Module 1 Pages 2-4 - Financial reporting is to communicate to external stakeholders to make effective descions - Financial reports also gives stewardship and accountability role to managed by requiring managers to give account on how resources are used. Important when there is a serpreation between owners and managers. - Financial reporting statements are called General Purpose Financials Statements (GPFS’s) - GPFS made up of ,Balance sheet (Stataement of position), Profit & Loss and Other Comprehensive income (State of performance), Cash flow report, and Statement of changes in Equty. - Main object of GPFS if for “Decsion-Usefulness” - Financial reporting is important because of the signifcant level of resources under the responsibility of managers and the financial impact of the decisions users make based on the information in the financial reports. - GPFS are designed to assit the primary users of the reports directly. - Primary users of GPFS’s are: Existing/potiental investors; lenders & other creditors. - Secondary users are: Regulators & Members of public (communities and potiental employees). GPFS’s are not directed to these users. - Primary users may have conflicting information needs. For example the needs of a lender may be different to an investors. The IASB framework resolves this by stating that the “information should be provide that meets the needs of the maximum number of primary users. - Different companies will have different primary users. Some companies main primary users are investors while others are creditors, or with others being lenders. - Companies can also provide additonal information if they wish to appease conflicting primary users Pages 5-6 - GPFS’s must comply with the International Financial Reporting Standards (IFRS) and achieve fair representation in accordance with the determination and recognition criteria in the conceptual framework. - Conceptual framework is not a standard and does not overide IFRS. If there is a confict between IFRS, the IFRS will always take precedence. There are two series of international accounting Standards. Standards developed by the IAS were made between 1973-2001 before the International Accounting Standard Board was formed. IASB then developed the standards from 2001 and onwards. Any relavant IAS standards remained and are under the IAS heading. - The Australian Accounting Standard Board (AASB) develop accounting standards for all the australian economic sectors. There is a specific numbering system to idenity their connection with International accounting standards. Standards number 1-99 (equvalen to IFRS) 101-199 (IAS) and 1001 -> (no international equivalent) - Each standard includes a statement at the beginning referring to its sructure, main princiapal and terms and the context in which the standard should be read. Page 7 - GPFS’s apply to all reporting entities. IFRS does not state who is a reporting entity. It is the governemnts and regulation agencies that determine who are the reporting entities for their nation. - In australia a reporting entity is when they statify the following conditions. - They have public accountability - They are quired by legislation to comply with Aus Acc Standards. - Public accountabiltiy: - Debt or equity instruments are traded in a public market or are in the process of issuing. - Or holds assets in a fiduciary capacity for a broad group (banks, insrnance comp., mutal funds) - Legislation: Corporations act 2001 requires an entity is a reporting entity is a public company, large private company, disclosing entity, or registerted scheme to prepare an annual finanacial statement report. - A large private company has less that 50 shareaholders, and meets 2/3 of the following: rev > 50m, gross assets over 25m, and 100+ emplyees. Page 12 –15 Obejective of Conceptual Framework - The IASB conceptul framework for financial reporting sets out the concepts that underlie the preparation and presentation of financial statements. - The conceptual framework is an imfortant foundation in guding the development of accounting standards and pracices. - Accounting standards do not address all possible transactions an entity may enter into. When standards do not provide the the specfic guidance it is up to the conceptual framework to provide guidance to faciiliate consistenacy in the reporting of transactions and events. - The conceputural framework provides a formal frame for reference for: - types and events tranactions and events should be recorgised, when the effects of transactions should be recognised, how effects should be measured, how effects should be measured and presented in financial statements. - Limitations of GPFS; Users with a lack of infimilarity with new info, Decscion-usefullness may very among users, capable of multiple interpreations, time and cost constraints in preparing. - Two principals underpining conceptual framweork: 1. Assumpting of accrual basis of accounting and 2. Assumtpion the entity is a going concern Page 15- 20 Qualitive chartieristing of Conceptural Framework - For information to be used it must be relevant and faithfully represent what it purports to represent. The usefulness of financial information is enhanced if it is comparable, verifiable, timely and understandable Conceptual Framework, para. 2.4) - Relevance: Information is only relevant when it is capable of influencing decsions of users. This infleunce can occur through the predicive value or the confirmatory value of financial information, or both. - Fundamental qualitive Charteristics of qualitive info: Relevance & Faithful representation (Always need to be exhibted before enhansive charactiriers be applied) - Enhacning qualitive characteristics are: Comparatability, verifiability, timliness, understdanbility. (Sometimes need to be traded off beyween one another) - Relevance information also encompasses materiality. Information is relevant when omitting, mistating, or obsecuring the information it could reasonably be expected to influence descions of the primary users relying on the reports. - Materialilty can be affected by the nature and/or size of an item of financial information. - Conceptual framework does not prescribe quanitive thresholds. Up to professional judgment. - Can be material irrespective of amounts, such as director aquiring interest that does not affect the profit but users would want to know, therefore influecing decsion. Company engaging in new actities that do not affect bottom line but may affect risk profile, therefor users would want to know. - Whether infomration is material is a matter of judgment that depends on the facts and circumstances of the entitiy. - In practice profissional judgment is used . >10% = Materiality PG 20 Costs constraints of Finanial reporting - Conceptual Framework notes balance between costs of providing financial information (that include the costs of collecting, processing, verifying and disseminating information) versus the benefits derived from providing such information. - Providing useful financial information allows users to make more informed decisions more confidently, which general benefits the entity providing the info. Therefore reducing cost of capital. - However, the cost of meeting all information needs of all users is normally prohibitive, and therefore some information may need to be left out from the statements. Therefore materiality plays an important part in deciding on what to report on. - IASB also provides specific exemptions within standards. eg leases may elect to not apply lease recognition for leases under 12 months as of low value because cost in reporting far outweigh the benefit for the user. PG 21-24 Elements of FInancal Statements - The element of financial Statements are Assets, Liabilites, Equities, Income and Expenses. - There are 4 keys decisions for accounting for a transction as an element. They are :- - Definition Did an event of past event give rise to an item to satisify the definition of an element? Recognition Measurement Once defined as an element, must be determined if the item needs to be incorprated in the financal statement? How to measure the item to be recognised in the fianncial statement? Disclosure / Presentation How should the item be discoled/presented in financial statements or notes to the accounts? Definitions of the elements of financial statements: Assets Right to future economic benefits which is controlled by an entity Liability Present obligation exists from past events to transfer an economic resource Equity Difference between assets and liabilities (A-L) Income Increase in assets / Reduction in Liabilities / Increase in Equity other than owner contributions Expenses Decrease in assets / Increase in liabilities / Decrease in equity other than arising from distribution to holders of equity claims. PG 25-26 - Criteria for recognising elements of financial statements Capturing in words and monetary amunts items that meet the difinitions of the 5 element above - The monetary amount is callred the carrying value - In recognising the elements cost contraints need to be considered as well. If benefits don’t justify the costs then may be no need to report. - Elements not reported might still need to be included in the notes to the financial statements. - The recognition of income incurs at the same time as 1. The initial recognition of an asset, or the increase in the carry amount of an asset. 2. The derecognition of a liabiltiy (unearned revenue), or decrease in the carrying amount of an asset. - The recognition of expense occurs at the same time as: 1. Initial recognition of a liability, or an increase in carrying of liaibltiy. 2. The derecognition of an asset or decrease of asset carrying amount Page 26-27 Constraints on international consistency of application of recognition criteria in conceptual framework - Business, legal , social, and politcal environment the entity operates in, may impose constranits on the recognition crites developed by the conceptual framework - Conceptual Framework does not remove the need for professional judgment - The application of accounting standards can have econmic consequences that management and user groups consider disadvantages - Eg. Not being able to recognise intangible assets causing investor risk perception to increase. Moreever if managers remuneration is based on share price, their remuneration may decrease. - Economic consequences of this kind may lead to accountants to depart from conceptually pure accouting to satifsy interest groups who otherwise would be adverselt affected. - Social and politcal: Accountants feel their power to exxerise judement is decreased by the framework and related standards. Page 27-31 Measure of elements of Financial Statements - Two stages of meaurement recognition: 1. How to measure the asset or liability at initial recogntion. 2. How to measure asset or liability at subsequent recognition. - Conceptual framework focuseses on the two following categories of meansurement bases: 1. Cost base and 2. Value based - Cost based measures: Measures based on entry price i.e the price paid to aquire the asset. Historical cost and Amortisation are two examples of cost based measures. - Value based involves measures that require some form of valuation to be undertake, such as fair value /current cost / Net realisable value. - Advantages of cost base method: Easily understood, relevant in descion making, reliable, inexpensive to implement. - Disadvantages of cost base: o Increase or decerease in value of assets are recognised when realised. Therefore true value isnt represented in FS until sold. o Limited relevance to decision making as it is a historical cost when statements want to show furutre benefits. o Further rules because cannot report carrying value higher than reliasable value. o Underrmines comparability in reports. I.e 2 companies make their own assets. The inefficent company will have a higher cost, therefore a higher asset on balance sheet. Page 32 - Fair value-based measure: This is the price that would be received to sell and asset or paid to transfer for a liability in an orderly tansaction between market participants at the the measurement date. - Considered to be more relevant than cost base models - Disadvantages: Lack of relevnce in decsion making when company never has any intention to sell or hold financial instruments to maturity. Problems with relaibiltiy: when there is not an active market to get a price. - There are 3 ranks to determine the fair value. The lower rank is used when the higher rank cant be used. - Level 1: Quoted price for an identical asset or liability in active markets Level 2: Model with no signficant unobservabale input. Used quote prices for comprable assets of liabilties in the active market Level 3: singifnciant unobservable inputs. Unable to determine a quoted price from active markets. Instead Uses the best avilble information about the assumption market particpants would use when pricing asset/liabilties Other example of value based methods: Current cost, Fair value less costs of disposal, Net realisable value, fullfilment value and value in use. PAGES 33-35 Accounting for Leases: Pages 39-43 Finance lease: A lease that transfers substantially risks and rewards to ownership of an underlying asset Operating lease: A least that does not transfer substantially risks and rewards to ownership of an underlying asset Employee benefits (page 43-48) Accumulative & Not accumulative Vesting & Not vesting For benefits to be paid in > 12 months’ time PV must be used (Discount Percentage) LSL things to consider, probability of pay out, wage at the time of payout, Discount rate Accounting for share based payments (Page 48,49) Share based (Debit bonus expense credit Equity) Cashed based (Debit bonus expense, credit Liability) Property: (Page 49-50) Investment property: IAS 40. Can use cost method or fair value method Property, Plant and Equipment: IAS 16. Can use cost method or revaluation method. In revaluation method an increase in the carrying amount is reported gain is reported in OCI and a decrease is reported as an expense in a similar way. Module 2 IAS1: Prescribes Basis for financial reporting Page 60 - IAS 1: Prescribes basis for financial representation for GPFS. Provides requirements and guidelines for statements on how to present. - IAS 1: States: Objective of financial statements to provide info about financial position, financial performance, cash flow that is useful for a wide range of user to make decisions. And show how resources are being used under stewardship. Page 61 - Financial statements provide info on assets, lib, equity, income & expenses (gains/losses), cash flow, contributions & distributions. - IAS1: States a complete set of financial statements are; o Statement of financial position o P&L and OCI o Cash flow o Change in equity o Notes to accounts - An Entity is required to disclose in it accounting policy notes whether the user is reading general or special purpose Financial Statements - Paragraph 13 of IAS 1 states • Entities may provide additional info required by law of disclosed voluntarily • Paragraph 13 IAS1 states many entities present a financial review by management to describe the key features of the financial performance, position and the principal uncertainties the company may be facing. • Others things that may be covered in the financial review: Main factors and influences affecting business performance, including changes in the environment entity is operating in and how it is responding to these changes. Details about source of funding and target asset to liability ratios. Details of entity resources not recognised in Financial Statements. Page 64 - IAS 1: Requires financial statements to be represent fairly with faithful representation. IAS1 requires the entity to make an explicit and unreserved statement of compliance with IFRS in the notes of the accounts. - IAS 1 states entity is not permitted to depart from IFRS standards unless complying would be so misleading that it goes against the objective of Financial Statement set out in the Conceptual Framework. - In the rare situations an entity that departs from a requirement of the IFRS statements must make the following disclosures: • Statement the management believes departing from the IFRS present fairly the entity’s financial performance, position, and cash flow. • That except from departing from a particular requirement it has complied with applicable IFRS • Title of IFRS, nature of departure, including treatment of IFR requires and the treatment adopted, and why adopting the IFRS would be misleading • Financial impact if IFRS had been used instead. Adopting an accounting policy that is not permitted by the IFRS details in the notes does not overcome noncompliance. Therefore, not allowed what’s so ever. Other General Features Page 65 - In addition to be presented fairly, IAS1 specifies several general factors that must be compiled with when preparing and presenting general purpose financial statement - These factors are: • Going Concern: Management must assess whether entity is a going concern. It does this be considering all available info about the future of the entity up to 12 months from reporting date. No specific requirement to disclose if it is a going concern but if isn’t then it must be disclosed. • Accrual Basis: Must be accrual basis. Provides better info than cash basis. • Offsetting: Prohibits offsetting except when permitted. Permitted to offset current tax and liability accounts and FEX gains and losses. Revenue contracts requires amounts to be recognised after discounts and rebates. • Frequency and reporting: Must provide complete set of Financial Statements at least annually. Entities may use 52 weeks period instead of annual. Retail companies like to do this as fits in all the public holidays. • Comparative info: Entity must present comparative info regarding preceding period for all amount reports. Allows to assess trends for predictive purposes. • Consistency: Should retain the presentation and classification items from one period to the next. Only should be changed when there a significant change in entity operations or a change is required by IFRS. Page 63: Segment Reporting - IFRS8 requires an entity to disclose information that enables users of its Financial Statements to evaluate the nature and financial effects of the business activities that the entity engages in and the environment in which it operates in. - Segment report in IFRS8 involves presenting disaggregated financial information in the notes to support an understanding of the aggregate financial info in the FS. - In AASB8 operating segments applies to entities as Tier 1 reporting entities. - IFRS8 requires disclosure of the; • Factors used to identify entities reportable segment. Eg (differences in products & services, geographical areas, regulatory environments) • Judgements made by management if operating systems have been aggregated • Types of products and services that each reportable segment derives its revenue from. - Operating segment defined as: Activities the generate income/expenses where the operating results are regularly reviewed by the chief operation decision maker (GM, MD, CEO) and has discrete financial info available. - There the focus of IFRS8 is to identify and report on operating segments using the same basis as the internal decision maker. Accounting policies PG 67- 68 - - Important to have accounting policies chosen in notes so user can compare financial statements of difference entities over reporting periods. Accounting policies is defined as “The specific principals, basis, considerations, rules and practices applied by an entity in preparing financial statements. Eg. Whether to capitalise or expense borrowing costs and whether to value non-current assets at cost or fair value. When Selection an accounting policy IFRS must be consulted first, if a policy cannot be applied then the conceptual framework must be consulted, and if not then they professional judgement will need to be used. Changes in accounting policies PG 70 - IAS8 permits change in accounting policy if it required by IFRS or results in info being more reliable and relent If required by IFRS than the IFRS transitional provisions applied. I not required by IFRS than it must be applied retrospectively. That is previous periods must be changed as well so it stays Revision of Accounting estimates and correction of Errors PG 72 Accounting estimates - Cannot be changes retrospectively. Must be recognised prospectively by including in the profit and loss in the period of change; or current period. Eg are bad debt predictions, fair value of assets and lib, useful lives of assets. Material errors in prior period - IAS8 acknowledges that an error could include mathematical mistakes, mistakes in applying accounting policies, oversights or misinterpretations of facts or fraud If there are material errors than financial statements are not considered to comply with the accounting standards therefore, they must be corrected. Must be fixed retrospectively. (Go back and fix all the previous financial statements, and make it flow through) IAS10 Events after reporting period PG 75 - The objective of IAS 10 is to prescribe when an entity should adjust its financial statements for events occurring after the reporting and when they should instead disclose such events in the notes. An event after a reporting period, a subsequent event, is known as an event to occur after a reporting period but before the date the financial statements have been authorised for issue. The date of authorisation for issue is important because events occurring after this date does not making them events after reporting period. - There are two types of events after reporting period; • Adjusting events – Financial statements are updated • Non-adjusting event – Disclosed in the notes - Adjusting events: Events that provide new or further evidence of conditions that existed at the end of the reporting period. Eg. Court case that had been in existence but was settled after the reporting period. Refer to page 75 for more examples - Non-adjusting events: Events that reflect conditions that were not in existence at the end of the reporting period, but arose for the first time after the end of the period. Changes of tax laws announced after the reporting date, decline in market value after reporting date. Refer to page 76 for more examples - Dividends declared after reporting period is a non-adjusting event as does not fit definition of present obligation. - Going concern: If an entity realises after the reporting period that they are no longer a going concern then it must be realised ans an adjusting even and financial statements must be prepared as an entity that is no longer a going concern. - IAS 34: Interim Financial reports PG 62 IAS 34 does not specific which entities have to prepare interims. Usually specified by governments, stock exchanges - In Australia, under section 32 of Corporation Act, all disclosing entities must produce interims - Disclosing entities are defined as an entity that issued “enhanced disclosure” security eg. Shares listed on ASX - Interim reports are condensed Financial Statements and so has substantially reduced disclosure requirements in accords to IAS 34. - As stated by IAS 34 the objective of interim financial reports are to improve the ability of investors, creditors and others to understand entity capacity to generate earnings and cash flow, and its financial condition and liquidity. Formulas for cash flow calculations
