T6 Lecture Note for Chapter 1 to 5

8/6/2019 T6 Lecture Note for Chapter 1 to 5

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Lecture Sheet-1

The Regulatory Framework

Contents1.The Regulatory Systems2.Regulatory Bodies

i. IASCii. IASBiii. IFRICiv.

SAC3.The Objectives of the IASC Foundation & IASB

4.The Role of Regulatory Bodies5.Standard Setting Process

Prepared By: KAMRUL HASANCell: 01911-563569

E-mail: [email protected]


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1. THE REGULATORY FRAMEWORK

THE INTERNATIONAL ACCOUNTING STANDARDS COMMITTEE (IASC):

The International Accounting Standards Committee (IASC) was set up in 1973.

It consists of representative from accountancy organizations from around the

world. In 2001 a new Constitution and structure came into force. Presently it is

called IASC Foundation.

THE REGULATORY SYSTEM

Structure of the international regulatory system

The Regulatory System

Regulatory Bodies

The Role of Regulatory Bodies

Standard Setting Process

THE IASC FOUNDATION

Controllin /Su ervisor bod

IASB

Issue IFRSs

IFRIC

Provide Inter retation of IFRS

SAC

Advisor bod


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International Accounting Standards committee (IASC) Foundation

The IASC Foundation:

y is the supervisory body for the new structurey has 22 trusteesy 6 trustees are appointed from North America, 6 from Europe and 6 from

Asia or Oceania. The remaining 4 can be appointed from any part of theworld

y is responsible for governance issues and ensuring each body is properlyfunded

y The trustees appoint the members of the IASB, the International FinancialReporting Interpretations Committee(IFRIC) and the Standards Advisory

Council (SAC)

The objectives of the IASC Foundation are to:

y develop a set of global accounting standards which of are high quality,are understandable and are enforceable

y which require high quality, transparent and comfortable information infinancial statements to help those in the worlds capital markets and other

users make economic decisions

y promote using and applying these standardsy bring about the convergence of national and international accounting

International Accounting Standards Board (IASB)

The IASB:

y is solely responsible for issuing International Accounting standards(IASs)

y standards now called International Financial Reporting Standards(IFRSs)y is made up of 14 membersy the IASB has 14 members, of which 12 are full time. Each member has

one vote

y has the same objectives as the IASC FoundationExpandable Knowledge

The IASB is solely responsible for issuing new IASs. The IASB has announcedthat its new standards will be called IFRSs, but the existing standards will

continue to be called IASs. Note that now the term IASC Foundation is used to

refer to the whole structure of the new organizations in the above diagram,

while the IASB is just the standard setting body.


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Internati nal inancial eporting Interpretations Committee (IFRIC)

The IFRIC:

y i es rapi gui ance on accounting matters where di ergentinterpretations of IFR s have arisen

y Issues interpretations called IFRIC 1, IFRIC 2, etc.y Its previous name was SIC.y SIC changed in to IFRICin 2002.

E pandable Knowledge

In 1997 the IASC formed the Standing Interpretations Committee (SIC toensure proper compliance with IFRSs by considering point s of contentionwhere divergent interpretations have emerged and issuing an authoritative

view; 33 interpretations (entitled SIC 1, SIC 2, etc) were issued by the SICbefore its change of name SICs are important because IAS 1 (revised) statesthat financial statements cannot be described as complying with IFRSs unlessthey comply with each IAS/IFRS and each interpretation from the SIC /IFRIC.

In 2002 the SIC changed its name to the International Financial ReportingInterpretations Committee (IFRIC). Interpretations are now designated IFRIC1, IFRIC 2, etc.

Standard Advisory Council (SAC)

The Standard Advisory Council (SAC) advises the IASB on its agenda, its work

program and its standard settings projects (with particulars emphasis on

practical issues). It consists to individuals and representatives of organi ations

affected by the IASB s work. There are at least 30 members and these are

drawn from a wide range of geographical areas and professional backgrounds

including user groups, preparers, financial analysts, academics, auditors,

regulators and professional accounting bodies.


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T e Development of an IFRS (Standard setting process)

The procedure forthe development of an IFRS is as follows:

y The IASB identifies subjects/issues and appoints an advisorycommittee to advice on the issues.

y The IASB publishes an exposure draft for public comment, being adraft version ofthe intended standard.

y Following the consideration of comments received on the draft, theIASB publishes the finaltext ofthe IFRS.

y At any stage the IASB may issue a discussion paper to encouragecomment.

y The publication of an IFRS interpretation requires the votes of atleasteight ofthe 14 IASB members.


Neither the IASC Foundation, the IASB nor the accountancy profession hasthe power to enforce compliance with IFRSs. Nevertheless, some countriesadopt IFRSs and theirlocal standards and others ensure thatthere is minimumdifference between their standards and IFRSs. In recent years, the status oftheIASB and its standards has increased; So IFRSs carry considerable persuasiveforce worldwide.

T e Role of IASC, IASB, IFRIC & SAC

Role of IASC: The role of the IASC Foundation is to oversee the IASB and

related bodies and to raise the fund needed.

Role of IASB: The role ofthe IASBis to develop and issue global accounting

standards.

Role of IFRIC: The role of IFRIC is to provide timely guidance on the

application of IFRSs where unsatisfactory interpretations exist or newprocesses arise.

Role of SAC: The role of SAC is to provide a formal forum where the IASB

can consult individuals and representatives of organi ations affected by its

work.


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Lecture Sheet-2 & 3

The Conceptual Framework

Contents

1.Definition of the conceptual framework2.Advantage & Disadvantage of framework3.Purpose of the framework4.Qualitative characteristics of financial information5.Element of the financial statement6.Reorganization of assets, liabilities, income &

expenses

7.Summary




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THE CONCEPTUAL FRAMEWORK

The word Conceptual came from the word Concept.

Her Concept means-

Coherent system Principles Rules & regulations

AND

The word Framework means-

Structure Boundary Limit

So, Conceptual Framework is a boundary of principles, rules & regulations

which are derived from IASB or national regulatory body e.g. The Stock

Exchange that an entity may how to follow to achieve its objectives.

What is a conceptual framework?A conceptual framework is:

y a coherent system of interrelated objectives and fundamental principlesy a framework which prescribes the nature, function and limits of financial

accounting and financial statements

The conceptual framework should ultimately provide a basic structure for

answering some of the fundamental questions of financial reporting. These

questions include:

y Why produce financial statements?y Who are the statements prepared for?y What information do they require?y What statements should be produced?

The conceptual framework should also standardize accounting rules and

practices, thus preventing the profession from establishing conflicting rules and

practices.

Benefits

y Provides a framework for developing and setting accounting standards.y Provides a basis for resolving disputes over the accounting treatment of

items.

yFundamental principles do not have to be repeated in accountingstandards.

y Influence of vested interests is minimized.Drawbacks

y Framework may be too general and therefore unhelpful when producingaccounting standards.

y People may not be an agreement as to the content of the framework.


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The Framework

The conceptual framework published by the IASBis called the framework. It

includes guidance with regard to

ythe qualitative characteristics of financialinformation

y the elements of financial statement y recognition ofthe elements

The purpose of the framework

The main purposes of IASB s Framework for the preparation and presentation

of financial statements are to:

y assists in the development of future accounting standards and in thereview of existing standards

y provide a basis for reducing the number of alternative accountingtreatments permitted by international standards

y assists preparers of financial statements in applying internationalstandards and in dealing with issues not covered by international

standards

y assist auditors in forming an opinion on whether financial statementsconform to international standards

y assist users of financial statements in interpreting informationy provide information aboutthe IASB s approach to standard setting

Conceptual Framework

Qualitative Characteristics

of Financial Information

Understandability Relevance

The Framework

Elements of Financial

Statements

Recognition of Elements of

Financial Statements

Materiality

Reliability Comparability


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Qualitative Characteristics of Financial Information

Introduction

Qualitative Characteristics are the attributes that make information provided in

financial statements usefulto others.

The frameworkidentifies four Qualitative Characteristics:

y relevancey reliabilityy comparabilityy understandability

All are subjectto a threshold quality of materiality.

What makes financialinformation useful

Threshold Information that is notQuality material cannot be useful

Content

Information thatinfluences decisions Information thatis free from error or bias

Inter-related

Materiality

Relevance Reliability

What makes information relevant

What makes information reliable?

Predictive

Value

Confirmatory

Value

Faithful

Representation

Completeness

Prudence

Neutrality

Substance


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Constrains

Relevance- Information is relevantifit has the ability to influence the economic

decisions of users and if provided in time to influence those decisions.

Reliability- Information is reliable if:

i. it can be depended on by users to represent faithfully what is eitherpurports to represented or could reasonably be expected to represent,and therefore reflects the substance ofthe transaction and other events

that have taken place

ii. it is free from deliberate or systematic bias and material error and iscomplete

iii. in its preparation under conditions of uncertainty a degree of cautionhas been applied in exercising the necessaryjudgments.

What qualities make the

presentation of financialinformation useful?

Comparability Understandability

Disclosuree.g. accounting policies

and corresponding

figures

Aggregation andClassification

Consistency Users abilities

Whatlimits the application

ofthe qualitative

characteristics?

Balance between

characteristics

Timeliness Benefit and cost


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Comparability- Information in financial statements needs to be prepared and

presented in a way that enables users to discern and evaluate similarities in, and

differences between, the nature and effects of transactions and other events

overtime and across different reporting entities.

Understandability- Information is understandable if its significance can be

perceived by users who have reasonable knowledge of business and economic

activities and accounting and a willingness to study with reasonable diligence

the information provided.

Expandable Knowledge

Faithful representation

In information is to represent faithfully the transactions and other events that is

purports to represent, they must be accounted for and presented in accordance

with their substance and economic reality and not merely their legal form.

Neutrality

Information must be natural, i.e. free from bias. Financial statements are not

natural if, by the selection or representation of information, they influence the

making of a decision or judgment in order to achieve a predetermined result of

outcome.

Completeness

Information must be complete and free from error within the bounds of

materiality. A material error or an omission can cause the financial statements to

be false or misleading and thus unreliable and deficient in terms of theirrelevance.

Prudence

Uncertainly surrounds many of the events and circumstances that are reported on

in financial statements. It is dealt with in those statements by disclosing the

nature and extent of the uncertainty involved and by exercising prudence.

Prudence means exercising a degree of caution in making judgments about

estimates required under conditions of uncertainty, such that gains and assets are

not overstated and losses and liabilities are not understated. The existence of

assets and gains requires more confirmatory evidence and greater reliability ofmeasurement than are required for liabilities and losses.

It is not necessary to exercise prudence there is no uncertainty. Nor is it

appropriate to use prudence as a reason for, e.g. creating hidden reserves or

excessive provisions, deliberately understanding assets or gains, or deliberately

over standing liabilities or losses. That would mean that the financial statements

are not neutral and, therefore, are not reliable.


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Elements of the financial statements

AssetsAssets are:

y resources controlled by the entityy as a result past eventsy from which future economic benefits are expected to flow to the entity

Liabilities

Liabilities are:

y an entitys obligationsy to transfer economic benefitsy as a result of pasttransactions events.

Equity interest

Equity interest is the residual amount found by deducting all liabilities of the

entity from all ofthe entitys assets.


Assets

An asset is a resource controlled by the entity as a result of past events andfrom which future economic benefits are expected to follow to the entity.

To Explain furtherthe parts ofthe definition of an asset:

y Controlled by the entity- control is the ability to obtain the economicbenefits and to restrictthe access of others (e.g. by a company being thesole user of its plant and machinery, or by selling surplus plant andmachinery).

y Past events- the event must be past before an asset can arise. Forexample, equipment will only become an asset when there is the righttodemand delivery or access to the assets potential. Dependent on theterms of the contract, this may be on acceptance of the order or ondelivery.

y Future economic benefits- these are evidenced by the prospective receiptof cash. This could be cash itself, a debt receivable or any item which

may be sold (on a going-concern basis) it houses the manufacturer ofgoods. When these goods are sold the economic benefit resulting fromthe use ofthe factory is reali ed as cash.


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Liabilities

Liabilities are an entitys obligations to transfer economic benefits as a result ofpasttransactions or events.

To explain furtherthe parts ofthe definition of a liability:

y Obligations- these may be legal and constructive. A constructiveobligation is an obligation which is the result of expected practice ratherthan required by law or a legal contract.

y Transfer economic benefits-this could be a transfer of cash, or otherproperty, the provision of a service, or the refraining from activitieswhich would otherwise be profitable.

y Past transactions or event- similar points are made here to those underassets.

Complementary nature of assets and liabilities-as should be evident from the above, assets and liabilities are seen as mirror

images of each other. Sometimes they are offset, e.g. a credit note issued to acustomer will be set against his debt rather than be recorded as a separateliability.

Equity interest

Equity interestis the residual amount after deducting a llliabilities ofthe entityfrom all ofthe entitys assets.

The definition describes the residual nature of equity interest. Owners wealthcan be increased whether or not a distribution is made. The sharing may be indifferent proportions. Equity interestis usually analyzed on financial statementsto distinguish interest arising from owners contributions from that resultingfrom other events. The latter is split into different reserves which may havedifferent applications orlegal status.

Income

Income is:

y an increase in economic benefits during the accounting period in the formofinflows or enhancements of asset or decreases in liabilities

y Transactions that result increases in equity, other than those relating tocontributions from equity participants.

E penses

Expenses are:

y decreases in economic benefits during the accounting period in the formof out follows or depletions of assets orincurrences ofliabilities

y Transactions that result in decreases in equity, otherthan those relatingto distributions to equity participants.


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Recognition of assets, liabilities, income and expenses

Recognition Criteria

y Economic Benefity

Reliable measurementy Evidence

Recognition of assets

An asset will only be recognized if:

y It gives right or other access to future economic benefits controlled by anentity as a result of pasttransactions or events

y it can be measured with sufficient reliabilityy there is sufficient evidence ofits existence.

Recognition ofliabilities

A liability will only be recognized if:

y there is an obligation to transfer economic benefits as a result of pasttransactions or events

y it can be measured with sufficient reliabilityy there is sufficient evidence ofits existence.

Recognition ofincome

Income is recognized in the income statement when:

y an increase in future economic benefits arises from an increase in anasset (or a reduction in a liability), and

y the increase can be measured reliably.Recognition ofExpenses

Expenses are recognized in the income statement when:

y a decrease in future economic benefits arises from a decrease in an assetor an increase in a liability, and

y can be measured reliably.


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SUMMARY:

Conceptual Framework

y Definitiony Advantagey Di advanta e

Reliable

y faithfulrepresentation

y neutraly error freey complete

prudent

QUALITATIVECHARACTERISTICS OF

FINANCIAL INFORMATION

Materiality

= threshold quality above which

Financial information must be:

Recognition of elements of

financial statements

y economic benefitsy measure reliablyy evidence (asset/liability)

Comparable

y time-to-timey company-to-

company

Relevant=influences economic

Decisions of users.

Understandable= users perceive

Significance

The Framework

y Purpose ofthe framework

Elements of financial

statements

y assety liabilityy equityy incomey expenses


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Lecture Sheet-4

Accounting Concept Policies & Assumption

Contents

1.Underlying assumption2.Accounting concept and principles3.Historical cost accounting (HCA)4.Advantage and disadvantage of HCA5.Alternative to HCA6.Deprival value7.Capital maintenance concept8.User group




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User Group:

Investors and potential investors: are interested in information that helps them tomake decisions abouttheir investment or potential investment in the entity. In otherwords, they need information about the entitys financial performance (profitabilityand dividends) and financial position that helps them to assess its ability to generatecash and to adaptto new opportunities or challenges when these occur.

Lenders: are interested in information that enables them to determine whether their

loans will be repaid, and whetherthe related interest will be paid. Potentiallenders areinterested in information that helps them to decide whetherto lend to the entity.

They need information about profitably, liquidity (working capital

management), asset valuations and cash flows.

Suppliers and other trade payables: are interested in information that enables themto decide whetherto sellto the entity and to assess the likelihood that amounts owing

to them will be paid when due.They need information about profitably, cash flows and working capitalmanagement.

Employees: are interested in information that helps them to assess their employers

ability to provide remuneration, employment opportunities and retirement benefits.

They need information about profitability, stability, level of borrowings and cash

flows.

Customers: need to be able to predict whether the entity will continue to trade,

particularly when they are dependent on the entity (for example where it provides

specialized replacement parts that the customer needs for its own activities). They

need information about profitability and cash flows.

Governments and their agencies: need information aboutthe activities of business

that helps them to allocate resources. They also require information in order to

regulate the activities of organizations, assess taxation and provide a basis for national

statistics. Taxation authorities are primarily interested in an entitys profit and the way

in which this has been arrived at; other authorities may be interested in more general

information about an in entitys activities. The public is interested in information

abouttrends and recent developments in an entitys profitability and in the range ofitsactivities. For example, an entity may contribute to a community by providing

employment and using local suppliers. It may also have a negative effect on a

community, for example by polluting the natural environment.

Note:Candidates NORMALY are required to identify FOURofthe above.


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Accounting concept, policies and underlying assumption:

Underlying assumptions

The underlying assumptions governing financial statements are:

y The accrual basisThe accrual basis of accounting means thatthe effects oftransactions

and other events are recognized as they occur and not as cash or its

equivalentis received or paid.

y Going concernThe going concern basis assumes thatthe entity has neitherthe need

nor the intention to liquidate or curtail materially the scale of its

operations.

Accounting concepts in IAS 1:

i. Accrual conceptii. Going concern concept iii. consistencyiv. Materiality & aggregationv. Prudencevi. Dualityvii. Substance over formviii. Offsetting


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HIST RICAL COST ACCOUNTING (Traditional Approach)

The traditional approach to accounting has the following features:

y Accounting transactions are recorder attheir original historical monetary cost.y Items or events for which no monetary transaction has occurred are usually

ignored altogether.

y Income for each period is normally taken into account only when revenue isrealized in the form of cash or in some form which will soon be converted into

cash.

y Profit for the period is found by matching income against the cost of itemsconsumed in generating the revenue for the period (such items includes non-

current assets which depreciate through use, obsolescence orthe past oftime).

These features of accounting have served users well over many years in accounting for the

stewardship ofthe directors.

Advantage ofHistoric Cost Accounting

The advantages of historic cost accounting include:

y Records are based on objectively verifiable amounts (actual cost of assets. etc).y Itis simple and cheap.y The profit conceptis well understood.y Within limits, historic cost figures provide a basis of comparison with the results of

other companies for the same period or similar periods, with the results of the same

company for previous periods and with budgets.

y Lack of competition- no acceptable alternative has been developed.Deficiencies of historical cost accounts

In periods in which prices change significantly, historical cost accounts have grave

deficiencies:

y Carrying value (CV) of non-current assets is often substantially below current value.y Inventory in the statement of financial position reflects prices atthe date of purchase

or manufacture ratherthan those current atthe year end.

y Income statement expenses do not reflect the current value of assets consumed soprofitin realterms is overstated.

y The overstatement of profits and the understatement of assets prevent a meaningfulcalculation of return on capital employed (ROCE)

As a result ofthe above, users of accounts find it extremely difficult to assess a companys

progress from yearto year orto compare the results of different operations.


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Expandable Knowledge- Alternative to historical cost

The alternative to historical cost accounting is a form of current valueaccounting, either:

y Constant purchasing power (CPP), ory

Current cost accounting (CCA).Constant purchasing power accounting (CPP):

Key features

y Accounting figures are adjusted to show all figures in terms of moneywith the same purchasing power.

y A general price index use forthis.y Use CPP factors.y Considerinflation

Current Cost Accounting (CCA):

The key features ofCCA are as follows:

y Itis based on deprival values or value to the business.y Inventory and non-current assets are valued at deprival value.y Monetary assets (cash, receivables, payables, loans) are not adjusted.y Cost of sales and depreciation also automatically adjusted at deprival

value.

Deprival value

Value to the business

ReplacementCost Recoverable Amount

NRV= fair value costto sale

Economic value in use

Lower of

Higher of


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CAPITALMAINTENANCE CONCEPT:

Expandable Knowledge- CapitalMaintenance

There are two main concepts of capital maintenance:

y financial capital maintenancey physical capital maintenance

FINANCIAL CAPITALMAINTENANCE

Underthis concept a profitis earned only ifthe financial (or money) amount of

the net assets atthe end of a period exceeds the financial (or money) amount of

net assets atthe beginning ofthe period.

Historical cost accounting combines the historic basis with financial capital

maintenance.

PHYSICAL CAPITALMAINTENANCE

Underthis concept a profitis earned only ifthe physical productive capacity at

the business atthe end of the period exceeds the physical productive capacity

at the beginning of the period. The physical capital maintenance concept

requires the adoption ofthe current cost basis of measurement.


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Lecture Sheet-5

Company (PLC)

Contents

1.Classification of company2.Characteristics of a company3.Method of formation of a company4.Presentation of FINANCIAL STATEMENT

according to IAS 1

i. Statement of comprehensive incomeii. The statement of financial position

iii. Statement of change in e uity5.Notes and workings according to IAS 1

i. Cost allocation for Income Statementii. Asset schedule

6.Comprehensive math for company final accountaccording to ACCA




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Statement of comprehensive income

A recommended formatis as follows:

XYZ Group: statement of comprehensive income of the year ended

31 December 200X2

$

Revenue X

Cost of sales (X)

Gross profit X

Otherincome X

Distribution costs (X)

Administrative-expenses (X)

Profits from operations X

Finance costs (X)

Profits before tax X

Income tax expense (X)

Profits forthe year X

Other comprehensive income

Gains on property revaluation X

Income tax retailing to components of other comprehensive income (X)

Other comprehensive incomes forthe year, net oftax X

Total comprehensive incomes for the year X


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Income Statement plus statement of comprehensive income

A recommendation format forthe income statementis as follows:

XYZ Group

Income statement for the year ended 31 December 200X2

$

Revenue XCost of sales (X)

Gross profit X

Otherincome X

Distribution costs (X)

Administrative-expenses (X)

Profits from operations X

Finance costs (X)

Profits before tax X

Income tax expense (X)

Net profits forthe period X


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A recommended format forthe presentation of other comprehensive income is:

XYZ Group

Income statement for the year ended 31 December 200X2

$

Profits forthe year X



Income tax relating to components of other comprehensive income (X)

Other comprehensive income ofthe year, net oftax X



Income tax retailing to components of other comprehensive income (X)

Other comprehensive incomes forthe year, net oftax X

Total comprehensive incomes for the year X


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The statement of financial position as at 31 December 200X2

Assets $ $

Non-current assets:

Property, plant and equipment X

Goodwill X

Otherintangible assets X

e.g. (Patent, Trade mark, Development cost, Brands) X

Current Assets:

Inventories X

Trade receivable X

Cash and cash equivalents X

X

Total Assets X

Equity & liabilities

Capital & reserves

Share capital X

Retained earnings X

Other components of equity X

e.g. revaluation reserve

General reserve X

Total equity X


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Non-current liabilities

Long-term borrowings X

Deferred tax X

X

Non-current liabilities

Long-term borrowings X

Deferred tax X

X

Current liabilities

Trade & other payables X

Short-term borrowings X

Currenttax payable X

Short-term provisions X

X

Total equity and liability X


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XYZ Group

Statement of changes in equity forthe year ended 31 December 20 X2

Share

capital

$

Share

premium

$

Revaluation

surplus

$

General

reserve

$

Retained

earnings

$

Total

equity

$

Balance at 31

December 20X1

X X X X X

Change in

accounting policy

(X) (X)

Restated balance X X X X X

Issue of share Capital X X X

Bonus issue X (X)

Dividends (X) (X)

TotalComprehensive Income forthe year X X X

Transferto retained earnings (X) (X) X -

Balance at 31

December 20X2

X X X X X


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An example of a property, plant and equipment note is shown bellow.

Land

and

buildings

Plant and

Machinery

Fixtures,

Fittings,

tools and

equipment

Payments

on account

and assets

in course ofconstruction

Total

$000 $000 $000 $000 $000

Coat of valuation:

At 1 January 200X4 871 998 207 27 2103

Additions 74 809 25 13 921

Disposal - (23) (5) - (28)

At 31 December

200X4

945 1784 227 40 299

Accumulated description:

At 1 January 200X4 33 292 25 - 350

Provision forthe

year

11 22 27 8 8

Disposals - (4) (4) - (8)

At 31 December

200X4

44 910 48 8 1010

Carrying value: at31 December

200X4

901 874 179 32 198

At 31 December

200X3

838 70 182 27 1753


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Property, Plant and equipment

Land Building Motor

vehicles

Plant &

machinery

Total

$000 $000 $000 $000 $000

Cost at beginning and endof year

8000 5000 1 0 700 138 0

Depreciation at beginning

of year charge for year:

(5000 X 5%)

((1 0- 0) X 25%)

((700-240) X 20%)

2000

250

0

25

240

92

2300

250

25

92

Description at end of year

(Accumulated Description)

2250 85 332 2 7

Net book value at end of year 2750 75 3 8 11193

Tangible non-current assets

Land Buildings Motor

vehicles

Furniture

and

equipment

Total

$000 $000 $000 $000 $000Cost

From TB 550 2,500 1 0 1,500 4,710

Revaluation - 200 - - 200

Closing 550 2,700 1 0 1500 4,910

Description

Opening - 330 0 300 90

Charge forthe year - 125 20 300 445

Revaluation - (455) - - (455)

Closing - - 80 00 80

Net book value 550 2,700 80 900 4,230


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ALLOCATIONS OF EXPRESSES:

Cost of sales Distribution

Cost

Admin

Cost$000 $000 $000

Opening inventories X

Purchase X

Purchase return (X)

Factory wages X

Wages and salaries X X X

Depreciation:

Plant & Machinery X

Delivery Vehicle XBuilding X X X

Office equipment X X

Rent & Rates X X X

Advertising X

Carriage inwards X

Irrecoverable debt Expense X

Doubtful debt allowance

(increase/Decrease)

X/(X)

Audit Fee X

General Expenses X X X

Heat & light X X X

Discount allowed X

DiscountReceived (X)

Closing inventories (X)

Total X X X

Note: In question paper candidates normally are referred where the

cost/expenses should be allocated.


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SONDAW (JUN 04 EXAM)

You have been provided with the following trial balance as at 31 May 20X4 for

a limited liability company called Sondaw.

Dr.

$000

Cr.

$000

Bank 50

Inventory at 1 June 20X3 1,200

General expenses 00

Heating & Lighting 90

Marketing and advertising expenses 248

Wages 490

Buildings at cost 5,000

Motor vehicle at cost 1 0

Plant and equipment at cost 700

Accumulated profits at 1 June 20X3 280

Trade receivables 438

Purchases 2,200Lone note interest paid 30

5% Loan note 00

Revenue 5,87

Discount received 150

Trade Payable 500

$ 1 Ordinary Shares 1,500

Accumulated depreciation at 1 June 20X3

Buildings 2000

Motor vehicles 0Plant and equipment 240

11,20 11,20


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The following notes are relevant:

(1) Inventory at 31 May 200X4 was valued at $800,000.(2) Marketing and advertising expenses include $ ,000 paid in advance for a marketing

campaign which will begin in June 20X4. Marketing and advertising expenses should be

allocated to administrative expenses.

(3) There are wages outstanding of $10,000 forthe year ended 31 May 20X4.(4) A customer ceased trading owing the company $38,000; the debt is not expected to be

recovered.

(5) An allowance for doubtful debts is to be established amounting to 5% oftrade receivables.( ) Depreciation to be provided for as follows-

i. Buildings at 5% per annum on their original cost, allocated 50% to cost of sales, 20% todistribution costs and 30% to administration expenses.

ii. Motor vehicle at 25% per annum of their written down value, allocated to distributioncosts.

iii. Plant and equipment at 20% per annum oftheir written down value, allocated to cost ofsales.

(7)No dividends have been paid or declared.(8) Income tax of $ 250,000 is to be provided forthe year.(9) The audit fee is estimated to be $20,000.(10) The expenses listed below should be apportioned as follows:

Cost of sales Distributioncosts

AdministrativeExpenses

General expenses 10% 40% 50%

Heating and Lighting 50% 30% 20%

Wages and salaries

0% 30% 10%Required:

(a) Prepare the following financial statement for the year ended 31 May 20X4 for Sondaw inaccordance with IAS 1 Presentation of Financial Statements:

(i) an income statement (18 marks)(ii) a statement of financial position (14 marks)


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(b) Briefly explain the purpose of providing for depreciation, and identify the factors to be takeninto account when deciding which depreciation method to use.

(3 marks)

(Total: 35 marks)


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Company

Chartered

Company

Statutory

Company

Register

Company

Others

Company

Foreign

Company

Non-Trading

Company

Unlimited

CompanyLimited

Company

Limited by

Guarantee

Limited by

Share

Private

Limited Co.

Public

Limited Co.

According to Ownership

Government Company Non-Govt. Company

According to control

Holding Company Subsidiary Company Associate Company InvestmentCompany

uoted/Listed Plc

Unquoted/Unlisted Plc


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1. Chartered Company :Company Act was first passed in UK as well as in world in 1844. Before

passing company Act, Company was formed by royal mandate.

Those types of companies are called Chartered Company.

For Example:

i. East India Companyii. Chartered Bank of England

2. Statutory Company:If a company is formed by Parliament or Presidents special ordinance

then itis called statutory company.

For Example:i. Bangladesh Bank

ii. WASA3. Registered Company:

Itis formed by company act.

a. Unlimited company: If liabilities are unlimited for shareholders, that are called

unlimited company.

This type of company is rare in Bangladesh.b. Limited company:

Liabilities are limit up to share capital for shareholder.

i. Limited by Guarantee.ii. Limited by Share.

a) Privet Limited Company.b) Public Limited Company.


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PUBLIC LIMITED COMPANY:

1. Govt. Company:If Govt. owes 51% - 100% share ofthe company.

2. Non Govt. Company:If non Govt. organization owes 51% - 100%

Holding Company: If one company owes more than 50% of ordinary

share of another company.

The 1

st

company control 2

nd

company

1st company Holding company

2nd company Subsidiary company

Characteristics of a company:

a) Legislative Characteristics: b) General Characteristics:i. Law created concern and separate entity i. Voluntary association

ii. Corporate artificial personality ii. Much capital

iii. Perpetual succession iii. EfficientManagement

iv. Number of share holder iv. Taxation

v. Common Seal v. Following democratic norm

vi. Share capital iv. Profit distribution as dividend.

vii. Transferability of share

viii. Statutory responsibility

ix. Limited liability


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Method of the formation of a company:

In this stage private

limited company can

commence its activities.

Preparatory Stage

Initial Promoter

Stage of documents preparation

(1)Memorandum of association(2)Articles of association

Stage of collection of

certificate of

incorporation

Prospectus issue

Certificate of

commencement


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Accruals Concept

The accruals concept means that transactions and events are recognized whenthey occur, not when cash is received or paid forthem.

Expenses are recognized in profit orloss on the basis of direct association

between the costs incurred and the earning ofthe related income.

Revenue is usually recognized when itis realized. The realization of revenue is

usually taken to occur on the date of sale ratherthan on the date when the cash

relating to the sale is received.

Example

Going concern concept

The going concern concept assumes that a business (or entity) will continue inoperational existence for the foreseeable future.

Example

Consistency of presentation

A business should be consistent in its accounting treatment of similar items,both within a particular accounting period and between one accounting periodand the next.

For example in the case of depreciation of assets, there is more than oneaccepted accounting treatment. One business may use one method, another

business may use another. As far as the consistency conceptis concerned, once

a business has selected a method, it should use this method consistently for all

assets in that class and for all accounting periods. Only in this way can users of

financial statements draw meaningful conclusions from reported results. If a

business were to change any of its accounting policies (e.g. the basis of

depreciation) it must have a good reason for doing so and in addition, the

financial effect of such a change should be quantified and, it material, reported

to the shareholders.

IAS 1 states that the presentation and classification of items in the financial

statements should be retained from one period to th e next unless:

y Itis clearthat a change will resultin a more appropriate presentation, ory A change is required by an IAS, IFRS or an interpretation.


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Materiality and aggregation

An item is material if its omission or misstatement could influence theeconomic decisions of users taken on the basis ofthe financial statements.

Financial statements should show material items separately, but immaterial

items may be aggregated with amounts of a similar nature.

Offsetting

Assets and liabilities should not be offset except when required or permitted by

another IAS.Example:

Items of income and expenses should only be offset in an IAS requires orpermits it, or they arise from similar transactions or events and are not

materials.

Prudence

Prudence is caution when making estimates under conditions of uncertainty, sothat income and assets are not overstated and expenses and liabilities are notunderstated.

Revenues and profits are not reported and recognized in the financial statements

unless the likelihood of conversion to cash is high. In most cases this means that

revenues are recognized on the date of sale. By way of contrast, immediate

provision is made for anticipated losses, provided that these losses meet the

definition ofliabilities.

Example

An example of the prudence concept is the situation in which a liability has

been estimated to be between $500 & $ 00. Some accountants will makeprovision for the highest estimate on the grounds of prudence. Modern

accounting thoughtthough would make provisio n forthe mostlikely value, high

orlow.


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Duality

The duality concept underpins double entry and statement of financial position.For each entry in the accounting records, there is an equal and opposite entry.

Substance over form

Financial statements Should reflect the economic substance of a transaction,ratherthan its legal form, where these are different.

A good example of this convention is that of assets acquired on hire purchase

terms under certain types of lease agreement. Despite the fact that such assets

are not owned by the user untilthe financial statement has been paid, an assetis

recorder in the accounts at the start of the agreement. This is because the user

has the benefit ofthe asset, as he or she owned it. The hire purchase agreement

(orthe lease) is simply a way of financing the purchase.

Test Your Understandability

State the accounting concept(s) being applied in each ofthese situations:

(1) Plant and machinery has a carrying value of $24m, butit would only fetch

$15m ifit were to be sold

(2) The plant and machinery is being depreciated over five years.(3) Inventory is valued at $23m, even though it will probably sell for $35m.

(4) Jhon Ltd hasjust boughtthe trade and assets of a sa lly, rival unincorporated

business. Jhon has changed Sallys accounting policies, bringing them into

line with the rest ofthe business.

T6 Lecture Note for Chapter 1 to 5

Documents

Transcript of T6 Lecture Note for Chapter 1 to 5