Financial Statements And Standards Flashcards
What is the fundamental of accounting?
Accounting is the process of maintaining financial record records of a businesses transactions
What are the two main aspects of accounting?
Recording transactions
Summarising transactions
How is accounting Used internally and externally?
Internally
It’s used to monitor performance, plan for the future and make decisions
Externally
Is presented to different users . You need to prep and present standardised and regulated reports.
Who are the users of the financial statements?
- Shareholders
- Investors
- The public
- Lenders
- Suppliers
- Customers
- Competitors
- Management
- Employees
- Government
Financial accounting versus management accounting
Financial accounting
Focuses on financial statements of reporting the financial performance of the business
Management accounting
Provides the management team with information and support to enable them to affectively run the business
For entities following IFRS, which statements need to be produced
- Statement of financial position
- Statement of profit and loss and other comprehensive income
- Statement of changes in equity
- Statement of cash flows
- notes including significant accounting policies and other explanatory information
Comparative information for previous periods is also required
What is an asset?
It is a resource of physical object used by the business to generate income
What is a liability?
Amount owed by a business to external entities
What is equity?
Equity can come from two sources
- Share capital.
The amount invested into the business by the owners fund operations - Retained earnings.
The cumulative net earnings/profit of an entity less any distribution or dividends paid to the owner
What is the accounting equation?
Assets = liability + equity
What is a ledger account?
I record that stores transactions and represents a specific asset liability or equity item revenue type or expense type
The general ledger is the complete record of all financial transactions in a company
These are shown as T accounts
What is DEADCLIC?
This shows the sides of a T account
Debit side
- Assets
- Expenses
- drawings (reductions to equity)
Credit side
- Liabilities
- Income
- Capital
This means the types on the debit side you would need to debit to increase and the types on the credit side you would need to credit to increase
What is the 8 parts of conceptual framework?
The framework provides guidance to all preparers and users of financial statements. It was put together in 2018.
- The objective of general purpose financial reporting.
- Qualitative characteristics of useful financial information.
- Financial statements and reporting entity.
- The elements of financial statements.
- Recognition and recognition.
- Measurement.
- Presentation and disclosure.
- Concepts of capital and capital maintenance
Types of grouped financial reports
Parent and subsidiary is called consolidated
Parent alone is called unconsolidated
Two or more entities not linked by a parent is called combined
What is recognition?
It is the process of capturing items for inclusion in one of the financial statements. It should be captured by its carrying amount.
In order to be recognised, the following criteria should be satisfied :
- It makes the definition of an element in the financial statement
- it provides relevant information regarding the particular element
- It provides faithful representation of the particular element
What is derecognition?
It is the removal of all or a part of a recognised asset or liability from an entity statement of financial position. This would normally happen because:
Asset - the entity loses control of all part of it
Liability - the entity no longer has a present obligation
It could also be if they have been expired, consumed collected, fulfilled or transferred
What is measurement in the conceptual framework?
There are two measurements allowed by IFRS and these are historical cost or current value
Historical cost
The price paid for the asset or liability
Current value
The value at the measurement date . This could be:
- Fair value (Price if sold in the current market)
- Value in use (present value of future cash flows)
- Current cost ( the cost of buying the equivalent asset on the measurement date)
Financial versus physical concept capital
Financial concept of capital is the same as the assets or equity of entity
Physical concept of capital is the productive capacity of the entity
What is IAS 16?
It is an accounting standard focusing on property plant and equipment that are:
- Held by an entity for use in production or supply of goods or services, for rental to others or for administrative purposes
- are expected to be used during more than one accounting period
These are all non-current tangible assets.
In accordance to IAS 16 when should an asset be initially recognised?
It should be recognised if:
- It is probable that the future economic benefits associated with the items will flow to the entity
And
- The cost of the item can be measured reliably
In accordance to IAS 16, what can be recognised?
- purchase price
- Directly attributable cost bringing the asset to its current current location and condition
Initial estimate for dismantling, removing and restoring the site whether there is an obligation to do so
What are the 2 ways to treat subsequent measurement?
Cost model
Cost of asset - accumulated depreciation - accumulated impairment losses
Revaluation model
Fair value - accumulated depreciation - accumulated impairment losses
What is depreciation?
The systematic allocation of the depreciable amount of an asset over its useful life
What is the depreciable amount?
Cost of an asset - it’s residual value
What is the residual value?
The estimated amount of empty would get for the disposal of an asset minus the cost of disposal
What can or can’t be depreciated?
To be depreciated an asset needs to have a limited life. For example, buildings.
If an asset has an unlimited life, it cannot be depreciated . For example, land.
2 methods of calculating depreciation?
Straight line
(Original cost - residual value)/ estimated useful life
Reducing balance
% X carrying amount
(Carrying amount = cost - accumulated depreciation)
Can you make changes in depreciation methods?
Yes
It has to be done prospectively so there is no need to adjust previous years financial statements . this must be done for the whole group of assets for example all buildings would need to be on the same type of depreciation method
Depreciation revaluations
You can revalue an asset to its fair value at the date of revaluation
In order to do this, a company must have all assets in the same class and revalue regularly . This avoids manipulation.
If an asset is revalued any accumulated appreciation should be written off to the revaluation reserve depreciation will then be carried out based on the revalued amount .
This must be done by a qualified professional
Revalue surplus versus revalued loss
If we have a revalue surplus, this sits in the statement of financial position until the Asset is sold or retired. At this point, it can be transferred to retained earnings.
If we have a revalue loss, we recognise this in the P&L when it happens.
What is IAS 36?
This is the impairment of assets.
When an asset is carried in the statement of financial position at more than what it is worth it is deemed to be impaired . The entity is then required to recognise an impairment loss.
What situations might indicate that an asset has been impaired?
- Declining market value
- Technological, legal or economic changes
- physical damage
- Plans to dispose of the asset
What is an impairment loss?
The amount by which the carrying amount of an asset exceeds its recoverable amount
How do we work out the recoverable amount?
It is the higher of either:
Fair value minus cost to sell
Value in use
How is impairment loss accounted for?
It should be recorded as an expense in a statement of profit or loss unless the asset has previously been revalued in which case the impairment can be offset against the revaluation surplus
What is excluded in IAS 36?
- inventories
- Deferred tax assets
- Assets from construction contracts or employee benefits
- Assets held for sale
- Assets in scope of IFRS 9
What is IFRS 16?
Lease accounting for leases
Leases are useful for a cash flow perspective as an NST gets the right to use the asset on the day-to-day basis but will pay lease rentals over period of time rather than buying the asset outright
What makes a lease?
At lease exists if the contract conveys the right to control the use of an identified asset for a period of time for exchange of a consideration
How to account for the initial recognition of a lease
There are two parts which are least liability and right of use asset
Lease Liability
This is the present value of the lease payments not yet made. It includes fixed payments., variable payments, options to purchase that are expected to be exercised and termination penalties if they are expected to be paid
Right of use asset
This is the least liability plus lease payments made before commencement date plus initial indirect costs plus estimated cost of asset removal
How to find the discount rate used to get to the present value for lease liability
The discount rate used to discount the liability will be the right implicit in the lease. If this is not obtainable, we would use the rate of incremental borrowing.
To calculate the lease liability, we would need to establish the length of the lease term
What is the subsequent treatment for lease liability?
Recognised the lease liability must be increased for the interest (finance cost) and reduced by the payments made
Finance cost
Dr finance cost
Cr lease liability
Lease payments
Dr lease liability
Cr cash
What is the subsequent treatment for right of use asset?
This will match the accounting of the underlying asset in the lease
It will be measured at cost less accumulated depreciation and impairment loss .
It is depreciated over the shorter of the least term and the useful life of an asset if ownership is not transferred
If ownership is transferred, it should be depreciated over the economic useful life of the asset
When does IFRS 16 not apply?
If the lease is short term (less than 12 months) or if it is low value
What is IFRS 5?
Non-current assets held for sale and discontinued operations
This looks at how to treat assets they plan to sell abandon or distribute to owners . Generally, these assets need to be presented separately in the P&L to ensure they are faithfully represented
What is a discontinued operation?
A component of an entity that either has been disposed of or is classified as health for sale
What is the classification of assets held for sale? (MYPCP)
M - Actively marketed for sale
Y - so expected to complete within a year
P - highly probable sale
C - present condition ready for immediate sale
P - reasonable price has been set
What is the measurement of non-current assets for sale?
They should be measured at the lower of the caring amount or fair value - disposal
They are depreciated once they have been classified as held for sale
Impairment should be considered at the time of classification
What should be the presentation of noncurrent assets held for sale?
They must be shown separately from other assets as current assets held for sale on statement of financial position. This avoids misinterpretation were looking at liquidity of the entity. The recovery of an asset classified is not considered an operating item or part of normal working capital
What is IAS 2?
Inventories
Inventories are an asset that:
- held for sale in ordinary course of business (finished goods)
- In the process of production for sale (WIP)
- Materials that will be used in the production process (raw materials)
What are the measurement of inventory?
Inventory must be valued at the lower of the cost or net realisable value
How much it cost us versus how much we can sell it for
What are the methods of calculation of cost?
FIFO (first thing first out)
The first terms of inventory received are assumed to be the first we sold
E.g. fruit and veg in a supermarket
AVCO (average cost)
Value at average price
E.g. oil at an oil refinery
What is excluded from IAS 2?
Abnormal amounts of wastage
Storage costs
Admin overheads
Selling costs
Types of inventory systems
Perpetual or periodic
Perpetual
- Favours larger entities with masticated accountant systems
- Record adjustment to inventory after each transaction
- Regular physical inventory account to correct errors
Period
- Favour smaller businesses with simpler accounting systems
- No regular adjustments to inventory
- Requires period and inventory count
- Requires calculation of cost of sales at each period
What is IAS 10?
Events after the reporting period
Those events both favourable and unfavourable that occur between the end of the reporting period and the date the financial statements are all authorised for issue
Adjusting versus non-adjusting events
Adjusting = conditions that existed at the end of the reporting period
E.g
- Error and fraud
- Valuation of inventory
- Major customers concern
- Completion of an insurance claim
- completion of a court case
Non-adjusting = conditions that arose after the end of the reporting period
E.g
- Tax or exchange rates
- Acquisitions disposals or mergers
- Fire and floods
- restructuring plans
-Dividends
IAS 10 and going concern
IAS 10 prohibits an entity from preparing its financial statement on a going concern basis if it’s plans on liquidating or ceasing trade
Disclosures of material non-adjusting events
They should be disclosed by note that states:
- The nature of the event
- Estimated impact of financial event
- The date the directors approved the financial statements
What is IAS 1?
Presentation of financial statements
It states that you need :
- Statement of profit and loss and other comprehensive income
- Statement of changes in equity
- Statement of financial position
- Statement of cash flows
- Notes compromising significant accounting policies and other info
They must have a comparative to Prior year
What are the general attributes of IAS one?
Fair presentation
Going concern
Accrual basis of accounting
Materiality
Aggregation
Comparative information
Consistency of presentation
What is IAS 7?
Statement of cash flows
It permits two methods for presenting cash flows from operating activity
Direct method is encouraged, although indirect method is accepted
