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a. Matching/accruals
transaction recognised when occur, revenue when earned, cost
when incurred
c. Prudence
being cautious as to not overstate asset and understate liability
d. Comparability
FS has to be prepared using consistent accounting policies to
enable users make
over time
e. Materiality
an item is material if its omission can affect the economic
decision of users. Not just monetary but also in nature
e. Materiality = inventories
for most companies, inventories are material. So if treatment or
valuation of inventory is omitted, it could affect the economic
decision of users.
JUNE 2010
4 (a) substance over form
= For FS to be of use to users, it has to be reliable faithfully
representation transactions
substance over form(accounted for according to their economic
reality instead of legal
form)
- control of an asset differs from ownership
- sold asset to 3rd party but still enjoy benefit from the asset(dnt
record as sale)
-
JUNE 2011
4 (B) IFRS disclosure in helping prediction
property) tell users these are one off event only, wont happen in
future
consistent presentation of comparative info users can make trend
analysis to predict future trend
definition of asset and liability future economic inflow and outflow
helps users understand the purpose of, and limitations of, financial reporting
Useful info
relevance = capable of making a difference to decision made by users
faithful rep = complete, neutral and free from error, sub over form
Comparable, verifiable, understandable, timely
ASSET
= resource controlled by entity as as result of past event and from which
future economic benefit expected to flow in. Control is the key issue.
Some assets will not be legally owned by entity, but all the risk and
rewards are on transferred to the entity must recognise as
asset(substance over form). E.g IAS 17 Leases, under finance lease the
legal title remains with the lessor, but all the risk and rewards are
transferred to the lessee. So the lessee must recognise this asset in its
SOFP. The economic reality of this asset is that it is under loan.
Liability
= present obligation arising from past event, settlement of which is
expected to result in economic outflow. Not just liability due on demand,
but present obligation arising from the entitys action. E.g IAS 37
Provision, Contingent Liabilities and Contingent Asses oil rig
decommissioning. As soon as a company erects an oil rig which needs to be
dismantled at the end of its useful life, the company will have a present
obligation in respect of the decommissioning costs. The liability will be
recognised in full in the year of the oil rig erection, and measured at
present value taking into account the time value of money. The past event
that gave rise to the obligation is the oil rig erection
Equity
= residual interest in an entity after deducting liabilities from asset.
Icludes share capital, share premium, retained earning, unrealised gain
Income
= increase in economic benefit of the asset in the form of inflows,
enhancement of asset or decrease in liability that result in increase in
equity other than contribution from owner. Income from normal course of
biz is shown in p/l while incomes from enhancement of asset is shown in
the reserve and OCI section
Expenses
= decrease in economic benefit in the form of outflow, depletion of asset
or increase in liability tat results in decreasein equity, other than due to
distribution to equity participants
= This is an operating lease. Under IAS 17, op lease the rents are charged to p/l and no asset
or liability is recognised.
Using the Framework, an asset and liability can recognised from operating lease. Liability
is recognised when a past event results in a present obligation. Signing of the lease is the past
event that gives rise to rental payment. The lessee controls the building and has the benefts it
brings. On entering the lease, a liability is recognised, measured at present value of the future
rental payment to reflect time value of money. Then the discount is unwinded every year by
charging finance cost in p/l. Annual cash rental payment accounted for as reduction in
liability
PERFORMANCE APPRAISAL
EXAMPLE
1.PROFITABILITY
A) ROCE =
shows how well a biz generates profit from its long term financing
relates to profit margin and asset turnover
Revenue
B) Asset Turnover =
C)
Profit margins =
2.
Liquidity
A)
Current assets
Current ratio =
Current liabilities
shows how well biz can cover its current liabilities with its current asset
ideal ratio is 1.5/2, but depends on industry
service industries very less current asset
B)
Payables
x 365
Credit purchases
increase means company having CF problem and using delaying payments
to supplier as free source of finance
but must pay within the credit period to avoid conflict with suppliers
if period reducing means paying faster, taking settlement discount
F) Gearing = Debt
Equity
or
Debt
Debt + equity
NOT-FOR-PROFIT ORGANISATIONS
1.
2. Subsequent cost
Can be capitalised if probable future economic inflow and
measured reliably
3. Revaluation
Cost model cost acc depn
Revaluation model fv at revaluation acc depn
Dr Acc depn
Cr Rev
Reserve
Dr Income stat
Cr PPE
2. Contingent consideration
Recognised at fair value
If there is a change in FV, equity is not adjusted
Onlyadjust the asset/liability with the resulting gain/loss
charged to P/L
IFRS 15 REVENUE
1. Step 1 = identify the contract
2.
3.
5.