Prepared by

Kent Wilson

Chapter 1

The IASB and its

Conceptual Framework
 Learning Objectives

1. Describe organisational structure of IASB

2. Describe the purpose of a conceptual framework

3. Qualitative characteristics that make information useful

4. Assumption underlying the preparation of financial

statements
 Learning Objectives

5. Define the basic elements in financial statements

6. Explain the recognition criteria of the basic elements

7. Distinguish between alternative measurement bases

8. Outline concepts of capital maintenance

 The International Accounting
Standards Board (IASB)

 Replaced IASC in 2001

 Full time board
 SAC appointed

 Initially adopted IAS with some modifications

 Issues IFRSs
The International Accounting
Standards Board (IASB)
 IFRIC & Advisory Bodies

 IFRIC – Two key roles

1. Reviews newly identified financial reporting issues that
are not dealt with by IFRSs
2. Overviews emerging interpretation issues

 Advisory bodies:
 IFRS Advisory Council
 Capital Markets Advisory Group
 Emerging Economics Group
 Global Preparers Forum
 SME Interpretation Group
 The Purpose of The
Conceptual Framework

 To assist in developing a consistent set of

standards & dealing with topics not covered
by a standard

 To assist preparers of financial statements

 To assist auditors in forming an opinion

 To assist users in the interpretation of

information
The Objective of Financial
Reporting
 Paragraph OB2 of the IASB Conceptual Framework
outlines the objective

 Key objectives:
 Financial statements should reflect the perspective of
the entity
 The key users of financial statements are capital
providers
Qualitative Characteristics of
Useful Information

 Fundamental qualitative characteristics:

 Relevance
 Faithful representation

 Enhancing qualitative characteristics:

 Comparability
 Verifiability
 Timeliness
 Understandability
 Assumption Underlying
Financial Statements

 Financial statements are prepared under the

going concern assumption

 Implications of going concern:

 Allocation of depreciation over useful life
 Supports inclusion of good will in statement of
financial position
 Set aside if management intends to liquidate the
entity’s operations
 Definition of Elements in
Financial Statements

Assets
 Controlled resources expected to reap future benefits
that have arisen from a past event

Three essential characteristics:

1. Future economic benefits
2. The entity must have control
3. There must be a past event
 Definition of Elements in
Financial Statements

Liabilities
 A present obligation arising from a past event
requiring resources to settle

Three essential characteristics:

1. A present obligation
2. Must result in the giving up of resources
3. Must have resulted from a past transaction or event
 Definition of Elements in
Financial Statements

Equity:
 The residual interest in assets less liabilities
 Increases as a result of profitable operations
 Is influenced by the system adopted
 May be subclassified in the smeasurement tatement
of financial position
 Definition of Elements in
Financial Statements

Income:
 Increases in economic benefits from inflows, asset
enhancements or decreased liabilities
 Note connection with assets and liabilities

Expenses:
 Decreases in economic benefits from outflows, asset
depletions or incurrences of liabilities
Recognition of Elements of
Financial Statements
Asset recognition
 Probable that future economic benefits will flow
 Can be measured reliably

Liability recognition
 Probable that an outflow of economic benefits will
occur
 Settlement amount can be measured reliably
Recognition of Elements of
Financial Statements
Income recognition
 When an increase in future economic benefits
relating to an increase in an asset or decrease in a
liability can be measured reliably

Expense recognition
 When a decrease in future economic benefits
relating to a decrease in an asset or increase in a
liability can be measured reliably
 Matching is no longer the recognition criterion
Measurement of the Elements
of Financial Statements

 Measurement involves assigning valuations on

all elements reported in financial statements

 Measurement bases:
 Historical cost
 Current cost
 Realisable or settlement value
 Present value
 Concepts of Capital

Financial capital concept:

Capital is synonymous with the net assets or equity of the
entity
Profit exists only after the entity has maintained its capital

Physical capital concept:

 Viewed as the operating capability of the entity’s
assets
 Profit exists only after the entity has set aside enough
capital to maintain the operating capability of its assets
 Chapter 9

Inventories

Prepared by
Kent Wilson
 Objectives

1. Discuss the nature of inventories and how to

measure them

2. Explain what is included in the cost of

inventory

3. Account for inventory transactions using both

the periodic and perpetual methods

4. Application of end of period procedures

 Objectives

5. Explain cost flow assumptions and apply both

FIFO and weighted average cost formulas

6. Explain the net realisable value basis of

measurement

7. Identify inventory expense inclusions

8. Implement the disclosure requirements of IAS 2

The Nature of Inventories

• IAS 2 defines inventories as assets that are:

– Held for sale
– In the process of production
– Materials or supplies to be used in production

• Inventories are classified as current assets

• Cost of goods sold (COGS) is the expense account

used to record the costs of inventory once sold
Initial Recognition of Inventory

‘Inventories shall be measured at the lower of

cost and net realisable value.’ (IAS 2 para 9)

• Cost Components:
– Costs of purchase
– Costs of conversion
– Costs in bringing inventory to present location & condition
 Determination of Cost

• The cost of purchase comprises:

– The purchase price
– Import duties and other transaction taxes
– Transport, handling and other directly attributable
costs
– Any discounts are to be deducted
 Costs of Conversion

• Costs of conversion are those costs directly related to

production including:
– Direct labour
– Systematic allocation of fixed and variable production overheads

• Variable overheads: vary with volume of production.

Allocated based on actual use of production facilities

• Fixed overheads: remain constant regardless of the

volume of production. Allocated based on normal
production capacity.
 Accounting for Inventory

• Periodic Method
– Balance of inventory determined periodically (normally annually)
– Amount of inventory determined via physical count (# of units X
unit cost)
– Cost-effective and easy to apply, but inexact day-to-day quantity
and cost

• COGS determined as follows:

Opening inv. + purchases – purchase returns – closing inventory = COGS
 Accounting for Inventory

• Perpetual Method
– Balance of inventory determined each time a transaction
occurs
– Requires subsidiary ledger linked to general ledger
– Up-to-date but more complicated and expensive than
periodic method
 End-Of-Period Accounting

• The following steps are normally undertaken to ensure

that reported figures for inventory and COGS are
accurate and complete:
– Physical count
– End-of-year
– Accounting for goods in transit and consignment inventory
– Control account/subsidiary ledger reconciliation procedures
(needed only under perpetual method)
Assigning Costs to Inventory on
Sale

• IAS 2 requires the specific identification method be used

where possible to assign costs to inventory
– Under this method costs are individually identified for each
inventory item

• Where there are large numbers of homogenous inventory

items one of the following two methods should be used:
– First-in first-out (FIFO)
– Weighted average cost method
Assigning Costs to Inventory on
Sale
FIFO
• Assumes that items of inventory purchased/produced
first are sold first
• Items remaining in inventory are those most recently
purchased/produced

Weighted average
• The cost of each item is determined from the cost of
similar items purchased during the period
• May be a weighted average or a moving average
 Net Realisable Value

• IAS 2 requires that inventories are recorded at the

lower of cost and net realisable value (NRV)

• NRV is the amount the entity expects to realise from the

sale of the inventory in the ordinary course of business

• NRV may fall below cost due to:

– Fall in selling price
– Physical deterioration of inventory
– Obsolescence
 Disclosure

• IAS 2 para 36 - 37 outline requirements:

– Need to classify into categories
– Common classifications:
• Merchandise
• Production supplies
• Materials
• Work in progress
• Finished goods
 Chapter 11

Property, Plant & Equipment

Prepared by
Kent Wilson
 Objectives

1. Understand the nature of property, plant and

equipment

2. Understand initial measurement and

recognition criteria

3. Alternative measurement subsequent to initial

recognition

4. The cost model

 Objectives

5. The revaluation model

6. Understand the factors to consider when

selecting measurement models

7. Accounting for derecognition

8. Implement the disclosure requirements of IAS 16

The Nature of Property, Plant
& Equipment
• IAS 16 defines property, plant & equipment as:
– Tangible items
– Assets with a specific use within the entity
– They are expected to be used during more than one period
– Excludes assets held for sale
• Normally divided into classes for disclosure purposes:
– Land
– Buildings,
– Machinery,
– Motor vehicles
– Office Equipment
 Initial Recognition of
Property, Plant & Equipment
• Cost of an item is recognised as an asset if:
– It is probable that economic benefits will flow to
the entity and
– The cost can be reliably measured

• Where future economic benefits are not expected to

flow to the entity, costs incurred should be expensed

• Significant parts (with different useful lives) are

required to be separately accounted for
– Aircraft
 Initial Measurement of
Property, Plant & Equipment

• Initially measured at cost which includes:

– Purchase Price
– Directly attributable costs
– Initial estimate of the costs of dismantling and
removing the item or restoring the location site.
Measurement Subsequent to Initial
Recognition

• IAS 16 allows a choice of two possible

measurement models:
– Cost model
– Revaluation model

• The choice of model is an accounting policy decision

• The policy that is chosen must be applied to a whole

class of assets

• May change policy, but only if results in more relevant

or reliable information
 The Cost Model

• IAS 16 requires that assets are carried at cost less

any accumulated:
– Depreciation
– Impairment losses

• Repair and maintenance costs are expensed as

incurred, not capitalised.

• Capitalisation requires increased probable future

economic benefit (at time of expenditure)
 Depreciation

• IAS 16 includes the following definitions:

– Depreciation – the systematic allocation of the depreciable amount

of an asset over its useful life

– Depreciable amount – the cost of an asset less its residual value

– Residual value – the estimated value that an entity would currently

obtain from disposal if the asset were at the end of it’s useful life

– Useful life – the period over which an asset is expected to be

available for use by an entity
 Depreciation

• Depreciation is a process of allocation designed to reflect

the fall in the value of the asset in a pattern consistent with
the consumption of economic benefits by the entity

• IAS 16 does not specify how this allocation process should

be undertaken

• Various depreciation methods are used in practice:

– Straight line method
– Diminishing-balance method
– Units-of-production method
 The Revaluation Model

• As an alternative to the cost model IAS 16allows the

revaluation model to be used for classes of assets
– Measurement basis is fair value (FV)

– Frequency of revaluations is not specified, but must be performed

with sufficient regularity such that the carrying amount of assets is
not materially different from their FV

– Revaluation performed on a class basis

– Accounting performed on an asset-by-asset basis

Applying the Revaluation Model:
Revaluation Increases

• IAS 16 para 39 outlines principles:

– An increase is recognised in comprehensive income
– The gain is transferred to equity (revaluation surplus)

• Refer Illustrative Examples 11.2 – 11.4

Applying the Revaluation Model:
Revaluation Decreases

• IAS 16 para 40 outlines principles:

– A revaluation decrease
• Recognition in P & L (Loss)

– A revaluation decrease following a previous increase

• Elimination of revaluation surplus
• Recognition in P & L
• Reversal of DTL

• Refer Illustrative Examples 11.5 – 11.6

 The Revaluation Model:
Transfers from Asset Revaluation
Surplus (ARS)
• Transfers may be made from the Asset Revaluation
Surplus in the following circumstances:
– When a revalued asset is derecognised the balance in the ARS
may be transferred to retained earnings
– When a revalued asset is being depreciated the ARS may be
progressively transferred to retained earnings over the useful
life of the asset

– Bonus share issues may be made from the ARS

Choosing Between the Cost
Model & the Revaluation
Model
• Revaluation model provides more relevant information

• However, there is a cost disincentive of adopting the

revaluation model

• Cost model harmonises with US GAAP

• Differing impacts on profit & loss

 Derecognition

• IAS 16 para 67 identifies two occasions

where derecognition should occur:
– On disposal
– Where no future economic benefits are expected

• When items are sold a gain or loss is recognised,

and included in the profit or loss for the period
 Disclosure

• IAS 16 para 73 - 79 outline requirements:

– Information on a class-by-class-basis
– Measurement bases
– Any restrictions on title
– Selection of depreciation methods
– Revaluation information
 Chapter 18

Financial Statement
Presentation

Prepared by
Kent Wilson
 Objectives

1. Describe the main components of financial

statements

2. General features of financial statements

3. Classification and presentation requirements for

the statement of financial position

4. Presentation requirements for the statement of

profit or loss and other comprehensive income
 Objectives

5.Presentation requirements for the statement of

changes in equity

6.Overview other disclosures required by IAS 1 in

the notes of the financial statements
 Components of Financial
Statements

• A complete set of financial statements

comprises:

– Statement of Financial Position

– Statement of Profit or Loss and Other Comprehensive Income
– Statement of Changes in Equity
– Statement of Cash flows
– Notes

(IAS 1 para 10)

General Features of Financial
Statements

• As per IAS 1, the following considerations must be

followed in the presentation of a financial report:
1. Fair presentation and compliance with IFRSs
2. Going concern
3. Accrual basis of accounting
4. Materiality and aggregation
5. Offsetting
6. Frequency of reporting
7. Comparative information
8. Consistency of presentation
General Features of Financial
Statements

Fair presentation & compliance with IFRSs

• A set of financial statements are required to present
fairly an entity’s financial performance, financial position
and cash flows

• Applying IFRSs (with additional disclosures where

necessary) is presumed to result in a fair presentation

(IAS 1 para 15-19)

General Features of Financial
Statements
Going concern
• There is an assumption that all entities adopt the
going concern basis of accounting
• Exception applies where management intends to
liquidate or cease trading
(IAS 1 Para 25)

Accrual basis of accounting

• Except for cash flow information, the financial
statements are required to be presented using the
accruals basis of accounting
 General Features of Financial
Statements
Materiality and aggregation
– Each material class of similar items must be presented separately
– Items of a dissimilar nature or function must be presented
separately, unless they are immaterial
(IAS 1 para 7)

Offsetting
– Assets & liabilities and income & expenses are not to be offset,
unless required or permitted by another accounting standard
– Offsetting detracts from the ability of the users to understand the
entity’s transactions
– Offsetting is appropriate when netting any income with related
expenses arising from the same transaction

(IAS 1 para 32, 34-35)

General Features of Financial
Statements
Comparative information
• Comparative information for the immediately preceding reporting period
must be disclosed for all amounts
(IAS 1 para 38)

Consistency of presentation
• Financial information must be consistently presented from one period to
the next unless:
– There has been a significant change in the entity’s operations
– A change in presentation or classification will provide more relevant
information
– An IFRS requires a change in presentation
(IAS 1 para 45)
Statement of Financial Position

• Summarises the elements directly related to the

measurement of financial position

• Provides the basic information for evaluating an

entity’s capital structure and analysing its liquidity,
solvency and financial flexibility

• Provides a basis for computing rates of return

Statement of Financial Position
Classifications

•No prescribed format in IAS 1, but assets and liabilities

to be classified on basis of:
– Current/non-current
– In order of their liquidity

•Assets are classified as current or non-current

depending on whether they are expected to be sold,
consumed or realised as part of the normal operating
cycle within 12 months of balance date
Statement of Financial Position
Classifications
• Conditions at balance date determine if liabilities are
classified current or non-current

• IAS 1 outlines the minimum line items to be disclosed

• Requires inclusion of additional items, headings and

sub-totals, if relevant, based on assessment of:
– The nature and liquidity of assets
– The function of assets
– The amounts, nature and timing of liabilities
Statement of Profit or Loss & Other
Comprehensive Income

• A prime source of information about an entity’s

performance

• Income, expenses and other comprehensive

income are included

• Total comprehensive income has two

components:
1. Profit or loss (P&L)
2. Other comprehensive income (OCI)
Statement of Profit or Loss &
Other Comprehensive Income
Profit or loss
• IAS 1 adopts an “all-inclusive” approach to the
determination of a company’s profit or loss

• All items of income and expense recognised into period

must be included in the company’s profit or loss. The
only exclusions relate to
• Corrections of errors and the effects of changes in accounting
policies
• Provisions within other AASBs that require or permit
components of other comprehensive income to be excluded
from profit or loss
Statement of Profit or Loss &
Other Comprehensive Income
Other Comprehensive Income (OCI)

• OCI comprises items of income and expense that are

not recognised in profit or loss

• Components of OCI comprise:

• Changes in a revaluation surplus
• Actuarial gains and losses on defined benefit plans
• Gains and losses arising from the translation of financial
statements of foreign operations
• Gains and losses on remeasuring available-for-sale financial
assets
• The effective portion of gains and losses on hedging
instruments in a cash flow hedge
Statement of Profit or Loss &
Other Comprehensive Income
• To enhance understandability of the statement IAS 1
requires separate disclosure of the nature and amount
of certain material income and expense items including:
– Inventory and PPE write-downs
– Cost of restructuring
– Disposals of PPE & other investments
– Profit/(losses) re discontinuing operations
– Litigation settlements
– Reversals of provisions

• Such disclosures can be made either in the statement

or in the notes
Statement of Changes in Equity

The following is disclosed in this statement:

• Total comprehensive income for the period attributable to:

– Equity holders of parent
– Non controlling interests

• For each component of equity

– Changes in accounting policies
– Corrections of errors required by IAS 8

• For each component of equity a reconciliation between

opening and closing balances showing changes resulting from
– Profit/(Loss)
– OCI
– Transactions with equity holders, showing separately distributions to
equity holders
 Notes

• Notes enhance the understandability of the other

statements

• Each item in the statements is cross-referenced to any

related information in the notes

• The order of notes is:

– Summary of accounting policies
– Supporting information for items in statements
– Other disclosures:
• Dividends
• Company details
• Auditor remuneration
Sources Of Estimation Uncertainty

• “an entity shall disclose in notes key assumptions

about the future of estimation uncertainty that is
material” (IAS 1 para 125)

• Notes shall include details of:

– Their nature
– Their carrying amount as at the reporting date

• Examples include:
– Future interest rates
– Useful lives of non-current assets
Accounting Policies, Changes
in Accounting Estimates &
Errors
• IAS 8 deals with:
– Selecting and changing accounting policies
– Changes in accounting estimates
– Correction of errors

• Selecting and changing policies

– The concept of substance over form is particularly important

• IAS 8 requires extensive disclosures when an entity

changes its accounting policy
Events After the Reporting Period

• “An event after the reporting date is one that

occurs after the end of the reporting period
but before the date on which the financial
statements are authorised for issue”
(IAS 10 para 3)

• Adjusting Events
– Refer IAS 10 para 8

• Non adjusting events

– Refer IAS 10 para 10