ACC 203 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS
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1
Module for
ACC203
Conceptual Framework and
Presentation of Financial Statements
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Accounting Standards and Financial Statements: A Comprehensive Guide, Cheat Sheet of Accounting
A comprehensive overview of accounting standards and financial statements, covering key concepts such as the objective of financial statements, elements of financial statements, classification of assets and liabilities, and the importance of notes to financial statements. It also delves into specific ifrs standards like ifrs 5 (non-current assets held for sale) and pas 32 (financial instruments), providing insights into their application and implications. The document further explores the accounting treatment of intangible assets, including their recognition, measurement, and disclosure requirements. It also includes exercises and questions to test understanding and promote deeper learning.
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Module for
ACC
Conceptual Framework and
Presentation of Financial Statements
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Module 1 Conceptual Framework and Presentation of Financial Statements Week 2 - 3
Introduction
This module tackles the new Conceptual Framework for Financial Reporting and PAS 1 for the Financial Statements Presentation. This discusses the concepts that underlies the preparation and presentation of financial statements. The Conceptual Framework sets the concepts and objectives of the general purpose financial reporting. PAS 1 - Presentation of Financial Statements discusses the specific accounting standards that are provided by the IASB in presenting the financial statements.
Learning Objectives
After studying this module, students should be able to:
- Understand the purpose and content of the Conceptual Framework for Financial Reporting.
- Acquire the knowledge and concepts about the Philippine Accounting Standards (PAS) 1 - Presentation of Financial Statements.
Discussion:
The Conceptual Framework for Financial Reporting
The Conceptual Framework for Financial Reporting is a basic document that sets objectives and the concepts for general purpose financial reporting. Its predecessor, Framework for the preparation and presentation of the financial statements was issued back in 1989. Then in 2010, IASB published the new document, Conceptual Framework for Financial Reporting.
Content of Conceptual Framework for Financial Reporting
- The Objective of General Purpose Financial Reporting.
- Qualitative Characteristics of Useful Financial Information.
- Financial Statements and the Reporting Entity.
- The Elements of Financial Statements.
- Recognition and Derecognition.
- Measurement
- Presentation and Disclosure
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- Fundamental, and
- Enhancing.
Fundamental qualitative characteristics ● Relevance: capable of making a difference in the users’ decisions. The financial information is relevant when it has predictive value, confirmatory value, or both. Materiality is closely related to relevance. ● Faithful representation: The information is faithfully represented when it is complete, neutral and free from error.
Enhancing qualitative characteristics ● Comparability: Information should be comparable between different entities or time periods; ● Verifiability: Independent and knowledgeable observers are able to verify the information; ● Timeliness: Information is available in time to influence the decisions of users; ● Understandability: Information shall be classified, presented clearly and concisely.
Financial Statements and the Reporting Entity
Financial Statements The financial statements should provide the useful information about the reporting entity:
- In the statement of financial position, by recognizing ○ Assets, ○ Liabilities, ○ Equity
- In the statements of financial performance, by recognizing ○ Income, and ○ Expenses
- In other statements, by presenting and disclosing information about ○ recognized and unrecognized assets, liabilities, equity, income and expenses, their nature and associated risks; ○ Cash flows; ○ Contributions from and distributions to equity holders, and ○ Methods, assumptions, judgements used, and their changes. Financial statements are always prepared for a specified period of time, or the reporting period. Normally, the financial statements are prepared on the going concern assumption. It means that an entity will continue to operate for the foreseeable future (usually 12 months after the reporting date).
Reporting Entity
Although the term “reporting entity” has been used throughout IFRS for some time, the Framework introduced it and “made it official” only in 2018. Reporting entity is an entity who must or chooses to prepare the financial statements. It can be: ● A single entity – for example, one company;
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● A portion of an entity – for example, a division of one company; ● More than one entity – for example, a parent and its subsidiaries reporting as a group.
As a result, we have a few types of financial statements: ● Consolidated: a parent and subsidiaries report as a single reporting entity; ● Unconsolidated: e.g. a parent alone provides reports, or ● Combined: e.g. reporting entity comprises two or more entities not linked by parent-subsidiary relationship.
Elements of the financial statements
This extensively deals with the definitions of individual elements of the financial statements. There are five basic elements:
- Asset = a present economic resource controlled by the entity as a result of past events;
- Liability = a present obligation of the entity to transfer an economic resource as a result of past events;
- Equity = the residual interest in the assets of the entity after deducting all its liabilities;
- Income = increases in assets or decreases in liabilities resulting in increases in equity, other than contributions from equity holders;
- Expenses = decreases in assets or increases in liabilities resulting in decreases in equity, other than distributions to equity holders;
The Framework then discusses each aspect of these definitions and provides wide guidance on how to decide what element you are dealing with.
Recognition and derecognition
Recognition Simply speaking, recognition means including an element of financial statements in the financial statements. In other words, if you decide on recognition, you decide on whether to show this item in the financial statements. Recognition process links the elements in the financial statements according to the following formula: Please let me stress here that not all items that meet the definition of one of the elements listed above are recognized in the financial statements.
The Framework requires recognizing the elements only when the recognition provides useful information – relevant with faithful representation. Then, the Framework discusses the relevance, faithful representation, cost constraints and other aspects in a detail.
Derecognition. it means removal of an asset or liability from the statement of financial position and normally it happens when the item no longer meets the definition of an asset or a liability. Again, the Framework discusses the derecognition in a greater detail.
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The Framework explains two concepts of capital:
- Financial capital – this is synonymous with the net assets or equity of the entity. Under the financial maintenance concept, the profit is earned only when the amount of net assets at the end of the period is greater than the amount of net assets in the beginning, after excluding contributions from and distributions to equity holders. The financial capital maintenance can be measured either in a. Nominal monetary units, or b. Units of constant purchasing power.
- Physical capital – this is the productive capacity of the entity based on, for example, units of output per day. Here the profit is earned if physical productive capacity increases during the period, after excluding the movements with equity holders.
The main difference between these concepts is how the entity treats the effects of changes in prices in assets and liabilities.
PAS 1: Presentation of Financial Statements
Statement of Financial Position
- Statement of Profit or Loss and Other Comprehensive Income
- Statement of Changes in Equity
- Statement of Cash Flow
- Notes to the Financial Statement
Terms to Remember:
- Financial Statements are written records that convey the business activities and the financial performance of a company.
- General Purpose Financial Statements are those intended to meet the needs of users who are not in a position to require an entity to prepare reports tailored to their particular information needs.
- Objective of 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.
- Frequency of Reporting states that financial statements shall be presented at least annually.
- Judgement is used to determine the best method of presenting information.
- Statement of Financial Position is a formal statement showing the three elements comprising financial position, namely assets, liabilities and equity. It is used to evaluate such factors as liquidity, solvency and the need of the entity for additional financing.
Asset
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- is a present economic resource controlled by the entity as a result of past events. An economic resource is a right that has the potential to produce economic benefits.
Classification of assets
Current Assets
- Cash and cash equivalents
- Financial assets at fair value such as trading securities and other investment in quoted equity instruments
- Trade and other receivables
- Inventories
- Prepaid expense
Non-Current Assets
- Property, plant and equipment
- Long-term investments
- Intangible assets
- Deferred tax assets
- Other non-current assets
Liabilities
- are present obligations of the entity to transfer an economic resource as a result of past events. An obligation is a duty of responsibility that the entity has no practical ability to avoid.
Classification of liabilities
Current Liabilities
- Trade and other payables
- Current provisions
- Short-term borrowing
- Current portion of long-term debt
- Current tax liability
Non-current Liabilities
- Non-current portion of long-term debt
- Finance lease liability
- Deferred tax liability
- Long-term obligations to company officers
- Long-term deferred revenue
Currently maturing long-term debt
The original term was for a period longer than twelve months.
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Comprehensive income for the period
- The effects of changes in accounting policies and corrections of error
- A reconciliation between carrying amount at the beginning and end of the period
Notes to the Financial Statement
Present information about the basis on which the financial statements were prepared and which specific accounting policies were chosen and applied to significant transaction
- Disclose any information which is required by IFRSs
- Show any additional information that is relevant to understanding which is not shown elsewhere in the financial statement
Assessments Answer the following requirements:
- Describe the Conceptual Framework for Financial Reporting
- Enumerate the Objectives of a general purpose financial reporting?
- Identify the Qualitative characteristics of a useful financial statement,
- Find the relationship between financial statements and reporting entity
- Enumerate the elements of financial statements.
- Explain the concept of recognition, derecognition and measurement
- Explain the presentation of financial
- Explain the concept of capital and capital maintenance.
- Enumerate the complete set of financial statements.
- Define the elements of financial statements.
- Explain the classification of assets and liabilities/
- Identify the content of statement of comprehensive income
- Explain the importance of notes to financial statements.
References APA style
Source: Peralta, Jose F., Valix, Christian Aris M., Valix, Conrado T. (2017), Financial Accounting Volume Two. Manila, Philippines. GIC Enterprises & Co.,Inc.
Asuncion, Darrell Joe O. CPA,MBA, Escala, Raymund Francis A. CPA, MBA, Ngina, Mark Alyson B. CPA, MBA (2018), Applied Auditing Book 2 of 2. Aurora Hill, Baguio City. Real Excellence Publishing and Nation’s Foremost CPA Review Inc.
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Silvia.M.,2019.https://www.ifrsbox.com/ifrs-conceptual-framework- 2018/#:~:text=The%20Conceptual%20Framework%20for%20the,was%20issued%20ba ck%20in%201989.
IFRS Community (2018). Retrieved From: https://ifrscommunity.com/knowledge-base/ifrs-16-recognition-and-measurement-of-l eases/#link-subsequent-measurement-of-the-lease-liability
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impracticable when an entity cannot apply a requirement after making every reasonable effort to do so.
Accounting policies are determined by applying the relevant IFRS and considering any relevant implementation Guidance issued by the IASB for that IFRS. When there is no applicable IFRS or interpretation, management should use its judgment in developing and applying an accounting policy that results in information that is relevant and reliable.
An entity must select and apply its accounting policies for a period consistently for similar transactions, other events and conditions. The same accounting policies are usually adopted from period to period, to allow users to analyze trends over time in profit, cash flows, and financial position.
When can changes be applied?
The change is required by an IFRS; the change will result in a more appropriate presentation of events or transactions in the financial statements of the entity.
The standard highlights two types of event w/c do not constitute changes:
- Adopting an accounting policy for a new type of transaction or event not dealt with previously by the entity,
- Adopting a new accounting policy for a transaction or event which has not occurred in the past or which was not material.
In the case of tangible noncurrent assets, a policy of a revaluation adopted for the first time is not treated as a change in policy under IAS 8, but as a revaluation under IAS 16 Property. Plant, and Equipment.
Where a new IFRS is adopted, resulting in a change of accounting policy, IAS 8 requires any transitional provisions in the new IFRS itself to be followed. If none are given, provisions of IAS 8 shall be followed.
- Reasons for the change/nature of change
- Reasons why new policy provides more relevant/reliable information
- Amount of the adjustment for the current period and for each period presented
- Amount of the adjustment relating to periods prior to those included in the comparative information
- The fact that comparative information has been restated or that it is impracticable to do so.
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- Estimates arise in relation to business activities because of the uncertainties inherent within them. Examples are: debt allowance, useful lives of depreciable assets, and obsolescence of inventory.
The rule here is that the effect of a change in an accounting estimate should be included in the determination of net proper or loss in one of:
- The period of the change, if the change affects that period only
- The period of the change and the future periods, if the change affects both
Prior Period Errors
Nature of the prior period error: For each prior period, to the extent practicable, the amount of the correction. The amount of the correction at the beginning of the earliest prior period presente. If retrospective restatement is impracticable for a particular prior period, the circumstances that led to the existence of that condition and a description of how and from when the error has been corrected. Subsequent periods need not repeat these disclosures.
IFRS 5: Non-current Asset held for Sale
IFRS 5 requires assets "held for sale" to be recognized separately in the statement of financial position. It sets out the criteria for recognizing a discontinued operation.
Noncurrent Asset is an asset that does not meet the definition of a current asset.
Noncurrent Asset Held for Sale - IFRS 5, paragraph 6, provides that a noncurrent asset or disposal group is classified as held for sale if the carrying amount will be recovered principally through a sale transaction rather than through continuing use.
Conditions for classification as held for sale.
- The asset or disposal group is available for immediate sale in the present con ditio/n.
- The sale must be highly probable.
PAS 7: Statement of Cash Flows
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- Using the Direct Method. This is the most obvious way because it is obtained by simply extracting information from the accounting records, which may be a laborious task.
- Using the Indirect Method. This method is undoubtedly easier from the point of view of the preparer of the statement of cash flows. The net profit or loss for the period is adjusted for:
Changes during the period in inventories, operating receivables and payables Non-cash items, e.g. depreciation, provisions, profits/losses on the sales of assets Other items, the cash flows from which should be classified under investing or financing activities
Cash flow from Investing Activities
Cash flow from investing activities is one of the sections on the cash flow statement that reports how much cash has been generated or spent from various investment related activities in a specific period. Investing activities include purchases of physical assets, investments in securities, or the sale of securities or assets. Negative cash flow is often indicative of a company's poor performance. However, negative cash flow from investing activities might be due to significant amounts of cash being invested in the long term health of the company, such as research and development. Cash flows from investing activities provide an account of cash used in the purchase of non current assets or long term assets that will deliver value in the future. Investing activity is an important aspect of growth and capital.
A change to property, plant, and equipment (PPE), a large line item on the balance sheet, is considered an investing activity. When investors and analysts want to know how much a company spends on PPE, they can look for the sources and uses of funds in the investing section of the cash flow statement. Capital expenditures (CapEx), also found in this section, is a popular measure of capital investment used in the valuation of stocks. An increase in capital expenditures means the company is investing in future operations. However, capital expenditures are a reduction in cash flow. Typically, companies with a significant amount of capital expenditures are in a state of growth.
Below are a few examples of cash flows from investing activities along with whether the items generate negative or positive cash flow.
- Purchase of fixed assets–cash flow negative
- Purchase of investments such as stocks or securities–cash flow negative
- Lending money–cash flow negative
- Sale of fixed assets–cash flow positive
- Sale of investment securities–cash flow positive
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- Collection of loans and insurance proceeds–cash flow positive
Cash flow from Financing Activities
Financing Activities are the activities that result in change in size and composition of the equity capital and borrowings of the entity. Include from the transaction involving non- trade liabilities and equity of the entity.
Financing Activities are the cash flow that result from the transactions:
- Between the entity and the owners equity financing
- Between the entity and the creditors debt financing
Cash flow from financing activities in IAS 7, paragraph 43, provides that investing and financing transactions that do not require use of cash or cash equivalents shall be excluded from the statement of cash flows. Such transactions shall be disclosed elsewhere in the financial statement either in the notes to the financial statement or in a separate schedule or in a way that provides information about the transactions.
The following noncash transactions are disclosed separately:
- Acquisition of asset by assuming directly related liability
- Acquisition of asset by issuing share capital
- Acquisition of asset by issuing bonds payable
- Conversion of bonds payable into share capital
- Conversion of preference share into ordinary shares
Interest
In IAS 7, paragraph 33, provides that Interest paid and interest received shall be classified as operating cash flows because they enter into the determination of net income or loss. Alternatively, interest paid may be classified as financing cash flow because it is a cost of obtaining financial resources. Alternatively, interest received may be classified as investing cash flow because it is return on investment. For a financial institution, interest paid and interest received are usually classified as operating cash flows.
Dividends
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- Discuss the presentation of interest, dividends and income taxes on the statement of cash flows.
References
Peralta, Jose F., Valix, Christian Aris M., Valix, Conrado T. (2017), Financial Accounting Volume Two. Manila, Philippines. GIC Enterprises & Co.,Inc.
Asuncion, Darrell Joe O. CPA,MBA, Escala, Raymund Francis A. CPA, MBA, Ngina, Mark Alyson B. CPA, MBA (2018), Applied Auditing Book 2 of 2. Aurora Hill, Baguio City. Real Excellence Publishing and Nation’s Foremost CPA Review Inc.
Silvia.M.,2019.https://www.ifrsbox.com/ifrs-conceptual-framework- 2018/#:~:text=The%20Conceptual%20Framework%20for%20the,was%20issued%20ba ck%20in%201989.
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Module 3 Revenues from Contracts with Customers and Government Grants Week 6
Introduction
This module discusses the accounting for Revenues from Contract with Customers and for Government Grants. It sets out rules for the recognition of revenue based on the transfer of control to the customers from the entity. This also tackles the step by step process on accounting for revenues from contracts with customers and the identification of the point of time in which revenues must be recognized. Additionally, this discusses the recognition of government grants and disclosure for government assistance.
Learning Objectives
After studying this module, students should be able to:
- Understand the recognition of revenues based on the transfer of control to the customer from the entity.
- Demonstrate the process on how to account for the revenues from contracts with customers.
- Identify the different points of time in the recognition of revenues.
- Explain the recognition of government grants and disclosure for government assistance.
Revenues from Contracts with Customers
Core Principle
- Entity should recognize revenue in a manner that depicts the pattern of transfer of goods or services to a customer.
- Amount recognized as revenue should reflect the consideration to which the entity expects to be entitled in exchange for good or service.
Things to remember:
- Income - increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in an increase in equity, other than those relating to contributions from equity instruments.
- Revenue - income arising from course of entity's ordinary activities
- Contract - agreement between two or more parties that creates enforceable rights and obligations