ACCA SBR
COMPLETE SUBJECT NOTES
BY VERTEX LEARNING SOLUTIONS
VALID UNTIL DEC 2024
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TABLE OF CONTENTS
CHAPTER
TOPIC
PAGE NO.
1
Conceptual Framework
4
2
Ethics, IAS 24, IAS 8
13
3
IFRS 15 Revenue
21
4.1
IAS 16 - Property Plant and Equipment
34
4.2
IAS 20- Government Grants
43
4.3
IAS 23-Borowing costs
44
4.4
Impairment of Assets
46
4.5
IAS 38 - Intangible Assets
59
4.6
IAS 40 - Investment Property
63
4.7
IAS 41 Agriculture.
66
4.8
IFRS 13 – Fair Value Adjustment
68
5
IAS 19-Employee Benefits
71
6.1
IAS 10 Events after reporting period
85
6.2
IAS 37 - Provisions
88
7
IAS 12 Tax
99
8.1
IFRS 7
110
8.2
IAS 32
112
8.3
IFRS 9
115
9
IFRS 16 Leases
130
10
IFRS 2
139
11
IFRS 10 and IFRS 3
150
12
Changes in Group Structures
161
13
Changes In Group Structures: Disposals
169
14
IFRS 5 Non-current assets held for sale and discontinued
operations
178
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15
IFRS 11 and IFRS 12
185
16
IAS 21 Foreign Exchange
189
17
Group Statement of Cash Flows
199
18
Interpreting Financial Statement
209
19
Reporting Requirements for SMEs
226
20
Current Issues
236
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Chapter 1
Conceptual Framework
IAS 1 Presentation of Financial Statements
In order to achieve fair presentation, an entity must comply with:
• International Financial Reporting Standards (IFRSs, IASs and IFRIC
Interpretations)
• The Conceptual Framework for Financial Reporting
The Conceptual Framework for Financial Reporting
Definition:
A conceptual framework for financial reporting is a statement of generally
accepted theoretical principles. These principles provide basis for:
•
The development of accounting standards (IFRS)
•
Assist preparers of accounting in areas where IFRS standards are not
available.
•
Understanding and interpretation of accounting standards.
Revised Conceptual Framework
The Conceptual Framework for Financial Reporting was revised and reissued in
2018. The revision follows criticism that the previous Conceptual Framework was
incomplete, and out of date and unclear in some areas. The revised Conceptual
Framework now includes:
•
New definitions of elements in the financial statements
•
Guidance on derecognition
•
Considerable guidance on measurement
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•
High-level concepts for presentation and disclosure
The Conceptual Framework is divided into 8 chapters:
1. The objective of general purpose financial reporting
2. Qualitative characteristics of useful financial information
3. Financial statements and the reporting entity
4. The elements of financial statements
5. Recognition and derecognition
6. Measurement
7. Presentation and disclosure
8. Concepts of capital and capital maintenance
Chapter -1: Objective of General-Purpose Financial Reporting:
Provide financial information about the reporting entity that is useful to existing
and potential investors, lenders and other creditors (primary users) in making
decision about providing resources to the entity.
Primary users make decisions about buying/providing, selling/settling or holding
shares/debt instruments. These decisions need information regarding:
•
Economic resources of the entity and claims against the entity.
•
Management’s stewardship (Efficiency of management in managing
entity)
Going Concern:
If the management is certain that the business will go on for further 12 months
(foreseeable future) then the business is said to be a going concern. However, if
the management has a doubt whether the business will not continue for next 12
months then the financial statements will be recorded at break-up value.
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Accrual’s Concept:
Effect of transactions should be recorded when they are occurred and not when
there is cash inflow/outflow.
However, going concern and accrual concept is linked. Because we are sure that
our business will continue till foreseeable future, we can record the cost of
production of goods that are yet to be sold.
Chapter-2: Qualitative Characteristics of Financial Information:
A financial statement is meaningful if it is true and fair. To achieve this there are
some characteristics that should be considered while producing the financial
statements
Fundamental Qualitative Characteristics:
1. Relevance:
Relevant information possesses either predictive or confirmatory value or both.
Predictive values are capable of predicting and influencing future decisions.
Confirmatory values are used to check, confirm or correct prior predictions.
2. Faithful Representations:
Information must be complete, neutral and free from errors.
Thus the information must include all the necessary details and explanations
needed to understand the financial statement.
To be neutral, the information must be without biasness. It should not be
manipulated in order to influence the decisions.
Free from errors mean that there are no omissions or misstatements even in the
estimates that are a matter of judgment.
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Substance over form is also an aspect of faithful representation.
Enhancing Qualitative Characteristics:
1. Comparability:
The financial statements should be measured in a way that they can be
compared over the past years or with the other similar businesses. This can be
achieved through consistency and disclosure.
2. Verifiability:
Information that can be verified independently is more trusted. Verifiability means
that different people with the same information are most likely to reach the same
conclusion.
3. Timeliness:
Information may be less useful if it is not provided at an appropriate time.
However, there should be a balance between timeliness and reliability.
4. Understandability:
The financial statement should be presented in such a way that is understandable
to people with reasonable knowledge of finance and economics.
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Chapter 3: Financial Statements and The Reporting Entity
Financial statements are:
Prepared for:
Presented from:
Normally prepared on
• A period of time
• The perspective of the
the assumption that an
• With comparative
reporting entity as a
entity is a going concern
information
whole
and will continue in
• Include information
• Not from the
operation for the
about transactions after
perspective of a
foreseeable future.
the reporting date if
particular group of
necessary
users
Chapter 4: Elements of financial Statements:
Asset:
Asset is an economic resource controlled by the business as a result of past events
and from which economic benefit is expected to flow in the business.
In simpler words, it is something valuable which a business owns or uses.
Liabilities:
It is a present obligation of the entity arising from the past events. In simpler words,
it is an accounting term for debts.
Equity:
It is the residual interest in the assets of an entity after deducting all its liabilities.
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Income:
It is an increase in assets or decrease in liabilities other than those relating to
contributions from equity participants.
Expense:
It is a decrease in assets or increase in liabilities other than those relating to
contributions from equity participants.
Chapter 5: Recognition and Derecognition
Recognition Of Elements:
The element is recognized if it meets the definition of one of the elements from
CLEAR (Capital, Liability, Expenses, Assets, Revenue) and if it adheres to the
qualitative characteristics of useful information.
The revised Conceptual Framework recognition criteria removes the probability
and reliability criteria and replaces it with recognition of an element if that
recognition provides
users
with relevant
information
that
is
a faithful
representation of that element.
De Recognition of Elements:
It is normally when an item no longer meets the definition of an element.
For an asset, it is when the control is lost whereas for liabilities, it is when there is no
longer an obligation present.
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Chapter 6: Measurement
There are usually two measurement bases:
Historical cost:
It is the cost that was incurred when the asset was acquired or created and for
liability, it is the value of consideration received when the liability was incurred. It
is a traditional form of accounting.
Current Value
•
Fair Value
•
Value in use ( for assets)
•
Current cost
Fair Value:
It is the price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date.
– IFRS 13
Value In Use:
It is the present value of the cash flows or other economic benefits that an entity
expects to derive from the use of an assets and from its ultimate disposal. (Future
value)
Current Cost:
Current Cost of An Asset:
It is the cost of equivalent asset at the measurement date, comprising the
consideration that would be paid at the measurement ate plus the transaction
costs that would be incurred at that date.
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Current Cost of a Liability:
It is the consideration that would be received for an equivalent liability at the
measurement date, minus the transaction costs that would be incurred at that
date.
Chapter 7: Presentation and Disclosure
• Effective presentation and disclosure requires:
– Focusing on presentation and disclosure objectives and principles rather than
on rules
– Classifying information by grouping similar items and separating dissimilar items
– Aggregating information so that it is not obscured by unnecessary detail or
excessive aggregation
• SPL: primary source of information about performance
• In principle all items of income and expenses reported in SPL
• However IASB may develop Standards that include income or expenses arising
from a change in the current value of an asset or liability as OCI if this provides
more relevant information or a more faithful representation.
• In principle, OCI is recycled to profit or loss in a future period when doing so
results in the provision of more relevant information or a more faithful
representation
Chapter 8: Concepts of Capital and Capital Maintenance
• Financial capital maintenance: profit is the increase in nominal money capital
over the period
• Physical capital maintenance: profit is the increase in the physical productive
capacity over the period
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Understanding the Conceptual Framework is vital as the principles within it
underpin the whole of IFRS. The Conceptual Framework is useful to preparers of
financial statements, especially when considering how to account for emerging
issues.
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Chapter 2
Ethics
What are ethics?
Ethics are a code of moral principles that people follow with respect to what is
right or wrong.
Ethical principles are not necessarily enforced by law, although the law
incorporates moral judgements.
Ethical Principles in Corporate Reporting
1. Integrity:
To be straightforward and honest in all professional and business
relationships
2. Objectivity:
Not to allow bias, conflict of interest or undue influence of others to override
professional or business judgements
3. Professional competence and due care:
To maintain professional knowledge and skill at the level required and act
diligently and in accordance with applicable technical and professional
standard.
4. Confidentiality:
To respect the confidentiality of information acquired as a result of
professional and business relationships and not disclose any such
information to third unless there is a legal or professional right or duty to
disclose.
5. Professional behavior:
To comply with relevant laws and regulations and avoid any action that
discredits the profession
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Threats To the Fundamental Principles
a) Self-interest :
The threat that a financial or other interest will inappropriately influence a
professional accountant’s judgement or behavior
b) Self-review:
The threat that a professional accountant will not appropriately evaluate
the results of a previous judgment made on which the accountant will rely
when forming a judgment as part of performing a current activity.
c) Advocacy:
The threat that a professional accountant will promote a client’s or
employing organization’s position to the point that the accountant’s
objectivity is compromised
d) Familiarity:
The threat that due to a long or close relationship with a client or employing
organization, a professional accountant will be too sympathetic to their
interests or too accepting of their work.
e) Intimidation:
The threat that a professional accountant will be deterred from acting
objectively because of actual or perceived pressures, including attempts
to exercise undue influence over the accountant.
➢ Safeguards against breach of compliance with the ACCA Code include:
a) Safeguards created by the profession, legislation or regulation (e.g.,
corporate (a) governance)
b) Safeguards within the client/the accountancy firm’s own systems and
procedures
c) Educational training and experience requirements for entry into the
profession, together with continuing professional development
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➢ IAS 1 states that departures from international standards are only allowed:
• In extremely rare cases; or
• Where compliance with IFRS would be so misleading as to conflict with the
objectives of financial statements
‘Compliance’ is necessary, but not sufficient for fair presentation. ‘Fairness’ is an
ethical concept to see the full picture of an entity’s position and performance.
Framework For Decisions
• What are the relevant facts?
• What are the ethical issues involved?
• Which fundamental principles are threatened?
• Do internal procedures exist that mitigate the threats?
• What are the alternative courses of action?
• Finally, can you look yourself in the mirror after making the decision and
applying any necessary safeguards?
Related Parties (IAS 24)
Transactions reflected in financial statements have been carried out on an arm’s
length basis, unless disclosed otherwise.
Arm’s length means on the same terms as could have been negotiated with an
external party, in which each side bargained knowledgeably and freely,
unaffected by any relationship between them.
Related parties : A person or entity that is related to the entity that is preparing its
financial statements (the ‘reporting entity’)
a) A person (or close family member) if that person:
(i) Has control or joint control (over the reporting entity).
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(ii) Has significant influence; or
(iii) Are key management personnel of the entity or of its direct or indirect parents
b) An entity if:
(i) A member of the same group (each parent, subsidiary and fellow subsidiary is
related)
(ii) One entity is an associate*/joint venture* of the other
(iii) Both entities are joint ventures* of the same third party
(iv) One entity is a joint venture* of a third entity and the other entity is an
associate of the third entity.
(v) It is a post-employment benefit plan for employees of the reporting
entity/related entity
(vi) It is controlled or jointly controlled by any person identified above
(vii) A person with control/joint control has significant influence over or is key
management personnel of the entity (or of a parent of the entity)
(viii) It (or another member of its group) provides key management personnel
services to the reporting entity (or to its parent)
* Including subs of the associate/joint venture
In considering each possible related party relationship, attention is directed to the
substance of the relationship, and not merely the legal form.
Not Related Parties
The following are not related parties
(a) Two entities simply because they have a director or other member of key
management personnel in common, or because a member of key management
personnel of one entity has significant influence over the other entity.
(b) Two ventures simply because they share joint control over a joint venture.
(c)
(i)
Providers of finance.
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(ii)
Trade unions.
(iii)
Public utilities; and
(iv)
Departments and agencies of a government; simply by virtue of their
normal dealings with an entity
(d) A customer, supplier, franchisor, distributor, or general agent with whom an
entity transacts significant volume of business, simply by virtue of the resulting
economic dependence.
Disclosure
Reasons for disclosure, to identify:
✓ Controlling party
✓ Transactions with directors
✓ Group transactions that would not otherwise occur
✓ Artificially high/low prices
✓ 'Hidden' costs (free services provided)
Materiality needs to be considered, no disclosure req'd if not material.
➢ IAS 24 Related Party Disclosures requires an entity to disclose the following:
(a) The name of its parent and, if different, the ultimate controlling party
irrespective of whether there have been any transactions.
(b) Total key management personnel compensation (broken down by
category)
(c) If the entity has had related party transactions:
(i) Nature of the related party relationship
(ii) Information about the transactions and outstanding balances, including
commitments and bad and doubtful debts necessary for users to understand
the potential effect of the relationship on the financial statements
No disclosure is required of intragroup related party transactions in the
consolidated financial statements.
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Items of a similar nature may be disclosed in aggregate except where separate
disclosure is necessary for understanding purposes.
Government-Related Entities
If the reporting entity is a government-related entity (i.e., a government has
control, joint control or significant influence over the entity), an exemption is
available from full disclosure of transactions, outstanding balances and
commitments with the government or with other entities related to the same
government.
However, if the exemption is applied, disclosure is required of:
(a) The name of the government and nature of the relationship
(b) The nature and amount of each individually significant transaction
IAS 8 Accounting Policies, Changes in Accounting
Estimates and Errors
Accounting Policies
Specific principles, bases, conventions applied by an entity in
preparing/presenting financial statements
• To choose:
(1) Apply relevant IFRS (choice within IFRS is a matter of accounting policy)
(2) Consult IFRS dealing with similar issues
(3) Conceptual Framework
(4) Other national GAAP
A change in accounting policy is only permitted if the change :
• Is required by an IFRS; or
• Results in financial statements providing reliable and more relevant information
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Change In Policy:
Apply retrospectively unless transitional provision of IFRS specifies otherwise
•
Adjust the opening balance of each affected component of equity
•
Restate comparatives
Accounting Estimates
Many items in financial statements cannot be measured with precision but can
only be estimated.
Examples:
•
Warranty obligations
•
Useful lives of depreciable assets
•
Fair values of financial assets.
A change in an accounting estimate may be necessary if new information arises
or if circumstances change.
Change should be applied prospectively which means that it should be
adjusted in the period of the change. No prior period adjustment is required.
Prior Period Errors
Omissions from, and misstatements in, the entity’s financial statements for one or
more prior periods arising from a failure to use, or misuse of, reliable information
that:
(a) Was available when the financial statements for those periods were
authorized for issue
(b) Could reasonably be expected to have been obtained and considered in
the preparation and presentation of those financial statements.
They may arise from:
(a) Mathematical mistakes
(b) Mistakes in applying accounting policies
(c) Oversights
(d) Misinterpretation of facts
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(e) Fraud
Accounting Treatment
Material prior period errors should be correctly retrospectively in the first set of
financial statements authorized for issue after their discovery by:
(a) Restating comparative amounts for each prior period presented in which the
error occurred.
(b) Restating the opening balances of assets, liabilities and equity for the earliest
prior period presented
(c) Including any adjustment to opening equity as the second line of the
statement of changes in equity.
Creative Accounting
While still following IFRS Standards, there is scope in choice of accounting policy
and use of judgement in accounting estimates. This may include:
• Timing of transactions may be delayed/speeded up to improve results
• Profit smoothing through choice of accounting policy e.g., inventory valuation
• Classification of items e.g., expenses versus non-current assets
• Revenue recognition policies e.g., through adopting an aggressive
accounting policy of early recognition
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