ASSESMENT

• TWO TESTS
• TWO ASIGNMENTS
 OVERVIEW OF TOPICS
1. REGULATORY FRAMEWORK
2. ACCOUNTING FOR NON-CURRENT ASSETS
3. ACCOUNTING FOR INVENTORIES (IAS 2)
4. EMPLOYEE BENEFITS IAS 19
5. CONSIGNMENT ACCOUNTS
6. ACCOUNTING FOR ROYALTY
7. CONTAINER ACCOUNTING
8. Accounting for Hire Purchase
 Course learning outcomes
• Explain accounting concepts and theoretical
principles
• demonstrate an understanding of controversial
accounting issues and emerging accounting issues
• Prepare detailed financial statements for publication
based on IAS 1
• Understand the accounting treatment for Non-
current assets, Inventories and employee’s
benefits according to relevant International
Accounting standards (IASs).
Financial accounting (ACC 121)

Nsubili Isaga (PhD)

nisaga@mzumbe.ac.tz
 Required readings
• ACCA- Paper F7 (INT) (latest), Financial
Reporting (International), Emile Woolf
International Publishing
• Barry Elliott and Jamie Elliott, (Latest edition).
Financial Accounting and Reporting:. Prentice
Hall.
Regulatory framework

TOPIC 1
 At the end of the topic students should be able to:

• Explain the evolution of global standards

• Understand Framework for presentation and
preparation of Financial statements
 Prepare published financial statements
(Income statement and statement of financial
position)
• Describe International Financial reporting
standards
 Purposes of financial reporting
– stewardship
• Companies are separate legal persons owned by
shareholders and managed by directors
• Need to ensure that the directors work in the best
interests of the shareholders not themselves. This is
the stewardship function
• Financial reporting is part of this corporate
governance process.
• One purpose of regulation is to ensure the
information provided by directors to shareholders
fairly portrays how well they have managed the
business
 Purposes of financial reporting
– information for decisions
• The markets require that financial reports
provide reliable and relevant information to
help users such as shareholders and lenders to
make decisions.
• They also need to be able to compare
information about different companies
• Investors may operate across national
boundaries so internationally standardised
accounting is useful
 The regulatory framework
• The need for regulation
• Sources of regulation
• Principles and rules
Why financial reporting practice should be
regulated
 • The need for regulation
• There are several reasons as to why financial
reporting practice should be regulated.
• Major one- without it an entity would be free
to adopt any accounting treatment that it
chose.
• External users
Regulation ensures that external users gets
relevant and reliable information
 The need for regulation
• Accounting standards and other form of regulation
help to ensure that entities adopt similar
accounting treaments for similar items and
account for similar transactions in the same way
over time. This makes posible the comparability
• Without regulation the management would adopt
whichever accounting treatment presented its
resultsand position in the best posible light.
 Sources of regulation
The main sources of regulation are
• Accounting standards
• Company law
• For listed company the listing rules of the
relevenat stock exchange
EXAMPLES OF ACCOUNTING STANDARD
• U.S.A GAAP-Financial Accounting Standards
Board (FASB)
• TFRS 1
• Japanese GAAP
• Chinese GAAP
• International Financial Reporting Standards
 The regulatory system for financial
accounting
Financial reporting is regulated and
controlled. Regulations should help to
ensure that information reported in
financial statements has the required
qualities and content.
 The regulatory system for financial
accounting
• Countries have their own national laws and
regulations about financial accounting.
• In addition, the accountancy profession has
developed a large number of regulations and
codes of practice that professional accountants
are required to use when preparing financial
statements. These regulations are accounting
standards.
Standard setting process
 Evolution of accounting global standards

• Every company around the world used to

make their own standards.
• The early 20th century saw the establishment
of standard-setting bodies in different
countries to address the need for uniformity
and consistency in financial reporting
International Convergence Efforts
IASC Foundation
The body with overall responsibility for international
accounting is the International Accounting Standards
Committee Foundation (IASC Foundation).
The members of the IASC Foundation have no direct
involvement in setting accounting standards, but
they have oversight of three bodies that do:
• 􀂄 The International Accounting Standards Board
(IASB)
 Three bodies cont.
• The International Accounting Standards
Board (IASB)
• The Standards Advisory Council (SAC)
• The International Financial Reporting
Interpretations Committee (IFRIC).
Search online the roles of each Board
 IASC
• was independent body set up by accountancy
bodies in 1973
• Had complete autonomy of setting of
international accounting standard and the
issue of discussion documents on
international accounting issues from 1981
 IASB
• The International Accounting Standards Board
(IASB) was formed to take over the work of
International Accounting standard Committee
(IASC) in April 2001.
 Objectives
The IASB develops new international
accounting standards. These are called
International Accounting Standards (IASs) or
International Financial Reporting Standards
(IFRSs). An IAS and an IFRS have equal
status: both are international accounting
standards
 Objectives of IASB
To develop, in the public statement, a
single set of high quality, understandable
and enforceable global accounting
standards that require high quality,
transparent and comparable information in
financial statements.
 That’s is
• To promote the use of rigorous application of
those standards
• To take account of the needs of a range of
sizes and types of entities in diverse economic
settings (e.g. emerging economies)
• To promote and facilities adoption of IFRSs
through the convergence of national
accounting standards and IFRS.
 The Standards Advisory Council
The SAC consists of representatives from
different countries. It gives advice to the IASB on
the development of new IFRSs. The IASB consults
with the SAC, to obtain the views and opinions of
its members, when new accounting standards or
amendments to existing standards are being
considered.
 IFRIC
• Sometimes, when an accounting standard is
issued, there is some uncertainty about what
the regulations actually mean, or how the
standard should be applied to particular
transactions.
• When uncertainty arises with the meaning of
an accounting standard, IFRIC interprets the
rules in an IAS or IFRS, and publishes its official
interpretation
 Conceptual framework
• A conceptual framework is a system of
concepts and principles that underpin the
preparation of financial statements
• A statement of generally accepted theoretical
principles which form a frame of reference for
financial reporting.
• These provide a basis for developing new
accounting standards and a platform to
evaluate those already in existence.
 Conceptual framework
• In the field we are concerned with, is a
statement of generally accepted theoretical
principles which form the frame of reference
for financial reporting.
• Form a theoretical basis for determining which
events should be accounted for, how they
should be measured and how they should be
communicated to the user
 Conceptual framework
The framework does not create standards. It aims
to assist
• standard setters in the development of future
standards so that there is a rational basis for
reducing the number of alternatives in existing
standards;
• preparers in preparing financial statements by
applying standards and in having a principles
basis for the treatment of matters not covered
by a standard (e.g IFRS)
 Conceptual framework
• auditors in satisfying themselves that financial
statements being audited are in conformity
with the Framework principles; and
• Users in interpreting the financial information
contained in a set of financial statements that
comply with the standards
 IASC Framework for presentation and
preparation of financial statements

In July 1989 the IASB (then IASC) produced a

document, framework for presentation and
preparation of financial statement.
 The conceptual framework IASC
• It Was formed in 1973 to develop worldwide
accounting standards it was an independent
private – sector body , whose objectives was
to achieve uniformity in accounting principle
that are used for worldwide financial reporting
 IASC Framework
The objective of financial statement

Underlying assumptions

Qualitative characteristics of financial

statement
 IASC Framework
The elements of financial statements
Recognition of the elements of financial
statement
Measurement of the elements of
financial statements
Concepts of capital and capital
maintenance
 Developments

• IASB has been working closely with FASB on a

wide range of projects with the aim of
converging IFRS and US GAAP. One of the
project has had the aim of producing a
conceptual framework common to each GAAP
• The REVISED conceptual framework was
developed in 2018
 A conceptual framework for financial
reporting
• The preparation and presentation of financial
statement is based on a large number of
concepts, principles and detailed rules. Some
of these are contained in law others are in
financial reporting standards.
• Many of the most fundamentals concepts are
not contained in any law or regulation or
standrds but are simply accepted accounting
principle.
 Work
What were reasons for the review of the
conceptual framework of the financial
reporting of 1989?
The conceptual framework for financial reporting 2018

• Chapter 1 the objective of general purpose of

financial statement
• Chapter 2 the qualitative characteristics of
usefull financial information
• Chapter 3 Financial statements and reporting
entity
• Chapter 4 Elements of Financial statement
• Chapter 5 Recognitionn and Derecognition
The conceptual framework for financial reporting
(2018)

• Chapter 6 Measurement
• Chapter 7 Presentation and Disclosure
• Chapter 8 Concepts of Capital and Capital
Maintanance
 Chapter 1: The Objective of general
purpose financial reporting
• The chapter notes that 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 relating to providing
resources to the entity.
 Users and their information needs

• Users of accounting information consist of

investors, employees, lenders, suppliers and
other trade creditors, customers, government
and their agencies and the public. You should
be able to remember enough to do the
following exercise.
QUESTION
• Consider the information needs of the users of
financial information listed above.
 Users of Financial information
Users need information about
• The economic resources of the entity
• The claims against the entity
• Changes in the entity's economic resources
and claims
 Thing to note
• The Conceptual Framework makes it clear that
this information should be prepared on an
accruals basis.
• The effects of transactions and other events
are recognised when they occur (and not as
cash or its equivalent 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.
 Underlying assumption

• Going concern
The entity is normally viewed as a going
concern, that is, as continuing in operation for
the foreseeable future.
It is assumed that the entity has neither the
intention nor the necessity of liquidation or of
curtailing materially the scale of its operations
Chapte2:Qualitative characteristics of useful financial information

The Conceptual Framework states that

qualitative characteristics are the attributes that
make financial information useful to users.
Chapter 3 of the Conceptual Framework
distinguishes between fundamental and
enhancing qualitative characteristics, for analysis
purposes
 Chapte2:Qualitative characteristics of useful financial information

• Two fundamental qualitative characteristics

– Relevance and faithful representation
• Other characteristics that may make the information
more useful are
– comparability;
– verifiability;
– Timeliness
– understandability.
– Substance overform
Are also called enhancing characteristics
 Relevance
• Relevant financial information is capable of
making a difference in the decisions made by
users. Information may be capable of making a
difference in a decision even if some users
choose not to take advantage of it or are
already aware of it from other sources.
 Relevance
• Financial information is capable of making a
difference in decisions if it has predictive
value, confirmatory value or both.
• Materiality
Information is material if omitting, misstating or
obscuring it could reasonably be expected to
influence decisions made by the primary users
of general purpose financial reports.
 Faithful representation
• Financial reports represent economic
phenomena in words and numbers. To be
useful, financial information must not only
represent relevant phenomena, but it must
also faithfully represent the substance of the
phenomena that it purports to represent.
• To be a perfectly faithful representation, It
would be complete, neutral and free from
error
 Chapter 3 - Financial Statements and the
reporting entity.
• It states the objective of financial statements (to provide
information about an entity's assets, liabilities, equity, income
and expenses that is useful to financial statements users in
assessing the prospects for future net cash inflows to the
entity and in assessing management's stewardship of the
entity's resources) and sets out the going concern
assumption.
• It only mentions two statements explicitly: the statement of
financial position and the statement(s) of financial
performance (the latter being the former statement of
comprehensive income); the rest are "other statements and
notes".
 Chapter 4: The Framework: the remaining
text
• Underlying assumption
• The elements of financial statements
 Underlying assumption
Accruals basis and Going concern
Accruals basis: The effect of transactions and other
events are recognized when they occur (not as cash or
its equivalent is received or paid) and they are recorded
in the accounting records and reported in the financial
statements of the period to which they relate.
 Going concern.
The entity is normally viewed as a going
concern, that is, as continuing in operation for
the foreseeable future. It is assumed that the
entity has neither the intention nor the
necessity of liquidation or of curtailing
materially the scale of its operations.
 The elements of financial statements

• Transactions and other events are

grouped together in broad classes and in
this way their financial effects are shown
in the financial statements. These broad
classes are elements of financial
statements.
 Elements of financial statements
• Measurement of financial position in the
statement of financial position
Assets, liabilities and Equity
• Measurement of performance in the income
statement Income and Expenses.
 Assets
Assets
• Present economic resource
• controlled by the entity
• As a result of past event

An economic resource is a right that has the

potential to produce economic benefits
 Liabilities
Liabilities are:
• an entity’s present obligations
• to transfer economic resource
• as a result of past transactions or events.
For liability to exist, three criteria must be satisfied
• The entity has a obligation
• The obligation is to transfer an economic resource
• The obligation is a present obligation that exists as a
result of past events
 Equity interest

Equity
• Equity is the residual interest in an entity after
the value of all its liabilities has been deducted
from the value of all its assets.
 Income

• an increase in assets, or decreases in

liabilities that result in increase in equity
other than those relating to contributions
from holders of equity claims.
• This definition follows a statement of
financial position approach rather that
the more traditional profit or loss
approach to recognising income.
 Expenses

Expenses are:
• decreases in assets or increase in liabilities
that result in decrease in equity other than
those relating to distributions to holders of
equity claims.
 Chapter 5: Recognition of the elements of
financial statements
Items which meet the definition of assets or
liabilities may still not be recognized in financial
statements because they must also meet certain
recognition criteria.
• Probability of future economic benefits will
flow to or from the entity
• The item has a cost or value that can be
measured with reliability
Regards must be given to materiality as well
 Recognition 64

What does probable mean?

The meaning of probable is determined at the
standards level. Therefore, inconsistent use across
IFRSs

What does measure reliably mean?

To a large extent, financial reports are based on
estimates, judgements and models rather than
exact depictions.
Item Recognized in When

Asset The statement of financial It is probable that the future economic

position benefit will flow to the entity and asset
has a cost or value that can be
measured reliably

Liability The statement of financial It is probable that an outflow of

position resources embodying economic
benefits will result from the settlement
of a present obligation and the amount
at which the settlement will take place
can be measured reliably

Income The statement of An increase in future economic benefits

comprehensive income related to an increase in an asset or a
decrease of a liability has arisen that
can be measured reliably

Expenses The statement of A decrease in future economic benefits

comprehensive income related to a decrease in an asset or an
increase of a liability has risen that can
be measured reliably
 Activity
Consider the following situations. In each case,
do we have an asset or liability within definions
given by the framework? Give reason for your
answer.
• Pat co has purchased a patent for shs 20,000.
the patent gives the company sole use of
particular manufacturing process which will
save shs 3000 a year for the next five years.
 Activity continued
• Bea co paid Don shs 10,000 to set up a car
repair shop, on condition that priority
treatment is given to cars from the company’s
fleet
• Deals on wheels co providers a warranty with
every car sold
 Chapter 6: Measurement of the elements
68
of financial statements
o Measurement is the process of determining
monetary amounts at which elements are recognised
and carried.
o To a large extent, financial reports are based on
estimates, judgements and models rather than exact
depictions. The Framework establishes the concepts
that underlie those estimates, judgements and
models
o IASB guided by objective and qualitative
characteristics when specifying measurements.
 Chapter 6: Measurement
• This chapter is dedicated to the description of
different measurement bases (historical cost
and current value (fair value, value in
use/fulfilment value, and current cost)), the
information that they provide and their
advantages and disadvantages.
• Current cost is newly introduced into the
Conceptual Framework as it is widely
advocated in academic literature
 Chapter 7: Presentation and disclosure
• Objective of financial reporting
• Presentation: financial statements portray financial effects of
transactions and events by:
– grouping into broad classes (the elements, eg asset)
– sub-classify elements (eg assets sub-classified by their
nature or function in the business)
• IAS 1
– application of IFRSs with additional disclosures when
necessary results in a fair presentation (faithful
representation of transactions, events and conditions)
– don’t offset assets & liabilities or income & expenses
 Reporting entity
• Nothing in current Conceptual Framework on reporting entity
• These are tentative decisions in CF project to date
Circumscribed area of economic activity
– Activities are being, have been, or will be conducted
– Activities can be objectively distinguished
– Provides information for users to make decisions
• Legal entity not necessary
– Branch or segment of a legal entity could be a reporting entity
• Consolidated financial statements are general purpose
– May also be a group of entities under common control
– Parent-only financial statements useful with consolidated
financial statements, but not on their own
71
Advantages of a conceptual framework

What are the advantages and

disadvantages of the a conceptual
framework?
 Conceptual Framework
Advantages of a conceptual framework
• Having a consistent conceptual base should avoid
contradictions and inconsistencies in basic concepts and so
produce standardised consistent accounting practices.
• The development of standards is less subject to political
pressure.
• A consistent statement of financial position driven or profit or
loss driven approach is used.
 Conceptual Framework
Disadvantages of a conceptual framework
• Financial statements have many users all with differing needs.

– A single framework cannot satisfy the needs of all users.

– There may be a need for a variety of accounting standards,
each produced for a different purpose with different
conceptual bases.
• Having a conceptual framework may not make it any easier to
prepare accounting standards.
 General Accepted Accounting Practice
(GAAP)
• GAAP signifies all the rules, from whatever source,
which govern accounting. It is a general term for a
set of financial accounting standards and reporting
guidelines used to prepare accounts in a given
environment.
• In individual countries this is seen primarily as a
combination of
 National company law
 National accounting standards
 Local stock exchange requirements
International Financial reporting standards

IFRSs are a major international GAAP. They

are widely used and accepted as a basis for
the preparation of financial statements
across many jurisdictions.
In short the term IFRS includes all
standards and interpretations approved by
the IASB and IASs.
 IFRS vs. local gap
• Over the past 10 years many countries have
adopted IFRS as their accounting framework
with local GAAP either disappearing or only
being used for private entities.
• Tanzania 1st July, 2004
 Advantages of IFRS
• One international model for all
• Access to global funds
• Training costs, accountants only need to
learn one model
• Recognized globally
 Disadvantages of IFRS
• Cost to convert from local GAAP
• Reluctance to change
• May be a requirement to both statutory and
IFRS accounts
• Perception of difficulty
 Measurement of the elements of financial
statements
• Historical cost
• Current cost
• Realizable (settlement) value
• Present value of future cash flows
 Challenges faced by IASB
i. Global acceptance- Not all IAS are accepted in all countries
ii. Conflict with framework- Some standards do not match
exactly with principles laid down in the framework- Eg the
framework defines liability as the a present obligation
arising from past events, the settlement of which is
expected to result in an outflow of economic benefits BUT
IAS 12 indicate about Deferred tax liability and Income
taxes as a future liability
iii. Common Conceptual Framework- Presence of different
conceptual framework is some other countries apart of
IASB Framework
 Session evaluation
• Go to www.menti.com and use the code 5262
7422
 Area for improvement
• Go to www.menti.com and use the code 5789
0596