AC201 Notes – PART 1

Conceptual Framework for Financial Reporting

 Definition – A ‘conceptual framework’ is a coherent system of interrelated objectives and

fundamentals that can lead to consistent standards that prescribe the nature, functions, and
limits of financial reporting.
 Purpose – one of the major challenges in communicating financial information is facilitating
the needs of the numerous and disparate users. It is difficult to assess its usefulness when
you are unsure how the information is being used and by whom, and it is almost impossible
to address all technical issues in a business context that would meet the needs of every
user. Therefore, it is important as it provides guidance on the broad principles of how items
should be recorded and how they should be presented.

The Objective of General-Purpose Financial Reporting

General purpose financial statements provide information about the reporting entity’s assets,
liabilities, equity, income, and expenses.
Information that is considered useful to primary users in making decisions relating to providing
resources to the entity is likely to address the following:
1. Economic resources and claims – assist users to assess and entity’s financial strengths and
weaknesses. It incorporates information on the resources the entity controls, its financial
structure and liquidity and solvency. Can help to assess the entity’s need for additional
financing and the likelihood of obtaining that financing. This information is typically
presented in the statement of financial position.
2. Changes in economic resources and claims – these result from an entity’s performance and
from other events or transactions, such as issuing debt or equity instruments. Typically
presented in the SPLOCI and statement of financial position.
3. Financial performance reflected by accrual accounting – indicates the effects of
transactions and other events in the period in which the effects occur, which could be
different from the period in which the resulting cash receipts and payments arise. Although,
under cash accounting, expenses are recorded when the cash is actually paid, and revenue
is recognised when the cash is actually received. Accruals information is typically presented
in the SPLOCI and statement of financial position.
4. Financial performance reflected by past cash flows – can help users to assess an entity’s
investing, financing, and operational activities and how these activities have affected the
financial position over the reporting period. This information is typically presented in the
statement of cash flows.
5. Changes in economic resources and claims not resulting from financial performance – such
as the issue of equity instruments or distributions to shareholders. Typically presented in
the statement of changes in equity.
The component parts of the financial statements are interrelated since they reflect different
aspects of the same transactions. Each depends on the other. A SPLOCI, for example, provides an
incomplete picture unless it is used in conjunction with the statements of financial position and
cash flows. For example, users can make better informed economic decisions if they are provided
with information that focuses on an entity’s ability to generate cash and to meet its cash
repayments. This requires details about the current financial position, the performance for the
period and changes in its financial position. Liquidity and solvency information is useful in predicting
the ability of an entity to meet its financial commitments as they fall due, with the former
addressing short-term needs and the latter the long-term availability of cash to meet financial
commitments. Profitability information and its variability are important in assessing potential
changes in economic resources, while information on financial position is useful in assessing
investing, financing, and operating activities during the reporting period.
A list of generally accepted users, and their information needs:
1. Investors – concerned about the risk and return provided by their investments. They need
information to help make decisions about: buying or selling shares, the company’s ability to
pay dividends, the managements efficiency, the liquidity position, the company’s future
prospects, and how the shares compare with those of its competitors. This group also
includes analysts and advisors e.g., economists, financial analysts, stockbrokers etc.
2. Employees – interested in the stability and profitability of their employer. Require
information of help assess: their employment security and future job prospects, the
company’s ability to pay wages and salaries, pensions and other benefits, and their position
in collective pay bargaining.
3. Lenders – who wish to assess whether their loans and interest can be repaid at the
appropriate time. They also need to verify that the value of any security remains adequate
and that any financial restrictions (maximum debt/equity ratios) have not been breached.
4. Suppliers and other trade creditors – need to know whether the company will be a good
customer and pay its debts when they fall due.
5. Customers – interested in whether the company will be able to continue producing and
supplying goods.
6. The Government – which include tax authorities, regulatory departments, and local
authorities, concerned with tax and company law compliance, the ability to pay tax and the
general contribution of the company to the economy.
7. The public – which include taxpayers, ratepayers, consumers, and special interest groups
interested in the economy, numbers employed and environmental issues.
IAS 1 – Presentation of Financial Statements
It is generally accepted that financial reports consist of:

 The financial statements

o A statement of financial position
o A statement of profit or loss and other comprehensible income
o A statement of changes in equity
o A statement of cash flows
 Notes to the financial statements, comprising a summary of significant accounting policies
and other explanatory notes
 Narrative information (often non-statutory) such as chairman’s report, directors’ report or
discussion and analysis statement.
The information presented must have the following characteristics to make it useful to its users:

 Relevance – must be relevant to the decision-making needs of users; such needs will vary
between users and over time. Information is relevant when it influences the economic
decisions of users by helping them to evaluate past, present or future economic events or
confirming or correcting their past evaluations. Financial statements do not normally
contain information about future activities however, past information can be used to predict
future financial position and performance.
 Faithful representation – to be useful, financial information must not only be relevant, but
it must also faithfully represent the transactions it is intended to represent. This
characteristic seeks to maximise the underlying characteristics of:
o Completeness – the information must be complete. An omission can cause
information to be false or misleading and therefore unreliable.
o Neutrality – free from bias. This will be enhanced by the application of accounting
standards, which are neutral.
o Freedom from error
 Comparability – this involves consistency in the application of accounting concepts and
policies and is vital to users and their decision making. The ability to identify trends in
performance and financial position and compare those both from year to year and against
other entities assists users in their assessments and decision-making. It is important that
users can understand the application of accounting policies in order to compare financial
information. To achieve comparability, users must be able to identify where an entity has
changed its policy from one year to the next and where other entities have used different
accounting policies for similar transactions.
 Verifiability – this helps to assure users that the information is a faithful representation of
the underlying transactions and events.
 Timeliness – the usefulness of information is diminished the later it is produced after the
times to which it relates.
 Understandability - An essential quality of financial information is that it is readily
understandable by users. For this purpose, users are assumed to have a reasonable
knowledge of business, economic activities and accounting, together with a willingness to
 study the information with reasonable diligence. Information on complex issues should be
included if relevant and should not be excluded on the grounds that it is too difficult for the
average user to understand.

Going Concern – financial statements should be prepared on a going concern basis unless there are
plans to liquidate the entity or to cease trading. When financial statements are not prepared on a
going-concern basis, that fact must be disclosed, normally by way of a note with the basis on which
the financial statements are prepared and the reason why the entity is not regarded as a going
concern.
Accruals Basis of Accounting - Under this basis of accounting the effects of transactions are
recognised when they occur and are recorded and reported in the accounting periods to which they
relate, irrespective of cash flows arising from transactions.
Consistency of Presentation – financial statements should retain a consistent approach to the
presentation and classification of items in each accounting period unless:

 It is apparent that another presentation or classification would be more appropriate, IAS 8

Accounting policies, changes in accounting estimates and errors
 An IAS/IFRS requires a change in presentation.
Materiality and Aggregation – IAS 1 requires that each material (this is an expression of the relative
significance of a particular matter in the context of the financial statements as a whole. A matter is
material if its omission or misstatement could reasonably be expected to influence the decisions of
users of financial statements) class of similar items must be presented separately in the financial
statements.
Offsetting – Assets and liabilities, and income and expenses, should not be offset (netted against
each other) unless required or permitted by a standard.
Comparative Information – the financial statements must disclose this information not only for the
current accounting period being reported but also for the previous accounting period. It is
important that it is presented in a similar manner and calculated on a similar basis for each of the
accounting periods presented.
It is important to remember that financial statements are a structured representation of the
financial position and financial performance of an entity. Therefore, they provide information about
an entity’s:

 Assets
 Liabilities
 Equity
 Income and expenses, including gains and losses
 Other changes in equity
 Cash flows
The Statement of Financial Position
The statement of financial position reports an entity’s assets, liabilities, and equity at a given point
in time. IAS 1 stipulates that, as a minimum, certain line items or key headings must appear on the
face of the statement of financial position:

 Property, plant and equipment

 Investment property
 Intangible assets
 Financial assets (non-current)
 Investments in associates (accounted for using equity accounting)
 Biological assets
 Inventories
 Trade and other receivables
 Cash and cash equivalents
 Trade and other payables
 Provisions
 Financial liabilities
 Current tax assets/liabilities
 Deferred tax assets/liabilities
 Non-controlling interests
 Issued Capital and reserves

Statement of Profit or Loss and Other Comprehensive Income

This is divided into two components: a statement of profit or loss; and OCI. The former section
shows the revenues from operations, expenses of operating and the resulting net profit or loss over
a specific period of time, while the latter includes items such as changes in in revaluation surplus,
actuarial gains and losses on defined benefit plans and gains and losses from foreign exchange.
As a minimum certain line items or key headings should appear of the SPLOCI such as:

 Revenue
 Finance costs
 Tax expense
 Profit or loss
 Each component of OCI classified by nature
 Total comprehensive income
Statement of Changes in Equity
This statement shows the changes in an entity’s equity throughout the reporting period. This
information is useful to users as such changes represent the total gains and losses generated by the
entity in that period.
An analysis of other comprehensive income by item is required to be presented either in the
statement or in the notes.
The main purpose of this statement is to show the amounts of transactions with owners and to
provide a reconciliation of the opening and closing balance of each class of equity and reserve.

Statement of Cash Flows

This is governed by IAS 7 statement of cash flows. A statement of cash flows reports on an entity’s
cash flow activities, particularly its operating, investing, and financing activities.
Notes to the Financial Statements
The notes to the financial statements normally include narrative descriptions or more detailed
analysis of items in the financial statements, as well as additional information, such as contingent
liabilities and commitments.
These notes should describe:

 The measurement basis used in preparation of these accounts

 Each specific accounting policy that is necessary for a proper understanding of the accounts.
 Disclose information required by other IASs/IFRSs that is not presented elsewhere
Other Disclosures
Details of the amount of dividends proposed or declared after the end of the reporting period, but
before the financial statements were authorised for issue, together with the amount of any
cumulative preference dividends not recognised should be provided.
IAS 2 – Inventories
Inventory – This refers to: raw materials; work in progress (WIP); finished goods produced; and
good purchased and held for resale by a Business.
Net Realisable Value (NRV) - This is defined as the estimated selling price in the ordinary course of
business less the estimated costs of completion and less the estimated costs necessary to make the
sale.
Cost – the cost of inventory consists of cost of purchase; cost of conversion; and any other costs
incurred in bringing the inventories to their present location and condition.
Inventory that is not in current use is an idle resource and is costing the organisation money.
Therefore, an organisation must have good reason to hold it. There are many reasons an
organisation will hold inventory, but some of the most important are:
1. Time – time lags at stages in the supply chain, from supplier to user, usually means that it
is essential to maintain a certain level of inventory to use in this ‘lead time’. Therefore,
inventory may be held to ensure production is not disrupted.
2. Uncertainty – inventory may be held as a buffer to meet uncertainties in demand, supply
and movements of goods. Therefore, inventory may be held to meet ongoing demand from
customers and/or to meet an expected rise in demand; and
3. Economies of scale – the notion of ‘one unit at a time at a place where the user needs it
when he needs it’ is unrealistic and would incur significant costs in terms of logistics. Bulk
buying, movement and storing can bring economies of scale. Furthermore, inventory may
be held to qualify for bulk order discounts/special promotions from suppliers and/ or to
meet a supplier’s requirement for minimum order sizes.
These reasons are applicable at any stage of the production process.
However, there are costs associated with inventory. For example:

 holding costs (e.g. warehousing and insurance);

 ordering costs (e.g. delivery);
 shortage costs (e.g. the loss of sales revenue, the loss of customer goodwill and the cost of
paying labour even when there are no raw materials to work with); and
 the purchase price.
Under IAS 2 Inventory should be measured at the lower of cost and net realisable value.
Costs not included in the cost of inventories:

 abnormal amounts of wasted materials

 storage costs – except where necessary in production process
 admin overheads
 selling costs
IAS 2 requires that fixed production overheads must be allocated to items of inventory on the basis
of normal capacity – the expected achievable production based on the average over several
periods.
IAS 2 also states that variable production overheads are those indirect costs of production that vary
directly or nearly directly with the volume of production e.g., indirect material and indirect labour.
Variable production overheads are allocated to each unit of production on the basis of the actual
use of the production facilities.
Two method of valuation:

 FIFO
 Weighted Average
IAS 16 – Property, Plant and Equipment
Property, plant and equipment are tangible items that are:
(a) held by companies for use in the production or supply of goods or services, for rental to others
or for administrative purposes; and
(b) expected to be used during more than one accounting or financial period.
The objective of IAS 16 is to prescribe the accounting treatment for property, plant, and equipment.
It deals with when such assets should be recognised, their carrying values and the associated
depreciation. Property, plant and equipment are classed as non-current assets in the statement of
financial position. While the classes of non-current assets referred to in the title of IAS 16 are
‘property, plant and equipment’, it applies equally to other classes of non-current assets, such as
motor vehicles and computers.
Before an entity decides the amount of expenditure to capitalise relating to property, plant and
equipment (i.e., to record the expenditure as an asset in the statement of financial position rather
than as an expense in the statement of profit or loss and other comprehensive income), the first
decision is actually whether the expenditure should even be recognised at all in the statement of
financial position.
They should only be recognised as an asset if:

 It is probable that future economic benefits associated with the item will flow to the entity.
 The cost of the item can be measured reliably
IAS 16 states that all items of property, plant and equipment should be recognised initially at cost.
This includes:

 The purchase price, including import duties and non-refundable purchase taxes, after
deducting trade discounts and rebates
 Any costs directly attributable to bringing the assets to its current location and condition
o Cost of site preparation
o Initial delivery and handling costs
o Installation and handling costs
o Costs of testing
o Professional fees
o Anticipated costs of dismantling and/or removing the asset

IAS 16 states that an entity should not recognise in the carrying value of an asset the costs of its
day-to-day servicing. They should be expensed to the statement of profit or loss.
An entity has a choice of accounting policy between:
Cost Model
• The asset is carried at cost less accumulated depreciation and impairment losses.
o Depreciate the asset over its useful life.

o Choose depreciation method that reflects the pattern that the entity benefits from
the use of the asset.
o Presented under non-current assets in the SOFP at carrying amount (cost minus
accumulated depreciation).

OR
Revaluation Model
• The asset is carried at a revalued amount, being its fair value at the date of revaluation less
subsequent depreciation.
• Can only be used provided that fair value can be measured reliably.
• The accounting policy must be applied to all assets in a particular class.
• Change from cost model to revaluation model is an example of a change in accounting
policy.
• Assets are depreciated annually based on revalued amount.
• Accounting for revaluation either by:
• proportionately re-state the asset (Method 1); or
• eliminate the accumulated depreciation and apply the revaluation
increase/decrease (Method 2, most commonly used).
Under the revaluation model, revaluations should be carried out regularly.
▫ Fair Value of Buildings = Market Value determined by professional valuers.
▫ Fair Value of Plant & Equipment = Market Value determined by appraisal.
▫ If an item is revalued, the entire class of assets to which that asset belongs should be
revalued – land and buildings, machinery, motor vehicles, office equipment, fixtures
and fittings.
• Where an asset has been revalued, the current periods depreciation charge is based on the
revalued amount and the remaining useful economic life.
Accounting Treatment of Revaluations

 If it is the first time the revaluation is valued downwards – the decrease should be
recognised as an expense in the SOPLOCI.
 If it is the first time it is valued upwards – the increase should be credited to the revaluation
surplus in the equity section of SOFP and taken through OCI.

An entity has a choice of depreciation method between:

The Straight-line Method
Equal amounts charged over the useful economic life
This method of depreciation requires three items of information:
1. original cost of asset (C)
2. estimated useful life of asset in years (N)
3. estimated residual value (R).
The annual depreciation charge (D) is given by:
D = (C – R)/N

Reducing balance
Depreciation is calculated as a fixed percentage of net book value

When choosing a deprecation method, the method must be consistently applied from one period
to the next. A change from one method of depreciation to another is permissible only on the
grounds that the new method will give a fairer presentation of the results and financial position.
Where a tangible non-current asset comprises two or more major components with substantially
different useful lives, each component should be accounted for separately for depreciation
purposes.
When a method is changed the effect should be quantified, disclosed and the reason for changing
stated.
Land and buildings are dealt with separately because land normally has an unlimited life and is
therefore not depreciated, buildings do have a useful life and must be depreciated.
The depreciation charge is recognised in the SOPLOCI.
Disposals
• The profit or loss on the disposal of a tangible non-current asset should be accounted for in
the SOPLOCI of the period in which the disposal occurs.
• It is the difference between the net sales proceeds and the carrying amount whether carried
at historical cost or at a valuation.
• A profit on disposal occurs when the proceeds/trade-in value is greater than the carrying
amount of the asset.
• A loss on disposal occurs when the proceeds/trade-in value is less than the carrying amount
of the asset.
• Where an asset that has been revalued is sold then the revaluation surplus becomes
realised. It may be transferred to retained earnings/distributable reserves at this stage.

Disclosures
• For each class of property, plant, and equipment, disclose:
o basis for measuring carrying amount

o depreciation method(s) used

o useful lives or depreciation rates

o gross carrying amount and accumulated depreciation and impairment losses

o reconciliation of the carrying amount at the beginning and the end of the period
showing: additions, disposals, revaluation increases, impairment losses,
depreciation, other movements.
Revaluation Disclosures
• IAS 16 requires the following to be disclosed for each major class of re-valued asset:
o the name and qualification of the valuer

o the basis of valuation

o the date and amounts of the valuation

o whether the valuer is internal or external to the organisation.

IAS 8 – Accounting Policies, changes in Accounting Estimates and Errors
The objective of this standard is to lay down the criteria for:
i) selecting and changing accounting policies
ii) the accounting treatment and disclosure of changes in accounting policies
iii) the accounting treatment and disclosure of changes in accounting estimates
iv) the accounting treatment and disclosure of prior year errors.

 Accounting policies are the specific principles, bases, conventions, rules and practices
applied by an entity in preparing and presenting their financial statements.
• In essence, accounting policies involve
• Recognising
• Selecting measurement bases for, and
• Presenting......
Assets, Liabilities, Gains, Losses and Changes in Equity
Management selects the accounting policy that it considers to be the most appropriate to the
entity.

 Accounting Estimates When an entity prepares its financial statements, it may not have
complete information, so it has to make estimates. These estimates are based on:
• management’s past experience.
• judgement; and
• economic environment in which the entity operates.
Accounting Estimates involve judgements based on the latest available reliable information.
Uncertainties are inherent in business activities, thus many items in Financial Statements cannot be
measured with precision.
• Examples
▫ Bad debt provisions
▫ Inventory obsolescence provisions
▫ Fair value of financial assets
▫ Depreciation rates and methods
 • Material omissions or misstatements of items are material if they could individually or
collectively influence the economic decisions of users taken on the basis of the financial
statements.
• Prior period errors are omissions from, and misstatements in, the entity’s financial
statements for one or more prior periods arising from a failure to use or misuse of reliable
information.
Accounting Policies
• Determined by reference to Accounting Standards.
• In the absence of an Accounting Standard, management must use judgement in selecting
accounting policies (refer to Conceptual Framework).
• Accounting policies should be applied consistently for similar transactions.
Should result in information that is:
o Relevant to the economic decision-making needs of users.

o Reliable, financial statements represent faithfully the financial position, financial

performance and cash flows of entity.
o Reflect the economic substance of transactions.

o Neutral, free from bias.

o Prudent and

o Complete in all material respects.

Changes in Accounting Policies

Changes in accounting policies are rare and should only be made if:
o Required by an accounting standard, or

o If the change will result in a more appropriate presentation of events or transactions

in the financial statements.
Accounting for Changes in Accounting Policies
• 3 situations
1. Change in accounting policy resulting from initial application of a Standard or Application -
Accounted for using specific transitional provisions of that standard.
2. As above but no specific transitional provisions - change in policy must be applied
retrospectively.
3. Changes to achieve more appropriate presentation- change in policy must be applied
retrospectively unless it is impracticable to determine the cumulative effect of the change.
Changes in Accounting Policies
• IAS 8 requires that where practicable a change in accounting policy should be reflected as
follows.
▫ The current year financial statements must be prepared based on the new
accounting policy.
▫ The comparative numbers in the financial statements must be restated as if the
change had applied in prior years.
▫ There should be disclosure in the Statement of Changes in Equity of the effect of the
change in Accounting Policy on the opening retained earnings coming forward.

DISCLOSURE REQUIREMENTS
• Title of the IFRS (or IAS).
• State if change is due to a new or existing standard.
• Nature of change in the accounting policy.
• Description of any transitional provisions in the accounting standard.
• Amount of adjustment and statement line affected.
• Amount of adjustments relating to previous period.
• If retrospective application is not practicable, then a description of how and when the
change in accounting policy has been applied.
Accounting Estimates
• Used in the preparation of financial statements, for example, estimates of useful lives of
items of property, plant and equipment.
• Estimates are based on the information available at a point in time.
• Estimates should be reviewed annually.
• Changes that arise as a result of this review are applied ‘prospectively’, that is the new
information based on the review is applied to current and future periods.
• There is no impact on the financial information presented in earlier reporting periods.
Changes in Accounting Estimates
Estimates arise because of inherent uncertainties and are based on judgements on the information
available.
Examples of accounting estimates:
1. Bad debt provision allowance
2. Useful life of depreciable assets
The rule is: the effect of a change in accounting estimate should be included in:
▫ The period of the change, if the change effects the current period only, e.g., 1 above
▫ The period of the change and future periods if the change affects both, e.g., 2 above

DISCLOSURE REQUIREMENTS
When a change in accounting estimate has occurred, the following must be disclosed
▫ The nature and amount of change for the current period and future periods,
▫ Where amount of the effect in future periods is impracticable, an entity shall disclose
that fact.
Errors
• When an error is discovered, management must correct it in the first set of financial
statements prepared after the error has been discovered.
• If the error is material, the impact of the error on previous financial periods is reflected in
the current years’ comparative figures with the effect of the adjustments on retained
earnings reflected in the SOCIE by restating the opening retained earnings figure.
• If the error is not material, adjustment is made in the current year’s statement of profit or
loss and other comprehensive income.
Disclosure requirements for errors (if material)
• The nature of the error.
• The amount of the correction for the current period and for each prior period presented.
• The fact that the comparative figures have been restated or that it is impracticable to do so.
IAS 10 – Events After Reporting Period
The objective of this standard is to prescribe:
• when an entity should adjust its financial statements for events that may occur after the
end of the reporting period and up to the date the financial statements are authorised for
issue and
• the required disclosures to reflect these events.
The standard also requires that an entity should not prepare its financial statements on a going
concern basis if events after the reporting period indicate that it is not appropriate.
Definition - Events after the end of reporting period are those events, favourable and
unfavourable, that occur between the end of the reporting period and the date that the financial
statements are authorised for issue.
Two types of events after the reporting period can be identified:
1. Adjusting events after the reporting period
These are events after the reporting period that provide further evidence of conditions that
existed at the end of the reporting period.
2. Non adjusting events after the reporting period
These are events after the reporting period that are indicative of a condition that arose after the
end of the reporting period.
Adjusting events after the reporting period - Accounting Treatment and Disclosures
• An entity shall adjust the amounts recognised in its financial statements to reflect adjusting
events after the end of reporting period.
Examples:
• Settlement after the SOFP date of a court case that confirms that the entity had an
obligation at the SOFP date.
• Receipt of information after the SOFP date indicating that an asset was impaired at the SOFP
date.
• Bankruptcy of a customer that occurs after SOFP date may confirm that a loss existed at
SOFP date on a trade receivable.
• Sales of inventories after SOFP date may give evidence about their NRV at SOFP date.
• Discovery of fraud or errors.
Dividends
Major change under IAS 10
• If an entity declares a dividend after the SOFP date, the entity shall not recognize those
dividends as a liability at the SOFP date. This is now deemed a non-adjusting event as
opposed to an adjusting event.
• These dividends should be disclosed in the notes to the financial statements in accordance
with IAS 1, assuming declaration takes place after the SOFP date but before the Financial
Statements were authorized for issue.
Non adjusting events after the reporting period - Accounting Treatment and Disclosures
• An entity shall not adjust the amounts recognised in its financial statements to reflect non-
adjusting events after the end of reporting period but should disclose them in the financial
statements.
• Non-disclosure could influence the economic decisions of users taken on the basis of the
financial statements.
• An entity shall disclose the following for each material category of non-adjusting event after
the reporting period:
• the nature of the event; and
• an estimate of its financial effect, or a statement that such an estimate cannot be
made.
Examples of Non adjusting events after the reporting period
• A major business combination after the SOFP date
• Announcing a plan to discontinue an operation,
• Destruction of a major production plant by a fire after the SOFP date,
• Major purchases of assets, other disposals of assets, or expropriation of major assets by
government,
• Announcing, or commencing the implementation of a major restructuring (see IAS 37).
• Major ordinary share transactions and potential ordinary share transactions after the SOFP
date
• Abnormally large changes after the SOFP date in asset prices or foreign exchange rates
• Decline in the market value of investment.
Going Concern
An entity shall not prepare its financial statements on a going concern basis if management
determines after the SOFP date either that it intends to liquidate the entity or to cease trading or
that it has no realistic alternative but to do so.
Other Requirements by IAS 10.
The date on which the financial statements are authorised for issue and who gave that
authorisation must be disclosed in the financial statements.
IAS 37 – Provisions, Contingent Liabilities and Contingent Assets ch.14
The objective of this standard is to set out the accounting rules in relation to
• provisions,
• contingent liabilities and
• contingent assets.
Provisions
A provision is defined as ‘a liability of uncertain timing and amount’.
• A provision should only be recognised when:
(a)there is an obligation which usually occurs as a result of some past event, and
(b)it is probable (greater than 50%) that an outflow of resources will be required to settle
the obligation, and
(c)a reliable estimate can be made of the amount of the obligation.
• The amount recognised as a provision shall be the best estimate of the expenditure required
to settle the present obligation at the statement of financial position date.
• The IAS distinguishes provisions from other liabilities such as Payables or Accruals because
with a provision there is uncertainty.
Contingent Liabilities
A contingent liability is defined as a possible obligation that arises from past events and whose
existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain
future events not wholly within the entity’s control
OR
A present obligation that arises from a past event but is not recognised because:
- it not probable that a transfer of economic events will be required to settle the obligation
or
- the amount of the obligation cannot be measured with sufficient reliability
These fail to satisfy all the criteria of provisions
• Outflow is only possible for a contingent liability.
• No adjustment is made to the financial statements in relation to a contingent liability.
• A disclosure note in relation to the contingent liability must be included in the notes to the
financial statements (unless the possibility of loss is remote) detailing:
• an estimate of the financial effect.
 • identification of any uncertainties in relation to the timing or the amount involved;
and
• an assessment of the possibility of any reimbursement.
Contingent Asset
• Probable future inflow of economic benefit.
• Do not recognise in the financial statements (prudence).
• Disclosure to be provided in the notes to the financial statements:
• brief description of the nature of the contingent asset; and
• an estimate of the financial effect.
Disclosures
• Probable future inflow of economic benefit.
• Do not recognise in the financial statements (prudence).
• Disclosure to be provided in the notes to the financial statements:
• brief description of the nature of the contingent asset; and
• an estimate of the financial effect.
IAS 20 – Accounting for Government Grants and Disclosure of Assistance ch.16
• Governments provide a variety of incentives to businesses to encourage and support
economic activity.
• The accounting rules in relation to grants are set out in IAS 20 Accounting for Government
Grants and Disclosure of Government Assistance.
• Grants are provided in relation to items of either capital or revenue expenditure.
Recognition of Government Grants
• A government grant is not recognised until there is reasonable assurance that:
▫ The entity will comply with conditions attached to it
▫ The grant will be received
• Grants shall be recognised in profit or loss on a systematic basis over the periods in which
the entity recognises as expenses the related costs for which the grants are intended to
compensate
Types of Grants
• A government grant is not recognised until there is reasonable assurance that:
▫ The entity will comply with conditions attached to it
▫ The grant will be received
• Grants shall be recognised in profit or loss on a systematic basis over the periods in which
the entity recognises as expenses the related costs for which the grants are intended to
compensate
Grants in Relation to Capital Expenditure
Government grants provided to entities to offset the cost of property, plant and equipment.
There are two methods off accounting for capital grants:
1. reduce the cost of the asset by the amount of the grant received; or
2. treat the grant as deferred income and amortise it to profit and loss over the life of the
asset.
Capital Grant – Method 1 – Reduce Cost
Reduce the cost of the asset by the amount of the grant received
• On receipt of the grant, the journal posted to recognise the amount received is:
DR: BANK CR: ASSET - COST
• Depreciation on the asset is calculated based on the asset cost net of the amount of the
grant received.
Revenue Grants
• Revenue grants are grants towards the cost of revenue expenditure in the accounts.
• Examples: training & employment grants
• Accounting treatment: Credit in full to the SPLOCI(P/L) for the period in which the expense
is incurred.
• The grant income can be presented in the SPLOCI as either
1. ‘Other income’ or
2. it can reduce the related expense in the SOPL.

Treatment
 Revenue Grants should be credited to the SPLOCI so as to match them with related
expenditure
 Grants made to reimburse costs previously incurred should be recognised in the year
when they become receivable.
 Grants made to provide immediate assistance should be recognised in the year they
become receivable.
 Grants made to finance activities over a specific period should be credited to SPLOCI
over that period.
Repayment of Government Grant
• Accounted for as a change in accounting estimate
• Repayment of grant related to:
▫ revenue expenditure:
 Dr Unamortised deferred credit
 Dr Profit or loss
 Cr Bank
▫ capital expenditure:
 Dr. carrying value of asset (adjust for depreciation),
 Dr Unamortised deferred income
 Cr Bank
Other Assistance
• Government agencies may provide non-cash assistance, such as technical or marketing
advice.
• It may be reasonable to place a value on such assistance.
• If assistance is significant, then disclose the nature, extent and duration of the assistance
provided to ensure that the financial statements are not misleading.
Disclosure Requirements
In the notes to the financial statements the following disclosures should be made:
• The accounting policy adopted in relation to government grants, including the method of
presentation adopted in the financial statements.
• The nature and extent of government grants recognized in the financial statements.
• Any unfulfilled conditions attaching to government grants that have been recognized.