IAS Flashcards
Four Characteristics Of Financial Statements/Benefits Of IAS:
1-Understandibility
2-Relevance
3-Reliability:
4-Comparability
explain understandibility
Information is easy to read and understand by any user with reasonable knowledge of
business and Accounting. However, user also needs to read financial statements with reasonable diligence.
relevance
It also means information should be available in time
when user wants to take decision otherwise information is useless when cannot be used in right time.
reliability
- Information is free of any material material errors or frauds.
- Financial statements should not be biased.
- Financial statements can be independently verified.
- Required caution has been taken regarding estimates and judgements while preparing accounts(prudence).
- Financial statements are true representation of company’s transactions and performance.
comparablilty
Information enables user to make comparisons conveniently with past year and with competitors. For this consistency concept should be followed in preparation of financial statements and
accounting policies used every year should also be disclosed. This will enable user to identify similarities and
differences while making comparisons whatsoever.
IAS 2(Inventories):
inventories should be valued at lower of cost and net
realizable value
Net Realizable Value is the amount of money a business expects to receive from sale of its inventory less cost
of selling inventory.
only FIFO(First In First Out) and AVCO
IAS 1(Presentation Of Financial Statements):
- Purpose Of Financial Statements to aid user in making economic decisions.
-compliance of financial statements with accounting concepts such as prudence, going concern
etc. - It should include separation among each financial statement component, name of the company,
time period such as year, months or quarters, currency used and the rounding off used such as in thousands,
millions etc.
Replacement Cost:
It is cost which will be paid to replace goods used or sold. It is either the current market
price of goods or near future market price of goods. It is not permitted to use replacement cost to value
inventory as per IAS2. However, it is allowed to be used for quoting price of an order to customer or for
preparing budgets
why same method is used inventory
Company to comply with consistency concept. Inventory valuation method can only be changed if there is a
good reason to do so. If inventory valuation method is changed in order to increase profits, then it will go
against prudence concept
accounting pricniples
The broad concepts that apply to almost all financial statements. These would
include such things as going concern, materiality, prudence and consistency
IAS 8(Accounting Policies, Changes In Accounting Estimates And Errors):what is accounting base
These are methods to ensure application of accounting principles to financial statements.
why NRV low cost
There are two events in which NRV/Selling price Of Inventory can go below Cost:
1. Inventory has been damaged/expired etc.
2. There is no demand for Inventory such as economic changes, going out of fashion, restriction
acc policy
Combination of Accounting Principles and Bases leads to Accounting Policies. But while selecting and applying accounting policies, it requires from directors that a)if accounting policy is given in an
accounting standard then that policy must be applied.b)If there is no accounting policy in an accounting
standard then company must use its best judgement to come up with treatment and interpretation. However,
that treatment and interpretation should not be in conflict with international accounting standards and
interpretations.
Dealing With Errors:
Errors are omissions from and misstatements in the entity’s financial statements recognised after published
Once financial statements are published, errors discovered after publishing financial
statements cannot be corrected. Though, they will be corrected in next year’s financial statements in which
previous year’s figures being shown as comparative figures
adjusting event
These are events which are discovered after reporting date but if evidence is found that
these events were material and would have affected the financial statements before or at the balance sheet
date then financial statements will be changed or amended to reflect these events.
ex fraud eror inventory NRV fell below price assets impairent required customer insolvent
non adjsting events
These are events which also occur between balance sheet date and date on which
financial statements are authorized for issue but no evidence exists that they occurred before or at the balance
sheet date. Thus, if they are insignificant events(minor)then they will neither be treated nor be disclosed.
However, if they are material then they will be disclosed as notes in notes
ex purchase of asset floods announce reconstruction proposed dividents
why proposed divident is non adjusting
This is because when a dividend is
proposed then voting is done by shareholders after which dividend is approved in case of
majority votes.
what is propert plant equipent
Property, Plant And Equipment: Tangible assets held for use in the production or supply of goods and
services, for rental to others and for administrative purposes, which are expected to be used for more than a
period of more than one year.
whats depreciable amt
The cost or valuation of the asset, less any residual amount
useful life
The length of time, production, for which an asset is expected
to be used.
residual value
The net amount the entity expects to obtain for an asset at the end of its useful life, after
deducting the expected costs of disposal.
fair value
value for non-current asset prevailing in the market at the time
of transaction. Thus, it is also known as market value of non-current asset.
carrying amt
The amount at which an asset is recognised in the balance sheet, after deducting any
accumulated depreciation and impairment loss. It is also known as Net Book Value of non-current asset.
recogition NCA
- probable non-current asset will generate economic benefit for the
company such as revenue generation, cost reduction etc. - costs of non-current asset can be
measured reliably.
Factors Affecting Useful Economic Life:
a) Expected No of Years Asset is expected to be used
b) Expected Wear And Tear.
c) Technical Or Commercial Obsolescence.
d) Legal or Other Limits Imposed On Use Of Asset.
IAS36(Impairment Of Assets):
It applies to all non-current assets be it tangible, intangible such as goodwill and long-term investments.
Impairment Loss: It occurs when a non-current asset’s carrying amount is higher than its recoverable amount.
Impairment Loss: Carrying Amount(Net Book Value)- Recoverable Amount
impairment loss due to
a) Significant decrease or fall in market price of non-current assets(external)
b) Technological Obsolescence.(external)
c) Non Current Asset becoming obsolete due to changes Economy.(external)
d) Damage To The Asset(internal)
e) Economic Performance Of Asset Is Worse Or Less than expected(internal)
g) Prudence: Profit and non-current assets will not be overstated.
h) Matching: Impairment charged in same year when NCA is used to generate economic benefit.
i) Financial statements will show True and Fair View
j) Carrying Amount of Non-Current Assets will not exceed Recoverable Amount.
what is recovrable amt and value in use
Recoverable Amount: It is higher of Fair Value Less Costs To Sell or Value-In-Use.
Value-In-Use: It is present value of future net cash flows
adjustment of impairment
if carrying exceeds recoverable amt
impairment loss will be recorded and will be treated as an expense in income statement.
If impairment is charged on previously Revalued asset, then impairment will firstly be adjusted from
Revaluation reserve then Income Statement/Retained Earnings.
intangible assets
Assets which is identifiable on-monetary asset but do not have a physical
substance Intangible Assets will be recorded only if it is probable that future economic benefits will be generated from use of such asset for company and
cost of these can be measured reliably. Otherwise will be treated as operating expense.
impairment according useful life
1-Finite(limited)Economic Life:
amortised over this time period on an annual basis.
Straight-line method residual value of zero. Amortisation will be shown as expense in income statement
2-Indefinite Useful Economic Life: Assets under this category will not be amortised.
research
is work undertaken to gain new knowledge
This will not generate economic benefits
for business as this will happen after development probably. It will always be written off as an expense in
income statement.
Training
Startup Costs
Advertising/Promotion Costs
Relocation Costs
development IAS 38
Is use of research to develop new products, services which will generate economic
benefits for business in future
capitalised when
It will create an asset which will generate economic benefits for company.
Cost of development can be measured reliably.
Availability of resources to complete development.
Intention of using or selling the asset arising from development
or else SLM amortise residual zero
IAS 37 provision
It is liability of either uncertain amount, uncertain timing due to past/current event.example warranty claim and legal costs are paid regrdless outcome
contigent liabiltiy
It is liability of uncertain amount or uncertain timing which may arise in future due to
some past event but chances of happening are less . This liability will only have to be paid if a decision is made which is not in company’s control ex co is sued customer fraud
probable adjust
If it is probable(more than 50%) it will be treated as Provision and it will adjusted in financial
statements as well as shown in notes to financial statements
contingent assets
: It is receivable of uncertain amount or uncertain timing which may arise in future due to
some past event. Receivable Amount/ economic benefit will be determined by events or decisions beyond
company’s control such as a court case started during year in which company is sued for fraud by a customer, chances co wins amt
cotingent liabiltiy ratio
Possible+Remote: In case of possible(less than 50%), then will be treated as Contingent Liability and there will
no adjustment in financial statements though details will be shown in notes to financial statements. For
remote contingent liability, neither adjustment will be made nor details will be shown in notes to financial
statements.
contingent asset ratio
If it is probable(more than 50%) it will not be adjusted in financial statements but will be
disclosed in notes to financial statements. In case of possible(less than 50%) and remote, neither adjustment
will be made nor will be shown in notes to financial statements.
dis IAS
Adopting IAS has high costs such as staff training, skilled accountants which know IAS etc.
Public limited companies will also have to get their accounts audited which will increase costs.
As IAS allow for change in accounting policy which requires a justification though by company, they
can be used for window-dressing by coming up with fabricated reasons for adopting change in
accounting policy.
Not accepted globally such as USA still uses GAAP Accounting standards and it is world-power. It will
be difficult for businesses to compare their performance with firms in companies based at US.
