Chapter 3 - Reporting financial performance Flashcards
What international accounting standards are we concerned with in this chapter?
- IAS8 - Accounting Policies, Changes in Accounting Estimates and Errors
- IFRS5 - Discontinued Operations
- IAS12 - Income Taxes
- IAS21 - The Effects of Changes in Foreign Exchange Rates
- IAS24 - Related Party Disclosures
Briefly outline what IAS8 establishes
IAS 8 establishes the principles for selecting and applying accounting policies, as well as how to account for changes in estimates and corrections of prior-period errors to ensure financial statements are consistent, comparable, and reliable.
According to IAS8, what is the definition of an accounting policy?
(in standard book)
The specific principles, bases, conventions, rules and practices applied in preparing financial statements
What does IAS8 stipulate regarding choice of and changes in accounting policy?
IAS8 states entities must apply accounting policies consistently and select them based on IFRS standards or, if no standard applies, by using judgment that provides relevant and reliable information.
A change in accounting policy is only allowed if:
* It is required by an IFRS - a new or amended IFRS standard mandates a change in accounting policy, the entity must adopt the new policy as per the transition provisions in that standard.
* It results in more relevant and reliable information - the change will provide a more accurate representation of what is being accounted for (RARE!)
Changes should be applied retrospectively, i.e. in the period of change, the comparative year and future periods if affected, unless impractical. When adjusting the comparative amounts in the financial statements, if this alters the prior years profit, in the current year the correction is recorded in the retained earnings or relevant equity component instead of being included in the current period’s profit or loss - it will appear as a line in the statement of changes in equity called ‘changes in accounting policy’
What change in accounting policy does not abide by the restropective change rule?
A change to the chosen accounting policy under IAS16 Property, plant and
equipment from the historical cost model to the revaluation model
Despite being a change in accounting policy, a retrospective change is prohibited - only affects current period
According to IAS8, what is the definition of an accounting estimate?
(in the standard)
Monetary amounts in financial statements that are subject to measurement uncertainty - They are used in areas such as depreciation, impairment assessments, provisions, and fair value measurements.
What does IAS8 stipulate regarding choice of and changes in accounting estimate?
IAS8 states entities must base estimates on the latest available, reliable information and reasonable assumptions.
A change in accounting estimate occurs when new information or developments cause a reassessment of the expected outcome of an item.
Changes are applied prospectively, meaning the change affects only the current and future periods.
According to IAS8, what is the definition of a prior period error?
(in the standard)
Omissions from, and misstatements in, the entity’s financial statements for one or more prior periods arising from a failure to use, or misuse of, reliable information that was available when those financial statements were authorized for issue and could reasonably have been expected to have been obtained and taken into account.
What does IAS8 stipulate regarding the correction of a prior period error?
Corrected retrospectively by adjusting the comparative amounts in the financial statements.
If this alters the prior years profit, in the current year the correction is recorded in the retained earnings or relevant equity component instead of being included in the current period’s profit or loss - it will appear as a line in the statement of changes in equity called ‘correction of prior period error’
What disclosures are necessary under IAS8 for changes in accounting estimates, policies or prior period error corrections?
(in standard)
- Nature of the change in accounting policy or prior period error.
- Reasons for the change in policy (why more reliable and relevant)
- The impact on financial statements, including adjustments to the current and prior period figures and adjustments to opening balances of equity (e.g., retained earnings).
- The fact that the comparative information has been restated or that it is impracticable to do so
Briefly outline what IFRS5 establishes
IFRS 5 establishes the accounting treatment for non-current assets held for sale and the presentation of discontinued operations in financial statements.
According to IFRS5, what is the definition of a discontinued operation?
A discontinued operation is a component of an entity that has either been disposed of or is classified as “held for sale” and meets the following criteria:
* It represents a separate major line of business operations or
* It is part of a single co-ordinated plan to dispose of a separate major line of business or
* It is a subsidiary acquired exclusively with a view to resale
According to IFRS5, what is the definition of a discontinued operation?
A discontinued operation is a component of an entity that has either been disposed of or is classified as “held for sale” and meets the following criteria:
* It represents a separate major line of business operations or
* It is part of a single co-ordinated plan to dispose of a separate major line of business or
* It is a subsidiary acquired exclusively with a view to resale
According to IFRS5, how should the affect of discontinued operations be presented in the financial statements?
An entity should disclose a single amount in the profit or loss comprising the total of:
* The post-tax profit or loss of discontinued operations
* The post-tax gain or loss recognised on the measurement to fair value less costs of disposal or on the disposal of the assets constituting the discontinued operation.
An entity should also disclose an analysis of this single amount in the notes, showing:
* The revenue, expenses and pre-tax profit or loss of discontinued operations
* The related income tax expense
* The post-tax gain or loss recognised on measurement to fair value less costs of disposal or on disposal of the assets constituting the discontinued operation
* The related income tax expense
In the statement of cash flows an entity should disclose the net cash flows attributable to the:
* Operating
* Investing
* Financing
activities of discontinued operations. These disclosures may be presented either in the statement of cash flows or in the notes
Briefly outline what IAS12 establishes
IAS 12 establishes the accounting treatment for income taxes, including both current tax and deferred tax (not in syllabus). It ensures that tax-related expenses and balances are properly recognized in financial statements.
According to IAS12, how is current tax accounted for?
Current tax is recognised as an expense in the profit or loss with a provision being recognised as a current liability in the SOFP.
Any adjustments for under or over provision of tax charged in respect of prior periods will be put to the P&L and netted off with the current periods current tax expense
Briefly outline what IAS21 establishes
IAS 21, The Effects of Changes in Foreign Exchange Rates provides guidance on how to account for foreign currency transactions and the financial effects of changes in exchange rates
According to IAS21, how should the value of foreign currency transactions be initially recognised?
IAS 21 states that a foreign currency transaction should be recorded on initial recognition by translating at the spot rate (the current exchange rate at which a currency pair can be bought or sold) at the date of the transaction.
According to IAS21, how should the value of foreign currency transactions be adjusted for at the year end?
According to IAS 21 – The Effects of Changes in Foreign Exchange Rates, foreign currency transactions must be adjusted at the year-end based on the type of items involved. IAS 21 distinguishes between monetary and non-monetary items, with different rules for their year-end adjustments:
Monetary Items:
Monetary items are items with fixed or determinable amounts of money, such as cash, receivables, payables, and loans and should be translated at the closing exchange rate (the spot rate at the reporting date). Any resulting exchange differences (gains or losses) must be recognized in the profit or loss for the period (e.g., in profit or loss or other comprehensive income).
Non-Monetary Items:
Non-monetary items are those that do not involve fixed amounts of currency, such as property, plant, and equipment (PPE), inventory, and intangible assets. The treatment of non-monetary items at year end depends on the cost model used.
For non-monetary items measured at historical cost remain translated at the exchange rate on the transaction date (no year-end adjustment is made).
Non-monetary items measured at fair value are translated using the exchange rate on the date when the fair value was determined. Any exchange differences arising may be recognized according to where the related fair value change is recorded (e.g., in profit or loss or other comprehensive income).
According to IAS21, how should the value of foreign currency payables and receivable transactions be adjusted for upon payment/receipt?
Conversion exchange gains and losses will be created at the point of receipt or payment of receivables and payables. These will again be recognised in the profit or loss (e.g gain/loss on foreign currency exchange).
For a monetary asset originally in a foreign currency, outline the journal entries for its recognition, retranslation at year end and subsequent payment
For a monetary liability originally in a foreign currency, outline the journal entries for its recognition, retranslation at year end and subsequent payment
Briefly outline what IAS24 establishes
IAS 24 – Related Party Disclosures establishes the rules for identifying and disclosing related party relationships, transactions, and balances to ensure transparency in financial statements.
According to IAS24, what is the definition of a related party?
Related party: A person or entity that is related to the reporting entity:
A person (or close member of that person’s family) is related if that person:
– has control, joint control or significant influence over the reporting entity
– is a member of key management personnel of the reporting entity (or its parent)
An entity is related if:
– The entity and reporting entity are members of the same group
– One entity is an associate or joint venture of the other entity
– Both are joint ventures of the same third party (note this does not apply if the third party has significant influence over both entities)
– The entity is controlled or jointly controlled by a person described above
– A person (or close member of that person’s family) with control or joint control over the reporting entity has significant influence over the entity or is a member of key management personnel.
What is typically considered close family members?
Directly related i.e. parents, children, siblings, grandparents
What are the common examples of parties wrongly designated as related parties?
- Two entities simply because they have a director in common
- Two venturers simply because they share joint control over the same joint venture
- Providers of finance, trade unions, public utilities and government agencies
- A customer or supplier on whom the entity has significant economic dependence
According to IAS24, what is the definition of a related party transaction?
A transfer of resources, services or obligations between a reporting entity and a related party, regardless of whether a price is charged.
According to IAS24, what are the disclosure requirements for related party transactions?
- The nature of the related party relationship.
- The amount and details of significant transactions with related parties (e.g., purchases, loans, dividends).
- Outstanding balances, including terms and conditions, and provisions for doubtful debts related to those balances.
Outline the key differences between UK GAAP and IFRS for the following aspects:
* Reporting performance
* Continuing and discontinued operations
* Foreign currency transactions
* Related party transactions
