22. ACCA SBR Notes - PDF

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(0) 2018 CONCEPTUAL FRAMEWORK DEFINITIONS Financial Posi+on

Economic Resource

Claims

Asset

Liability

Equity

A present economic resource controlled by the en3ty as a result of past events

A present obliga+on of the en3ty to transfer an ecomomic resource as a result of past events.

The residual interest in the assets of the en3ty a6er deduc3ng all its liability

An economic resource is a right that has the poten+al to produce economic benefits.

! Economic benefits include : ● Cash flows, such as returns on investment sources ● Exchange of goods, such as by trading, selling goods, provision of services ● Reduc3on or avoidance of liabili3es such as paying loans ! Obliga+on is a duty or responsibility that the en3ty has no prac3cal ability to aviod: ● A present obliga3on exists as a result of past events if the en3ty has already obtained economic benefits or taken an ac3on, and as a consequence, the en3ty will or may have to transfer an economic resource that it would not otherwise have had to transfer.

Fundamental qualita+ve characteris+cs : ● Relevant informa3on is capable of making a difference in decisions made by users. It has predic3ve and conformatory value. ● Consider materiality : informa3on is material if omIng or missta3ng it could influence decisions of primary users.

1. Relevance

2. Faithful Representa+on

A faithful representa3on reflects economic substance rather than legal form and is : ● Complete : all informa3on necessary for undestanding ● Neutral : without bias, supported by exercise of prudence ● Free from error : processes and descrip3on without error, does not mean perfect

Enhancing Qualita+ve Characteris+cs ● ● ● ●

Comparibility Verifiability Timeliness Undestandibility

1. Comparability : 2. Verifiability : 3. Timeliness :

4. Undestandability :

Usefulness of informa3on is enhanced if these characteris3cs are maximised

Comparability is the quali3ta3ve characteris3c that enables users to iden3fy and undestand similari3es in and differences among items. Verifiability helps assure users that informa3on faithfully represents the economic phenomena it purports to represents. It means having informa3on available to decision makers on 3me to be capable of influencing their decisions. Generally, the older informa3on is less useful. Classifying, characterising and presen3ng informa3no clearly and concisely makes it undestandable.

The new Conceptual Framework states that assets and liabilities should be recognised if such recognition provides users of financial statements with:! (a) relevant information about the asset or the liability and about any income, expenses or changes in equity;! (b) a faithful representation of the asset or the liability and of any income, expenses or changes in equity; and! (c) information which results in the benefits exceeding the cost of providing that information.!

The Five fundamental ethical principals set out in our ACCA Rulebook are: ● Integrity : Being straighNorward and honest in all professional and business rela3onships ● Objec+vity : Not allowing bias, conflicts of interest or undue influence to others to override professional or business judgements ● Professional Competence and Due Care : To maintain professional knowledge and skill at a level required ● Confiden+ality : To respect the confiden3ality of informa3on acquired as a result of professional and business rela3onships and therefore, not disclose any such informa3on to third par3es without proper and specific authori3es. ● Professional Behaviour : To comply with relevant laws and regula3ons and avoid any ac3on that discredits the profession.

How to write Ethical Responsibili>es of Accountants 1. The purpose of financial statements is to present a fair representa3on of the company's posi3on and if the financial statements are deliberately falsified, then this could be deemed unethical. 2. Accountants have a social and ethical responsibility to issue financial statements which do not mislead the public. 3. Any manipula3on of the accountants will harm the credibility of the profession since the public assume that professional accountants will act int an ethical capacity. 4. The directors should remember that professional ethics are in integral part of the profession and that they must follow the ethical guidelines such as ACCA's Code of Ethics and Conduct. 5. Deliberate falsifica3on of the financial statements would contravene the guiding principles of intergrity, objec3vity and professional behaviour. 6. The judgement made by professional accountants should be independent and not affected by business pressures. 7. Financial Statements must comply with Interna3nal Financial Repor3ng Standards (IFRS), the framework and local legisla3on. 8. Transparency, and full and accurate disclosure is important if the financial statements are not misleading.

(1) IAS 16 – PROPERTY, PLANT AND EQUIPMENT Property plant and equipment are tangible assets that: (i) Are held for use in the produc3on or supply of goods or services ,for rental to others, or for administra3ve purposes; and (ii) Are expected to be used during more than one period. Carrying amount is the amount at which an asset is recognized a6er deduc3ng any accumulated deprecia3on and accumulated impairment losses Deprecia+on is systema3c alloca3on of the depreciable amount of assets over its useful life. Depreciable amount is the cost of an asset less its residual value. Residual Value is the es3mated amount that an en3ty can obtain when disposing of an asset a6er its useful life has ended. When doing this the es3mated costs of disposing of the asset should be deducted. First +me Revalua+on (1)Revalua+on Upward : Surplus !Revalua3on Reserve !OCI Debit. Non-current Asset Credit. Revalua3on Reserve (2)Revalua+on Downward : Deficit/Impairment !Expense ! SOPL Debit. Profit or Loss Account Credit. Non-current Asset ● Old Deprecia3on - New Deprecia3on = Excess Deprecia3on " (Op3on given to the company Revalua3on Reserve to transfer excess deprecia3on " when there is a change in Retained Earnings deprecia3on) " SOCIE Journal

Debit. Revalua3on Reserve Credit. Retained Earnings

Second +me Revalua+on Case 1 : Before Revalua+on Upward ! Now Downward Revalua+on Journal :

Debit. Revalua3on Reserve Debit. Profit & Loss Account (Balancing Figure) Credit.Non-current Asset

Case 2 : Before Revalua+on Downward ! Now Upward Revalua+on Journal :

Debit. Non-current Asset Credit. Profit or loss Account (Previous Deficit) Credit. Revalua3on Reserve (Balancing Figure)

● If the revalued asset is disposed off, then the remaining revalua3on surplus need to be transferred from Revalua3on Surplus to Retained Earnings within SOCIE.

(2) IAS 38 - INTANGIBLE ASSETS An intangible asset is an iden3fiable non-monetary asset without physical substance held for use in the produc3on or supply of goods or services, for rental to others, or for administra3ve purposes. Thus, the three cri+cal aRributes of an intangible asset are: • Iden3fiability • control (power to obtain benefits from the asset • future economic benefits (such as revenues or reduced future costs) Intangible assets are business assets that have no physical form. Unlike a tangible asset, such as a computer, you can‘t see or touch an intangible asset. An intangible asset can be termed iden+fiable if it: • is separable or • arises from contractual or other legal right Research is original and planned inves3ga3on undertaken with the prospect of gaining new scien3fic or technical knowledge and understanding. Development is the applica3on of research findings or other knowledge to a plan or design for the produc3on of new or substan3ally improved materials, devices, products, processes, systems or services before the start of commercial produc3on or use

Internally Generated Intangible Asset

Goodwill

Research and Development Expenditure

●Should not be recognised in Financial Statements Inherient Goodwill

●Purchased goodwill = Recognise in FS Cost of considera3on Less: FV of iden3fiable Net asset Goodwill

Research Purchased Goodwill Write off as expense in SOPL

X

Development Cost PIRATE

Don’t recognise X X

+ve

-ve

●Probable future economic benefits ●Inten3on to complete and use/sell asset

Gain on bargain purchase

●Resource adequate and available to complete and use/sell asset ●Ability to use/sell asset

Recognise in SOPL

Recognise as asset in SOFP. Impairment review at the end of each financial year.

●Technical feasibility of comple3ng asset for use/sale ●Expenditure can be measured relaibly If PIRATE yes capitalise If PIRATE no then write off in SOPL

(3) IAS 36 - IMPAIRMENT OF ASSETS Recoverable amount is the higher of an asset‘s net selling price and its value in use. Value in use is the present value of es3mated future cash flows expected to arise from the con3nuing use of an asset and from its disposal at the end of its useful life. An impairment loss is the amount by which the carrying amount of an asset exceeds its recoverable amount A cash-genera+ng unit is the smallest iden3fiable group of assets that generates cash inflows from con3nuing use that are largely independent of the cash inflows from other assets or groups of assets. Corporate assets are assets other than goodwill that contribute to the future cash flows of both the cash-genera3ng unit under review and other cash-genera3ng units. The discount rate should be a pre-tax rate. It should reflect the current market assessments of the 3me value of money and the risks that relate to the asset for which the future cashflows have not yet been adjusted.

Reversal should not be more than depreciated historical cost Cost (-)Deprecia3on Carrying Value Impairment Recoverable Amount

100,000 (20,000) 80,000 (30,000) 50,000

Now the revalued amount is 90,000 But this revalued amount that is to be recorded in books cannot be more than $80,000. Reversal of Impairment loss 2 Years Cost 30,000 Dep (2/10) (6,000) CV 24,000 Impairment (8,000) Recoverable Amt 16,000

Cost Dep (3/8) Recoverable Amt

New Recoverable amount = 40,000

Calculate as if there was no impairment from the beginning Cost Dep (5/10) CV

5 Years 16,000 (6,000) 10,000

30,000 (15,000) 15,000

Now asset cannot be more than 15,000. So the reversal of impairment loss is 15,000 - 10,000 = $5,000

(4) IAS 40 - INVESTMENT PROPERTY

-

The Investment property is property held to earn rentals or for capital apprecia3on or both, rather than for: Use in the produc3on or supply of goods or services or for administra3ve purposes; or Sale in the ordinary course of business. The Owner-occupied property is property held (by the owner or by the lessee under a finance lease) for use in the produc3on or supply of goods or services or for administra3ve purposes. Par+al own use - If the owner uses part of the property for its own use, and part to earn rentals or for capital apprecia3on, and the por3ons can be sold or leased out separately, they are accounted for separately. Therefore the part that is rented out is investment property. If the por3ons cannot be sold or leased out separately, the property is investment property only if the owner-occupied por3on is insignificant. An investment property should be derecognized on disposal or when the investment property is permanently withdrawn from use and no future economic benefits are expected from its disposal. Change from Investment to PPE & vice versa FV

CV

PPE " Revalua3on " Gain/loss " OCI

Investment (FV Model)

PPE " Current CV

FV Investment (FV Model) " Revalua3on " Gain/loss " SOPL

Investment (Cost Model)

CV PPE (Cost) " Dep

Investment (Cost Model) " Current CV

PPE (Cost) " Dep

(5) IAS 2 - INVENTORIES Inventories are assets; I. Held for sale in the ordinary course of business II. In the process of produc3on for such sale; or (work in progress, finished goods awai3ng to be sold) III. In the form of materials or supplies to be consumed in the produc3on process or in the rendering of services Net Realizable Value is the es3mated selling price in the ordinary course of business less the es3mated costs of comple3on and the es3mated cost necessary to make a sale.

IAS 2 Inventories Value The Lower of

Cost The cost of inventory comprises all cost incurred in bringing the asset to its present condi3on and loca3on

Net Reliasable Value ! Revenue expected to be earned in the future when the goods is sold Less: Any selling cost ! Expected Selling price of the inventory Less: Es3mated cost of comple3on and sale or es3mated cost necessary to make sale ! Fair Value Less: Future cost to sell ! NRV is the net amount that would be realised a6er incurring any future cost required to make the same ! NRV is the 'Best es3mate' available at the reporing date.

Journal ✓ Purchase of Inventory Debit. Inventory A/c Credit. Cash/Trade Payable ✓ Inventory is sold Debit. Cost of Sales (SOPL) Credit. Inventory (SOFP) ✓ Closing Inventory Debit. Inventories (SOFP- Creates asset) Credit. Cost of Sales (SOPL-Reduces from COS) ✓ Opening Inventory Debit.Cost of Sales (SOPL-Increases COS) Credit. Inventories (SOFP- Reduces asset in SOFP)

(6) IAS 41 - AGRICULTURE Biological asset: A living animal or plant. Agricultural produce: The harvested produce of the en3ty‘s biological assets. Agricultural produce is measured at fair value less es3mated costs to sell at the point of harvest. Biological transforma+on: The process of growth, degenera3on, produc3on, and procrea3on that cause an increase in the value or quan3ty of the biological asset. Harvest: The process of detaching produce from a biological asset or cessa3on of its life. Bearer plant: A living plant that:

- Is used in the produc3on or supply of agricultural produce - Is expected to bear produce for more than one period, and - Has a remote likelihood of being sold as agricultural produce, except for incidental scrap sales. Costs to sell: The incremental costs directly asributable to the disposal of an asset, excluding finance costs and income taxes Ac+ve market exist when; the items traded are homogenous, willing buyers and sellers can normally be found at any 3me and prices are available to the public. Biological assets or agricultural produce are recognised when:

- En3ty controls the asset as a result of a past event - Probable that future economic benefit will flow to the en3ty; and - Fair value or cost of the asset can be measurement reliably.

IAS 41

Biological Assets

Agricultural Proceeds

Proceeds

Sheep Diary Casle Sugar Cane

Wool Milk Picked Leaves Picked Fruits

Tea Chease Sugar Yarn

Living Plant or Animal

✓ Probable Economic Benefits

Measurement !FV less cost to sell !Gain/loss = SOPL !Produce = Harvest " Inventory

IAS 2 Inventories

✓ Cost of FV can be measured reliably ✓ En3ty controls asset

Measurement ✓ Ini+al Measurement: FV Less: Point of Sale cost If no FV, then cost model ✓ Subsequent Measurement: Revalue to FV Less: Point of Sale cost Gain/Loss !SOPL

IAS 41

IAS 2

←Biological Transforma+on ! Plan+ng/Slaughter Harvest/Slaughter

Sale

(7) IAS 23 - BORROWING COST Borrowing costs are interest and other costs, incurred by an en3ty in connec3on with the borrowing of funds in order to construct an asset. Qualifying asset: A qualifying asset is an asset that necessarily takes a substan3al period of 3me to get ready for its intended use or sale (e.g. inventories, manufacturing plants, power genera3on facili3es, intangible assets, investment proper3es etc.). However, financial assets, inventories produced over short period of 3me and assets ready for intended sale are not qualifying assets. Recogni+on :

- An en3ty should capitalize the borrowing costs that are directly asributable to the acquisi3on, -

construc3on or produc3on of a qualifying asset as part of the cost of that asset and, therefore, should be capitalized. Other borrowing costs are expensed in statement of profit or loss when occurred. Return on any surplus funds invested is first deducted from the amount of interest and then the remaining amount is capitalized. The capitaliza+on commences: -

- Expenditures for the assets are being incurred; - Borrowing costs are being incurred; and - Ac3vi3es necessary to prepare the asset for its intended use/sale are in progress The capitaliza+on should cease, when substan3ally all the ac3vi3es necessary to complete the qualifying asset for its intended use/sale are complete (physical construc3on is complete, administra3ve or decora3ve work may con3nue). Disclosures :

- The accoun3ng policy adopted. - Amount of borrowing cost capitalized during the period. - Capitaliza3on rate used.

(8) IAS - 20 ACCOUNTING FOR GOVERNMENT GRANTS AND DISCLOSURE OF GOVERNMENT ASSISTANCE Government refers to government, government agencies and similar bodies whether local, na3onal or interna3onal. Government assistance is provision of economic benefits by government to a specific en3ty or range of en33es which meet specific criteria. Government assistance for the purpose of this Standard does not include benefits provided only indirectly through ac3on affec3ng general trading condi3ons, such as the provision of infrastructure in development areas or the imposi3on of trading constraints on compe3tors. Government grants are transfer of resources to an en3ty, from government, in return for compliance with certain condi3ons.

The following must be disclosed:

- Accoun3ng policy adopted for grants, including method of statement of financial posi3on presenta3on

- Nature and extent of grants recognized in the financial statements - Unfulfilled condi3ons and con3ngencies asaching to recognized grant Government grants do not include government assistance whose value cannot be reasonably measured, such as technical or marke3ng advice. The government grants are not recognized because no value can be assigned to them or they are not dis3nguishable from the other transac3ons of the en3ty if material shall be disclosed.

(9) IAS - 8 ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES AND ERRORS Accoun+ng Policies are the specific principles, bases, conven3ons, rules and prac3ces applied by an en3ty in preparing and presen3ng financial statements. IAS 8 Accoun+ng Policies, Changes in Accoun+ng Es+mates and Errors states that a change in accoun3ng es3mate is an adjustment of the carrying amount of an asset or liability, or related expense, resul3ng from reassessing the expected future benefits and obliga3ons associated with that asset or liability. A change in accoun+ng es+mate is an adjustment of the carrying amount of an asset or liability, or related expense, resul3ng from reassessing the expected future benefits and obliga3ons associated with that asset or liability.

-

Examples of change in accoun+ng es+mates: Es3ma3ng the recoverability of receivables at the year end, i.e. bad debts Inventory obsolescence Fair values of assets/liabili3es Determining the remaining useful lives of; or the expected paserns of consump3on of depreciable assets Es3ma3ng Income tax expenses

It can be changed only if the change : ● Is required by an IFRS Standard ● Result in the financial statement providing reliable and more relevant informa3on A change in accoun3ng policy occurs only if there is a change in...