AC2101 Accounting

Recognition and Measurement

Seminar 1
Introduction
Semester 2, AY2013/2014

Seminar 1 Agenda
Introduction to AC2101 Course Syllabus and
Requirements

Introduction to Fundamental Concepts


2
AC2101: Course Instructor

Name: Choo Teck Min

Office: S3-01B-44 Tel: 67905685
Email: atmchoo@ntu.edu.sg
Office hrs: By appointment. Email or call before stopping by.
Groups: 1 (Mon 8:30 am SR7, Wed 8:30 am SR20)
3 (Mon 10:30 am SR7, Wed 10:30 am SR20)
7 (Tues 10.30 am SR6, Thur 10.30 am SR7)

3
AC2101 Course Syllabus
Contents Seminar #
1 Fundamental concepts & issues 1, 2 & 3
2

Assets:
a. Leases
b. Financial assets


4, 5, 6 & 7
7, 8, 9 & 10
3
Liabilities:
a. Financial liabilities
b. Deferred tax liabilities

11, 12
13,14,15 & 16
4
AC2101 Course Syllabus
Contents Seminar #
4 Equity (e-Lecture) 17
5
Revenue
a. Revenue recognition principles & criteria
b. Customer loyalty programmes
c. Construction contracts

18
18
19,20 & 21
6
Expenses
a. Expense recognition principles
b. Share-based payments and employee stock
options
a. Employee benefits

22
22, 23 & 24

24
5
AC2101 Course Format
Seminars
24 x 2 hours (twice per week, with some
exceptions)
Includes 1 e-Lecture (Seminar 17)


6
AC2101 Course Matters
A. Course materials
1. Textbook (NCKL)
2. Seminar readings (Course Main Site on Edventure)
3. Accounting standards
(http://www.asc.gov.sg/frs/frsEffective01012013.htm)
4. Interpretations of accounting standards
(http://www.asc.gov.sg/frs/ifrsEffective01012013.htm)
5. Exposure drafts (http://www.asc.gov.sg/draft.htm)
6. Seminar outlines (Course Main Site on Edventure)
7. Seminar slides (Seminar Groups Site on Edventure)


7
AC2101 Course Matters
B. Pre-Requisites

1. AB1102
2. Use of financial calculator to do present value-related
computations
3. Bring clickers to every class


8
AC2101 Course Assessment
Components Weights Basis
1 Seminar participation 15 Individual
2 Group project presentation 15
Group & individual
(50% each)
3 Term quiz 20 Individual
4 Final exam 50 Individual
Total 100
9
Seminar Participation: Expectations
A. Pre-seminar
1. Complete ALL assigned readings in seminar outline
2. Attempt ALL assigned questions in seminar outline
B. During seminar
1. Clicker questions
2. Voluntary participation
3. Cold calls
C. Post-seminar
1. Review seminar slides & discussions
2. Review/complete assigned questions
3. Clarify all outstanding questions & doubts
4. Post updated presentation slides if your group is in charge of the
formal presentation for that week.
(Project Discovery) Pedagogy
Students take active responsibility for their learning
Instructor plays a facilitating role
10
Project Presentation: Expectations
A. Pre-seminar
1. Project questions available in seminar outline released 2 weeks beforehand
2. Email slides in powerpoint format to your respective instructors and upload on
course main site (Assignments folder) for the Turnitin anti-plagiarism check by
stipulated deadline as stated on the COURSE OUTLINE; clearly labeling
project number, seminar group number and members names in the 1
st
slide
3. Penalties are imposed for late submission and a high degree of similarity to
other submissions.
B. During seminar presentation
1. Based on submitted slides, no changes allowed
2. 20 to 25 minutes of presentation time, followed by Q&A by fellow students &
instructor. Penalties are imposed for poor time management.
3. Presentation skills (individual) and presentation content (group)
C. Post-seminar presentation
1. Amend slides based on class discussion
2. Upload revised slides in PDF format to Discussions folder in your respective
seminar groups site within a week from presentation
11
Term Quiz & Final Exam
A. Term Quiz
1. Feb 28, 2014 (Fri) 4:30 pm LKC LT
2. Open book; usually MCQ plus 2 short questions; 1.5
hours
3. Seminars 1 to 12

B. Final Exam
1. May 8, 2014 (Thurs) 1 pm
2. Open book; usually three questions with multiple parts;
2.5 hours
3. Seminars 1 to 24 (i.e., everything)
12
Seminar 1 Fundamental Concepts
Objective of accounting (Review of AB1102)
Why do we need accounting? (Review of AB1102)
Characteristics of useful accounting information
(Review of AB1102)
What does the generation of accounting information
involve?
Recognition
Measurement
Disclosure
GAP in Statement of Financial Position


13
Use of Clickers
Please set your clicker channel to this SRs channel
number:
1. Press the Go button on your clicker
2. Enter the SRs channel number (XX)
3. Press the Go button on your clicker again. You
should see a flashing green light.
Per the new FRS Conceptual Framework (2011),
the objective of financial reporting is to
provide
15
1 2
0% 0%
1. Info about the fin position, performance and changes in
fin position of an enterprise that is useful to a wide
range of users in making economic decisions
2. Fin info about the reporting entity that is useful to
existing & potential investors, lenders and other
creditors in making decisions about providing resources
to the entity
Why do we need accounting?

Information asymmetry between stakeholders

Adverse Selection: information advantage

Moral Hazard: unobservability of managers effort

16
Per the new FRS Conceptual Framework (2011),
the fundamental qualitative characteristics of
useful financial info include
17
1 2 3 4 5 6 7
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1. Comparability
2. Faithful representation
3. Relevance
4. Reliability
5. Understandability
6. Timeliness
7. Verifiability
1. Relevance
Predictive value; Confirmatory value; Materiality (nature & size; entity-specific)
2. Faithful representation
Complete (within bounds of materiality & costs); Neutral; Free from error (
accurate in all respects)
3. Comparability
Over time; Across different entities; achieved via consistency; uniformity
4. Understandability
Clearly & concisely
5. Timeliness
6. Verifiability
Different knowledgeable & independent observers could reach consensus, not
necessarily complete agreement

Review: Qualitative Characteristics
18
Items (1) & (2): fundamental QC
Items (3) to (6): enhancing QC
Recognition
- Process of incorporating an item in an entitys statement
of financial position or comprehensive income
- General recognition criteria (conceptual framework):
1. Meet the definition of a financial statement element
2. Probable inflow/outflow of future economic benefit
3. Cost or value can be reliably measured
- Item-specific recognition criteria
Found in the accounting standards governing the specific item
Accounting Recognition,
Measurement & Disclosure
19
Probable = More likely than not (in practice, > 50%)
Found in specific FRSs
Applicable only to the specific accounting items
covered in the FRSs
May not be fully consistent with the general
recognition principles
Specific recognition principles
20
Measurement
- Process of determining the monetary amount of an
item to be recognized & carried in the F/S
- The focus of this and next seminar
Disclosure
- Accounting standards often require that certain
information be disclosed either in the main body of or
in the notes to the financial statements.
- Is it the same as presentation?

Relationship?

Accounting Recognition,
Measurement & Disclosure
21
Concepts of Measurement

What is measurement?

How to go about measuring?

Problems of measurement in accounting?


23
What is measurement?

Measurement is the assignment of numerals to
represent the magnitude of an attribute of a
phenomenon.

Phenomenon: object or event to be measured
Attribute: characteristic or quality of the
phenomenon that is to be measured

24
How to go about measuring?
Identify relevant phenomenon
Identify relevant attribute of the phenomenon
Find a reliable way to assess the magnitude of
the relevant attribute of the relevant
phenomenon (i.e., measurement scale)
Estimation may often be needed substitute
with a different phenomenon, a different
attribute, or both.


25
Relevant
Phenomenon (P1)
Substitute
Phenomenon (P2)
Direct Observation Estimation
Relevant
Attribute
(A1)

A1P1

A1P2
Estimation Estimation
Substitute
Attribute
(A2)

A2P1

A2P2
Miller and Mosso (1983)
Relevant
Phenomenon
Substitute
Phenomenon
Direct Observation Estimation

Relevant
Attribute

1

3
Estimation Estimation

Substitute
Attribute

2

4
Miller and Mosso (1983)
Seminar Question 1:
Measurement in Accounting:
Attribute
















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Phenomenon (Object) Attribute
Property, plant & equipment
Inventory
Short-term equity investment

Seminar Question 2:
Measurement in Accounting: Unit
Seminar Question 3:

Unit of measure?

Nominal $

Purchasing power




29
Problems of Measurement in
Accounting

Seminar Question 4:
Is aggregation (e.g. total assets) meaningful?

Problems:

Mixed attributes, and

Mixed unit of measure




30
31

Year
P/B
Ratio
Average Price-to-Book Ratio of the S&P 500 Companies,
Dec 1977- Mar 2001 (Source: Lev 2001)

1980s 2000
Current
price to
book ratio
is about 7
Hence, GAP in
the Statement of
Financial Position!
Problems of Measurement in
Accounting
Seminar Question 5:

Webber (2000) article key issues or concerns?

33
When BBB Ltd uses the historical cost of a car that it
owns, adjusted for the cars estimated accumulated
depreciation, as a measure of fair market value of the
car, BBB Ltd is using:

34
A. B. C. D. E.
0% 0% 0% 0% 0%
A. Relevant attribute of a substitute phenomenon
B. Relevant attribute of a relevant phenomenon
C. Substitute attribute of a relevant phenomenon
D. Substitute attribute of a substitute phenomenon
E. None of the above

Which one of the following statements below is FALSE?

35
A. B. C. D. E.
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A. Comparability and understandability are referred to as enhancing
qualitative characteristics in The Conceptual Framework for Financial
Reporting (2011).
B. Based on Miller and Mosso (1983), direct observation of the relevant
attribute of the relevant phenomenon provides the first-order quality of
measurement.
C. Under The Conceptual Framework for Financial Reporting (2011),
the objective of financial reporting is to provide information that is
useful to a wide range of users, including the suppliers, customers
and government, in making economic decisions.
D. The mixed attributes problem in accounting is one of the reasons
causing a difference in the net book value of the firm and its market
price.
E. Financial information is capable of making a difference in decisions if
it has predictive value or confirmatory value or both.