Essay on RSM426 NOTES

Submitted By zman0107
Words: 6951
Pages: 28

Financial Reporting Warranty If the probability of having to pay out is greater than 50% a provision is required under IAS 37.
Make sure lawyers are likely to confirm that there is a greater than 50% chance of settlement. If so, a provision should be recorded. [Note: should they be unable to estimate the potential liability or should probability of settlement be less than 50%, then the firm has a contingent liability. A contingent liability is disclosed, and not recognized. Disclosures include the nature of the contingency and, when practicable, the estimated financial effect and indication of uncertainties.] Estimating the provision: determine a range of possible outcomes and make an estimate of the obligation that is sufficiently reliable to use in recognising a provision. If firm was aware of this liability at the time it sold the product but failed to accrue it, the accrual could be accounted for retroactively as a correction of an error.
Research and Development
Conditions for capitalizing development costs under IAS 38: the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset, adequate financial resources must be available to complete the project. We will also need to make sure that the other criteria for capitalizing the development costs are met: the technical feasibility of completing the intangible asset so that it will be available for use or sale, its intention to complete the intangible asset and use or sell it, its ability to use or sell the intangible asset, how the intangible asset will generate probable future economic benefits.
Among other things, the entity can demonstrate the existence of a market for the output of the intangible asset or the intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset. Also check its ability to measure reliably the expenditure attributable to the intangible asset during its development.
Contract uncertainty
When the outcome of a construction contract cannot be estimated reliably: (a) revenue shall be recognised only to the extent of contract costs incurred that it is probable will be recoverable; and (b) contract costs shall be recognised as an expense in the period in which they are incurred. The completed contract method is not allowed. The percentage­of­completion method could be applied in different ways. The percentage could be determined based on costs incurred, products produced, or products delivered. Of potential concern is the amount owed by the contractor. The percentage­of­completion method does not require that any money be collected, but collectability is required. As a result, we need to satisfy ourselves that the contractor will be able to pay.
Operating lease or Finance lease
IAS 17: A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership. A lease is classified as an operating lease if it does not transfer substantially all the risks and rewards incidental to ownership. Examples a finance lease are: (a) the lease transfers ownership of the asset to the lessee by the end of the lease term; (b) the lessee has the option to purchase the asset at a price that is expected to be sufficiently lower than the fair value at the date the option becomes exercisable for it to be reasonably certain, at

the inception of the lease, that the option will be exercised; (c) the lease term is for the major part of the economic life of the asset even if