MODULE 1 – ROLE AND IMPORTANCE OF

FINANCIAL REPORTING
OBJECTIVES:
1. Role and importance of financial reporting
2. Role of IASB Conceptual Framework
3. Objective and Limitations of General Purpose Financial Reporting
4. Elements of financial reporting and Recognition criteria
5. Application of standards to financial reporting process
6. Importance of Professional judgement
7. Implications of using cost and fair value accounting
8. Materiality of transactions

STANDARDS:
IASB Conceptual Framework for Financial Reporting (2018)
IFRS 2 – Share based payments
IFRS 5 – Non-current Assets held for sale and Discontinued Operations
IFRS 9 – Financial Instruments
IFRS 13 – Fair Value Measurement
IFRS 16 – Leases
IAS 1 – Presentation of Financial Statements
IAS 2 – Inventories
IAS 8 – Accounting policies, changes in accounting estimates and errors
IAS 16 – Property, plant and equipment
IAS 19 – Employee Benefits
IAS 36 – Impairment of Assets
IAS 37 – Provisions, Contingent Liabilities and Contingent Assets
IAS 40 – Investment Property

1) Role and Importance of Financial Reporting

- The role of financial reporting
- The importance of financial reporting
- Information needs of the users
- Understanding the IFRS
- Interaction between Financial reporting and regulatory environment – Who must prepare GPFRs?
IASB and AASB
- Two tiers of GPFR
- External Reporting Board of NZ
- International initiatives to decrease financial reporting complexity
- International initiatives toward sustainability-related financial reporting (ISSB)

2) Conceptual Framework for Financial Reporting

- Purpose and application of conceptual framework
- Objectives and limitations of GPFR
- Principles established in the conceptual framework (Accrual Basis and Going Concern)
3) Qualitative Characteristics of Useful financial information
- Fundamental Qualitative characteristics (Relevance, Faithful Representation)
- Enhancing Qualitative characteristics (Comparability, Verifiability, Timeliness, Understandability)
- Cost Constraints on useful financial reporting
- Application of Qualitative characteristics in IFRS

4) The Elements of Financial Statements

- Defining the Elements (Assets, Liabilities, Equity, Income, Expenses)
- Key decision areas in accounting for transactions and other events
1) Definition
2) Recognition
3) Measurement
4) Disclosure/ Presentation

- Recognising elements of financial statements

- Derecognition of Financial Assets and Liabilities
- Constraints on international consistency of application of recognition criteria established by
conceptual framework

5) Measurement of Elements of Financial Statements

- Cost-based Measures
 Cost
 Amortised cost
- Value-based Measures
 Fair Value
 Current cost
 FV less costs of disposal
 Net realisable value
 Fulfilment value
 Value in Use)
- Present value as a valuation technique
 Uncertainty of future cash flows
  Selection of appropriate discount rates
6) Application of Measurement principles in IFRS
- IFRS 16 LEASES
 Recognition Criteria for the Lessee
- Right-of-use asset
- Lease liability
 Recognition Criteria for the Lessor
- Finance lease
- Operating lease
 Presentation and Disclosure

- IAS 19 EMPLOYEE BENEFITS

 Short-term employee benefits
- Accumulating and non-accumulating benefits
- Vesting and non-vesting benefits
 Long-term employee benefits
- Long service leave

- IFRS 2 SHARE-BASED PAYMENTS

 Cash- settled share-based payment transaction
 Equity-settled share-based payment transaction
 Measurement of share-based payment transactions

- IAS 40 INVESTMENT PROPERTY

 Cost model
 Fair value model

- Professional Judgement
- Disclosures
 Role and purpose of disclosures
 Criteria for determining whether disclosure is required
 Importance of consistent approach to disclosure
Recognition Criteria for Lessor: Finance Lease and Operating Lease
Finance Lease – transfer all risks and rewards to the lessee
Operating Lease – Do not transfer all risks and rewards to the lessee

Finance Lease:
Initial Direct costs, Fixed and variable lease payments, Penalties, expected residual value guarantees,
unguaranteed residual value and exercise price of purchase option

Operating Lease:
Lease payments received are recognised as Income and initial direct costs are added to the carrying
amount and are recognised as Expenses

Disclosures of Leases:
LESSEE:
Right-of-use assets and Lease liabilities are reported separately from other assets & liabilities
(Exception: If right-of-use asset is an investment property, it is presented in the statement of
financial position)

Interest on lease liability -> component of finance costs and presented separately from
depreciation expense on the right-of-use asset

LESSOR:
Nature of leasing activities (whether finance or operating) and their Risk Management Strategy
must be disclosed.
Employee Benefits can be Short-term and Long-term

SHORT -TERM BENEFITS:

Accumulating Compensated Absences – Employees can carry forward any unused leave
entitlements to future
Non-Accumulating Compensated Absences – Employees cannot accumulate and the benefits lapse
with the period

Accumulating compensation can be Vesting and Non-Vesting Benefits

Vesting Benefits – Employer has to pay any unused benefits to the employee on their leaving
Non-Vesting Benefits – Employee is only compensated for absences taken. Employer will not pay
any unused entitlement during the termination of employment

LONG-TERM BENEFITS:

Benefits are settled when the employee is still employed or upon resignation – Long Service Leave
Benefits are settled subsequent to employee’s employment – Superannuation benefits

Long-Service Leave
Liability is satisfied when the employee provide services that result in LSL entitlements, irrespective
of employees are legally entitled to LSL.

Steps in calculating estimated LSL Payments:

1. Probability assessment to estimate the number of employees who will get paid for LSL
2. Timing and amount of payments that will result from services provided up to the reporting date
3. Projected annual salary levels must be estimated -> to determine the future cash flows
4. Estimated future LSL payments must be discounted to PV
Share-Based Payments:
A transaction in which entity acquires good/services or incurs an obligation to settle in a share-based
payment arrangement

CASH-SETTLED SHARE-BASED PAYMENT

Entity acquires goods/services by incurring a liability to transfer cash or other assets -> the amount
will be based on the price of entity’s equity insutruments

Increase in liability is recognised

EQUITY-SETTLED SHARE-BASED PAYMENT

Entity acquires goods/servcies as consideration for its own equity instruments or it receives
goods/services but has no obligation to settle the transaction with the supplier

Increase in equity is recognised

Difference between IAS 16(PPE) and IAS 40(Investment Property):
IAS 16 permits the entity to choose between cost and fair value model after the asset’s initial
recognition.

But when FV model is chosen -> increase in asset’s CA is recognised in OCI and is accumulated in
equity.

IAS 40 -> FV model is chosen -> gains or losses are recognised in P&L