Author Archives: Karl

Cash flows from ‘investing activities’

Cash flows are on the statement of cash flows divided into three groups and one of them is labeled as ‘Investing activities’. First of all when preparing the statement of cash flows two methods of presentation are allowed to be used – direct and indirect. We’ll cover those two methods with their pros and cons in our later blogs, but when it comes to cash flows from investing activities, keep in mind that they are always presented using the ‘direct’ method and we’ll soon tell you why.

Now, the meaning of ‘investing’ should be fairly simple. A company invests into assets as machines, equipment, buildings, software etc. A company may as well purchase shares in other companies’ thus owning subsidiaries, associates or being a part of joint ventures. What a company may also do, is give out loans. Note here that when the activity of giving out loans is a part of daily business routine for the company, granting loans are part of ‘Operating activities’ cash flows and not ‘Investing activities’. So in a nutshell all proceeds or charges arising from such activities are presented on the statement of cash flows within ‘Investing activities’.
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Capitalizing expenses as property, plant and equipment – Excel Balance Sheet Template

Excel Balance Sheet Template includes a group of assets labeled as “Property, plant and equipment”. When we have covered the meaning of those assets in our separate blog about property, plant and equipment, in general we want to share with you some issues regarding capitalizing expenses under the abovementioned line.

What often is ignored and neglected are the conditions when expenses are capitalized as assets and when not. It happens more than often that auditors find expenses that should have been capitalized. This is strange when you stop to think about it however. One should be more interested in keeping the costs as low as possible. But to put that aside, we are concentrating more on the possible treatments that should be considered.
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Classification of current and non-current liabilities – Excel Balance Sheet Template

Excel Balance Sheet Template includes both current and non-current liabilities. The question we sometimes get is when a liability is current and also what are non-current ones? What companies and accountants are not struggling, but simply forget, is the simple proper classification. The rules are fairly simple and remembering them is worthwhile.

So as a general rule, liabilities are shown on the balance sheet in two major groups. The condition for this classification is rather straightforward. If a liability is due to be paid in next 12 months, the liability is current. It’s due to be paid in next financial year and hence should be labeled as “current”. And as a result every other liability is non-current.

This is simple right? There are some additional considerations that may be of help to you in classification of liabilities. If loans or overdrafts are tied with covenants, then in case of any breaches that result in a default meaning that the loans may be called to be fulfilled in full, the loans need to be classified as current ones although the agreed due date is later than 12 months.
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Disclosing the impairment in the Annual Report – Property, plant and equipment schedules template

Property, plant and equipment schedules template includes a line “Impairment charge”, which is essentially an expense that is recognized after certain tests have been made for particular cash generating units (we’ll cover them in our future posts). When the expense is recognized in the accounts, it’s not all over yet.

Something has got to be disclosed in the Annual Report and what is almost always neglected besides showing the expense as part of the schedule, is additional information describing some of the key aspects of the charge. Readers of the Annual Report are entitled to know why the charge was made in the first place. So there’s the first disclosure – what and why was written off in value. But when this is the easiest part what usually is more not only sensitive, but trickier to disclose is the measurement. Yes, you did a test, but in addition to give a true and fair view of the financial performance and Continue reading →

Understanding when impairment needs to be charged – Property, plant and equipment schedules template

Property, plant and equipment schedules template includes a line labeled as “Revaluation surplus”. It may however not always be surplus and may be a negative in the form of a charge. In the accounting and IFRS it’s called an impairment charge. To start off with impairment one needs to understand when impairment is initially charged and why is it?
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revaluation surplus – Property, plant and equipment schedules template

Property, plant and equipment schedules template includes a line named as “Revaluation surplus”. This is not a normal default line in the schedule and is added on rare cases only. How and why is there such a line in the schedule?

First off the line only comes up when revaluation model is used. When normally assets are carried on the balance sheet at cost less accumulated depreciation model, under the revaluation model the assets are carried at a revalued amount, being its fair value at the date of the revaluation less subsequent depreciation and impairment, provided that the fair value can be measured reliably. Don’t make a mistake here, even assets that are revalued, are also depreciated. But that’s not the point we’re trying to make here.
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Subsequent measurement – Property, plant and equipment schedules template

Property, plant and equipment schedules template includes in addition to line “Additions” other changes inside the asset groups. After the initial recognition already discussed in our previous post the asset is carried on the balance sheet and various things can happen to it. It may be disposed, classified as held for sale, depreciated, revalued and impaired. When we’ll cover those changes in more detail in our future posts, what are in fact the key principles one should keep in mind when measuring the assets after the initial recognition?
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