Financial Accounting For Test

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6 Steps to the Standard Setting Process

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1. Setting the Agenda
2. Planning the project
3. Developing and publishing the Discussion Paper
4. Developing and publishing the Exposure Draft
5. Developing and publishing the Standard
6. Process after the standard is issued

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The Introduction of IFRS in EU

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23rd March 2002 - Lisbona - The European Council decided to accelerate the process of harmonization of Accounting rules and established the deadline of 2005 for the adoption of common principles.

19 July 2002 - The European Council of Ministries approved the regulation that would require all EU companies listed on a regulated market to prepare accounts in accordance with International Accounting Standards for accounting periods beginning on or after 1 January 2005.

2003-2004 The EU commission endorses the International Accounting Standards in the European Union.

2005 - 2006 All EU companies listed on regulated markets in the EU to use endorsed IAS for consolidated accounts.

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Global Acceptance of the IFRS

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Canada 2011
EU 2005
Australia 2005
South Africa 2005
Brazil 2009 for listed companies, 2010 for banks
Japan - 2010 for some companies
Saudi Arabia - for banking insurance companies
USA - GAAP

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What is the ISAB Framework?

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Not an accounting standard
It is to guide the standard-setters for transactions not directly covered.

Objective: to make economic decisions.

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What is the conceptual framework of concepts for the ISAB?

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Investors
Objective: to make economic decisions
Need: to predict future cash flows
Relevant Information

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Except for the cash flow statement, all statements must be on the _______________ basis.

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accrual

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Under the _______________ for the accounting period concept, revenues and expenses are reported in the income statement in the period in which cash is received or paid.

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Cash pass if of accounting

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Under the _________________ for the accounting period concept, revenues are reported in the income statement in the period for which they are earned.

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Accrual Basis

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Enhancing characteristics of the Accrual Basis of Accounting

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Comparability (previous period and other companies)
Verifiability (same view by different users)
Timelines (up to date)
Understandability
NOT PRUDENCE OR CONSERVATISM

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Relevance of Accrual Basis of Accounting

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Relevant to its purpose
ECONOMIC DECISION MAKING
MATERIALITY & AGGREGATION

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Faithful Representation of Accrual Basis of Accounting

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TO REPRESENET AS WELL AS POSSIBLE WHAT UNDERLIES ITEMS
ECONOMIC SUBSTANCE (the real economic effects)
NEUTRALITY (free from bias)
COMPLETENESS (not too costly)

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Define the materiality and aggregation principle

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An entity shall present separately each material class of similar items, It shall present separately items of a dissimilar nature of function unless they are immaterial.

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Describe the frequency of reporting

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At least annually…

… in case of change in the end of the reporting period and presents financial statement for periods longer or shorter than one year.

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Asset/Liability Approach

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reducing the importance of the matching concept (the process of profit calculation)

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What is the accounting equation

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Assets = Equities + Liabilities

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Define an asset

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a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity

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Define a liability

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a present obligation of an entity arising from past transactions or events (outflows)

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Define Equity

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owner's capital + profit (drawings and retained earnings)

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A complete set of financial statements includes:

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the statement of financial position
the statement of comprehensive income
the cash flow statement
the statement of changes in equity
accompanying financial statements

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additional financial statements to the complete set of financial statements includes:

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financial review by management
environmental statement
value added statement

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IAS 1 (DOES / DOES NOT) prescribe the layout of the balance sheet.

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DOES NOT

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IAS 1 suggests showing items in order of _______________.

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liquidity

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Under IAS 1 it is usual to show ____________________ items separately.

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current and non current asset

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An asset is classified as a current asset if:

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Part of operating cycle of business
Held for trading purposes
Expected to be realized within 12 months
Cash or cash equivalent
Inventory or receivables

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Liability classified as current liability if

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Expected to be settled in normal course of the operating cycle

Primary purpose is to be traded

Due to be settled within 12 months of BS date

Payables

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Minimum items for IAS 1

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Revenue is a company's income from all product or service sales

Finance costs

Tax expenses

Amount related to P&L from discontinued operations

Profit or loss

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Define the Income Statement

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The statement of profit or loss and other comprehensive income.

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Other Comprehensive income includes

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items of income or expense that are not registered in profit or loss as required or permitted by other IFRS

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Total comprehensive income

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all components of 'profit or loss' and of 'other comprehensive income'

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Components of other comprehensive income

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changes in revaluation surplus
actuarial gains and losses on defined benefit plans
gains and losses arising from translating the financial statements of foreign countries
gains and losses on remeasuring available for sale financial assets
the effective portion of gains and losses on hedging instruments in cash flow hedge

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Statement of Changes in Equity

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reconciliation between the carrying amount at beginning and end of period (adjustments)

devided distributed per share

new capital contributed by the owners

Regulated by IAS 7

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Inventories are...

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assets held for sale in the ordinary course of business, in the process of production for such sale, or in the form of materials or supplies to be consumed in the production process or in the rendering of services.

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Inventories are measured at the __________ of historical cost and net realizable value (NRV).

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lower

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Net Realizable Value (NRV) is...

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the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs to make the sale.

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In order to measure inventory, you need to know…. (3)

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what costs are included
what cost formulas are permitted
and how net realizable value is determined

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Cost formulas to calculate historical cost that are permitted should...

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correspond closely with the actual physical flow of the goods and services.

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3 formulas are permitted to calculate historical cost

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Specific Identification
FIFO
Weighted Average

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IAS 2: EVALUATION OF CLOSING INVENTORY

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1. FIFO
2. WEIGHTED AVERAGE

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US GAAP: EVALUATION OF CLOSING INVENTORY

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1. FIFO METHOD
2. LIFO METHOD
3. WEIGHTED AVERAGE

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The valuation of inventory ______________________ the income statement and the balance sheet.

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directly affects

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the valuation of inventory at the end of an accounting period directly affects _____________.

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the profit

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there are _______________ ways of valuing the remaining inventory

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many

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although the _______________________ of all accounting periods is not affected by the valuation of inventory (because one year's closing inventory is the next year's opening inventory), the profit of any _______________ is affected.

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total profit; any single year

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In conventional accounting

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tangible assets were the main fixed assets to account for and cost was the main measurement basis

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in modern accounting

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companies moved towards intangible assets and values and accounting is moving to be suited to the changes

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Examples of tangible assets

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property, plant and equipment

held for use in the production or supply of goods/services, for rent to others, or for admin purposes.

they are expected to be used during more than one period (examples: land, buildings, plant, machinery, fittings, equipment, tools…)

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Intangible assets are:

Examples

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identifiable, non-monetary assets without physical substance.

R&D, patents, licenses, trade marks, concessions, goodwill, know-how, software, brands.

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For tangible assets, the problems of ________________ are generally smaller than for the intangible assets.

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recognition

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Intangible assets created by the company cannot be recognized as assets unless they have been __________ from somebody else because otherwise a cost or value is difficult to determine.

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bought

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Tangible Assets - an item of property that qualifies for recognition as an asset shall be measured at its _____________.

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cost

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the cost of tangible assets comprises

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purchase price
any costs directly attributable
the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located

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Intangible assets can be recognized if

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probable expected future economic benefits
reliable measure of cost (cuts out goodwill, research, brands or customer lists if they were internally generated)

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An intangible asset shall be measured initially at ______________

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cost

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Define depreciation

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the systematic allocation of the depreciable amount of an asset over its useful life

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tangible assets

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depreciation

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intangible assets

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amortization

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In the case of an asset that has a _______________________________ , it seems reasonable that no expense should ever be charged for using it up. This generally applies to land, purchased brands….

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a potentially unlimited/indefinite useful life

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These things can be depreciated

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equipment
buildings

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This thing cannot be depreciated

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land

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Intangible assets useful life is

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finite and indefinite

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Intangible assets with indefinite useful lives _________ amortize.

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shall not

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the useful life on an intangible asset that is not being amortized shall be reviewed each period to determine whether events and circumstances continue to ...

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support an indefinite useful life assessment

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IAS 36 on impairment to assets

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if there is any impairment of an asset the company must take into account and record the relative loss

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Measurement after recognition model

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an entity shall choose either the cost model or the revaluation model as its accounting policy and shall apply that policy to an entire class of property, plant and equipment

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cost model

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the asset shall be carried at its cost less any accumulated depreciation and any accumulated impairment losses

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revaluation model

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the asset whose fair value can be measured reliable shall be carried at a reevaluated amount, being its fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment loss. Revaluation shall be made with sufficient regularity to ensure that the carrying amount does not differ from that which would be determined using fair value at the balance sheet date.

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Arguments in favor of cost or revaluation model

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historical cost is an easier and cheaper method of valuation than most

historical cost is more reliably determined than other current valuation could be

historical cost is not the most relevant information for making economic decisions

fair value is more relevant than past value, but it involves much more subjectivity

for certain assets, fair values are reliable

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Financial assets are any assets that are

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cash

contractual rights to receive cash/other financial assets from another party

contractual rights to exchange financial instruments with another party under conditions that are potentially favorable to the entity

an equity instrument of another entity

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cash is reported as a current asset if it is

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readily available to pay current obligations and is free of restrictions

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cash consists of

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coins, currency, available funds on deposit at the bank and petty cash

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cash also includes

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money orders, certified checks, cashier's checks, personal checks, bank drafts, and savings accounts.

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___________ CHECKS ARE NOT CLASSIFIED AS CASH

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POSTDATED

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Reporting cash needs special attention to the following:

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1. restricted cash
2. cash in foreign currencies
3. bank overdrafts
4. cash equivalents

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Restricted cash

if the compensating balance is material, must be segregated from cash as follows:

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classified as current assets if they relate to ST loans
classified as non-current assets if set aside for investment or financing purposes

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Bank overdrafts are reported as

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current liabilities

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In general, bank overdrafts _________________ be offset against the cash account

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should not

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Bank overdrafts may be offset against available cash if...

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both accounts are at the same bank

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define cash equivalents

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short-term, highly liquid investments that are readily convertible to known amounts of cash … subject to an insignificant risk of change in value.

origional maturity is generally less than 3 months

examples: t bills, money markets funds, commercial paper

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Under IFRS, some equity instruments can be classified as cash equivalents. For example,

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preferred shares acquired within a short period of time of their maturity and with a specified redemption date.

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Receivables are

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claims against customers and other parties for money, goods, or services, classified as current assets if there is the expectation to collect within one year of the operating cycle.

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receivables can be classified as either _______________________________________.

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trade receivables or non trade receivables

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Trade receivables include

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accounts receivable
notes recieveable

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non-trade receivables include...

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advances to employees or other officers
receivables from the government
dividends and interest receivables
amounts owing by insurance companies

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A liability is defined as

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a present obligation arising from a past event, the settlement of which is expected to lead to an outflow of future economic benefits from the entity

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liabilities include...

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payables
provisions
contingent liabilities

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a provision should be recognized when...

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(a) an entity has a present obligation as a result of a past event

(b) it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and

© a reliable estimate can be made of the obligation

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the amount recognized of the provision is

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the best estimate of the expenditure required to settle the present obligation at the balance sheet date

where the provision being measured involves a large population of items, the obligation is estimated by weighing all possible outcome with their associated probabilities

provisions shall be reviewed at each balance sheet date to reflect the best estimate

a provision shall be used only for expenditures for which it was originally recognized

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an entity (SHOULD/SHOULD NOT) recognized a contingent liability

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should not

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Components of equity

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subscribed capital
share premium
reserves
profit or loss reserves

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subscribed capital is made up of different classes of shares including

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ordinary shares
+provide a claim against the entity
+confer voting rights on shareholders
+entitle their owners to distribution of profits in the form of dividends


and preference shares
+subject to preferential treatment, often with receipt of dividends or order of ranking for asset distributions
+some have voting rights
+some have voting rights if dividend unpaid
+ others have no voting rights

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Define share premium

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the amount received by a firm over the par value of its shares that forms a part of the non-distributable reserves of the firm. Also called paid in surplus

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Define Par value

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the nominal value shown on the principal side of a bill of exchange, currency, security, or other type of financial instrument. It is typically different from the market price. AKA face value, nominal value, or redemption value

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revaluation reserve

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gains and losses on revaluation of property, plant, and equipment. The current and probable future value of the asset is higher than the recorded historical cost of the same asset.

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Legal reserve

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a percentage of profits undistributable by law

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reserves

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all equity other than those arising from contributed capital.

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retained earnings

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accumulation of prior periods profits and losses
reduced by dividends declared and paid
reduced by any transfers to other reserves

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changes in accounting policies as the result of the initial adoption of a new accounting standard can result in ….

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a direction adjustment in retained earnings

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the recognition of prior period erros can result in...

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in a reduction in retained earnings