Economic life

Economic life also known as useful life is either Economic life

  1. the period over which an asset is expected to be economically usable by one or more users, or Economic life
  2. the number of production or similar units expected to be obtained from an asset by one or more users. Economic life

Every asset has a lifecycle, which is its useful life from acquisition to disposal. Inevitably, the facilities we manage will outlive their installed building systems. The facility manager is responsible for managing not only the maintenance, but also the replacement of these systems. Additionally, facility managers replace components and systems for the purpose of improving performance or efficiency, which might occur prior to the end of the asset’s Read more

Required Disclosure for error restatements

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Required Disclosure for error restatementsRequired Disclosure for error restatements – If an error (either accidental or intentional in nature) is subsequently discovered that affected a prior period, the nature of the error, its effect on previously issued financial statements, and the effect of its adjustment on current period’s net income and EPS should be disclosed in the period in which the error is adjusted. In addition, any comparative financial statements provided must be adjusted. Required Disclosure for error restatements

In accounting for events after the reporting period errors easily occur because adjusting events are not properly recognised or the difference between adjusting events and non-adjusting events is not correctly made. Adjusting events are those providing evidence of conditions existing at the Read more

What are related parties?

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What are related parties – Related parties are relationships in which one party has the ability to control or significantly influence the economic and operating decisions of another. Transactions with related parties are a common feature of business. Typically related party relationships include the following:

  • Enterprises controlled or controlling one another, such as subsidiaries and joint venturesWhat are related parties
  • Individuals having an interest in the enterprise that gives them significant influence over the enterprise, such as majority owners
  • Key management personnel responsible for planning, directing and controlling the activities of the reporting enterprise, including close members of families of these individuals

Parties are considered related when one of the parties has control over the other or is able to Read more

Investment funds

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Investment funds are companies or organized joint ownerships which are collecting funds from a certain number of investors and which are engaged in reinvesting those funds according to the principle of risk spreading and to make its stockholders or members benefit from the results of its asset management.

The US terminology is mutual fund (among others).

Mutual funds are investment vehicles managed by an investment management company which pool funds from its participants called unitholders and invest them according to a specific investment style to earn return for the unitholders and allow diversification opportunities.

A mutual fund is created by forming a legal entity which collects cash from investors and issues them shares called units in proportion … Read more

Share-based payment

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In share-based payment transactions, an entity receives goods or services from a counterparty and grants equity instruments (equity-settled share-based payment transactions) or incurs a liability to deliver cash or other assets for amounts that are based on the price (or value) of equity instruments (cash-settled share-based payment transactions) as consideration.

The following transactions are not in the scope of IFRS 2:

  • transactions with counterparties acting as shareholders rather than as suppliers of goods or services;
  • transactions in which a share-based payment is made in exchange for control of a business; and
  • transactions in which contracts to acquire non-financial items in exchange for a share-based payment are in the scope of the financial instruments standards.

A ‘counterpartyRead more

Cash Flow Risk Management

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Cash Flow Risk Management The risk that companies must identify and manage is their cash flow risk, meaning uncertainty about their future cash flows. Finance theory is, for the most part, silent about how much cash flow risk a company should take on. Company Cash Flow Risk Management

In practice, however, managers need to be aware that calculating expected cash flows can obscure material risks capable of jeopardizing their business when they are deciding how much cash flow risk to accept. They also need to manage any risks affecting cash flows that investors are unable to mitigate for themselves. Company Cash Flow Risk Management

Deciding how much cash flow risk to take on what should companies look … Read more

Fundamental Principles of Value Creation

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Fundamental Principles of Value CreationFundamental Principles of Value Creation – Companies create value by investing capital to generate future cash flows at rates of return that exceed their cost of capital. The faster they can grow and deploy more capital at attractive rates of return, the more value they create. The mix of growth and return on invested capital (ROIC) relative to the cost of capital is what drives the creation of value. A corollary of this principle is the conservation of value: any action that doesn’t increase cash flows doesn’t create value. Fundamental Principles of Value Creation

The principles imply that a company’s primary task is to generate cash flows at rates of return on invested capital greater than the … Read more

Market Bubbles

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Market Bubbles- During the Internet bubble, managers and investors lost sight of what drove return on invested capital; indeed, many forgot the importance of this ratio entirely. When Netscape Communications went public in 1995, the company saw its market capitalization soar to $6 billion on an annual revenue base of just $85 million, an astonishing valuation.

This phenomenon convinced the financial world that the Internet could change the way business was done and value created in every sector, setting off a race to create Internet-related companies and take them public. Between 1995 and 2000, more than 4,700 companies went public in the United States and Europe, many with billion-dollar-plus market capitalizations. Market Bubbles

Many of the companies … Read more

Acquisition of investment properties

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Acquisition of investment properties – When should a purchase of investment property (or properties) be accounted for as a business combination, and when as a simple asset purchase? This is an important issue because the IFRS accounting requirements for a business combination are very different from asset purchases. Acquisition of investment properties

The purchase of investment property (or properties) is a business combination if the acquired set of assets and activities meets IFRS 3’s definition of a business

(IFRS 3 Appendix A and supporting guidance). That guidance explains that a business consists of ‘inputs’ and ‘processes’ applied to those inputs that together have the ability to create ‘outputs’ (IFRS 3.B7). Determining whether a … Read more

Financial reporting models

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Financial reporting models – This is a note on the innovative history of Philips’ financial reporting, see the ‘Introduction to a history of innovation in financial reporting‘.

Financial reporting modelsLiterature suggests that voluntary disclosure of financial reporting is associated with participatory, democratic ownership structures. Conversely, secretive attitudes are fostered by the centralization of equity ownership around dominating interest groups and by institutionalized systems of collective bargaining.

Over the years the purpose of annual reports changed by its changing group of users. Three ownership models that explain the purpose of annual reports are firstly described. After that the agency theory (see below) and creative accounting by CEO succession (follow link) are worked out as explaining tools.

(1) Proprietary

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