING: ASSETS AND LIABILITIES Part 2 Equityandotherliabilities a) definition, general classification b) Equity c) Other liability Key terms equity, other(current) liabilities, capital, reserves, retainedearnings, profit loss, not-own-capital, allowances-provisions, loans, payables, accruals.

27 Definitionofequityandliabilities Liability present obligationof the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits, the amount at which the settlement will take place couldbe measured reliably. Equity residual interestin the assets of the entity after deducting all its liabilities. Definition according to meaning of Framework for the Preparation and Presentation of Financial Statements relating to International financial reporting standards (IFRS)

28 Basic structure of E&L E&L consist from following separated segments: A Capital and reserves, so-called Equities B Current liabilities, so-called not-own-capital C Temporary accounts of liabilities, so-called accruals and deferred income. Classification according to Fourth Council Directive No. 78/660/EECof 24 July 1978, which has to be adopted in the national rules of any European country if it is a member of EU. accounting/legal_framework/annual_accounts_en.htm

29 Basic structure of E&L E&L consist from following separated segments: A Capital and reserves, so-called Equities A1 A2 A3 A4 A5 Capital (legal, registered, subscribed) Other equity accounts (Reserves) Reserves created from net profit Retained earnings or accumulated losses (retained earnings deficit) from previous years + Profit / - Loss of current period Net income / Net loss B Other liabilities, so-called not-own-capital (current and longterm) B1 B2 Provisions (Allowances) Payables C Temporary accounts of liabilities, so-called accruals Accrued expenses, Deferred (unearned) revenue

30 A. EQUITY

31 Equity A. Equity means claims of owners (description of how much value (amount) of assets is owned by owners of the company). A1 Capital (legal, registered, subscribed) a) Public limited company (Joint stock company) total amount of nominal (face) value of issued shares common stock at par, Equity at par. b) Limited liability company total amount paid in ownership interests. The amounts of subscribed capital and paid-up capital must be shown separately. A2 Other equity accounts(reserves) A21 Additional paid in capital (share premium) A22 Other paid in capital (gifts and subsidies of the capital from outside parties)

32 STUDY CASE: LEGAL CAPITAL AND ADDITIONAL PAID INTO CAPITAL Capital companies in the Czech Republic Minimal capital required according to Czech Act on Corporations(since 2014): Plc. (Public limited/joint stock companies) : CZK 2,000,000 or 80,000 Ltd. - Limited liability companies: CZK 1 The company is subscribing 1,000 shares with face value CZK 2,000. (So required capital is covered: 1,000 x 2,000 = CZK 2,000,000.) But shareholders are opened to pay, i.e. marketablevalueis CZK 2,500 for each share; then: 2,000,000 CZK is legal capital registered officially by the commercial court, 500,000 CZK is additional paid into capital share premium.

33 Equity A3 Reserves created from net profit A31 Statutory reserve account Legal reserve in so far as national law requires such a reserve. A32 Other reserves A4 Retained earnings or accumulated losses from past years (accumulated losses are also so-called retained earnings deficit ) A5 + Profit / (-) Loss of current period Net income / Net loss This item is described in details in Profit and Loss Account, so-called Income statement.

34 B. OTHER LIABILITIES

35 Otherliabilities B Not-own-capital (other, current and long-term liabilities) are claims of outside parties, description of how much value (amount) of assets is used by company but is owed (= not owned by a business) to the creditors(i.e. suppliers, banks, employees, ). B1 Provisions (allowances) amounts retained for planed future liabilities and charges B11 Tax deductible provisions in so far as national law requires such a provision B12 Other non-tax deductible provisions ((e.g. compensated absences, bonuses, customer claims product warranties, coupons, premiums, self or under-insurance, defects and damages(e.g. environmental), litigation, restructuring etc.))

36 STUDY CASE: PROVISIONS (ALLOWANCES) product warranties The company producer of TV sets; it warrants its products for 2 years. This obligation arises on the day of sale. In the year 20X1 the company sold its products for 20 mil. Total production cost for sold products are 12 mil. Due the experience in the last 5 years it is known to perform warranty repairs in the amount of 5%of annual sales. In the year 20X2 we made the warranty repairs in the amount of 0.6 mil. and in the year 20X3 in the amount of 0.5 mil. For above mentioned reasons the company is preparing the provision policy intheyear20x1: Total planned amount of the warranty repairs is 1 mil. for following 2 years. Note: Profit = total revenues total expenses

37 STUDY CASE: PROVISIONS(ALLOWANCES) The effects: 1. Without recognition of the provision: Profitintheyear20X1: 20 12= 8mil.(profit) Profitintheyear20X2: 0 0.6= -0.6mil.(loss) Profitintheyear20X3: 0 0.5= -0.5mil.(loss) 2. With recognition of the provision: Profitintheyear20X1: = 7mil.(profit) Profitintheyear20X2: 0,6 0,6= 0 Profitintheyear20X3: 0,4 0,5= -0.1mil.(loss)

38 B2 Payables Otherliabilities B21 Long-term liabilities i.e. bonds issued, long term bills of exchange to be paid, intercompany long term liabilities, payables under lease contracts. B22 Current liabilities(short-term) trade payables, payables to partners, to employees, to social security, taxes payable. B23 Bank loans long-term and current bank loans, short-term financial assistance.

39 ACCRUALS

40 Accruals Accounting is focused on revenues / expenses and their connection with the proper accounting period which does not depend on cash inflows / outflows(payment received from the revenue and payment made for the expense). Accrualscome into existence when revenues / expenses are recognized at a different point in time than the related cash inflows / outflows. Pre-paid items are recorded when cash flowsoccur before revenue or expenses. Accrued items are recorded when cashflows occur after revenue or expenses. 1. Deferred expenses(pre-paid expenses) 2. Accrued revenue 3. Accrued expenses 4. Deferred revenue, so-called unearned revenue.

41 STUDY CASE: ACCRUALS Accounting of the renter (leaseholder) Accounting of the Lessor (owner of the office) Rent paid/received in advance Rent paid/received later Rent is paid in current period for the expense (cost) of next accounting period (in December we pay for the January's rent). DEFERRED EXPENSE (asset) For the rent of this accounting period (this year expense) we will pay next year. ACCRUED EXPENSE (liability) We receive payment for the January's rent in December, that means received payment from the next year revenue. DEFERRED REVENUE (liability) Revenue from this year rent will be received as a payment next accounting period. ACCRUED REVENUE (asset)

42 EXERCISE 2.2 Markthecorrectanswerby thecross. Definetheappropriateitemin detail Item Equity Not-own capital Other liabilities Payables to suppliers Short-term bank credit Registered capital Unpaid income taxes Statutory reserve account Bonds issued with 3 years maturity Payables to employees Long-term bank credit Retained earnings deficit Dividend to be paid Retained earnings from previous years Accrued expenses Profit of current period

43 EXERCISE 2.2 Deferred revenue Other paid in capital - gift Property tax to be paid Allowance for enterprise risks Amounts payable to partner Share premium Credits for discounted securities VAT to be paid Tax deductible allowances Due to social security institutions Advance payments received Salaries and wages Net income Other reserves