A86045 Accoun,ng and Financial Repor,ng (2015/2016)

A86045Accoun,ngandFinancialRepor,ng(2015/2016)

Session6CostsandExpenses

PaulG.SmithB.A.,F.C.A.

SESSION6OVERVIEW

A86045Accoun,ngandFinancialRepor,ng 2

Session6Overview

Mins

Sessionoverviewandobjec,ves 5

Reviewofpre-workandsession5recap 5

Classifica,onofCostsandExpenses 5

CostofSales 20

Othergoodsandservices 5

Employeeexpenses(Payroll,Share-basedpayments,OtherPostEmploymentBenefits(OPEBs)

25

Classexercise 15

Requiredreadingandassignmentfornextsession 5

Summaryandvalida,on,overviewofsession7 5

90

3A86045Accoun,ngandFinancialRepor,ng

CourseObjec,ves


Attheendofthiscoursestudentswillbeableto:•  Readandperformahighlevelinterpreta2onofthefinancialstatementsofcompaniesapplyinginterna9onalaccoun9ngstandards

•  Iden2fyandevaluatetheimpactonacompaniesaccountsofalterna9veaccoun9ngmethods

•  Carryoutahighlevelassessmentofthetheeconomic-financialposi9onofacompanyrepor9ngunderIAS/IFRS.

CourseOverview


1.Financialrepor,ngunderIFRS 15.Inventories

2.Financialanalysisandra,os 16.Review

3.Financialanalysisandra,os-cont’d 17.Accountsreceivable

4.Review 18.Groupaccounts

5.Revenues 19.Taxa,on(directandindirect)

6.Costsandexpenses 20.Non-financialliabili,es

7.Non-currentFinancialassets/liabili,es 21.Review

8.Non-currentassets-Tangibleassets 22.Review

9.Financialleases 23.CashFlowStatement

10.Review 24.Review

11.Non-currentassets-Intangibleassets 25.Review

12.Impairmentofassets 26.Businesscombina,ons

13Review 27.Finaltest

14.Midtermtest

Objec,vesofSession5


Attheendofthissessionsessionstudentswillbeableto:1.Recognizeandunderstandthedifferencebetweenaprofitandlossaccountwiththecostsandexpensespresentedbynatureandbyfunc,on.2.Calculatecostofgoodssold/costofsales3.Understandtheaccoun,ngforpayrollexpenses,stockop,onsandotheremployeebenefits.

SESSION5RECAPANDPRE-WORK


Session5Summary

•  Revenues–largestnumberintheincomestatementandtheareamostsuscep,bletomanipula,on

•  Fivestepapproachtorevenuerecogni,on•  Importanceofindustrycontextandunderstanding

•  Frameworkforrevenuerecogni,on•  IFRS15,IAS18andIAS11


Session6Pre-work•  Reading– MelvilleInterna,onalFinancialRepor,ngAPrac,calGuide:•  Chapter14–Employeebenefits

–  IASBTechnicalsummaries•  IAS19Employeebenefits•  IFRS2Share-basedpayments

•  Exercises– Melville13.1–13.6Pluson-linemul,plechoiceques,onsforchapter13

–  EX5Revenues


CLASSIFICATIONOFCOSTSANDEXPENSES


Classifica,onofcostsandexpenses


Session'1'SM3'Profit'and'Loss'Account'by'Nature'and'by'Destination

A86045'Accounting'and'Financial'Reporting Paul'G.'Smith

Revenu

es

Cost'of'sales

Gorss%p

rofit

Other'ope

ratin

g'income

Selling'and

'distrib

ution'expe

nses

Adminstrativ

e'expe

nses

Other'ope

ratin

g'expe

nses

Ope

ratin

g%profit

Finance'costs

Finance'income

Share'of'profit'of'associate'and

'JV

Profit%be

fore%ta

x%Co

nt%ope

ratio

ns

Income'tax'expe

nse

Profit%for%the

%year%from%con

t%ope

ratio

ns

Profit'after'tax'from

'disc

ont'o

peratio

ns

Profit%for%the

%year

Continuing%operationsRevenues 180.462 180.462

Other'operating'income 1.584 1.584

Changes'in'inventories (1.134) (1.134)Raw'materials'and'consumables (127.739) (127.739)Employee'benefits'expense (35.880) (3.451) (14.001) (18.428)Depreciation'and'amortization (3.922) (3.922)impairment'on'nonVcurrent'assets (200) (200)Other'expenses (1.153) (2) (1.151)Finance'costs (2.766) (2.766)Finance'income 1.186 1.186Share'of'profit'of'associate'and'JV 671 671Profit'befor'tax'from'continuing'operations 11.109Income'tax'expense (3.098) (3.098)Profit%for%the%year%from%continuing%operations 8.011

Discontinued%operations

Profit%after%tax%from%discontinued%operations 220

Profit%for%the%year 8.231 220180.462 (136.448) 44.014 1.584 (14.001) (18.428) (1.151) 12.018 (2.766) 1.186 671 11.109 (3.098) 8.011 220 8.231

Session6

Session5

Sessions8-12

Session18

Session19

ByNatureofExpense

ByDesHnaHonorFuncHonofExpense

COSTOFGOODSSOLD(COGS)


CostofGoodsSold(COGS)Openinginventory 100

Purchases 2,000 2,000

2,100

Closinginventory (150)

Changeininventory (100–150) (50)

Costofgoodssold 1,950 1,950


Costofgoodssold(COGS)isthesameasCostofSales(COS)

OR

WewilllookatmethodsofvaluinginventoriesinSession15

OTHERCOSTSANDEXPENSES


OtherCostsandExpenses


Accoun,ngperiod

1/1/XX 31/12/XX30/09/XX30/06/XX31/03/XX

Electricitybill

Insurancecontract

Accrual

Deferral

EMPLOYEEEXPENSES


Employeeexpenses

•  Payroll•  Postemploymentbenefits(PEB)•  Share-basedcompensa,on


PAYROLLEXPENSES


Payrollexpenses

BasicSalary Company’ssocialcharges

TerminaHonindemnity

Totalcosttocompany

Employee’sgrosssalary

50,000 15,000 5,000 70,000

Socialcharges (5,000)

Incometaxes (15,000)

Employee’snetsalary

30,000


Whataretheaccoun9ngentriesforthis?

Payrollexpenses-accoun,ng


Drpayrollexpense 50,000

Drtermina,onindemnityexpense 5,000

Drsocialsecurityexpense 15,000

Crsocialsecurityliability(15,000+5,000) 20,000

Crtermina,onindemnityprovision 5,000

Crincometaxauthori,es 15,000

Crcash 30,000

70,000 70,000

Othershort-termemployeebenefits

•  Holiday/vaca,onpay•  Profitsharing/bonuses•  Non-monetarybenefits– Car– Phone– Medicalcare


POSTEMPLOYMENTBENEFITS


Postemploymentbenefits-Pensions-IAS19

Definedbenefit•  Theplandefinesthe

benefitsthatanindividualwillreceivebasedonanumberoffactorssuchasage,yearsofserviceandcompensa,on.

DefinedcontribuHon•  Theplanspecifieshowan

individual’scontribu,onsaredeterminedasopposedtothebenefitsthattheywillreceive


Fixedcosttothecompanyandnofurtherobliga,ononceliabilityis

sefled.

Thecompany’sobliga,onistoprovidetheagreedbenefits

thereforetheactuarialriskandinvestmentriskfallonthecompany.

Fundedvs.Unfunded

Accoun,ngfordefinedbenefitplansandotherpostemploymentbenefits


Assump,onsrequired(alsotobedisclosed)•  Discountrate•  Infla,on•  Rateofincreaseinsalaries•  Rateofincreaseinpensionpayments•  Long-termmedicalcostinfla,on•  Expectedlong-termratesofreturn:

•  Equi,es•  Bonds•  Property•  Others

•  Lifeexpectancies/mortalityrates

AnActuarialValua9onisnormallyRequired

Accoun,ngfordefinedbenefitplans


a)  Determinethedeficitorsurplus.Thisinvolves:a)  Usinganactuarialtechniquesuchasthe“projectedunitcredit”methodto

es,matetheul,matecosttotheen,tyforserviceincurrentandpriorperiodsandmakees,matesaboutdemographicandfinancialvariables

b)  Discoun,ngthebenefittodeterminethenetpresentvaluec)  Deduc,ngthefairvalueofanyplanassets

b)  Determiningtheamountofthenetdefinedbenefitliability/assetc)  Determiningtheamounttoberecognizedinprofitandloss:

a)  Currentservicecostb)  Anypastservicecostandgainorlossonseflementc)  Netinterestonthenetdefinedbenefitliability(asset)

d)  Determiningthere-measurementsofthenetdefinedbenefitliability(asset)toberecognizedinothercomprehensiveincomecomprising:a)  Actuarialgainsandlossesb)  Returnonplanassetsc)  Anychangeintheeffectoftheassetceiling

SHAREBASEDCOMPENSATION


Share-basedpayments-StockOp,ons


GrantDate Ves,ngDate ExerciseDate

Ves,ngcondi,ons•  Service•  Performance

Costofop,onrecognized(Adjustedannually)

TheFairvalueoftheop9onismeasuredattheGrantDate

Nofurtheradjustmentoncevested

LapseDate

StockOp,ons–Valua,on


Op,onValue Intrinsicvalue TimeValue= +

SharepriceLess

Exerciseprice

Vola,lityInterestrate

Timetoexpira,onDividendrate

Ves,ngperiodEarlyexercise

Non-transferabilityPerformancehurdles

Employeeop,onsOp9onpricingmodels:

•  Black-Scholes-Merton•  Binomial•  MonteCarloSimula9on

AnActuarialValua9onisnormallyRequired

StockOp,ons–Accoun,ng

Cashse]ledDrEmploymentcosts CrLiability

Equityse]ledDrEmploymentCosts CrEquity


Ifop9onsaremodified,cancelledorevennotexercised,thecostisnotmodifiedorreversed

CLASSEXERCISE


ClassExercise


Anen,tygrants100shareop,onstoeachofits500employees.Ves,ngiscondi,onalupontheemployeesworkingfortheen,tyoverthenextthreeyears.Theen,tyes,matesthatthefairvalueofeachshareop,onis€15.Theen,tyes,matesthat20%oftheoriginal500employeeswillleaveduringthethreeyearperiodandthereforeforfeittheirrightstotheshareop,ons.Ifeverythingturnsoutexactlyasexpected,calculatetheamountstheen,tywillrecognizeduringtheves,ngperiodforservicesrenderedasconsidera,onfortheshareop,ons.

Classexercise-solu,on

Year CalculaHonofcumulaHveexpense

CumulaHveexpense€

Expensefortheperiod

1 50,000op,onsx80%x€15x1/3 200,000 200,000

2 50,000op,onsx80%x€15x2/3 400,000 200,000

3 50,000op,onsx80%x€15x3/3 600,000 200,000


REQUIREDREADINGANDASSIGNMENTFORNEXTSESSION


OverviewSession7


•  Non-currentFinancialAssets/Liabili,es•  FinancialInstruments-Standardsanddefini,ons

•  FairValueandAmor,zedCost

•  RiskManagement

Session7Pre-work•  Reading

–  MelvilleInterna,onalFinancialRepor,ng–APrac,calGuide:•  Chapter11–FinancialInstruments

–  IASBTechnicalSummaries•  IAS32FinancialInstruments:Presenta,on•  IAS39FinancialInstruments:Recogni,onandMeasurement•  IFRS7FinancialInstruments:Disclosures•  IFRS9FinancialInstruments

•  Exercises–  Melville14.1–14.5,Pluson-linemul,plechoiceques,onsforchapter14.–  EX6.CostsandExpenses

•  Research–  Iden,fythenatureoftheFinancialInstrumentsinyourchosencompanyand

bepreparedtodiscusshowtheyareclassifiedandaccountedfor.


SUMMARYANDVALIDATION


Session6Summary

•  Classifica,onofcosts/expensesbynatureorbydes,na,on

•  Costofgoodssold•  Othercosts/expenses–accruals/deferrals•  Employeeexpenses– Payroll– Pensions– Stockop,ons


Session6Valida,on

•  Whatisthedifferencebetweenadefinedbenefitplanandadefinedcontribu,onplan?

•  Overwhatperiodisthecostofthefairvalueofastockop,onrecognized?

•  Whatisthedifferencebetweenandaccrualandaprepayment/deferral?


Documents

A86045 Accoun,ng and Financial Repor,ng (2015/2016)