IAS summaries - Summary notes of IAS and IFRS PDF

Preview

Summary

Summary notes of IAS and IFRS...

Description

Financial Reporting International Accounting Standards International Accounting Standards (IASs) were issued by the antecedent International Accounting Standards Council (IASC), and endorsed and amended by the International Accounting Standards Board (IASB). The IASB will also reissue standards in this series where it considers it appropriate.

IAS 1-Presentation of financial statements Objective of IAS 1 The objective of IAS 1 (2007) is to prescribe the basis for presentation of general purpose financial statements, to ensure comparability both with the entity's financial statements of previous periods and with the financial statements of other entities. IAS 1 sets out the overall requirements for the presentation of financial statements, guidelines for their structure and minimum requirements for their content. [IAS 1.1] Standards for recognising, measuring, and disclosing specific transactions are addressed in other Standards and Interpretations. [IAS 1.3] Scope IAS 1 applies to all general purpose financial statements that are prepared and presented in accordance with International Financial Reporting Standards (IFRSs). [IAS 1.2] General purpose financial statements are those intended to serve users who are not in a position to require financial reports tailored to their particular information needs. [IAS 1.7] Objective of financial statements The objective of general purpose financial statements is to provide information about the financial position, financial performance, and cash flows of an entity that is useful to a wide range of users in making economic decisions. To meet that objective, financial statements provide information about an entity's: [IAS 1.9]     

assets liabilities equity income and expenses, including gains and losses contributions by and distributions to owners (in their capacity as owners) cash flows.

That information, along with other information in the notes, assists users of financial statements in predicting the entity's future cash flows and, in particular, their timing and certainty.

IAS 2-Inventories Objective of IAS 2 The objective of IAS 2 is to prescribe the accounting treatment for inventories. It provides guidance for determining the cost of inventories and for subsequently recognising an expense, including any write-down to net realisable value. It also provides guidance on the cost formulas that are used to assign costs to inventories. Scope Inventories include assets held for sale in the ordinary course of business (finished goods), assets in the production process for sale in the ordinary course of business (work in process), and materials and supplies that are consumed in production (raw materials). [IAS 2.6] However, IAS 2 excludes certain inventories from its scope: [IAS 2.2] 1. work in process arising under construction contracts (see IAS 11 Construction Contracts) 2. financial instruments (see IAS 39 Financial Instruments: Recognition and Measurement) 3. biological assets related to agricultural activity and agricultural produce at the point of harvest (see IAS 41 Agriculture). Also, while the following are within the scope of the standard, IAS 2 does not apply to the measurement of inventories held by: [IAS 2.3] 



producers of agricultural and forest products, agricultural produce after harvest, and minerals and mineral products, to the extent that they are measured at net realisable value (above or below cost) in accordance with well-established practices in those industries. When such inventories are measured at net realisable value, changes in that value are recognised in profit or loss in the period of the change commodity brokers and dealers who measure their inventories at fair value less costs to sell. When such inventories are measured at fair value less costs to sell, changes in fair value less costs to sell are recognised in profit or loss in the period of the change.

Inventories are required to be stated at the lower of cost and net realisable value (NRV).

IAS 7-Statement of Cash flows https://www.iasplus.com/en-gb/standards/ias/ias7 Objective of IAS 7 The objective of IAS 7 is to require the presentation of information about the historical changes in cash and cash equivalents of an entity by means of a statement of cash flows, which classifies cash flows during the period according to operating, investing, and financing activities. Fundamental principle in IAS 7 All entities that prepare financial statements in conformity with IFRSs are required to present a statement of cash flows. [IAS 7.1] The statement of cash flows analyses changes in cash and cash equivalents during a period. Cash and cash equivalents comprise cash on hand and demand deposits, together with short-term, highly liquid investments that are readily convertible to a known amount of cash, and that are subject to an insignificant risk of changes in value. Guidance notes indicate that an investment normally meets the definition of a cash equivalent when it has a maturity of three months or less from the date of acquisition. Equity investments are normally excluded, unless they are in substance a cash equivalent (e.g. preferred shares acquired within three months of their specified redemption date). Bank overdrafts which are repayable on demand and which form an integral part of an entity's cash management are also included as a component of cash and cash equivalents. [IAS 7.7-8] Presentation of the Statement of Cash Flows Cash flows must be analysed between operating, investing and financing activities. [IAS 7.10] Key principles specified by IAS 7 for the preparation of a statement of cash flows are as follows: 

 

operating activities are the main revenue-producing activities of the entity that are not investing or financing activities, so operating cash flows include cash received from customers and cash paid to suppliers and employees [IAS 7.14] investing activities are the acquisition and disposal of long-term assets and other investments that are not considered to be cash equivalents [IAS 7.6] financing activities are activities that alter the equity capital and borrowing structure of the entity [IAS 7.6]

IAS 8- Accounting policies, changes in accounting estimates and errors IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors is applied in selecting and applying accounting policies, accounting for changes in estimates and reflecting corrections of prior period errors. The standard requires compliance with any specific IFRS applying to a transaction, event or condition, and provides guidance on developing accounting policies for other items that result in relevant and reliable information. Changes in accounting policies and corrections of errors are generally retrospectively accounted for, whereas changes in accounting estimates are generally accounted for on a prospective basis. An entity is permitted to change an accounting policy only if the change:  

is required by a standard or interpretation; or results in the financial statements providing reliable and more relevant information about the effects of transactions, other events or conditions on the entity's financial position, financial performance, or cash flows. [IAS 8.14]

Note that changes in accounting policies do not include applying an accounting policy to a kind of transaction or event that did not occur previously or were immaterial. [IAS 8.16]

IAS 14- Segment reporting IAS 14 Segment Reporting requires reporting of financial information by business or geographical area. It requires disclosures for 'primary' and 'secondary' segment reporting formats, with the primary format based on whether the entity's risks and returns are affected predominantly by the products and services it produces or by the fact that it operates in different geographical areas. Objective of IAS 14 The objective of IAS 14 (Revised 1997) is to establish principles for reporting financial information by line of business and by geographical area. It applies to entities whose equity or debt securities are publicly traded and to entities in the process of issuing securities to the public. In addition, any entity voluntarily providing segment information should comply with the requirements of the Standard. Applicability IAS 14 must be applied by entities whose debt or equity securities are publicly traded and those in the process of issuing such securities in public securities markets. [IAS 14.3] If an entity that is not publicly traded chooses to report segment information and claims that its financial statements conform to IFRSs, then it must follow IAS 14 in full. [IAS 14.5] Segment information need not be presented in the separate financial statements of a (a) parent, (b) subsidiary, (c) equity method associate, or (d) equity method joint venture that are presented in the same report as the consolidated statements. [IAS 14.6-7] Key definitions Business segment: a component of an entity that (a) provides a single product or service or a group of related products and services and (b) that is subject to risks and returns that are different from those of other business segments. [IAS 14.9] Geographical segment: a component of an entity that (a) provides products and services within a particular economic environment and (b) that is subject to risks and returns that are different from those of components operating in other economic environments. [IAS 14.9] Reportable segment: a business segment or geographical segment for which IAS 14 requires segment information to be reported. [IAS 14.9] Segment revenue: revenue, including intersegment revenue, that is directly attributable or reasonably allocable to a segment. Includes interest and dividend income and related securities gains only if the segment is a financial segment (bank, insurance company, etc.). [IAS 14.16] Segment expenses: expenses, including expenses relating to intersegment transactions, that (a) result from operating activities and (b) are directly attributable or reasonably allocable to a segment. Includes interest expense and related securities losses only if the segment is a financial segment (bank, insurance company, etc.). Segment expenses do not include:     

interest losses on sales of investments or debt extinguishments losses on investments accounted for by the equity method income taxes general corporate administrative and head-office expenses that relate to the entity as a whole [IAS 14.16]

Segment result: segment revenue minus segment expenses, before deducting minority interest. [IAS 14.16] Segment assets and segment liabilities: those operating assets (liabilities) that are directly attributable or reasonably allocable to a segment. [IAS 14.16]

IAS 16-Property, plant and equipment Objective of IAS 16 The objective of IAS 16 is to prescribe the accounting treatment for property, plant, and equipment. The principal issues are the recognition of assets, the determination of their carrying amounts, and the depreciation charges and impairment losses to be recognised in relation to them. Scope IAS 16 applies to the accounting for property, plant and equipment, except where another standards requires or permits differing accounting treatments, for example:    

assets classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations biological assets related to agricultural activity accounted for under IAS 41 Agriculture exploration and evaluation assets recognised in accordance with IFRS 6 Exploration for and Evaluation of Mineral Resources mineral rights and mineral reserves such as oil, natural gas and similar non-regenerative resources.

The standard does apply to property, plant, and equipment used to develop or maintain the last three categories of assets. [IAS 16.3] The cost model in IAS 16 also applies to investment property accounted for using the cost model under IAS 40 Investment Property. [IAS 16.5] The standard does apply to bearer plants but it does not apply to the produce on bearer plants. [IAS 16.3] Recognition Items of property, plant, and equipment should be recognised as assets when it is probable that: [IAS 16.7]  

it is probable that the future economic benefits associated with the asset will flow to the entity, and the cost of the asset can be measured reliably.

This recognition principle is applied to all property, plant, and equipment costs at the time they are incurred. These costs include costs incurred initially to acquire or construct an item of property, plant and equipment and costs incurred subsequently to add to, replace part of, or service it. IAS 16 does not prescribe the unit of measure for recognition – what constitutes an item of property, plant, and equipment. [IAS 16.9] Note, however, that if the cost model is used (see below) each part of an item of property, plant, and equipment with a cost that is significant in relation to the total cost of the item must be depreciated separately. [IAS 16.43] IAS 16 recognises that parts of some items of property, plant, and equipment may require replacement at regular intervals. The carrying amount of an item of property, plant, and equipment will include the cost of replacing the part of such an item when that cost is incurred if the recognition criteria (future benefits and measurement reliability) are met. The carrying amount of those parts that are replaced is derecognised in accordance with the derecognition provisions of IAS 16.67-72. [IAS 16.13]

Also, continued operation of an item of property, plant, and equipment (for example, an aircraft) may require regular major inspections for faults regardless of whether parts of the item are replaced. When each major inspection is performed, its cost is recognised in the carrying amount of the item of property, plant, and equipment as a replacement if the recognition criteria are satisfied. If necessary, the estimated cost of a future similar inspection may be used as an indication of what the cost of the existing inspection component was when the item was acquired or constructed. [IAS 16.14] Initial measurement An item of property, plant and equipment should initially be recorded at cost. [IAS 16.15] Cost includes all costs necessary to bring the asset to working condition for its intended use. This would include not only its original purchase price but also costs of site preparation, delivery and handling, installation, related professional fees for architects and engineers, and the estimated cost of dismantling and removing the asset and restoring the site (see IAS 37 Provisions, Contingent Liabilities and Contingent Assets). [IAS 16.16-17] If payment for an item of property, plant, and equipment is deferred, interest at a market rate must be recognised or imputed. [IAS 16.23] If an asset is acquired in exchange for another asset (whether similar or dissimilar in nature), the cost will be measured at the fair value unless (a) the exchange transaction lacks commercial substance or (b) the fair value of neither the asset received nor the asset given up is reliably measurable. If the acquired item is not measured at fair value, its cost is measured at the carrying amount of the asset given up. [IAS 16.24] Measurement subsequent to initial recognition IAS 16 permits two accounting models: Cost model. The asset is carried at cost less accumulated depreciation and impairment. [IAS 16.30] Revaluation model. The asset is carried at a revalued amount, being its fair value at the date of revaluation less subsequent depreciation and impairment, provided that fair value can be measured reliably. [IAS 16.31] The revaluation model Under the revaluation model, revaluations should be carried out regularly, so that the carrying amount of an asset does not differ materially from its fair value at the balance sheet date. [IAS 16.31] If an item is revalued, the entire class of assets to which that asset belongs should be revalued. [IAS 16.36] Revalued assets are depreciated in the same way as under the cost model (see below). If a revaluation results in an increase in value, it should be credited to other comprehensive income and accumulated in equity under the heading "revaluation surplus" unless it represents the reversal of a revaluation decrease of the same asset previously recognised as an expense, in which case it should be recognised in profit or loss. [IAS 16.39]

A decrease arising as a result of a revaluation should be recognised as an expense to the extent that it exceeds any amount previously credited to the revaluation surplus relating to the same asset. [IAS 16.40] When a revalued asset is disposed of, any revaluation surplus may be transferred directly to retained earnings, or it may be left in equity under the heading revaluation surplus. The transfer to retained earnings should not be made through profit or loss. [IAS 16.41] Depreciation (cost and revaluation models) For all depreciable assets: The depreciable amount (cost less residual value) should be allocated on a systematic basis over the asset's useful life [IAS 16.50]. The residual value and the useful life of an asset should be reviewed at least at each financial yearend and, if expectations differ from previous estimates, any change is accounted for prospectively as a change in estimate under IAS 8. [IAS 16.51] The depreciation method used should reflect the pattern in which the asset's economic benefits are consumed by the entity [IAS 16.60]; a depreciation method that is based on revenue that is generated by an activity that includes the use of an asset is not appropriate. [IAS 16.62A] The depreciation method should be reviewed at least annually and, if the pattern of consumption of benefits has changed, the depreciation method should be changed prospectively as a change in estimate under IAS 8. [IAS 16.61] Expected future reductions in selling prices could be indicative of a higher rate of consumption of the future economic benefits embodied in an asset. [IAS 16.56] Depreciation should be charged to profit or loss, unless it is included in the carrying amount of another asset [IAS 16.48]. Depreciation begins when the asset is available for use and continues until the asset is derecognised, even if it is idle. [IAS 16.55]

IAS 18- Revenue IAS 18 Revenue outlines the accounting requirements for when to recognise revenue from the sale of goods, rendering of services, and for interest, royalties and dividends. Revenue is measured at the fair value of the consideration received or receivable and recognised when prescribed conditions are met, which depend on the nature of the revenue. Objective of IAS 18 The objective of IAS 18 is to prescribe the accounting treatment for revenue arising from certain types of transactions and events. Key definition Revenue: the gross inflow of economic benefits (cash, receivables, other assets) arising from the ordinary operating activities of an entity (such as sales of goods, sales of services, interest, royalties, and dividends). [IAS 18.7] Measurement of revenue Revenue should be measured at the fair value of the consideration received or receivable. [IAS 18.9] An exchange for goods or services of a similar nature and value is not regarded as a transaction that generates revenue. However, exchanges for dissimilar items are regarded as generating revenue. [IAS 18.12] If the inflow of cash or cash equivalents is deferred, the fair value of the consideration receivable is less than the nominal amount of cash and cash equivalents to be received, and discounting is appropriate. This would occur, for instance, if the seller is providing interest-free credit to the buyer or is charging a below-market rate of interest. Interest must be imputed based on market rates. [IAS 18.11] Recognition of revenue Recognition, as defined in the IASB Framework, means incorporating an item that meets the definition of revenue (above) in the income statement when it meets the following criteria:  

it is probable that any future economic benefit associated with the item of revenue will flow to the entity, and the amount of revenue can be measured with r...