FACTORS WHICH DETERMINE A REPORTING ENTITY

• Legal form: This is the most obvious way of determining a reporting entity, and, with the exception of
consolidated financial statements, is the method generally used for reporting purposes. Sometimes
however the substance of what constitutes an 'entity' may be different from its legal form. This is
generally dealt with by applying the definition of control in IFRS 10.

• Ownership: A reporting entity could be defined as all the property owned by a particular investor
regardless of how that is distributed over legal entities. For example, an investor may have 3 different
unrelated entities and investment in, say, a joint venture. While not a group, combining these ownership
interests together can provide useful information for the investor

• Management: A management approach brings together all assets managed by the same party, again
regardless of how distributed over legal entities. This can be useful from an investor's point of view in
order to assess how effective management of resources by the same party is. This is the approach used
in IFRS 8 for segment reporting

RECOGNITION CRITERIA OF ASSETS, EQUITY AND LIABILITY

• ASSETS - An asset—and all the other elements of accounting—shall be recognised when

• It is probable that any future economic benefit associated with the item will flow to or
from the entity, and

• The item has a cost or value that can be measured with reliability (IASB Framework,
para. 83)

Probable is generally considered to mean ‘more likely rather than less likely’

• LIABILITIES - A liability shall be recognised when

• It is probable that the sacrifice of economic benefits will be required, and

• The amount of the liability can be measured reliably

• EQUITY – Equity is defined as ‘the residual interest in the assets of the entity after deducting all
of its liabilities’ (IASB Framework, para. 49(c))

• As a residual interest it ranks after liabilities in terms of claims against the assets

NB:

• Expenses - An expense shall be recognised when

It is probable that the consumption or loss of future economic benefits resulting in a reduction in assets
and/or an increase in liabilities has occurred

• INCOME - As with the other elements of accounting, income is recognised when

Kuti Michael - 0558846179

 • It is probable that the inflow or other enhancement or saving in outflows of future
economic benefits has occurred, and

• The inflow or other enhancement or saving in outflows of future economic benefits can
be measured reliably

QUALITATIVE CHARACTERISTICS OF FINANCIAL STATEMENTS

Please note that there 2 fundamental qualitative characteristics, i.e. Relevance and Faithful
representation. Without which financial statements information may be misleading. Other enhancing
qualitative characteristics are Comparability, Timeliness, Verifiability and Understandability

- RELEVANCE: Information has the quality of relevance when it can influence, on a

timely basis, users’ economic decisions. It helps to evaluate past, present and future
events by confirming or perhaps correcting past evaluations of economic events.
The relevance of an information is affected by it’s nature and it’s materiality.

-FAITHFUL REPRESENTATION: is the concept that financial statements be produced

that accurately reflect the condition of a business. For example, if a company reports in
its balance sheet that it had $1,200,000 of accounts receivable as of the end of June, then
that amount should indeed have been present on that date.
To be a faithful representation, information must be neutral, complete and free
from error.

LIMITATIONS OF RELYING ON FINANCIAL STATEMENTS

1. Financial Statements Are Derived from Historical Costs - Transactions are
initially recorded at their cost. This is a concern when reviewing the balance sheet,
where the values of assets and liabilities may change over time. Some items, such as
marketable securities, are altered to match changes in their market values, but other
items, such as fixed assets, do not change. Thus, the balance sheet could be
misleading if a large part of the amount presented is based on historical costs.
2. Financial Statements Are Not Adjusted for Inflation- If the inflation rate is
relatively high, the amounts associated with assets and liabilities in the balance sheet
will appear inordinately low, since they are not being adjusted for inflation. This
mostly applies to long-term assets.
3. Financial Statements May Not Have Been Verified - If the financial
statements have not been audited, this means that no one has examined the
accounting policies, practices, and controls of the issuer to ensure that it has created
accurate financial statements. An audit opinion that accompanies the financial
statements is evidence of such a review.
4. Financial Statements Only Cover a Specific Period of Time - A user of
financial statements can gain an incorrect view of the financial results or cash flows
of a business by only looking at one reporting period. Any one period may vary from
the normal operating results of a business, perhaps due to a sudden spike in sales or
seasonality effects. It is better to view a large number of consecutive financial
statements to gain a better view of ongoing results.

Kuti Michael - 0558846179

 Q3. RECOGNITION CRITERIA

- BORROWING COST - Borrowing costs that are directly attributable to the acquisition,
construction or production of a qualifying asset form part of the cost of that asset and,
therefore, should be capitalised. Other borrowing costs are recognised as an expense.
[IAS 23.8]

-DEVELOPMENT COST –
• Technical feasibility
• Intention to complete and use or sell
• Generate future economic benefits
 Existence of market for asset or output
• Availability of adequate resources to complete
 Technical
 Financial
 Reliable measurement of costs possible
Where all the above are not satisfied, expense the development costs!

ASSETS HELD FOR SALE

• An asset must meet the following criteria to be classified as held for sale:
 Management is committed to a plan to sell.
 An active programme to locate a buyer is initiated.
 The asset is available for immediate sale.
 The sale is highly probable, within 12 months of classification as held for sale.
 The asset is being actively marketed for sale at a sales price reasonable in relation to the
its fair value.
 Actions required to complete the plan indicate that it is unlikely that the plan will be
significantly changed or withdrawn.

REVENUE FROM CONTRACTS WITH CUSTOMERS

-Identify the contract(s) with a customer
-Identify the performance obligations in the contract
-Determine the transaction price
-Allocate the transaction price to the performance obligations in the contract
-Recognise revenue when (or as) the entity satisfies a performance obligation.

PROVISIONS, CONTIGENT LIABILITIES AND CONTIGENT ASSETS

• Have a present obligation from past event
• Have a probable outflow of economic benefits
• Have a method to evaluate timing and amount (so can ‘measure reliably’)

Kuti Michael - 0558846179