Accounting Flashcards
Advantages of using IFRS
- internationality
- high-quality accounting standards
- comparability of international companies
- transparency for investors – especially for international investors
- closer to economic reality, shows true performance (fair value)
- increases decision usefulness
- decreases risk and WACC –> easier to acquire capital –> growth
Need for global set of standards from POV of:
- investor
- creditor
- government
a.) an investor
- transparency for international investors
- need relevant and reliable (decision useful) information
- want to see the true performance of the company
- comparability of different companies as investment cases
b.) a creditor
- transparency for creditors regarding (international) possible credit takers
- want to see the true performance of the company
- high quality reporting standards decreases risk
c.) a government
- easier to attract foreign investors –> economic growth
- should promote high-quality legislative standards
- not a concern for tax purposes (tax statements follow national standards)
HGB: creditor focus
IFRS: shareholder focus
Why are both general purpose standards?
- both have multiple users of the financial statements
- Characteristics of general-purpose statements are:
o Produced at least annually
o For a wide range of external users
o For privately owned and state- owned businesses
Effect of errors and non-compliance with IFRS
Possible for reasons for non-compliance:
- misunderstanding in accounting departments/management,
- errors in booking, using different standards/currencies/data
- might be done knowingly / in bad faith to inflate numbers for HR/investment purposes
Consequences
- poor reliability, lack of transparency
- general rule of true and fair presentation not respected
- low-quality accounting standards and practices increase risks
- poor comparability of international companies
- doesn’t show true economic reality / performance (fair value)
- information not decision useful
- scandal can lead to long-term damage (PR, customers, investors)
Which companies must/can prepare FSs according to IFRS?
- Companies without subsidiaries (i.e. company reporting) must prepare financial statements according to national standards
- Listed companies with subsidiaries (i.e. consolidated reporting) must prepare financial statements according to IFRS
- Non-listed companies with subsidiaries (i.e. consolidated reporting) may choose whether to publish financial statements according to IFRS or national standards
Benefits of US companies adopting IFRS
- Companies would avoid “double reporting” i.e. US companies listed in Europe (IFRS) must currently still file financial report according to US-GAAP
- IFRS is simpler, less detailed than US-GAAP
- IFRS easier to use, might result in better reporting(?)
- Investors prefer IFRS
- IFRS is a “global” approach; comparability to financial statements from other countries that have already adopted IFRS
What does the “going concern principle” imply?
- Going concern is an assumption that a company will still exist and operate in the foreseeable future and has no need or intention for liquidation
- The going concern is especially relevant for depreciation and amortization of assets (and liabilities). If no future benefit is anticipated, remaining books value of assets will be written off.
- Also important for considering acquisition of new assets or multi-period intra-company investments
Materiality and why omitting minor amounts doesn’t affect investor decisions
- Materiality: items of such size and nature that omitting/misstating them would influence economic decisions of primary users of financial statements
- Material items must be highlighted and described in notes of financial statements
- Material items is of more importance / more decision relevant for investors
- Minor amounts do not influence investment decision because of the small/marginal do not impact total value of the company, its assets and equity
Resining behind publishing financial statements as early as possible
- the balance sheet is recorded at the end of the financial period, the income statement and cash flow statements are recorded from beginning to end of the financial period
- if companies wait too long to publish financial statements after end of the financial period, the statements will no longer show true economic reality of the company
- thus, information becomes less reliable, it is no longer a fair representation of the company’s recent performance
- the quality / decision-usefulness of the information for investors decrease, thus increasing the investment risk and WACC
- it is unlikely that any material items will be left out by publishing financial statements before they are 100% precise –> therefore, investors prefer early reporting/recent data with (possibly) imprecise minor/non-material items
Concept of prudence/conservatism
- ensures that the value of incomes and assets are not overstated, and the value of liabilities and expenses are not understated
- the principle of conservatism is also applicable to IFRS, as it is a basic assumption under the framework
How does the IAS framework affect accounting under IFRS?
- The conceptual framework is not a standard; nothing in the framework overrides any standard / requirements of standard
- The conceptual framework describes the objectives of general-purpose financial reporting.
The purpose of the framework is to:
- Assist IASB to develop IFRS standards
- Assist preparers to develop consistent accounting practices where to standards apply
- Assist all parties in understanding and interpreting these standards
Effect on the balance sheet, if future economic benefits are no longer expected
if no future economic benefits are expected to be generated from an asset, said asset can no longer be capitalized and must be written off, i.e. fully depreciated over the P&L / income statement and removed from the balance sheet
Recognition of provisions
- 50-100%: probability/certainty of outflow of resources –> must be recognised as a liability in financial statements
- 10-49%: outflow of resources not probable –> not recognised as a liability, but must be included as contingency in notes of the financial statements
- <10%: remote possibility –> no recognition or notes
Key differences between HGB and IFRS
- PPE: Fair value (IFRS) vs. book value / depreciated hist (HGB)
- Goodwill impairment (IFRS) vs. depreciation (HGB)
- Capitalization of development costs mandatory (IFRS) vs. optional (HGB)
- Percentage-of-completion method (IFRS) vs. completed contract method (HGB)
Capitalisation of development costs (IFRS)
- Recognition criteria:
- Technical feasibility
- Intention to complete and sell
- Ability to use or sell
- Existence of a market
- Availability of resources
- Ability to measure costs reliably - Development costs are recognized as internally generated intangible assets
- Next step is determine the useful lifetime of the intangible asset:
- Finite lifetime –> amortization according to straight-line method
- Indefinite –> yearly impairment tests
