Summary of Accounting Standards Flashcards
Day 1 SBR knowloedge prep for AAA
Conceptual Framework for Financial Reporting
What are the objectives of financial reporting?
- To provide information to potential and current investors, lenders and other creditors
- User groups need to be able to assess future cash flows and management’s stewardship of assets
Conceptual Framework for Financial Reporting
What are the qualitative characteristics of useful information?
- fundamental characteristics of relevance and faithful representation
- enhancing characteristics of comparability, verifiability, timeliness and understandability
Conceptual Framework for Financial Reporting
What are the elements of financial statements?
- Assets –economic resources controlled by an entity from a past event
- Liabilities – obligations to transfer economic resources as a result of a past event
- Equity – residual interest in an entity’s assets after deduction of all liabilities
- Income – an increase in assets/reduction in liabilities that increases equity
- Expenses – a decrease in assets/increase in liabilities that reduces equity
Conceptual Framework for Financial Reporting
When to recognise an element?
If recognition provides: (both needed)
* relevant information
* faithful representation
Conceptual Framework for Financial Reporting
When to derecognise an element?
When the (either or):
* Entity no longer controls asset
* Entity no longer has obligation for liability.
Conceptual Framework for Financial Reporting
What are the method of measurement in Financial Statements?
- Historical cost or current value
- When deciding on measurement base, consider characteristics of item and how it will generate cash flows.
Conceptual Framework for Financial Reporting
Where are specifics items presented in the Financial Statements?
- Profit or loss is the primary source of information about performance
- **Income/expenses **normally recognised in P/L
- Recognise income/expense in OCI if arises from current value measurement and enhances relevance of P/L
- Items in OCI will be reclassified to P/L unless unable to determine timing or amount
Summary of the IAS Standards
IAS 1 Presentation of financial statements
- Provides formats for classification and presentation of financial statements and disclosures
- Items of OCI must be classified as either items that may be reclassified to profit or loss in future periods, or those items which will not be reclassified in future periods
Summary of the IAS Standards
IAS 2 Inventories
Definition: items sold in the ordinary course of business (or associated raw materials and work-in-progress)
* Valued at lower of cost and estimated selling price less selling costs (i.e. NRV) for each separate item or product
* The ‘cost’ of inventory includes all costs of getting the item or product to current location and condition
Summary of the IAS Standards
IAS 8 Accounting policies, changes in accounting estimates and errors
- Accounting policies should be appropriate and relevant, be consistently applied and be disclosed
- Changes in estimates are taken to statement of profit or loss in current and future periods – e.g. change in depreciation method
- Changes in accounting policy and the correction of prior period errors require the restatement of comparative information and opening reserves
Summary of the IAS Standards
IAS 7 Statement of cash flows
Reconciles cash and cash equivalents year-on-year
* Cash equivalents are short-term, highly liquid and readily convertible to a known amount of cash.
* Three standard headings
o Operating activities
o Investing activities
o Financing activities.
* Cash generated from operations can be derived using the direct method or the indirect method
* The indirect method begins with profit before tax and then adjusts it for non-cash items, as well as for items that relate to investing or financing activities.
Summary of the IAS Standards
IAS 8 Accounting policies, changes in accounting estimates and errors
- Accounting policies should be appropriate and relevant, be consistently applied and be disclosed
- Changes in estimates are taken to statement of profit or loss in current and future periods – e.g. change in depreciation method
- Changes in accounting policy and the correction of prior period errors require the restatement of comparative information and opening reserves
Summary of the IAS Standards
IAS 10 Events after the reporting period
Definition – those events between the reporting date and date of approval of financial statements
* Adjusting events – those which provide additional evidence of the situation existing at thereporting date e.g. insolvency of major debtor notified shortly after the reporting date
* Non-adjusting events – those which do not provide evidence of the situation at the reporting date e.g. share issue after the reporting date. These are disclosed, but may become adjusting event if going concern basis threatened.
Summary of the IAS Standards
IAS 12 Income Taxes
Deferred tax is accounted for on temporary differences (differences between the carrying
amount and tax base of assets and liabilities).
o If the tax base is higher than the carrying amount = deferred tax asset
o If the carrying amount is higher than the tax base = deferred tax liability
Temporary differences include:
o The timing difference between accounting and tax depreciation
o The timing difference between the amortisation of development assets and the period
in which tax relief for development activity is obtained.
Deferred tax is calculated by applying the applicable tax rate to the temporary difference
o Deferred tax is not discounted to present value
o Deferred tax assets can only be recognised if probable benefits are expected
The deferred tax charge (or credit) is recorded in the same statement as the underlying
transaction
o Most deferred tax is recorded in profit or loss
o Deferred tax on transactions in OCI (such as PPE revaluations) is recorded in OCI
Summary of the IAS Standards
IAS 16 Property, plant & equipment
Definition = asset used to produce or store inventories or for administrative or distribution functions.
* Initially recognised at cost
o Cost is all expenditure attributable to bringing the asset into working condition as well as directly attributable borrowing costs.
* Subsequent expenditure is capitalised if it enhances the economic benefits of the asset.
* Depreciation starts when the asset is available for use
* PPE may be revalued
o Revalue all items in the same class
o Gains are recorded in other comprehensive income.
o Losses are recorded in OCI until the revaluation reserve is reduced to nil. Any excess loss is recorded in P/L.
