Chapter 4 - Other Contents And Features Of Published Accounts

Question 1

What are the primary uses of published accounts?

Answer 1

Provide info about the company’s activities and financial performance throughout the preceding year. May indicate the future prospects of the company.

Key element of communication with stakeholders. Used to examine:

1. Profitability;
2. Sources or nature of profit;
3. Balance sheet strength; and
4. Trends.

Question 2

What are the objectives of the strategic report?

Answer 2

Provides clear and coherent info about the company’s activities, performance, position, strategic position of the business and probable risks.

Provides info to the members of the company and helps them assess how the directors have performed their duties and functions.

Must contain and provide the following:

1. Fair review of the company’s business;
2. Description of the principal risks and uncertainties the company faces;
3. Change in the going concern assessment; and
4. References to the annual accounts.

Must also include info on the company’s strategy, business model and disclosures about environmental, employee and social issues (including human rights and gender diversity).

Question 3

Briefly discuss the purpose of notes to the accounts in publishes accounts.

Answer 3

Provides info not presented elsewhere in the FS. This includes:

1. More detailed analysis of figures in the FS;
2. Narrative info explaining figures in the FS; and
3. Additional info, such as contingent liabilities and commitments.

IAS 1 requires the notes to disclose the following key info:

1. The basis for prep of FS including the policies chosen and applied to significant transactions/events;
2. Info which is required by IFRS but not presented elsewhere in the FS; and
3. Any additional info that is relevant to understanding which is not shown elsewhere in the FS.

Question 4

A has sold machinery to B on terms that the same asset will be leased back to A under a lease agreement. How will the transaction be recorded in the books of A?

Answer 4

Substance over form concept applied.

1. Determine whether transfer qualifies as a sale based on the requirements for satisfying a performance obligation under IFRS 15 ‘Revenue from Contracts with Customers’.
2. Under IFRS 15 the transfer of goods and services is based upon the transfer of control - the ability to direct the use of, obtain substantially all of the remaining benefits from, the asset.

In view of the above - the transaction will not be recorded as a sale in the books of A. It will be treated as a lease and accounted for as per IFRS 16.

IFRS provides a single lessee accounting model, requiring lessees to recognise assets and liabilities. The asset will remain in the books of A and the money received from B by A will be recorded a secure loan.

Question 5

What are the contents of the annual report and accounts?

Answer 5

1. Strategic report or business review
2. Directors’ report
3. Directors’ remuneration report
4. Corporate governance statement
5. Auditor’s report
6. Financial statements, including:
   - Statement of financial position
   - Statement of profit and loss and/or statement of comprehensive income
   - Statement of changes in equity
   - Statement of cash flows
7. Notes to the accounts

Question 6

What is the purpose of the Director’s Report?

Answer 6

To inform members of the financial state of the company as well as its compliance with financial, accounting and CSR standards.

Provides info on: (1) whether the company has good finances, (2) whether the business has the structural capacity to expand and grow, (3) how well it is performing within its market and market in general and (4) whether the company is complying with financial regulations, accounting standards and social responsibility requirements.

Question 7

What does the Director’s Report have to disclose?

Answer 7

• Names of all directors during the financial year
• Summary of the company’s trading activities
• Summary of future projects principal activities of the company and, if relevant, the
  principal activities of its subsidiaries
• The amount of dividend, if any, for the reporting year
• Any financial events that occurred after the date on the balance sheet
• Any significant changes to the company’s fixed assets
• Statement confirming all relevant information has been provided to the company’s
  auditor
• Directors statement of responsibilities
• A record of all board meetings in a financial year with a directors’ attendance record.

Question 8

What order does IAS 1 suggest that notes to the accounts are presented in?

Answer 8

1) Statement of compliance with IFRS
2) Statement of the measurement basis (e.g. historical cost) and summary of significant accounting
policies applied in preparing the FS. Where more than one measurement basis has been used, it should be stated to which assets each basis has been applied.
3) Supporting information for items presented in the statement of financial position, statement of comprehensive income, income statement and the statement of changes in equity and of cash flows.
4) Other disclosures

Question 9

What is an operating segment and which accounting standard governs in?

Answer 9

IFRS 8 defines an operating segment of an entity as
a business component:
- from which it may earn revenues and incur
expenses
- whose operating results are regularly reviewed by
the entity’s chief operating decision maker to make decisions about recourses to be
allocated to the segment and assess its performance; and
- for which discrete financial information is available.

Question 10

What are the 3 quantitative thresholds for operating segments?

Answer 10

1) Reported revenue (both external and inter-segment sales or transfers), is more than 10% of overall gross revenue of all operating segments.
2) The absolute amount of the segment’s reported profit or loss is 10% or more of the great, in an absolute amount, of:
a. The combined reported profit of all operating segments that did not report a loss; and
b. The combined reported loss of all operating segments that reported a loss
3) The segment’s assets are 10% or more of the combined assets of all operating segments.

Question 11

What does substance over form mean?

Answer 11

“Substance” refers to the economic benefits or economic losses or any kind of economic implications
related to the transaction.

e.g. Sale and leaseback
arrangements - Co sells asset to another party and gets it back via lease. If the nature of the transaction is that of a lease, lease accounting is applied as per IFRS 16

Question 12

What are the 8 limitations of published accounts?

Answer 12

1. Historical cost - does not take into account change in price levels over time.
2. Creative accounting /
   earnings management - deliberate manipulation of FS to achieve predetermined results.
3. Intra-group transactions - high possibility that these transactions have not been agreed at arm’s length price or in the best interests of the entity itself. Used to evade tax.
4. Ignoring non-financial matters - some factors of financial position and profits cannot be measured in
   monetary terms.
5. Not forward looking - prospective investors want to know developments that will affect future prospects. No decision on this can be made by looking at accounts which are prepared on the basis of historical information.
6. Seasonality of trading - entities who trade in a seasonal nature tend to report their results where the company is at its most solvent which may distort results.
7. Not always comparable - different entities use different accounting practices depending on their size, nature of business and conventions.
8. Only covers a specific time period - the position may be different on the day in which the user is looking at the
   financial information. Timing of transactions can manipulate profits.