APC311

International Financial Reporting

Lecture 1: Introduction:


The regulatory and conceptual framework of IFR
Why do standards need to be
mandatory?
To define the way in which accounting
numbers are presented in financial
statements
To eliminate (or reduce) subjectivity in
presenting financial information
To increase publics confidence in the
accounting profession and in the financial
reporting system
How might we regulate financial
reporting?
1. Market
Each company chooses its own rules pressured by
the capital markets
2. Associationism
Rules are developed by organisations formed to
represent the interests of its members
3. Corporatism
Rules are developed by organisations that are
licensed by the state and incorporated into a state
sponsored system of regulation
4. State
Statutory rules with an enforcement mechanism

The IASB Framework
First: Objectives of financial
statements:
To provide information about financial
position, performance and changes in
financial position
To a wide range of users priority user
is the investors group
For the purpose of rationalising
economic decision making
The IASB Framework
Underlying assumptions:
Accruals (or matching)
Revenues are to be recognised when they
are earned, i.e. when goods are sold not
when cash is collected
Expenses are to be recorded when they are
incurred not when they are paid
Going concern (justifies the Historical Cost
principle)
The IASB Framework
Second: Qualitative characteristics of
quality information
Understandability
Relevance (including materiality)
Reliability (including faithful
representation; neutrality; prudence;
completeness)
Comparability
The IASB Framework
Third: Element definition:
Asset: a resource controlled by an enterprise
as a result of past events and from which future
economic benefits are expected to flow to the
enterprise
Liability: a present obligation of the enterprise
arising from past events the settlement of which
is expected to result in an outflow from the
enterprise of resources embodying economic
benefits
The IASB Framework
Equity: the residual interest in the
assets of the enterprise after deducting
all its liabilities
Income: increases in equity (other than
transactions with owners)
Expenses: decreases in equity (other
than transactions with owners)
The IASB Framework
The recognition of elements when:
It is probable that any future economic
benefit associated with the item will flow
to or from the enterprise, and
The item has a cost or value that can be
reliably measured
The IASB Framework
The measurement of elements:
Choices include:
Historical cost
Current or replacement cost (entrance
value)
Net realisable value (NRV) (exit value)
Present value (PV) (economic value)
Why a regulatory framework?
Financial statements
Direction
Guidance
Quality
Users requirements
Quality
True and fair view/fair presentation
Global standards?
The EU regulation imposes endorsed IFRSs
on the consolidated statements of all
companies listed in the UK from 1
st
January
2005 onwards.
Currently the US Financial Accounting
Standards Board (FASB) and the IASB are
working together on a convergence project
2009 aim to eliminate the SEC requirement for
foreign private issuers that seek registration in
NYSE to reconcile IFRS-based financial
statements to US GAAP
IFRS and IAS Summaries
Framework - Technical Summary *

IFRSs:
IFRS 1 First-time Adoption of IFRSs
IFRS 2 Share-based Payment
IFRS 3 Business Combinations *
IFRS 4 Insurance Contracts
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations
IFRS 6 Exploration for and evaluation of Mineral Resources
IFRS 7 Financial Instruments: Disclosures *
IFRS 8 Operating Segments
IFRS 9 Financial Instruments
IFRS 10 Consolidated Financial Statements
IFRS 11 Joint arrangements
IFRS 12 Disclosure of interests in other entities
IFRS 13 Fair value measurement


APPENDIX
IFRS and IAS Summaries
IASs:
IAS 1 Presentation of Financial Statements *
IAS 2 Inventories
IAS 7 Cash Flow Statements *
IAS 8 Accounting Policies, Changes in Accounting Estimates
and Errors
IAS 10 Events After the Balance Sheet Date
IAS 11 Construction Contracts
IAS 12 Income Taxes
IAS 16 Property, Plant and Equipment *
IAS 17 Leases *
IAS 18 Revenue
IAS 19 Employee Benefits
IAS 20 Accounting for Government Grants and Disclosure of
Government Assistance
IAS 21 The Effects of Changes in Foreign Exchange Rates
IAS 23 Borrowing Costs *
IFRS and IAS Summaries
IAS 24 Related Party Disclosures
IAS 26 Accounting and Reporting by Retirement Benefit Plans
IAS 27 Consolidated and Separate Financial Statements
IAS 28 Investments in Associates
IAS 29 Financial Reporting in Hyperinflationary Economies
IAS 31 Interests in Joint Ventures
IAS 32 Financial Instruments: Presentation *
IAS 33 Earnings per Share *
IAS 34 Interim Financial Reporting
IAS 36 Impairment of Assets *
IAS 37 Provisions, Contingent Liabilities and Contingent Assets *
IAS 38 Intangible Assets *
IAS 39 Financial Instruments: Recognition and Measurement *
IAS 40 Investment Property
IAS 41 Agriculture

The trial balance

A trial balance is a list of account balances arranged according to whether
they are debit or credit balances.

The basic structure of a trial balance is below

Dr Cr

Name of account
Sales X
Expenses X
Assets X
Liabilities X
Capital X
Drawings X
X X
DR () CR ()
Sales 96,450
Stock at 01/06/ 2005 23,500
Purchases 73,180
Wages and Salaries 12,555
Rent and rates 6,050
Telephone 352
Insurance 820
Sundry expenses 318
Buildings at cost 25,000
Fixtures at cost 3,500
Creditors 12,295
Debtors 14,320
Bank 3,500
Cash 150
Drawings 8,500
Loan from C Green 10,000
Motor vehicles at cost 12,000
Capital 65,000
183,745 183,745
Review of financial
statements

The following is the trial
balance of G Brown as
at 31 May 2006.

Construct the
appropriate financial
statements for the
year ended 31 May
2006, i.e. prepare
Profit & Loss Account
and Balance Sheet.

(Stock at 31 May 2006
was valued at 25,350)




Profit & loss account for the year ended 31 May 2006


Sales 96,450
Less: Cost of goods sold
Opening stock 23,500
Purchases 73,180
96,680
Less: Closing stock 25,350
Cost of goods sold (71,330)
Gross profit 25,120
Less: Expenses
Wages and salaries 12,555
Rent and rates 6,050
Telephone 352
Insurance 820
Sundry expenses 318
(20,095)
Net profit 5,025
18
Balance sheet for the year ended 31 May 2006


Non-Current assets Buildings 25,000
Fixtures 3,500
Motor vehicles 12,000
40,500
Current assets Stock 25,350
Debtors 14,320
Bank 3,500
Cash 150
43,320
Less current liabilities Creditors (12,295)
Current assets less Current Liabilities 31,025
71,525
Long term liabilities Loan C Green (10,000)
Net Assets 61,525
Financed by:
Capital 65,000
Add: Profit for the period 5,025
Less: Drawings (8,500)
61,525
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2. Accruals and prepayments

An accrual (accrued expense) is a current liability
representing an amount which relates to the period under
review but not yet paid at the end of that period.

A prepayment is a current asset representing an amount
paid in the period under review but which relates to the
following period, i.e. an expense for the following period
paid in advance.


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Example

Mr J Smith paid 200 for the telephone bill for the year ending 31 Dec
2011 but prepaid 50 for 2012. He also paid 500 rent for the same
period. However, he should have paid 700 for the whole year

(a) Profit & loss account for the year ending 31 Dec 2011

Expenses
Telephone (200 paid - 50 prepayment) 150
Rent (500 paid + 200 accrual) 700

(b) Balance sheet extract as at 31 Dec 2011

Current assets
Prepayments 50 (how much he paid extra up to the year ending 31
Dec 2011)
Current liabilities
Accruals 200 (how much he still owes up to the year ending 31
Dec 2011)




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3. Depreciation

Depreciation is the reduction in the value of an asset over time. The
following are the two methods of depreciation:

1. Reducing balance method = Percentage of net-book value

E.g., if depreciation is charged at the rate of 20% per annum:

(a) Profit & loss account as at 31 Dec 2007 and 31 Dec 2008

Expenses 2007 2008
Depreciation 200 160

(b) Balance sheet as at 31 Dec 2007 and 31 Dec 2008











2007 2008
Asset Cost 1,000 800
Depreciation @ 20% (200) (160)
Net Book Value 800 640
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e.g. Bought an asset on 1
st
Jan 2007 for 1,000. Expected useful life 4
years and residual value expected to be 400:

1,000 - 400 = 150 p/a
4

(a) Profit & loss accounts as at 31 Dec 2007 and 31 Dec 2008

Expenses 2007 2008
Depreciation 150 150

(b) Balance sheet as at 31 Dec 2007 and 31 Dec 2008

Non-current assets 2007 2008







Asset Cost 1,000 1,000
Less depreciation (150) (300)
Net book value 850 700
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2. Straight Line method = Cost - Residual Value
Useful Life