MISHHAL HAMZA PK ACCA FINANCIAL REPORTING (FR) SHORT NOTES MISHHAL HAMZA PK ACCA Academic Head Xylem Institute of Commerce Instagram : mishhtagram Youtube: Mishhal Hamza PKMISHHAL HAMZA PK CONCEPTUAL FRAMEWORK A conceptual framework is a set of theoretical principles and concepts that underlie the preparation and presentation of financial statements. Qualitative characteristics of useful financial information Fundamental Qualities: 1. Relevance (Materiality) 2. Faithful representation (Free from error, Neutral, Complete) Additional concept: Substance over form, Prudence Enhancing Qualities: 1. Understandability 2. Timeliness 3. Verifiability 4. Comparability (Consistency, Disclosures) Elements of financial statements Asset ¢ A present economic resource controlled by the entity as a result of past-event. ¢ An economic resource is a right which has the potential to produce economic benefits. Liability ¢ A present obligation of the entity to transfer an economic resource as a result of past event. e An obligation is a duty of responsibility that the entity has no practical ability to avoidMISHHAL HAMZA PK Recognition criteria * relevant information * a faithful representation * information that results in benefits exceeding the cost of providing that information. Measurement Basis * Historical cost measurement basis * Current value measurement basis: o fair value o value in use (or fulfilment value for liabilities) © current cost.MISHHAL HAMZA PK REGULATORY FRAMEWORK IFRS FOUNDATION IFRS ADVISORY IFRS INTERPRETATION ‘COUNCIL COMMITTEE 1ASB The IFRS Foundation ¢ Supervisory body who looks after governance. © Objectives: o To develop a set of global accounting standards © To promote the use and application of these standards. o To bring about the convergence of national and international accounting standards International Accounting Standards Board e Responsible for Issuing, modifying and deleting standards. ¢ Also helps other accounting bodies in implementing IFRS. International Financial Reporting Interpretations Committee (IFRIC®) e They interpret the application of new accounting standards. ¢ Identify issues that are not particularly addressed by the standards and report about it to IASB. The IFRS Advisory Council (IFRSAC) ¢ A forum for the Board to consult a wide range of interested parties affected by the Board's work. ¢ They provide a medium of communication. +MISHHAL HAMZA PK Development of an IFRS Standard The procedure for the development of an IFRS Standard is as follows: * Identifies a subject and appoints an advisory committee. * Issue a discussion paper. * Publishes an exposure draft. Publishes the final text of the IFRS Standard.MISHHAL HAMZA PK IAS 2 INVENTORY Definition : Includes raw materials and working in progress. Measurement INITIAL MEASUREMENT YEAR END MEASUREMENT Cost Closing inventory is measured at: Lower of: Cost or NRV Initial measurement Cost includes: ¢ Purchase cost ¢ Conversion cost ¢ All other cost incurred in bringing the inventories to their present location and condition Year end measurement © Closing inventories should be valued at the lower of Cost or NRV. ¢ NRV = Estimated selling price in the ordinary course of business minus the estimated cost of completion and the estimated cost necessary to make the saleMISHHAL HAMZA PK IAS 7 CASHFLOW STATEMENT STATEMENT OF CASHFLOWS FOR THE YEAR ENDED 31-12-12 CASHFLOW FROM OPERATING ACTIVITY PROFIT BEFORE TAX ADJUSTMENT (E+, 1-) DEPRECIATION AMMORTISATION IMPAIRMENT FV GAIN FV LOSS INCREASE/DECREASE IN PROVISION GAIN/LOSS SALE OF ASSET INVESTMENT INCOME FINANCE COST OPERATING PROFIT/LOSS BEFORE WORKING CAPITAL CHANGES. A: DCA;ICL WC CHANGES M:1CA;DCL VD INVENTORY VD RECEIVABLES Vd PAYABLES NET CF.FROM/(USED IN) OPERATIONS INTEREST PAID TAX PAID NET CF FROM/ (USED IN) OP ACTIVITY XXX XXX XXX XXX (XXX) XXX XXX/ (XXX) (XXX) / XXX (Xxx) XXX XXXX/(XXXX) (XXX)/XXX (XXX)/XXX XXX/(XXX) XXXX/(XXXX) (XXX) (XXX) XXXX/(XXXX)MISHHAL HAMZA PK CASHFLOW FROM INVESTING ACTIVITY PURCHASE OF TANGIBLES SALE OF TANGIBLES PURCHASE OF INTANGIBLES. PURCHASE OF INVESTMENTS. INVESTMENT INCOME NET CF FROM/(USED IN) INVESTING ACTIVITIES CASHFLOW FROM FINANCING ACTIVITY ISSUE OF SHARES ISSUE OF LOAN NOTE REDEMPTION OF LOAN NOTE DIVIDEND PAID LEASE RENTAL NET CF FROM/(USED IN) FINANCING ACTIVITY NET INCREASE/(DECREASE) IN‘;CASH OP BAL OF CASH & CE CL BAL OF CASH & CE (XXX) XXX (XXX) (XXX) XXX XXXX/(XXX) XXX XXX (Xxx) (XXX) (XXX) XXXX/(XXXX) XXXX/(XXXX) XXX/(XXX) XXXX/(XXXX)MISHHAL HAMZA PK IAS 8 CHANGES IN ACCOUNTING POLICIES, ESTIMATES AND PRIOR PERIOD ERRORS CHANGES IN ACCOUNTING POLICIES « Accounting policies are rules, conventions used to record transactions. ¢ Cannot be changed from time to time. © Changes are permitted if it is required by IFRS or if it will.result in areliable and more relevant presentation of events and transactions. Examples (1) recognition, e.g. an expense is now recognized as an asset. (2) presentation, e.g. depreciation is now classified as cost of sales rather than an administration expense; (3) Measurement basis, e.g. stating assets should be valued as replacement cost rather than historical cost. Itis applied retrospectively so that the financial statements look as if the new policy had always been in existence. ¢ Impact of current-year changes will be recorded in current year financial statements. © The impact of prior period changes should be shown in current year opening RE. ¢ Acomparative financial statement for the previous year should be prepared to show all the prior period changes. CHANGES IN ACCOUNTING ESTIMATE e An accounting estimate is a method adopted by an entity to arrive at estimated amounts for the financial statements. ¢ Can be changed when a new information is available which asks for a change in estimate.MISHHAL HAMZA PK © Changes in accounting estimates result from new information or new developments and, accordingly, are not corrections of errors. Examples © Change in depreciation methods, residual value of NCA etc. © Changes are recorded prospectively, i.e. it affects only current year and future FS. ERRORS Prior period errors are omissions from and misstatements in the financial statements for one or more prior periods. ¢ It mainly arises through mistakes in accounting process, oversights or fraud. ¢ Achange is applied retrospectively. Errors are therefore treated in the same way as accounting policy.changes. 10MISHHAL HAMZA PK IAS 10 EVENTS AFTER THE REPORTING PERIOD ¢ These are events that occur between the reporting date and the date on which the financial statements are authorised for issue. ¢ There are two types of event after the reporting period: o Adjusting events — = Provide evidence of conditions that existed at the end of reporting period. = These are adjusted. o Non-adjusting events — = Are indicative of conditions thatarose after the reporting period. " Disclosed if material. Examples of adjusting events provided by IAS 10 include: * the sale of inventory after the reporting date. * the bankruptcy of a customer after the reporting date. * the discovery of fraud. or-errors. * the settlement after the reporting period of a court case. Examples of non-adjusting events provided by IAS 10 include: * a major business combination after the reporting date or the disposal of amajor subsidiary * announcing a plan after the reporting date to discontinue an operation * major purchases and disposals of assets after the reporting date © destruction of assets by a fire after the reporting date * announcing or commencing a major restructuring after the reporting date large changes after the reporting date in foreign exchange rates IIMISHHAL HAMZA PK IAS 12 INCOME TAX The tax amount shown in SOPL consist of 3 elements: 1. Current tax 2. Under or over provision 3. Deffered tax CURRENT TAX - Tax estimate for the current year profit UNDER/OVER PROVISION Trial balance Dr. Current tax - Under provision Cr. Current tax - Over provision DEFERRED TAX - Future tax consequence. ¢ Arises because of difference in accounting profit and taxable profit. © Differences can be classified as: o Permanent differences (no DT) o Temporary differences (Create DT) 1, Permanent differences — © These differences-arises due to incomes or expenses when are disallowed-under tax rules. ¢ No deferred tax computations are needed in such cases. 2. Temporary differences — « These differences arise because items of income or expenditure are taken account in one accounting period for tax purposes, but taken account in a different accounting period for taxation purposes.MISHHAL HAMZA PK ¢ Deferred tax arises because of temporary differences. Deferred tax match the tax effects of transactions with their accounting impact. 1. If C.V of an asset > Tax base It is Taxable temporary difference Create a Deferred tax liability. 2. If C.V of an asset < Tax base It is Deductible temporary difference Create a Deferred tax asset. Current year estimate (From Adjustment) Add / minus UP or OP(From trial balance) Add / Minus | / D in deferred tax (2) = Tax expense DTL Op balance (From trial balance) Add: transfer from revaluation =Total 1/Dindeferred tax (B) Cl balance (From adjustment) xxx (SOFP) xxx/ (xxx) xxx/ (xxx) xxx (SOPL) XXX XXX 1K xxx / (xXx), xxx (SOFP)MISHHAL HAMZA PK TANGIBLE NON-CURRENT ASSETS IAS 16 PROPERTY PLANT AND EQUIPMENT Definition Property plant and equipment is held for production or supply of goods or services, or for administrative purposes. Measurement INITIAL MEASUREMENT YEAR END MEASUREMENT Cost Cost model Revaluation model Cost Cost = Depreciation in SOPL = Depreciation in SOPL =e in SOFP = Revaluation gain or loss in OCI and Rev surplus fv in SOFP Initial measurement Cost ¢ Purchase price, less any trade discounts or rebate ¢ Import duties © Directly attributable costs of bringing the asset to working condition ( The cost of site preparation, Initial delivery and handling costs, Installation costs, Testing, Professional fees (architects, engineers )) Initial estimate of the unavoidable cost of dismantling and removing the assets and restoring the site. ¢ Administration and general OHD, Start up and pre-production cost are expensed ccsMISHHAL HAMZA PK Year end measurement Cost model or Revaluation model © Cost Model : o Cost — Depreciation = Carrying Value o Change in useful life: Recalculate the depreciation value using the formula; New depreciation = Net carrying value/Remaining useful life of the asset. © Revaluation Model o The carrying value of the Asset is revalued to FV. Any gain or loss is shown in OCI and in equity section under Revaluation surplus. Conditions of revaluation reliable fair value (market value) of the asset should be available The whole class of assets needs to be recognized at the revalued amounts Il items within the class should be revalued at the same time. evaluation should be done on a rolling basis to keep the values up- to-date Subsequent Expenditure e Anyadditional expenditure incurred is capitalised if it provides the company with any future extra benefit or if it was incurred to improve the existing capacity of the business. © Modification, upgradation and Adoption in an asset can be capitalized normally. 15MISHHAL HAMZA PK Repairs and reconditioning * The costs of servicing and repairing PPE are expensed to the statement of profit or loss. * Replacement costs are capitalised and depreciated until next replacement. Provision cannot be created 16MISHHAL HAMZA PK IAS 20 ACCOUNTING FOR GOVERNMENT GRANTS AND DISCLOSURE OF GOVERNMENT ASSISTANCE Government grants are transfers of resources to an entity in return for past or future compliance with certain conditions. Recognition Criteria e@ When the conditions for receipt have been complied with and, ¢ there is reasonable assurance that the grant will be received. There are 2 types of government grants: « Revenue grants — Govt. contribution towards cost of wages. © Capital grants - Govt. contribution towards cost of a new piece of machinery Accounting treatments Revenue grants e Shown as an income in SOPL by matching it with the related expense © Capital grants: o Reduction from the cost of the asset — Grant amount removed from cost of the asset. o As deferred income — The grant amount should be split over the assets useful life using depreciation method. Government assistance ¢ Government assistance helps businesses through advice, procurement policies and similar methods. ¢ It is not possible to place reliable values on these forms of assistance, so they are not recognised in the financial statements. 17MISHHAL HAMZA PK IAS 21 THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES Functional and presentation currencies ¢ Functional currency is the currency of the primary economic environment in which an entity operates. ¢ Anentity maintains its day-to-day financial records in its functional currency. ¢ The presentation currency is the currency in which the entity presents its financial statements. Accounting for individual transactions designated in a foreign currency 1. Initially record the transaction at — Spot rate 2. If it is cash settled, the transaction is recorded at spot rate. This creates a gain or loss which should be shown in SOPL. 3. If transaction is not cash settled, there will be an asset or liability. If monetary, these should be retranslated using closing rate. Gain or loss on retranslation shown.in SOPL.MISHHAL HAMZA PK IAS 23 BORROWING COST Borrowing costs are interests and other costs incurred by the entity in connection with the borrowing of funds. ¢ Preferred treatment — Expense in SOPL ¢ Additional treatment — Borrowing cost incurred on qualifying asset can be capitalised. Qualifying assets are those which takes substantial period of time for its intended use or sale. Capitalisation period ¢ Capitalisation starts while construction is inprogress and when borrowing costs are incurred. © Capitalisation stops when the construction.is completed or construction is interrupted. Interest paid [Interest received Capitalisation period | Added to cost of asset | Removed from borrowing cost FQN capitalised Non capitalisation Expensed in SOPL Income in SOPL period 19MISHHAL HAMZA PK IAS 33 EARNINGS PER SHARE Basic EPS EPS = PATAPD / WANS WANS = Number of shares X Time factor X Rights factor X Bonus factor Rights factor = Actual CUM Rights price / TERP Bonus Factor = Proportion after bonus issue / Proportion before bonus issue Diluted EPS 1. Convertible loan note = (PATAPD + After tax interest saved) / (Number of shares + potential shares) 2. Share option = PATAPD / (Number of shares + net dilution)MISHHAL HAMZA PK IAS 36 - IMPAIRMENT OF ASSETS Impairment. A fall in value of the asset, so that its recoverable amount is now less than its C.V in the SOFP. C.V — net value of the asset in SOFP Recoverable amount — it is the higher of a. Fair value less cost of disposal; and b. Its value in use Measurement. If the asset CV is greater than its RA, the asset should be valued at its RA. The difference between CV and RA should be charged to SOPL as impairment loss. If CV is less than RA, continue showing asset at its CV. Indications of impairment ¢ Internal o Obsolescence o physical damage o adverse change in usage of asset e External o Fallin market value of the asset o change in technology o rise in market interest rate oC of entities net asset greater than market capitalisation Treatment of Impairment loss © Cost model - Impairment loss charged to SOPL. © Revaluation model- It is treated as revaluation lossMISHHAL HAMZA PK CASH GENERATING UNITS ¢ When it is not possible to calculate the recoverable amount of a single asset, then that of its CGU should be measure instead. Rule to allocate impairment loss in CGU 1. First allocate the loss against any likely impaired asset. 2. Then against the goodwill 3. And then against other non-current assets on a pro-rata basis. Important : An asset shouldn’t be impaired beneath its recoverable amount Reversal of impairment losses ¢ Recorded as income in SOPL but only to the extent of previously recorded impairment loss. e¢ However, the new CV should not be higher than the CV of the asset if the impairment had not occurred previously. ¢ Exception to the rule isan impairment loss for goodwill should not be reversed in a subsequent periodMISHHAL HAMZA PK IAS 37 PROVISIONS, CONTINGENT LIABILITIES AND ASSETS PROVISION ¢ A provision is a liability of uncertain timing and amount. ¢ E.g. warranty provision, legal provision. Recognition: Only when the following criteria are met; = A present obligation arising as a result of past event ¢ Legal obligation ¢ Constructive obligation = It is probable that there will be an outflow of economic benefits © More likely than not © More than 50% = Areliable estimate of the amount could be made. ¢ Based on judgement e Expected value approach Decommissioning cost Calculate present value; and. then Dr Asset Cr Provision. The asset should then be depreciated accordingly. Provision should be compounded by year end and finance cost is charged to SOPL. Provision for warranties Use expected.value to create a provision Expected value = Amount * Probability Restructuring provision Criteria A restructuring provision can only be made if: ¢ A detailed and formal plan exists e Aplan has been announced to those affected.MISHHAL HAMZA PK Amount should include only direct cost arising from the restructuring, which are: = necessary for restructuring, and = not associated with the ongoing activities of the entity. CONTINGENT LIABILITY Possible obligation. Treatment Disclosed if material CONTINGENT ASSET Possible or probable asset. Treatment Disclosed if probableMISHHAL HAMZA PK INTANGIBLE NON-CURRENT ASSETS IAS 38 — INTANGIBLE ASSETS Intangible assets are non-monetary assets which are: = Identifiable = Controlled by the entity as a result of its past events = Without physical substance = Which give rise to future economic benefits to the entity. = Cost can be measured reliably Measurement PURCHASED INTANGIBLES Are recorded in FS NITIAL MEASUREMENT YEAR END MEASUREMENT Useful life Cost Definite Indefinite Ammortise using Annual impairment test Cost Revaluation model model Purchased intangibles ial measurement — At cost Year end measurement Depends on the assets useful life. = Definite UL— Ammortise © cost model o revaluation model = active market = Indefinite UL— Annual impairment testMISHHAL HAMZA PK Internally generated intangibles RESEARCH AND DEVELOPMENT. ESEARCH DEVELOPMENT DEVELOPMENT COMPLETE (NO PIRATE) (YES PIRATE) Expense Expense Start capitalising Stop capitalisting = Not recognised. = Exception is research and development. = Research cost o Expensed in SOPL. = Development cost PRODUCTION START Start ammortising © are capitalized in SOFP if all of the criteria PIRATE is met. © Capitalisation continues until Development is completed. = After development and when production started o Ammortisation startsMISHHAL HAMZA PK IAS 40 INVESTMENT PROPERTY Definition © property held by the entity to earn rentals or for capital appreciation or for both Measurement INITIAL MEASUREMENT YEAR END MEASUREMENT Cost Cost model FV model Cost Cost - Depreciation in sopl Fv gain in sopl =cVv in sofp FV insofp Initial measurement at cost Year end measurement © Cost model : Cost - Depreciation ¢ Fair value model o The cost of the asset is changed to its FV. o Any gain.orloss shown in SOPL. o The asset-won’t be depreciated. Note: owner-occupied property is PPE Transfer of Investment property IAS-16 to 40 - An owner occupied property being given for rental purpose. ¢ Until Date of transfer (DOT) — IAS 16, Depreciate e At DOT-—IAS 16, Revalue the asset, Revaluation gain in OCI e After DOT —IAS 40, Don’t depreciate, Year end fair value to SOPLMISHHAL HAMZA PK IAS 40 to 16 - Property used for rental purpose now used in production. ¢ Until DOT — IAS 40, Don’t depreciate ¢ At DOT -—IAS 40, Asset shown at FV. Gain or loss to SOPL. e After DOT-—IAS 16, Depreciate, Year end revaluation gain to OCIMISHHAL HAMZA PK IAS 41 — AGRICULTURE IAS 41 applies to : * Biological assets (cows) * Agricultural produce at the point of harvest (milk) « Government grants related to biological assets IAS 41 doesn’t apply to: * Land related to agricultural activity * Intangible assets related to agricultural activity * Bearer plants related to agricultural activity as they have remote likelihood of being sold * Government grants related to bearer plants MEASUREMENT INITIAL MEASUREMENT YEAR END MEASUREMENT - FV minus estimated point of >FV minus estimated point of sale cost sale cost - Point of sale cost in SOPL - Gain or loss in SOPL Initial measurement fair value less estimated costs to sell. * Cost to sell is expensed. e Any new biological assets for free is shown at FV with entire amount shown in SOPL. Year end measurement © revalued to fair value less cost to sell. © Gain or loss shown in SOPLMISHHAL HAMZA PK IFRS 5 NON-CURRENT ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS Definition © NCA is ‘held for sale’ if its carrying amount will be recovered through sale rather than through usage. Recognition criteria e Asset must be available for immediate sale in the present condition ¢ The sale must be highly probable, which means: o Management are committed to a plan:to sell the asset o There is an active programme to locate a buyer; and o The asset is actively marketed ¢ The sale is expected to be completed within 12 months of its classification as held for sale. ¢ Itis unlikely that the plan will be significantly changed or will be withdrawn. Measurement ¢ Lower of C.V or FV'less.cost to sell (NRV) ¢ If NRVTrade receivables) Investment proportion of parent Co. (Ordinary share investment) 20 - 50% RULES OF CONSOLIDATION 1. Consolidation process begins at DOA. But the consolidated FS are prepared for the year end 2. At the DOA, all the net assets of subsidiary is shown in its FV . At the DOA, goodwill is calculated 4. The profit made by subsidiary from DOA until the year end should be calculated and should be shared between parent and NCI 5, Parent consolidate the subsidiary fully (not just the parents %). However, the % in subsidiary not belonging to parent is recorded separately (NCI) 6. The assets and liabilities of Parent and Subsidiary will be added up. But Intragroup items will be cancelled wMISHHAL HAMZA PK Adjustments W1 GROUP STRUCTURE Paquires S 80% Parent 20% subsidiary W2 NET ASSETS OF SUBSIDIARY SH CAP RE FV GAIN OF PLANT EXCESS DEP (UL 10YRS) FV LOSS OF PLANT EXCESS DEP (UL 10RS) FV GAIN OF INVNTRY SOLD AT YR END FV GAIN OF INTANGIBLES EXCESS AMMORTIZATION (UL SYRS) REV GAIN OF PLANT AT YR END FV GAIN OF INVESTMENTS FV GAIN OF INVESTMENTS MINUS: URP IF SUB SELLER WN3 GOODWILL AT DOA FV OF PURCHASE CONSIDERATION DOA 10000 2000 500 -300 40 100 1400 13740 RS PAR DOR 10000 8000 500 -300 2000. 1400 400 -10 22050 8310 SOFP:PPE+500 SOFP:PPE-50; SOPL: COS +50 SOFP: PPE-300 SOFP: PPE+30; SOPL: COS -30 SOFP:NIL; SOPL: COS +40 SOFP: INTANGIBLES+100 SOFP: INTANG -20; SOPL: COS+20 SOFP:PPE+2000; OCI SUB GAIN +21 SOFP:INVSMNT +1400;SOPL NIL SOFP AND SOPL: 400 SOPL: COS +10; SOFP: -INVENTOR' 2000 PAR RS 6310 PAR RE 1. SHARE ISSUE = TOTAL SHARE IN SUB * PARENTS % * SHARE FRACTION * PARENTS SH PRICE. RECORDED IN SH CAP AND SH PREMIUM IF IT IS NOT RECORDED ALREADY 2.DEFERRED PAYMENT = FUTURE VALUE/(1+Rn). RECORDED AS CURRENT LIABILITY AT PRESENT VALUE 3. LOAN NOTE = TOTAL SHARE IN SUB * PARENTS % * LOAN FRACTION * 100. RECORDED IN LOAN NOTE AS NCL IF IT IS NOT RECORDED ALREADY 4. CASH - DON'T RECORD IN SOFP AS IT WILL BE ALREADY RECORDED 5. CONTINGENT PAYMENT- RECORDED AT ITS VALUE AT THE TIME OF ACQUISITION. RECORDED IN CURRENT LIABILITY ‘ADD: FV OF NCI AT DOA 1. FV METHOD = TOTAL SHARE IN SUB * NCI % * SUBSIDIARYS SH PRICE 2. PROPORTIONATE METHOD = NA AT DOA * NCI % a 100