B. Financial statements Flashcards

1
Q

What is the ‘Framework’?

A

The Conceptual Framework of Financial Reporting

  • transactions are becoming more complex
  • IASB developed Framework to law out broad principles that should be applied when developing accounting standards and treatment
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2
Q

Purpose of IFRS Framework?

A
  • assist IASB to develop IFRS Standards that are based on consistent concepts
  • assist preparers to develop consistent accounting policies that are new
  • assist all parties to understand and interpret IFRS standards
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3
Q

What is prioritised between Framework and IFRS Standards?

A

Standards prioritised as Framework is not an accounting standards

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4
Q

What does the Framework cover?

A
  • objs of the general purpose of financial reporting
  • qualitative characteristics of useful financial reporting
  • financial statements and the reporting entity
  • elements of the financial statements
  • recognition and derecognition
  • measurement
  • presentation and disclosure
  • concepts of capital and capital maintenance
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5
Q

What is the objective of financial reporting?

A

provide information about the reporting entity that is useful to users in making decisions relating to providing resources to the entity

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6
Q

Who uses financial statements?

A
  • existing and potential investors
  • lenders
  • other creditors
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7
Q

What decisions are made in relation to resources and financial statements?

A
  • buy, sell of hold equity and debt instruments
  • provide or settle loans and other forms of credit
  • exercise the rights to vote on management actions
  • assessment of stewardship of directors
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8
Q

What are the two qualitative categories of the Framework?

A

fundamental-‘must have’

  • relevance
  • faithful representation

enhancing- ‘would be nice to have’

  • comparability
  • verifiability
  • timeliness
  • understandability
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9
Q

What is the fundamental quality characteristic ‘relevance’?

A
  • when it influences an economic decision by helping them evaluate past, present or future events
  • affected by nature or materiality
  • according to Framework, info is material if its omission or misstatement could influence the decision of its users
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10
Q

What is ‘materiality’?

A
  • entity specific aspect of relevance
  • depends on size of item/entity in context of specific financial statements
  • takes different forms and values so Framework does not attempt to quantify it
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11
Q

What is the fundamental quality characteristic ‘faithful representation’?

A
  • info must be accounted for and presented in accordance with substance and economic reality
  • not merely legal form
  • concept of applying substance over form
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12
Q

What are the 3 characteristics of ‘faithful representation’?

A
  • completeness:full picture, understandable
  • neutrality:no bias, prudence
  • free from error:within bounds of materiality
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13
Q

What is prudence?

A
  • accounting mindset
  • favours caution in situations of uncertainty and judgement
  • tied to neutrality of faithful representation
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14
Q

What is measurement uncertainty?

A
  • estimate used and described clearly and accurately as an estimate
  • free from error does not mean perfectly accurate in all respects
  • tied to free from error of faithful representation
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15
Q

What is the enhancing quality characteristic ‘comparability’?

A
  • compare fin stmts over time to identify trends
  • compare to different entities
  • must treat similar items in a relevant, reliable and consistent matter
  • disclose accounting policies
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16
Q

What is the enhancing quality characteristic ‘verifiability’?

A
  • if info can be independently confirmed or verified i.e audited
  • verification can be direct or indirect e.g counting cash or checking inputs
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17
Q

What is the enhancing quality characteristic ‘timeliness’?

A
  • providing info to decision makers in timely manner

- older info is less useful

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18
Q

What is the enhancing quality characteristic ‘understandability’?

A
  • info needs to be readily understandable by users
  • include all useful info
  • need to consider format and audience
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19
Q

What does the Framework state that financial statements provide?

A

provide information about economic resources of the reporting entity

  • claims against the entity
  • changes in those resources and claims that meet the definitions of the elements of financial statements
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20
Q

What is the going concern assumption?

A
  • foreseeable future is considered to be >12 months
  • fin statements are prepared under the assumption that entity neither has an intention to liquidate or significantly reduce scale of operations
  • if business was not deemed to be a going concern, the financial statements would be prepared on the break-up basis
  • -e.g all assets values using realisable values and no -non-current-classifications can be used
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21
Q

What is the accruals concept?

A

states that events should be dealt with in the accounting period they occur, rather than the period in which cash flows occur

  • no longer considered to be an underlying concept of financial statements
  • still considered by Framework as important concept
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22
Q

What is the reporting entity?

A

entity that chooses to or is required to prepare financial statements
-can be single or be composed of multiple

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23
Q

What is a consolidated financial statement?

A

-statements including both parent and subsidiaries

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24
Q

What is a unconsolidated financial statement?

A

-reporting parent alone’s financial statements

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25
What are the 5 elements of a financial statement?
``` assets liabilities equity income expenses ```
26
What are assets?
'a present economic resource controlled by the entity as a result of past events an economic resource is a right that has the potential to produce economic benefits'
27
What is a liability?
'a present obligation of an entity to transfer an economic resource due to past events'
28
What is equity?
'the RESIDUAL interest in the assets of an entity after deducting all its liabilities'
29
What is income?
'increase in assets or decrease in liabilities that results in an increase in equity, other than those relating to contributions from equity participants' -e.g sales, gains on disposal of non-current assets and unrealised gains
30
What are expenses?
'decrease in assets or increase in liabilities that results in a decrease in equity, other than those relating to distributions to equity participants -e.g expenses such as wages, purchases, depreciation and loses
31
breakdown of Asset meaning?
right: created through contracts or legislation potential to produce future economic benefit:right exists and would produce benefits beyond those available to other parties control:direct use and obtain benefit, restrict others, can be leased or owned
32
breakdown definition of liabilities?
obligation:duty/responsibility transfer of economic resource: transfer of cash, property or service present obligation as a result of past events:entity has already reaped benefits or as a consequence make a transfer
33
breakdown definition of equity
- residual amount after deducting all liabilities | - may be sub-classified into share capital, retained earnings and other reserves
34
What criteria must items meet to be recognised in financial statements?
- meet the definitions of one of the elements - provide relevant info - provide faithful representation of element
35
What indicates that information on an element is not relevant?
- uncertain whether asset or liability exists | - it exists but probability of an inflow or outflow of economic benefits is low
36
What indicated that information on an element provides faithful represenation?
- linked to the ability of measuring element | - high measurement uncertainty(hard to estimate) means inclusion would not provide faithful representation
37
What is derecogntion?
- removal of all or part of an asset/liability from fin stmts - occurs when item no longer meets the definition of asset/liability
38
When is an asset derecognised?
when entity loses control of all/part of recognised asset
39
When is a liability derecognised?
entity no longer has a present obligation for all/part of the recognised liability
40
What are the 2 types of ways you can measure elements in financial statements?
historical | current value: fair value, value in use, current cost
41
What is historical cost?
providing monetary information derived from the price of transaction at the date transaction occurs - does not reflect change in value except for impairment - better for stable, long term asset
42
What is an asset's historical cost?
value incurred in acquiring/creating asset | (consideration paid +transaction cost)
43
What is an asset's liability cost?
value of the consideration received to incur or take on liability - transaction costs
44
What does current value measure?
monetary value using info updated to reflect conditions at the measurement date -better for volatile, market sensitive asset bases include:fair value, value in use, current cost
45
What is fair value of an item?
price that would be received to sell an asset, or paid to transfer a liability, between market participants at measurement date
46
What is value in use and fulfilment values?
assets use value in use:present value of cash flow, or other economic benefits, which an entity expects to derive from the use of an asset and from its ultimate disposal fulfilment value of a liability: present value of cash, or other economic resources, that an entity expects to be obliged to transfer as it fulfils a liability
47
What is current cost?
cost to acquire(of consideration) equivalent asset(liability) at measurement date, plus(minus) the transaction costs that would be incurred
48
What features does the historical cost approach have?
- accounting transactions recorded at their original historical monetary cost - items/events for which no monetary transaction has occurred are usually ignored altogether - profit for period found by matching income against the cost of items consumed in generating the income for the period
49
What are the advantages of historical cost accounting?
- easy to understand - straightforward to produce - objective and free from bias - reliable and original values can be verified based on original invoices/accompanying documents - do not record gains until they are realised
50
What are the disadvantages of historical cost accounts?
- prices may change significantly over period - affects accounting ratios and analysis - not accurate reflection of current value - difficult to assess year to year results
51
What factors should be considered when selecting a measurement base for an item?
- should provide most relevant and faithful representation in line with the fundamental qualitative characteristics - characteristics of asset should be considered when selecting the measurement base e.g more volatile->use current value, longterm and stable->use historical - judgement applied when deciding
52
Where does the Framework outline that income and expenses should be included?
- in SOPL:as it is primary source of info | - outside SOPL in other comprehensive income
53
When is the Board allowed to exclude income and expenses from SPL?
in exceptional circumstances, board may choose to exclude from SPL due to change in current value and instead include outside SPL -only allowed if the result gives a more relevant and faithful view
54
What does the Framework suggest about aggregation?
need to find balance between summarising large volume of data and concealing detail i.e between insignificant detail or excessive aggregation
55
What are the 2 concepts of capital?
- financial concept of capital | - physical concept of capital
56
What is the financial concept of capital?
capital=net assets or equity of entity - use if main concern of financial statements is the maintenance of the nominal value invested capital - used by most entities
57
What is the physical concept of capital?
capital=productive capacity of the entity - measured as units of output per day - used if main use of financial statements is operating capacity of the entity
58
What is capital maintenance?
preserving the value of the capital of the entity and reporting profit only if the capital of the entity has been increased by activities and events in the accounting period -tried to ensure excessive dividends are not paid in times of changing prices
59
What are capital maintenance concepts?
Physical capital maintenance (PCM) also known as operating capital maintenance (OCM) Financial capital maintenance (FCM)
60
What is Physical capital maintenance?
setting aside profits in order to allow the business to continue to operate at current levels of activity -adjusting opening capital by specific price changes
61
What is financial capital maintenance?
set aside profits in order to preserve the value of shareholders' funds in 'real terms' i.e after inflation -can be measured in monetary terms or in constant purchasing power
62
What is the purpose of financial statements?
- provide info bout financial position to help make economic decisions - show how effectively management have looked after the resources of the entity
63
What does the IAS1 define as a complete set of financial statements?
- SFP - either SPL and other comprehensive income or SPL plus statement showing OCI - statement of changes in equity (SOCIE) - statement of cash flows (SCF) - accounting policies note and other explanatory note
64
What was the previous term for SFP & SCF?
previously called balance sheet & cash flow statement
65
Who is responsible for preparing and presenting financial statements?
the board of directors (and /or other governing bodies)
66
What does fair presentation of fin statements require?
- FAITHFUL REPRESENTATION of the effects of transactions - select definitions and RECOGNITION criteria in accordance with framework and apply according accounting policies - present info in a RELEVANT, reliable, comparable and understandable manner - provide additional disclosures if the requirements are insufficient
67
What disclosures should an entity make if they feel compliance to IFRS Standards would be misleading?
- that management have concluded that fin stmts do present fairly the financial position - entity complies with IFRS Standards except for one - Standards departed from and the nature of departure - financial impact of departure Departure is usually very rare
68
What does it mean for fin stmts to be prepared on going concern basis?
preparing them on assumption that entity will continue trade for the foreseeable future -not intending to liquidate assets or cease trading
69
What does it mean to prepare financial stmts on accrual basis?
transactions should be recorded in the accounting period they relate to regardless of whether or not cash has been received/paid -expenses recognised in SOFP and other comp income to match against directly related income
70
What does consistency mean in fin stmts?
presentation and classification of items should be consistent from one period to the next
71
How are materiality and aggregation handled in fin stmts?
each material class of similar items should be presented separately immaterial items should be aggregated with amounts of a similar nature and need to be disclosed separately
72
What are the IAS1 rules on offsetting?
assets and liabilities, income and expenses, should not be offset except when required
73
What are the IAS1 rules on comparative information?
should be disclosed in respect to previous period for all amounts reported unless IFRS requires otherwise
74
What are some other requirements of financial statements?
- presented at least annually - within 6 months are the end of the reporting period for public entities and 9 months for private entities - no format specified but does provide appendix which sets out illustrative formats - provides guidance on items that should be disclosed and those that can be relegated to notes
75
When should an asset be classified as a current asset?
- expected to be realised in normal operating cycle - held primarily for trading purposes - expected to be realised within 12 months of the end of the reporting period - is cash or cash equivalent
76
When should a liability be classified as a current liability?
- expected to be settled within normal operating cycle - due to be settled within 12m of the end of the reporting period - help primarily for the purpose of being traded - entity does not have unconditional right to defer settlement of the liability for atleast 12m after the end of the reporting period
77
What is the SOCIE?
Statement of changes in equity - summary of all changes in equity i. e effect of share issues and dividends, changed in net assets in period
78
What does share capital in the SOFP include?
ordinary/equity shares and preference shares
79
What is an ordinary/equity share?
- shareholder owns a percentage of the entity's net assets - voting rights attached to share - year end dividend may be paid depending on performance - dividend is paid as amount per share - dividend will first be proposed by directors then declared (confirmed) and then paid - dividends should only be accounted for when declared - dividends may be interim i.e paid part way through the year and final
80
What are preference shares?
- own a percentage of the entity's share capital - voting rights not attached - year end dividend paid based on percentage of investment - should be accounted for on accrual basis, usually on SOFP and SPL
81
What is total comprehensive income?
profit or loss for the period plus other comprehensive income
82
What is OCI?
other comprehensive income - income that is not recognised in profit or loss - i.e they are recorded in reserves rather than as an element of the profit for the period - mainly includes change in reservation reserve
83
What is the alternative method for presentation of expenses other than function method?
categorise by NATURE of expenses, commonly associated with manufacturing entities but not widely utilised
84
Where are material items disclosed?
nature and amount disclosed separately before operating profit eg: -inventory write offs -impairment losses -restructuring costs -disposals of property, plant and equipment
85
What was the SPL formerly known as?
the income statement
86
What are property, plant and equipment? (IAS 16)
tangible assets that: - are held by an entity for use in the PRODUCTION or supply of goods or services - expected to be USED during more than ONE period
87
What is the carrying amount?
'amount at which an asset is recognised, after deducting any accumulated depreciation or impairment losses'
88
What is the cost of an asset?
'amount paid and the fair value of other consideration given to acquire an asset at the time of its acquisition or construction'
89
What is the depreciable amount?
'the cost or valuation of an asset less its residual value'
90
What is depreciation?
'systematic allocation of the depreciable amount of an asset over its useful life'
91
What is fair value?
'the amount for which an asset can be exchanged between knowledgable, willing parties in an arm's length transaction'
92
What is impairment loss?
'amount by which carrying amount exceeds its recoverable amount' i.e loss in fair value
93
What is the recoverable amount?
'the higher of an asset's net realisable value and its value in use'
94
What is the residual value?
'the residual value of an asset is the amount it would currently obtain from disposal of the asset, after deducting the estimated costs of disposal, assuming that the asset was already at the point where it would be disposed of' i.e estimated value of a fixed asset at the end of its lease term or useful life.
95
What is the useful life of an asset?
'the period over which the asset is expected to be available for use by the entity of the volume of output expected from the asset'
96
When should an asset be recognised according to IAS16?
- it is probable that future economic benefits will flow to the entity - the cost of the asset can be measured reliably
97
What should the cost of an asset include according to IAS16?
all of the items that can be attributed to its purchase and to putting the asset to use e.g purchase price, delivery, dismantling and restoration
98
When should subsequent expenditure be capitalised?
any enhancements - the expenditure improves the future economic benefits the asset with generate - it replaces a component of an asset and the carrying amount of the component is derecognised - cost of a major inspection for faults and the carrying amount of the previous inspection is derecognised
99
How should the costs of day-to-day servicing be recognised?
in the statement of profit or loss as incurred
100
What are the 2 models IAS 16 required entities to apply for measurement after initial recognition?
cost model | revaluation model
101
How do you calculate the carrying value using the cost model?
carrying value = cost - accumulated depreciation - accumulated impairment losses
102
How do you calculate the carrying value using the revaluation model?
carrying value=fair value - accumulated depreciation - accumulated impairment losses
103
What should an entity ensure if they use a combination of the cost model and the revaluation model?
that each class of assets uses the same model
104
What is the depreciable amount of an asset?
cost - residual value or valuation - residual value
105
Is land depreciated?
No as it has unlimited life -remove land value from total buildings have finite life so should be depreciated
106
When is the depreciation charge 0?
when residual value > carrying amount
107
What are the two methods used to calculate depreciation?
straight line or reducing balance
108
What is the straight line method of depreciation?
same value of depreciation yearly - same % value each year - if % isnt given: (cost - residual value)/economic life
109
What is the reducing balance method of depreciation?
based on carrying amount of asset, expressed as %, doesnt take into account any estimated residual value Dr depreciation expense (SPL) Cr Accumulated depreciation (SOFP)
110
How often should depreciation methods be reviews?
periodically - if there is a change in consumption patterns, must be changed to reflect this - does not represent change in policy so no need to alter previous periods
111
Does a change in useful life or residual value affect previous accounting periods?
No, only adjustments for current or future periods as it is just a change in accounting estimate
112
What is the revalued amount of an asset ?
the fair value at the date of revaluation
113
What is the IFRS 13 definition of fair value?
'the price that would be received to sell and asset/transfer a liability in an orderly transaction between market participants at the measurement date' i.e market price
114
What should be done with accumulated depreciation up to the date of revaluation?
if an asset is revalued, acc dep should be reverse - will increase reval surplus - depreciation calculated based on revalued amount
115
Can you revalue a single asset in a class?
no, whole of the class of assets must be revalued e.g all buildings if one is revalued
116
How frequently should revaluations happen?
depends on volatility of the fair values of the asset class | -more volatile, more frequent revaluations
117
What are the 4 steps to account revaluation?
1. Restate asset cost to the revalued amount 2. Remove any existing accumulated depreciation 3. Transfer the increase in the cost account and the existing accumulated depreciation to the revaluation surplus account within equity 4. Recalculate current year's depreciation on the revalued amount if applicable
118
Where are revaluations that affect the revaluation surplus shown?
on the SFP and OCI under the heading 'OCI'
119
What should be done with an asset when it disposed of or is permanently withdrawn from use?
should be eliminated from the SOFP
120
How do you calculate gain/loss on disposal?
net disposal proceeds- carrying amount
121
How is the gain on disposal measured for a revalued asset?
difference between the carrying amount on the SOFP and the proceeds received - unrealised gain in the revaluation surplus must be removed if asset has been revalued in the past - transferred from revaluation surplus to retained earnings - movement seen in SOCIE, doesnt affect year's profits
122
What disclosures are required for each class of property, plant and equipment?
- measurement bases i.e cost or valuation - depreciation methods with useful life or depreciation rate - gross carrying amount and accumulated depreciation at the beginning and end of the period - reconciliation of additions, disposals, revaluations, impairments and depreciation - when assets have been revalued:basis, date, whether independent valuer was used, carrying amount, revaluation surplus
123
What situations indicate that an asset may be impaired?
- decline in market value - technological, legal or economic changes - physical damage - plans to dispose of asset
124
Where should an impairment loss be recorded?
as an expense in the SPL (OCI), unless the asset has previously been revalued upwards then it is offset against revaluation surplus
125
What is a cash-generating unit?
smallest identifiable group of assets that generates independent cash flows
126
What disclosures does IAS 36 require of PPE?
- amount of impairment losses recognised in SPL during period and where it has been included i.e which expense category - amount of reversals for impairment losses recognised in SPL during period and where included - amount of impairment losses recognised directly in equity during the period - amount of reversals of impairment losses recognised directly in equity during the period
127
What is the purpose of IFRS 5?
establish principles for reporting information about discontinued operations and non-current assets held for sale
128
What is the definitions of a discontinued operation?
'a component of an entity that either has been disposed of or is classified as held for sale and: - represents a separate major line of business - is part of a single co-ordinated plan to dispose of a separate major line of business - is a subsidiary acquired exclusively with a view to resale'
129
What is a held for sale asset?
when an asset may not have been disposed but is no longer used by entity e.g something they are attempting to sell
130
When can an entity classify a non-current asset as held for sale?
if carrying amount will be recovered principally through a sale transaction rather than through continuing use
131
What is the held for sale asset criteria?
- available for immediate sale in its present condition - sale if highly probable - management are committed to a plan to sell the asset - an active programme to locate a buyer has been initiated - asset is being actively marketed at a reasonable price - sale is expected to complete within one year from the date of classification - it is unlikely that the plan will change significantly or be withdrawn -all criteria must be met
132
How is a non current asset held for sale measured?
LOWER of the: - carrying amount - fair value - cost of disposal
133
Are non-current assets depreciated?
no
134
What should be done if value of the asset held for sale is less than carrying amount?
should be written down and the impairment charged against profit
135
Where are held for sale assets classified?
separate category of current assets between the normal current asset section
136
What is a lease?
a contract, or part of a contract, that conveys the right to use an asset for a period of time in exchange for consideration
137
Who is the lessor?
entity that provides the right to use an underlying asset in exchange for consideration
138
Who is the lessee?
entity that obtains the right to use an underlying asset in exchange for consideration
139
What is the 'right-of-use' of an asset?
represents the lessee's rights to use an underlying asset for the lease term
140
At the commencement of the lease, what should the lessee recognise?
- a lease liability | - the right-of-use asset
141
How is lease liability initially measured?
at the present value of the lease payments that have not yet been paid
142
What should lease payments include?
- fixed payments over the lease term - amount expected to be payable under residual value guarantees - options to purchase the asset that are reasonably certain to be exercised - termination penalties, if the lease term reflects the expectation that these will be incurred
143
What is the discount rate?
the rate implicit in the lease | -if it cant be determined, entity should use its incremental borrowing rate
144
What is the right-of-use asset initially recognised at?
recognised at cost
145
Initial cost of the right-of-use asset comprises of?
- amount of the initial measurement of the lease liability - lease payments made at of before commencement date - any initial direct costs - estimate costs of removing or dismantling the underlying asset, as per the conditions of the lease
146
What is the lease term?
the length of time that the lessee has the right-of-use of an asset
147
What does the lease term comprise of?
- non-cancellable periods - periods covered by an option to extend the lease, if they are reasonably certain to be exercised - periods covered by an option to terminate the lease, if these are reasonably certain not to be exercised
148
How is the carrying amount of the lease liability increase?
by the interest charge
149
How is the right-of-use asset measured?
using the cost model: initial cost -acc. dep. - impairment losses -can also use other methods if asset is usually accounted in these methods
150
How is depreciation of the right-of -use asset calculated?
- if ownership of the asset transfers to the lessee at the end of the lease term then depreciation should be charged over the asset's remaining useful life - otw, depreciation is charged over the shorter of the useful life and the lease term
151
When is a simplified treatment of leased assets allowed?
If the lease is short term (<12m) or of low value - lessee can recognise payments in PorL on straight line basis - no lease liability or right-of-use asset would be recognised
152
What are some examples of low value assets?
tablets, small personal computers, telephones, small items of furniture -low value when new so car not included
153
How do you calculate annual lease rental expense?
total rentals payable/total lease period
154
What are inventories?
Assets that are: - held for sale - in the process of production - materials that will be used in the production process
155
How is inventory measured?
value at lower or cost vs net realisable value
156
What costs are not included in inventory?
- abnormal amounts of wasted materials, labour or other production costs - storage costs - administration costs that do not contribute to bringing the inventories to their present location and condition - selling and distribution costs these should be treated as expenses against profit in the period that they arise
157
What is costs of purchase?
purchase price, import duties, handling costs and other costs directly connected with the acquisition of the goods
158
What are the costs of conversion?
costs directly related to the units being produced e.g direct labour costs, allocation of fixed and variable overhead costs incurred in production
159
What are variable production overheads?
indirect costs of production that vary directly with the volume produced e.g heat, light and power
160
What are fixed production overheads?
indirect costs of production that do not vary directly with the volume produced and remain constant regardless of the number of units produced e.g depreciation of machinery, factory administration costs
161
What should the allocation of overheads be based one?
normal capacity of the business -any excess OHs due to inefficiencies or production problems should be treated as an expense in the period that they occur
162
What costs should be used if inventory is valued at cost?
actual cost of an item (unit cost) or a reasonable approximation to actual cost should be used (if there are a large number of items)
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What are the most common approximations?
FIFO and AVCO
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What is FIFO?
first in, first out - oldest inventory sold first e.g supremarkets - closing inventory valued at most recent purchase prices
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What is AVCO?
average cost - total purchase price of all units/total units in period - using periodic or continuous method - used in oil refinery where inventory is stored together and prices fluctuate so cant distinguish difference
166
What are the main disclosure reqs of IAS 2 Inventories?
- accounting policy adopted and cost formula used - total carrying amount (raw materials + wip + finished goods) - amount of inventories carried at NRV - amount of inventories recognised as an expense during the period - details of circumstances that have led to the write-down of inventories to their NRV
167
According to IAS 10, what defines an event after the end of the reporting period?
'those events, favourable and unfavourable, that occur between the end of the reporting period and the date when the financial statements are authorised for issue'
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What are the two main types of events after the reporting period?
adjusting events | non-adjusting events
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What is an adjusting event?
'those events which provide evidence of conditions that existed at the reporting date' -FS should be adjusted to reflect event
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What is a non-adjusting event?
'those that are indicative of conditions that arose after the reporting date' - FS should not be adjusted - should be disclosed if the affect users' understanding of the FS
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What are some examples of non-adjusting events?
- selling in post year-end - evidence that customer has gone into liquidation - discovery of fraud or error that existed prior to the year-end - completion of a court case entered into before the reporting date - completion of an insurance claim relating to an event that occurred prior to the year-end - determination after year end, of the sale or purchase price of assets sold or purchased before year end
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What are some examples of non-adjusting events?
- acquisition or disposal of subsidiary after YE - announcements of a plan to discontinue an operation - destruction of an asset by a fire or flood after reporting date - announcements of a plan to restructure - share capital transactions after the reporting date - changed in taxation/exchange rate after reporting date - strikes or other labour disputes - equity dividends declared after the reporting period but before the financial statements are authorised for issue
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How should non-adjusting events that are material be disclosed?
by note: - nature of event - estimate of financial effect - date the directors approve financial statements
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What is NRV?
net realisable value: | estimated selling prices - costs to completion - costs to sell
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How does the statements of cash flows help?
- assess liquidity and solvency - assess financial adaptability - help users assess future cash flows - highlight where cash is generated - cash flows are objective:fact, not opinion - help indicate problems early on
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What is cash?
'comprises cash on hand and at bank including overdrafts and demand deposits'
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What is cash equivalents?
'short-term, highly liquid investments that are readily convertible to known amounts of cash which are subject to an significant risk of changes in value e.g short-dates treasury bill'
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What are operating activities?
'the principal revenue-producing activities of the enterprise and other activities that are not investing or financing activities'
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What are investing activities?
'the acquisition and disposal of long-term assets and other investments not included in cash equivalents'
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What are financing activities?
'activities that result in changes in the size and composition of the contributed equity and borrowings of the entity'
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What are the two ways 'cash generated from operations' can be calculated?
direct method and indirect method | -indirect method most likely to be examined
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What is the indirect method of calculation?
-takes profit pre-tax from SPL -adjusts it for non-cash items -converts income and expenses figure from accruals basis to cash basis so that just the cash flows generated from operating activities remain
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What is the direct method of calculation?
adding cash inflows and deducting cash outflows in respect of operating activities
184
Which method does IAS7 encourage between direct and indirect method?
indirect
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What are the differences between direct and indirect methods?
Indirect: - reconciliation highlights the fact that profit=/= cash - doesn't show significant elements of trading cash flows - low cost in preparing the info direct: - discloses info not shown elsewhere in fin stmts - shows the cash flows from trading - gives the users more info in estimating future cash flows
186
What are the other cash flows from operating expenses?
- interest paid | - income tax paid
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What are some cash flow from investing activites?
Inflows: - interest received - dividends received - proceeds from the sale of non-current assets Outflows: -purchases of non-current assets
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What are some cash flows from financing activities?
inflows: - proceeds from the issue of shares - proceeds form the issue of loans/debentures outflows: - repayments of loans/debentures - dividends paid
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SCF: Investing activities?
``` purchase of PPE purchase of investments proceeds from sale of PPE/investments interest received dividends received ```
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SCF:Financing activities?
proceeds from issue of shares proceeds from long-term borrowings redemption of long-term borrowings dividends paid
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SCF:cash flow from operating activities?
``` PBT dep profit on disposal interest receivable fin costs = operating profit ``` ^in TR ^in inv ^ in TP =cash generated from operations less interest paid less tax paid
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What does the SOCIE show?
- effect of share issues and dividends - increase/decrease in net assets - change in wealth for enterprise