DEFINTIONS Flashcards
What is the objective of financial reporting?
The objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity
What are the five main elements of financial statements?
- Assets
- Liabilities
- Equity
- Income
- Expenses
Assets
- A resource controlled by the entity
- As a result of past events
- Future benefits are expected to flow
Liabilities
- A present obligation of the entity
- Arising from past events
- The settlement is expected to result in an outflow of resources embodying economic benefits.
Equity
- Equity is the residual interest in the assets of the entity after deducting all its liabilities.
Income
- Income is increases in economic benefits in the form of inflows or enhancements in assets or decreases in liabilities.
- Increases equity other than those relating to contributions.
Expenses
- Expenses are decreases in economic benefits in the form of outflows or depletions of assets or incurrences of liabilities.
- Decreases in equity other than those relating to distributions
Conceptual Framework for Financial Reporting.
Purposes
- Assist in the development and review of international financial reporting standards
- Assist in promoting harmonisation of standards by reducing the number of permissible alternative accounting treatments
- Help preparers of accounting to deal with issues not yet covered by the standards
- Help users of accounts to interpret the information in financial statements which have been prepared in accordance with the standards
- Deals with the objective of financial reporting.
Going Concern
Financial statements are prepared on the assumption that the entity will continue in business for the foreseeable future. Thus no intentions to liquidate or reduce the size of the business.
Accrual Accounting
Accruals basis means that the effects of transactions are recognised when they occur (and not when the cash is received or paid) and they are recorded in the accounting records and reported in the financial statements of the periods to which they relate.
Relevance
- Information that is capable of making a difference in the decisions of its users. It has a predictive value, confirmatory value or both.
Faithful representation
- Information must be faithful in its presentation – ie complete, neutral and free from error.
Comparability
Enables users to identify and understand similarities in, and differences among, items for other years and other companies
Verifiability
Helps assure users that information is faithfully represented.
Timeliness
Having information available to decision-makers in time to be capable of influencing their decisions.
Understandability
- Classifying, characterising and presenting information clearly and concisely.
Materiality
Information is material if omitting it or misstating it could influence the decisions that users make on the basis of financial information about a specific reporting entity.
Recognition
Recognition is the process of including an element (ie assets, liabilities, equity, income and expenses) An item should be recognised:
- If it is probable that future economic benefits will flow to or from the entity, and
- It has a cost or value that can be reliably measured.
Historical cost
Assets are recorded at the amount paid or the fair value at the time of acquisition: liabilities are recorded at the amount expected to be paid
Current cost
what it would cost to replace assets and liabilities at today’s prices.
Realisable (Settlement) value
what the assets could be sold for, and the amount required to settle the liabilities today.
Present value
Assets and liabilities are valued at the present discounted values of their future cash inflows and outflows.
Inventories
Inventories are assets held for sale in the ordinary course of business.
Operating activities
• the main revenue producing activities of the business, together with the payment of interest and tax
Investing Activites
• The acquisition and disposal of non-current assets, and other investments, together with interest and dividends received
Financing Activities
receipts from the issue of new shares, payment to repay shares, changes in long term borrowings, payments of dividends.
CF - Depreciation
Add
CF - Loss on sale of NCA
Add
CF - Gain on sale of NCA
Deduct
CF - Dividends recieved
Deduct
CF - Decrease in Inv
Add
CF - Decrease in TR
Add
CF - Decrease in TP
Deduct
CF - Increase in Inv
Deduct
CF - Increase in TR
Deduct
CF - Increase in TP
Add
What goes in Investing?
Inflows, Outflows Interest and Dividends recieved
What goes in Financing
Increase in SC, Repayment of SC or loans, finance lease liar, dividends paid
Adjusting events?
- The settlement after the end of the reporting period of a court case which confirms that a present obligation existed at the year end.
- Non-current assets, the determination after the reporting period of the purchase price, or sale price, of assets bought or sold before the year end.
- Assets, where a valuation shows impairment.
- Inventories, where net realisable value falls below cost price.
- Trade receivables, where a customer has become insolvent.
- The determination after the reporting period of the amounts of profit sharing or bonus payments.
- The discovery of fraud or errors that show that the financial statements are incorrect.
Non Adjusting events
- Business combinations
- Discontinuing a significant part of the business
- Major purchase of assets
- Losses of production capacity
- Announcing or commencing a major restructuring
- Major share transactions
- Large changes in asset prices or foreign exchange rates
- Changes in tax rates
- Entering into significant commitments or contingent liabilities
- Commencing litigation based on events arising after the reporting period.
Property, plant and equipment
Tangiable assets held for use in the production or supply of goods and services, which are expected to be used for more than one period.
Depreciation
The systematic allocation of the depreciable amount of an asset over its useful life.
When to recognise PPE
An item of PPE is to be recognised as an asset when; it is probable that future economic benefits will flow to the entity and the cost of the asset can be measured reliably.
Cost model
the asset is carried at cost less accumulated depreciation and impairment losses
Revaluation model
the asset is carried on the FP at a revalued amount, being its fair value less any subsequent depreciation and impairment losses. Revaluations are to be made regularly to ensure that the carrying amount does not differ materially from its fair value. Revaluations can be made every three to five years.
Finance Lease
usually a longer term lease, under which substantially all the risks and rewards of ownership are transferred to the lessee
Operating Lease
usually a shorter term lease, where there is no substantial transfer of the risks and rewards of ownership to the lessee
Finance lease conditions?
- the lease transfers ownership of the asset to the lessee by the end of the lease term
- the lessee has the option to purchase the asset at a price that is expected to be sufficiently lower than the fair value at the date the option becomes exercisable for it to be reasonably certain, at the inception of the lease, that the option will be exercised
- the lease term is for the major part of the economic life of the asset, even if the title is not transferred
- at the inception of the lease, the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset
- the leased assets are of such a specialised nature that only the lessee can use them without major modifications
Finance Lease - How to recognise?
the lower of the fair value of the asset and the present value of the minimum lease payments
Associate
An entity over which the investor has significant influence.
Significant influence
Where the investor has the power to participate in the financial and operating policy decisions – such as the expansion or contraction of the business, changes in products, markets, activities – of the investee but is not in control of those policies.
Equity method of accounting
- Initially the investment in the associate company is recognised at cost
- The investor’s share of subsequent profit or losses of the investee is added to, or deducted from, the carrying amount of the investment
- The investor’s share of the investee’s profit or loss is recognised in the investor’s statement of profit or loss
- Distributions received from the investee reduce the carrying amount of the investment
- The investor’s share of other comprehensive income of the investee is recognised in the investor’s other comprehensive income and adjusted to be carrying amount of the investment.
Carrying amount
amount at which an asset is recognised after deducting accumulated depreciation and accumulated impairment losses.
Impairment loss
amount by which the carrying amount of an asset exceeds its recoverable amount
Fair Value
Is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
Recoverable amount
An asset is the higher of its fair value, less costs of disposal and its value in use.
Value in use
Present value of the future cash flows expected to be derived from an asset.
Provision
liability of uncertain timing or amount.
contingent liability
possible obligation ie less than 50% likelihood of its occurrence.
contingent asset
possible asset arising from past events whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the entity’s control.
Identifiability
• the asset is either separable from the entity and is capable of being sold or transferred, or it arises from contractual or other legal rights.
Control
the entity has the power to obtain future economic benefits from the asset.
Research
Original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding.
Development
The application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials, devices, products before the start of commercial production or use.
Examples of research
activities to obtain new knowledge, searches for alternatives for materials ect and formulation/design/evaluation of possible alternatives for materials
Examples of development
design/construction of pre-production prototypes, design of new technology production equipment, design/construction/testing of chosen alternative for materials, products/processes ect.
acquirer
the entity that obtains control of the acquiree’
acquiree
the business or businesses that the acquirer obtains control of in
a business combination
Control
when it (the investor) is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee’
parent
• an entity that controls one or more entities
subsidary
an entity that is controlled by another entity
parent
a parent and its subsidiaries
