Foundation to Accounting
(ACC 111)
INTRODUCTION TO
FINANCIAL REPORTING
(CHAPTER 1)
ACCA FA/FFA
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This presentation references IFRS® Standards and IAS® Standards, which are
authored by the International Accounting Standards Board (the Board), and
published in the 2019 IFRS Standards Red Book.
Week 1: Introduction to financial reporting
• Financial reporting standards provide guidance on how
to account for specific transactions and events within
financial statements
• Historically, many countries developed their own
national financial reporting standards
• e.g. the UK produced Financial Reporting Standards
(FRSs) to apply when preparing company accounts in
the UK
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Financial reporting standards
• International financial reporting standards (IFRS
Standards) were developed for application by multinational entities and by business entities within
countries that did not have their own national
accounting standards
• As the scale and complexity of business entities has
expanded, more countries have adopted the use of
IFRS Standards, either in full, or via a harmonisation
process with national standards to some degree:
- e.g. all stock exchange listed entities in the EU
must now prepare their annual financial statements
in accordance with IFRS Standards
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The structure of the IFRS regulatory system
IFRS
Foundation
International
Financial
Reporting
Interpretations
Committee
(IFRS IC)
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International
Accounting
Standards
Board (IASB)
IFRS
Advisory
Council
(IFRS AC)
WHAT IS ACCOUNTING ?
Accounting is the process of
recording
financial
transactions pertaining to a
business. The accounting
process includes identifying,
recording,
summarizing,
analyzing
and
reporting
these
transactions
to
oversight
agencies,
regulators
and
tax
authorities.
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Users of financial statements
Suppliers
Competitors
Customers
Investors
Employees
Lenders
Government
and
regulators
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Types of business entity
Types of business
entity
- Sole trader
- Partnership
- Limited liability
company
Discuss the differences
between the 3 business
entity?
Hint: Pg. 5&6 (textbook)
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Forms of Business Ownership
Sole trader

Owned by one
person

Owner is often
manager/operator

Owner receives
any profits, suffers
any losses, and is
personally liable
for all debts
Partnership

Owned by two or
more persons

Often retail and
service-type
businesses


Generally
unlimited
personal liability
Limited liability company

Ownership
divided into
shares of stock

Separate legal
entity organized
under state
corporation law

Limited liability
Partnership
agreement
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LO 2
Qualitative characteristics
• The Framework identifies two fundamental qualitative
characteristics of useful financial information:
- relevance
- faithful representation
Relevance – ability to influence the financial decision of users and is
provided in time to influence those decisions.
Faithful representation – must be presented in accordance with their
substance and economic reality. Thus, needs to be complete, neutral
(unbiased), and free from error.
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Qualitative characteristics
•
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The Framework also identifies four enhancing qualitative characteristics to support
the two fundamental characteristics:
Verifiability - is the extent
to which information is
reproducible given the
same data and
assumptions-
Timeliness – having
information in time for decisionmakers to make decision.
Comparability – be able to
compare over time and with
different entities to evaluate
relative performance
Understandability – the way in
which information is presented
Other important Accounting Concepts
•
•
•
•
•
•
•
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Prudence
Materiality
Substance over form
Going concern
Business entity
concept
Accruals
Consistency
With reference
to Pg. 19-21 of
the textbook,
discuss the
Accounting
Concepts.
• Prudence – Prudence is the exercise of caution when making judgements under conditions of uncertainty. For
example, ensuring that assets and income are not overstated, and that liabilities and expenses are not understated.
• Materiality – An item is regarded as material if its omission or misstatement is likely to change the perception or
understanding of the user of that information.
• Substance over form – If information is to be presented faithfully the economic substance of transactions must be
accounted for, and not just their strict legal form. Lease back: financial institutions sell their real estate (2,300
branches) simultaneously rents them for 100 years.
• Going concern – Financial statements are presented on the basis that the entity will continue to trade for the
foreseeable future.
• The business entity – This means that financial accounting information presented in the financial statements
relates only to activities of the business and not to those of the owner.
• The accruals basis of accounting – This means that transactions are recorded when revenues are earned and
when expenses are incurred. This pays no regard to the timing of cash receipts and payments.
• Consistency – Users of the financial statements need to be able to compare the performance of an entity over a
number of years and so classification and presentation of items included in financial statements must be retained
from one accounting period to the next.
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Substance over form
Example 1: Company A is essentially an agent for Company B, and so should only record a sale on behalf of Company B in the
amount of the related commission. However, Company A wants its sales to appear larger, so it records the entire amount of a sale
as revenue.
Example 2: Company C hides debt liabilities in related entities, so that the debt does not appear on its balance sheet.
Example 3: Company D creates bill & hold paperwork to legitimize sale of goods to customers where the goods have not yet left
the premises of Company D.
Example 4: A food-processing company has cash flow problems, so it sells its fleet of delivery trucks to a bank and gets it back on
a lease (sale & leaseback). Legal ownership of assets has transferred, but the underlying economics remains the same and hence
under the substance over form principle the sale & leaseback are looked at as one transaction. The company cannot just remove
the fleet from its balance sheet because the legal ownership has changed. It will continue to recognize the fleet as an asset and
shall also record a lease liability that arise out of the associated lease-back.
Going concern assumption
Example: Company M stopped production and trading, and it started to offer its big machines (PP&E) for sale → company M
must classify them as current, as they meet IFRS 5 criteria (non-current asset classified as held for sale).
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Elements of the financial statements
• Asset
‘a present economic resource
controlled by the entity as a
result of past events’
(Framework, para 4.3)
classify as either a current or noncurrent asset to include in the
statement of financial position
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Classification of assets
https://www.almarai.com/en/careers
Employees are considered as
“assets”, because they are essential
so that companies earn revenues,
but they are not reported on the
balance sheet
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Elements of the financial statements
• Liability
‘a present obligation of the
entity to transfer an economic
resource as a result of past
events’
(Framework, para 4.26)
classify as either a current or noncurrent liability to include in the
statement of financial position
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Classification of liabilities
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Elements of the financial statements
Income/revenue:
‘increases in assets, or
decreases in liabilities,
that result in increases in
equity, other than those
relating to contributions
from holders of equity
claims.’
(Framework, para 4.68)
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Elements of the financial statements
• Expenses:
‘decreases in assets, or
increases in liabilities, that
result in decreases in equity,
other than those relating to
distributions to holders of
equity claims.’
(Framework, para 4.69)
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Elements of the financial statements
• Equity
‘the residual interest in the
assets of the entity after
deducting all its liabilities’
(Framework, para 4.63)
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Classification of equity
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The components of a set of financial statements
The main purpose of financial statements is to
provide information to a wide range of users.
• The statement of financial position
[Balance Sheet] provides information on the
assets and liabilities of a business entity
• The statement of profit or loss and other
comprehensive income provides
information on the performance of a business
entity
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Example: Statement of Financial Position
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Example: Statement of profit or loss and
other comprehensive income
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The components of a set of financial statements
• The statement of changes in equity
provides information about how the
equity of a business entity has
changed over the accounting period
• The statement of cash flows
provides information on the financial
adaptability of a business entity
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Example: Statement of changes in equity
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The components of a set of financial statements
• The notes to the financial statements comprise the accounting policies
disclosures and any other disclosures required to enable the shareholders
and other users to make informed judgements and decisions about the
business entity
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