Here’s my version of dumbed down FSA. I’m hoping this helps someone who like me can’t seem to get things straight. Please feel free to correct my errors. Goodluck to us all
How assets are carried on Balance sheet/Income statement.
Current Asset
Cash and Cash Equivalent :
Measured on Balance sheet at Fair Value under both IFRS and US GAAP
Financial Securities:
Only three types:
a) Marketable securities: You want to sell these things off ASAP, so you measure them on BS at fair value. If the fair value drops, then you must record Unrealized loss on the income statement. If the fair value rises, you can also record unrealized gains. When you sell them, loss or gain is recognized in the Income statement.
b) Available for sale: You don’t want to sell these ASAP…but maybe, just maybe you could change your mind at some point. If the fair value of these securities drop, you must recognized Unrealized loss in shareholders equity when the value rises again, then you can simply reduce the losses in shareholder’s equity.
c) Held till Maturity: You don’t want to sell, you just want to hold this stock till you are 99 years old. Well then, there’s no need to recognize unrealized losses or gains, simply record on balance sheet at their amortized value
Recievables:
Measured on balance sheet net of valuation allowance under both IFRS and US GAAP. When it is suspected that an amount cannot be recovered, bad debt expense is created in income statement, and a contra account called Valuation allowance is created on Balance sheet.
Inventory
If your company likes the IFRS, then you record Inventory on your balance either based on the original cost of purchasing the inventory or the best amount it can be sold for in the market today (of course after factoring all the cost of hiring a van to take your inventory to the market). Whichever is lower of this two is what you report. The accounting Jingo for this is Lower of Cost or Net Realizable Value.
If your company likes it the American way (GAAP) then you must record inventory on your balance sheet either based on the original cost of purchase or the “market” (I personally hate the use of this word, but Americans are very poor in English anyway). The market, is simply how much it will cost you to replace your inventory at current prices. So it’s actually a replacement cost. But the replacement cost cannot be more than Net realizable value (which is the amount you will sell it) nor can it be lower than Net realiable value - profit margin (which is the worst case scenario)
Prepaid Expenses:
This is usually my favourite. It’s the asset that gradually melts away into expenses overnight. So it’s recorded on the balance sheet at fair value minus amount of expenses used up.
Non Current Assets
A wise man once told me it’s always best to split this into two: Tangible Assets and Intangible Assets. These are normally the assets you can’t consume in a single year! And what makes these guys different is that most of them have got that same ol stigma called Depreciation/Amortization attached to them
For Tangible Assets:
The most important is Properties, Plants & Equipments: So your small start up has got some properties, plants and equipement, but how much value do you attach to this on your balance sheet?
Well, if you are british and you follow the IFRS, then you can either use the Cost Model or the Revaluatiion Model…if you are not swearing by now, then you are just not concentrating enough.
So the cost model is simply how much you bought your Equipment minus that stupid depreciation…but it doesnt end there, your asset could have been impaired…and get this, that’s even a lot worse than depreciation.
So under the cost model, your nice piece of Equipment is measured on the balance sheet at Historical cost minus accumulated depreciation minus impairMent!
But how do you know that your asset is bloody impaired?
It’s simple, just compare it’s recoverable amount with the carrying amount…but that’s even the difficult part, you still need to know what the recoverable amount is. The recoverable amount is the amount that the asset is worth to you, which could either be the amount you can sell it in the market today or the present value of all the cash flows you can gain from it in the future, whichever is higher…***sighs****
Okay, hard part is over, you know the recoverable amount, you can confirm if your asset is impaired or not, and if impaired, you can value your asset with the cost model. But what other options are out there??
Lucky you! if after all these, you are still british, then you can simply use the Revaluation model.
Revaluation model is simply the Fair Value minus accumulated depreciation, Simple!!!
But let’s just say you aren’t british, you are, erhm , unfortunately, American!!..and you are forced to use the US GAAP. Well, sorry mate, there are no other alternatives, you simple have to use the cost model, you hate so much. But with a caveat! Under US GAAP, you don’t just impair! The americans are very specific. You have to conduct a recoverability test…which in normal people’s speak, means you should compare how much the current carrying value of your asset is and it’s discounted future cashflow.
Investment Property
Under IFRS, this is measured on the balance sheet either using the cost model or the fair value model.
Cost model is same as above.
Fair value model implies the asset is carried at fair value and any increase or decrease in fair value is recorded as either gain or loss in the balance sheet.
For Intangible Assets:
Well, this says it all in it’s name. They aren’t tangible, you can for instance put them in your car or travel with them in your briefcase, they exist only in your head…and your balance sheet.
But then, you still have to differentiate between two types (accounting is an arse!!)
first types are the ones that can be stolen away from you, like patents (I’m not even thinking of Apple vs Samsung) they are called identifiable
The second types are stuck with you they are called non identifiables.
They can even be classified further into two groups…(wtf!!!)…which includes those with definite lives and those with indefinite lives.
For those with definite lives, if your purchased them as opposed to developing them yourself, IFRS says you can recognize them on balance sheet based on the amount you bought them for and their amortized cost. US GAAP says you can only recognize these things if it is probable that future economic benefits will flow from them and their cost can be measured reliably. (tough life, i know)
For those with indefinite lives, you don’t amortize, your impair!
In all of these, know that
***Land is not impaired or depreciated
****Most of the time, only IFRS allows upward revaluation. The only time US GAAP allows upward revaluation is if you’ve got a non current assets that you normally use in your operations (held for use) and then you choose to sell it (re-classified as held for sale)
shit, i didn’t just type that!!!
. Thanks a lot.
