Beruflich Dokumente
Kultur Dokumente
FOR FINANCIAL
ACCOUNTING
Learning Objectives
1. Understand the significance of the conceptual
frame work in outlining the qualities of good
accounting information.
Level 1 Objectives
of Financial
Reporting
Level 2 Qualitative
Elements
Characteristics
of Financial
of Accounting
Statements
Information
Usefulness.
Understandability.
Targetaudience: investors and creditors.
Assessing future cash flows.
Evaluating economic resources.
Primary focus on earnings.
Objectives of Financial Reporting
Usefulness
Financial reporting should provide
information that is useful to present and
potential investors and creditors and
other users in making rational
investment, credit, and similar
decisions.
Objectives of Financial Reporting
Understandability
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Fundamental Qualitative
Characteristics (Relevance)
Predictive value
Can be used to predict
future outcomes
Complete
Includes all information necessary for
users to understand the business
Faithful standing
representation Neutral
Information should Information is not slanted,
represent the actual weighted, emphasized,
situation of a business deemphasized or manipulated
or entity
Free from error
No errors in the information or
omission of information
No error in the process used to
produce the information
Enhancing Qualitative
Characteristics
• Enables users to understand the similarities and
differences
Comparability
• Comparable between periods, companies, industries
and countries
• Assets An important
part of
• Liabilities accounting
• Equity conceptual
• Investment framework is a
• Distribution set of
definitions that
• Comprehensive Income describe the
• Revenues basic terms
• Expenses used in
• Gains accounting.
• Losses
Elements of Financial Statements
Asset Income
An asset is Income includes both revenue and gains.
• a resource controlled by the entity Revenue arises in the course of ordinary activities of an
•as a result of past events and entity.
•from which future economic Gains may not arise from the ordinary activities of an
benefits are expected to flow to the entity such as those arising from the disposal of non-
entity.
current assets. Some gains may be unrealised such as the
surplus on the revaluation of non-current assets.
Liability
A liability is the
• present obligation of the entity
• arising from past events,
• the settlement of which is Expenses
expected to result in an outflow Expenses include both losses as well as expenses that arise
from the entity of resources in the ordinary course of the business. Expenses decrease
embodying economic benefits. the economic benefits during the accounting period in the
form of outflows or depletions of assets or the incurrence
Equity of liabilities that result in decreases in equity, other than
Equity is the residual interest in those relating to contributions/payments from/to equity
the assets of the entity after participants.
deducting all its liabilities.
Recognition of Assets, Liabilities, Income and
Expense
1. HISTORICAL COST
2. REVENUE RECOGNITION
3. MATCHING
4. FULL DISCLOSURE
Historical Cost principle
COST COST
is relevant because it
is reliable because it is:
represents:
OBJECTIVELY MEASURED
PRICE PAID
or
or
FACTUAL
ASSETS SACRIFICED
or
or
VERIFIABLE
COMMITMENT MADE
Revenue Recognition Principle
Examples:
Sales for the period is offset with the cost of the
inventory sold
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES USUALLY
THE FIRST FOOTNOTE
Materiality
Material Information:
All items that are material will be reported.
It depends on the size of the item
If the inclusion or omission of the item may influence the
judgment of the users of financial information, it is
material.
However, there is no definitive numerical materiality
threshold – based on judgment
What About Conservatism?
Substance
44
Substance over form
45
Substance over form
Factored Receivables
A company transfers its receivables balances to another organization (a
Factor) and receives an advance on the value of those receivables in
return.
The receivables are legally “sold” to the factor.
The factor advances the company cash, eg. 90% of receivables.
The factor collects receivables balance from the customer and may
advance further sums to the company.
Accounting issue
47
Substance over form
If the factor has full recourse then AB will not have transferred
the risks and rewards since it still faces the risk of non payment
entirely. Therefore, the receivables will not be derecognised and
the sum advanced represents a loan secured on the receivables.
Dr. Bank (90% x RM15m) 13,500,000
Cr. Loan 13,500,000
The loan and receivables balance would then be derecognised
when the customer pays the factor, with any difference being
expensed as a finance cost.
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Substance over form
Sale and repurchase transactions
An asset is sold by one party to another.
The terms of the sale provide for the seller to repurchase the asset in
certain circumstances at some point in the future.
The asset has been “legally” sold, but there is either a commitment or
an option to repurchase the asset at a later date.
Accounting issue