TERM PAPER

OF
FINANCIAL ACCOUNTING

TOPIC: The impact of Financial reporting standards: Does size of the firm
Matters ?

Submitted to: Submitted by:

Mrs. Gagandeep Birbal Kumar Mahato

Reg.no:10906418

Roll no: A12

Section: RR1908

BBA2nd Semester
 Table of content

1. Acknowledgement
2. Introduction

3. FINANCIAL REPORTING STANDERDS:

4. History

5. Accounting Policies
6. Disclosure in Annual Financial Statements
7. Structure of IFRS

8. Objective of financial statements

9. Elements of financial statements

10. Recognition of elements of financial statements
11. Concept of capital and capital maintenance
12. Concepts of capital maintenance and the
determination of profit

Allocating the cost of a combination

13. Article
 Acknowledgement

I, BIRBAL KUMAR MAHATO, BBA Student in LPU, highly grateful to all those who guided
me in completing this term paper.
First of all, I would like to pay my heartiest thanks to entire teacher but especially, Mrs.
Gagandeep mam my accounts teacher who provided me such a wonderful opportunity to do
term paper on the impact of financial reporting standards: Does size of the firm matters? And
provided their valuable suggestions in understanding the work.
Last but not the least, I would like to thanks all faculties of LSB, I would like
to thanks my friend who help me, Mr. Mandip sir for imparting his valuable
guidance to me.

Words can never express the deep sense of gratitude.

Introduction
The revised financial reporting standard business combination is part of a joint effort by the
international acc. Standard board and the us financial acc. Standards board to improve financial
reporting while promoting the international convergence of acc. Standards .each board decided
to address the accounting for business combination in two phases . the iasb and the FASB
deliberated the first phase separately .The FASB concluded first phase in June 2001 by issuing
FASB statement no.141 business combination .The IASB concluded its first phase in march
2004 by issuing the previous version of IFRS combination .The board’s primary conclusion in
the first phase was that virtually all business combination are acquisitions .The second phase of
the project addressed the guidance for applying the acquisition method. An acquirer of a
business recognizes the assets acquired and liabilities assumed at their acquisition date fair
values and discloses their information that enables users to evaluate the nature and financial
effects of the acquisition. The financial reporting standards requires the acquirer to disclose
information that enables users of its financial statements to evaluate the nature and financial
effects of business combinations that occurred during the current reporting period after the
reporting date before the financial statements are authorized for issue .After a business
combination, the acquirer must disclose any adjustment recognized in the current reporting
period that relate to business combination that occurred reporting period that relate to business
combination that occurred in the current or previous reporting period.

The objectives of the financial reporting standard are to enhance the relevance, reliability and
comparability of the information that an entity provides I its financial statements about a
business combination and its effects. It does their by establishing principles and requirements for
how an acquirer recognizes and measure in its financial statements the identifiable assets
acquired .the liabilities assumed and any non controlling interest in the acquire. Recognizes and
the measures the goodwill acquired or again from a bargain purchase and determines what
information to disclose to enable users of the financial statements to evaluate the nature of the
business combination.

FINANCIAL REPORTING STANDERDS:

Financial reporting standards are standards, Interpretations and the Framework adopted by the
International Accounting Standards Board. Financial reporting period shorter than a full
financial year. A financial report that contains either a complete or condensed set of financial
statements for an interim period

Many of the standards forming part of IFRS are know by older the older name of International
Accounting Standards (IAS). IAS was issued between 1973 and 2001 by the board of the
International Accounting Standards Committee. On 1 April 2001, the new IASB took over from
the IASC the responsibility for setting International Accounting Standards. During its first
meeting the new board adopted existing IAS and SICs. The IASB has continued develop
standards calling the new standards IFRS.

History:

Financial Reporting Standard (FRS) Any of a series of standards issued by the Accounting
Standards Board. Many of the more recent FRSs have the aim of harmonizing UK practice with
the standards published by the International Accounting Standards Board.
Financial Reporting Standards:

1. Cash Flow Statements, issued 1991, revised 1996

2. Accounting for Subsidiary Undertakings, issued 1992, amended 2004

3. Reporting Financial Performance, issued 1992

4. Capital Instruments, issued 1993, now superseded by FRS 25 below

5. Reporting the Substance of Transactions, issued 1994, amended 1994, 1998, 2003

6. Acquisitions and Mergers, issued 1994

7. Fair Values in Acquisition Accounting, issued 1994

8. Related Party Transactions, issued 1995

9. Associates and Joint Ventures, issued 1997

10. Goodwill and Intangible Assets, issued 1997 11. Impairment of Fixed Assets and Goodwill,
issued 1998

12. Provisions, Contingent Liabilities and Contingent Assets, issued 1998

13. Derivatives and Other Financial Instruments: Disclosures, issued 1998

14. Earnings Per Share, issued 1998, now superseded by FRS 22 below

15. Tangible Fixed Assets, issued 1999

16. Current Tax, issued 1999

17. Retirement Benefits, issued 2000, revised 2002

18. Accounting Policies, issued 2000

19. Deferred Tax, issued 2000

20. Share‐based Payment, issued 2004

Accounting Policies:
The same accounting policies should be applied for interim reporting as are applied in the
entity's annual financial statements, except for accounting policy changes made after the date of
the most recent annual financial statements that are to be reflected in the next annual financial
statements. A key provision of IAS 34 is that an entity should use the same accounting policy
throughout a single financial year. If a decision is made to change a policy mid-year, the change
is implemented retrospectively, and previously reported interim data is restated.

Disclosure in Annual Financial Statements

If an estimate of an amount reported in an interim period is changed significantly during the
financial interim period in the financial year but a separate financial report is not published for
that period, the nature and amount of that change must be disclosed in the notes to the annual
financial statements

Structure of IFRS

IFARS are considered a principle based set of standards in that they establish broad rules as

Well as dictating specific treatments.

International Financial Reporting Standards comprise:

• International Financial Reporting Standards (IFRS) standards issued after 2001

Interpretations originated from the International Financial Reporting Interpretations

Committee issued after 2001.

Standing Interpretations Committee issued before 2001

Framework for the preparation and presentation of financial statements

Objective of financial statements:

A framework is the foundation of accounting standards.

Underlying assumption:

The underlying assumptions used in IFRS are:

 Accrual basis- the effect of transactions and other events are recognized when they
occur, not as cash is gained or paid.

 Going concern- an entity will continue for the foreseeable future.

Characteristics of financial statements:

Qualitative characteristics of financial statements include:

 Understandability

 Reliability

 Comparability

 Relevance

 Constraints on relevant and reliable information

 True and fair

Elements of financial statements:

The financial position of an enterprise is primarily provided in the Statement of Financial

Position. The elements include:

Asset: An asset is a resource controlled by the enterprise as a result of past events, and from
which future economic benefits are expected to flow to the enterprise.

Liability: A liability is a present obligation of the enterprise arising from the past events, the
settlement of which is expected to result in an outflow from the enterprise resource. i.e. asset.

Equity: Equity is the residual interest in the assets of the enterprise after deducting all the
liabilities. Equity is also known as owner's equity.

The financial performance of an enterprise is primarily provided in an income statement or profit

and loss account. The elements of an income statement or the elements that measure the
financial performance are as follows:

Revenues: Increases in economic benefit during an accounting period in the form of inflows or
enhancements of assets, or decrease of liabilities that result in increases in equity. However, it
does not include the contributions made by the equity participants i.e. proprietor, partners and
shareholders.

Expenses: Decreases in economic benefits during an accounting period in the form of outflows,
or depletions of assets or incurrence of liabilities that result in decreases in equity.

Recognition of elements of financial statements:

An item is recognized in the financial statement when:

 It is probable future economic benefit will flow to or from an entity.

Measurement of the elements of financial statements

Measurement is the process of determining the monetary amounts at which the elements of the
financial statements are to be recognized and carried in the balance sheet and income statement.
This involves the selection of the particular basis of measurement.

(a) Historical cost. Assets are recorded at the amount of cash or cash equivalents paid or the
fair value of the consideration given to acquire them at the time of their acquisition.
Liabilities are recorded at the amount of proceeds received in exchange for the
obligation, or in some circumstances (for example, income taxes), at the amounts of cash
or cash equivalents expected to be paid to satisfy the liability in the normal course of
business.

(b) Current cost. Assets are carried at the amount of cash or cash equivalents that would
have to be paid if the same or an equivalent asset was acquired currently. Liabilities are
carried at the undiscounted amount of cash or cash equivalents that would be required to
settle the obligation currently.

(c) ) Realizable value. Assets are carried at the amount of cash or cash equivalents that could
currently be obtained by selling the asset in an orderly disposal. Liabilities are carrient
value. Assets are carried at the present discounted value of the future net cash inflows
that the item is expected to generate in the normal course of business. Liabilities are
 carried at the present discounted value of the future net cash outflows that are expected to
be required to settle the liabilities in the normal course of business.

Concept of capital and capital maintenance:

Concept of capital

A financial concept of capital is adopted by most entities in preparing their financial

statements. Under a financial concept of capital, such as invested money or invested
purchasing power, capital is synonymous with the net assets or equity of the entity. Under a
physical concept of capital, such as operating capability, capital is regarded as the productive
capacity of the entity based on, for example, units of output per day. The selection of the
appropriate concept of capital by an entity should be based on the needs of the users of its
financial statements. Thus, a financial concept of capital should be adopted if the users of
financial statements are primarily concerned with the maintenance of nominal invested
capital or the purchasing power of invested capital.

Concepts of capital maintenance and the determination of profit

Following concepts of capital maintenance:

(a) Financial capital maintenance. Under this concept a profit is earned only if the financial
amount of the net assets at the end of the period exceeds the financial amount of net
assets at the beginning of the period, after excluding any distributions to, and
contributions from, owners during the period. . Financial capital maintenance can be
measured in either nominal monetary units or units of constant purchasing power.

(b) Physical capital maintenance. Under this concept a profit is earned only if the physical
productive capacity of the entity at the end of the period exceeds the physical productive
capacity at the beginning of the period, after excluding any distributions to, and
contributions from, owners during the period.

Allocating the cost of a combination

IFRS 3 requires an acquirer to record the acquires net assets, at their fair values, at the
acquisition date. For the purpose of allocating the cost of a combination, the acquirer must treat
the following measures as fair values:

1 for financial instruments, traded in an active market, the acquirer must use current market
values.

2 for financial instruments not traded in an active market, the acquirer must use estimated
values that take into consideration features such as price-earnings ratios, dividend yields
and expected growth rates of comparable instruments of undertakings with similar
characteristics.

3 for receivables, beneficial contracts and other identifiable assets, the acquirer must use
the present values of the amounts to be received, determined at appropriate current
interest rates, less allowances for doubtful debts and collection costs.

Discounting is not required for short-term receivables, beneficial contracts and other identifiable
assets, unless the impact is material.

(4) for inventories of:

i finished goods and merchandise, use selling prices less the sum of the costs of disposal and a
reasonable profit allowance.

Profit is based on the selling effort, and profit for similar finished goods and merchandise;

ii work in progress, use selling prices of finished goods less the sum of:

Costs to complete, costs of disposal and a reasonable profit allowance for the completing and
selling effort based on profit for similar finished goods; iii raw materials, use current
replacement costs.

Article:
Accawniirg and Businexs Research. Internnuonnl Act'ounung Policy Fomni.
International Financial Reporting Standards (IFRS): pros and cons for investors
Ray Ball* Abstract--Accountings in shaped by economic and political forces. II follows that
increased worldwide integration of bolh niarkels and politics driven by reductions’ in
communications and information processing costs makes increased integral I tin of financial
reporting sianduriJs and practifc almost inevitable. Furthermore, there is little settled theory or
evidence on which to build an assessment to' the advantages and disadvantages of uniform
accounting rules within ii country-, let alone internationally. The pros and cons of IFRS
therefore are somewhat conjectural, the unbridled enthusiasm of allegedly altruistic proponent. s
notwithstanding. On the 'pro' side of the ledger. I conclude that extraordinary,' success has been
achieved in developing a comprehensive set of 'high quality' IFRS standards, in persuading
almost KK) countries to adopt them, and in obtaining convergence in standards with important
non-adopters On the 'con' side, I envisage problems with the current fascination of the lASB with
'fair value accounting'. A deeper concern is that there inevitably will be substantial differences
among countries in implementation of IFRS. Which now risk being concealed by a veneer of
uniformity? The notion that uniform standards alone will produce uniform financial reporting
seetns naive. In addition. I express several longer run concerns. Time will tell.

REFERENCES:

http://www.enotes.com/business-finance-encyclopedia/ethics-
accounting

http://www.articlesbase.com/ethics-articles/ethics-in-accounting-
1276428.html

http://en.wikipedia.org/wiki/Accounting_ethics

http://acct.tamu.edu/smith/ethics/ethics.htm