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IFRS 15 Revenue from Contracts with Customers

IFRS 15 requires an entity to (a) identifying the contract, (b) identify the performance obligation, (c) measure the transaction price, (d) allocate it to the performance obligations, and (e) recognize revenue when/as those obligations are met.

Sale and Leaseback

A sale and leaseback is a transaction in which one party (seller/lessee) sells and simultaneously leases-back an asset from another party (buyer/lessor). If it qualifies as a sale under IFRS 15, it recognized as a lease otherwise it is treated as a financial liability/asset.

Applying IFRS 16

IFRS 16 requires all lessees to bring their leases (with some exceptions) on balance sheet. It leaves the lessor accounting predominantly unchanged. Lessees can use either the full retrospective or modified retrospective approaches when initially applying the standard.

Lease Components

When a lease contract contain one or more lease and non-lease components, the lessee and the lessor allocates the consideration to the components based on their stand-alone selling prices.

Short-term Leases

In the context of lease accounting under IFRS 16 and ASC 842, short-term leases are leases not containing any purchase option which have a lease term of 12 months or less at the commencement date.

Lease Receivable

Lessors recognize a lease receivable on their finance leases at an amount equal to the net investment in the lease. Net investment in the lease equals gross investment in the lease minus unearned finance income.

Lease Payments

Lease payments represent the consideration for the underlying asset in a lease. It includes fixed payments, variable payments linked with an index or rate and payments/penalties contingent upon exercise of extension/termination options.

Lease Modifications

A lease modification is a change in scope and/or consideration of a lease which was not part of the initial terms and conditions of the lease agreement. They are accounted for either as separate leases or by adjusting lease liability and right of use asset.

Lease Liability

Lease liability represents the amount recognized by a lessee on its statement of financial position regarding its leases. It is initially measured at the present value of lease payments and is remeasured whenever there is a change in lease payments or lease modification.

Expected Credit Losses

Expected credit losses (ECLs) represent a probability-weighted provision for impairment losses which a company recognizes on its financial assets carried at amortized cost or at fair value through other comprehensive income (FVOCI) under IFRS 9.

Right of Use Asset

A right of use asset refers to the amount recognized by a lessee on its balance sheet that represents its right to use an asset under a lease contract. It is either presented on the face of the balance sheet or as part of fixed assets.

Lease Interest Rates

Accounting standards prefer the implicit rate but allow use of lessee's incremental borrowing rate if the implicit rate is not readily available.

IAS 23 Borrowing Costs

IAS 23 Borrowing Costs is an accounting standard that is part of IFRS and that contains the requirements for certain finance costs to be capitalized with the cost of qualifying assets for which such finance costs are being incurred.

Lease Term

Under IFRS 16, lease term equals the non-cancelable period for which the lessee has a right to use the underlying asset together with periods covered by an extension option which the lessee is reasonably certain to exercise and a termination option which the lessee is reasonably certain not to exercise.

IFRS 16 Leases

IFRS 16 Leases is the new lease accounting standard which replaced IAS 17. It eliminates the finance / operating lease classifications for lessees but retains it for lessors. A lessee is required to recognize right of use (ROU) assets and associated lease liabilities on the statement of financial position for most leases.

IAS 2 Inventories

IAS 2 Inventories contains accounting rules and principles that need to be followed with respect to inventories when financial statements of a company are being prepared according to IFRS.

Annuity Payment

An annuity is a series of equal cash flows that occur after equal interval of time. If we know the interest rate and number of time periods, we can work out the annuity cash flow that corresponds to a specific present value and/or future value.

Time Value of Uneven Cash Flows

When a cash flow stream is uneven, the present value (PV) and/or future value (FV) of the stream are calculated by finding the PV or FV of each individual cash flow and adding them up.

Types of Interest Rates

An interest rate is a percentage which represents the cost of money as a percentage of initial principal. Interest rates differ depending on whether they are nominal or real, quoted or effective, annual or periodic and so on.

Nominal Interest Rate

Nominal interest rate is the interest rate which includes the effect of inflation. It approximately equals the sum of real interest rate and inflation rate.

Real Interest Rate

Real interest rate is the interest rate adjusted for the effect of inflation on maturity value of a loan or investment. It approximately equals nominal interest rate minus inflation rate.

Quoted vs Periodic Interest

Quoted interest rate (also called nominal interest rate or annual percentage rate) is the non-compounded interest rate for a period of one year. It can be converted to periodic interest rate by dividing it with the number of compounding periods per year.

Time Periods in TVM

In case of simple interest, number of time periods t equals total interest divided by product of PV and interest rate and in case of compound interest, number of periods can be calculated using NPER function or using a logarithm-based formula

Tax Shield

Depreciation tax shield represents reduction in tax outflows when tax laws allow deduction of depreciation expense from taxable income. Interest tax shield refers to the tax-saving advantage of debt form of capital.

Pro Forma Financial Statements

Proforma financial statements are financial statements which provide information about a company’s expected financial performance and financial position in future.

Primary & Secondary Market

A primary market is a market in which corporations sell their securities to investors for the first time. On the other hand, a secondary market is a market in which investors trade the securities already issued with each other.

Break-even Analysis

In management accounting, break-even analysis is a technique aimed at finding the level of sales (in units or dollars) at which a company is neither making a profit nor incurring a loss.

Differential Analysis

Differential analysis (also called incremental analysis) is a management accounting technique in which we examine only the changes in revenues, costs and profits that result from a business decision instead of creating complete income statements for each alternative.

Segment Margin

Segment margin is the amount contributed by a segment towards common fixed costs and profit of a business. It equals the contribution margin of a segment minus traceable fixed costs i.e. fixed costs which can be traced to it.

Contribution Margin per Unit

Contribution margin per unit is the net amount that each additional unit sold contributes towards a company’s fixed costs and profit. It equals the difference between the product’s sales price and variable cost per unit.

Derivation of DOL Formula

Degree of operating leverage (DOL) is defined as percentage change in operating income that occurs in response to a percentage change in sales. In this article we use this definition to derive different formulas for DOL.

Histogram Equalization

Histogram equalization is an image processing technique which transforms an image in a way that the histogram of the resultant image is equally distributed, which in result enhances the contrast of the image. An equalized histogram means that probabilities of all gray levels are equal. In other words, histogram equalization makes an image use all colors in equal proportion.

Manufacturing Overhead Costs

Manufacturing overheads costs represent all such costs which are incurred in production of goods excluding direct materials and direct labor. Manufacturing overhead costs are further classified into fixed manufacturing overhead costs and variable manufacturing overhead costs.

Variable Costs

In management accounting, variable costs are cost items whose total cost varies proportionately with some underlying activity level such as total units, labor hours, machine hours, etc.

Mixed Costs

Mixed costs (also called semi-variable costs) are costs that have both fixed and variable components. The fixed element doesn’t change with change in activity level at all and the variable component changes proportionately with activity.

Trial Balance

Trial balance is a draft report used by accountants that simply lists all the ledger account balances extracted from the accounting system of a business at a given date.

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