Showing posts with label Financial Accounting. Show all posts
Showing posts with label Financial Accounting. Show all posts
  • Structure and content of Financial Statement Structure and Content of Financial Statements in General

    Clearly identify: [IAS 1.46]
    * the financial statements
    * the reporting enterprise
    * whether the statements are for the enterprise or for a group
    * the date or period covered
    * the presentation currency
    * the level of precision (thousands, millions, etc.)

    Reporting Period

    There is a presumption that financial statements will be prepared at least annually. If the annual reporting period changes and financial statements are prepared for a different period, the enterprise must disclose the reason for the change and a warning about problems of comparability. [IAS 1.49]

    Statement of Financial Position

    An entity must normally present a classified statement of financial position, separating current and noncurrent assets and liabilities. Only if a presentation based on liquidity provides information that is reliable and more relevant may the current/noncurrent split be omitted. [IAS 1.51] In either case, if an asset (liability) category commingles amounts that will be received (settled) after 12 months with assets (liabilities) that will be received (settled) within 12 months, note disclosure is required that separates the longer-term amounts from the 12-month amounts. [IAS 1.52]

    Current assets are cash; cash equivalent; assets held for collection, sale, or consumption within the enterprise's normal operating cycle; or assets held for trading within the next 12 months. All other assets are noncurrent. [IAS 1.57]

    Current liabilities     are those to be settled within the enterprise's normal operating cycle or due within 12 months, or those held for trading, or those for which the entity does not have an unconditional right to defer payment beyond 12 months. Other liabilities are noncurrent. [IAS 1.60]

    Long-term debt expected to be refinanced under an existing loan facility is noncurrent, even if due within 12 months. [IAS 1.64]

    If a liability has become payable on demand because an entity has breached an undertaking under a long-term loan agreement on or before the reporting date, the liability is current, even if the lender has agreed, after the reporting date and before the authorisation of the financial statements for issue, not to demand payment as a consequence of the breach. [IAS 1.65] However, the liability is classified as non-current if the lender agreed by the reporting date to provide a period of grace ending at least 12 months after the reporting date, within which the entity can rectify the breach and during which the lender cannot demand immediate repayment. [IA 1.66]

    Minimum items on the face of the statement of financial position [IAS 1.68]

    * (a) property, plant and equipment;
    * (b) investment property;
    * (c) intangible assets;
    * (d) financial assets (excluding amounts shown under (e), (h) and (i));
    * (e) investments accounted for using the equity method;
    * (f) biological assets;
    * (g) inventories;
    * (h) trade and other receivables;
    * (i) cash and cash equivalents;
    * (j) trade and other payables;
    * (k) provisions;
    * (l) financial liabilities (excluding amounts shown under (j) and (k));
    * (m) liabilities and assets for current tax, as defined in IAS 12;
    * (n) deferred tax liabilities and deferred tax assets, as defined in IAS 12;
    * (o) minority interest, presented within equity; and
    * (p) issued capital and reserves attributable to equity holders of the parent.

    Additional line items may be needed to fairly present the entity's financial position. [IAS 1.69]

    IAS 1 does not prescribe the format of the balance sheet. Assets can be presented current then noncurrent, or vice versa, and liabilities and equity can be presented current then noncurrent then equity, or vice versa. A net asset presentation (assets minus liabilities) is allowed. The long-term financing approach used in UK and elsewhere – fixed assets + current assets - short term payables = long-term debt plus equity – is also acceptable.

    Regarding issued share capital and reserves, the following disclosures are required: [IAS 1.76]
    * numbers of shares authorised, issued and fully paid, and issued but not fully paid
    * par value
    * reconciliation of shares outstanding at the beginning and the end of the period
    * description of rights, preferences, and restrictions
    * treasury shares, including shares held by subsidiaries and associates
    * shares reserved for issuance under options and contracts
    * a description of the nature and purpose of each reserve within owners' equity

    SOURCE : IAS

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  • Fair Value Measurement Fair value, also called fair price (in a commonplace conflation of the two distinct concepts), is a concept used in finance and economics, defined as a rational and unbiased estimate of the potential market price of a good, service, or asset, taking into account such objective factors as:
    * acquisition/production/distribution costs, replacement costs, or costs of close substitutes
    * actual utility at a given level of development of social productive capability
    * supply vs. demand

    and subjective factors such as
    * risk characteristics
    * cost of capital
    * individually perceived utility

    Differences between the definitions of fair value in SFAS 157 and in IFRSs
    SFAS 157 defines fair value as ‘the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date
    IFRSs defined as ‘the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction’
    (with some slight variations in wording in different standards).

    The difference set in 3 ways
    * SFAS is explicitly an exit (selling) price, IFRSs is neither explicitly an exit price nor an entry (buying) price
    * SFAS 157 explicitly refers to market participants. The definition in IFRSs refers to knowledgeable, willing parties in an arm’s length transaction
    * For liabilities, the definition of fair value in SFAS 157 rests on the notion that the liability is transferred (the liability to the counterparty continues; it is not settled with the counterparty). The definition in IFRSs refers to the amount at which a liability could be settled between knowledgeable, willing parties in an arm’s length transaction

    The developments included the deferral of the effective date of SFAS 157 for non-recurring measurements (for example in business combinations). It was noted that these developments would have no impact on the IASB project on fair value measurements.
    * Assets:
    o Current entry price: The price that would be paid to buy an asset in an orderly transaction between market participants at the measurement date.
    o Current exit price: The price that would be received to sell an asset in an orderly transaction between market participants at the measurement date.
    * Liabilities:
    o Current entry price: The price that would be received to incur a liability in an orderly transaction between market participants at the measurement date.
    o Current exit price I (transfer notion): The price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date.
    o Current exit price II (settlement notion): The price that would be paid to settle a liability in an orderly transaction at the measurement date.

    For detail information my learning source IAS Plus

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  • Disclosure of Balance sheet Disclose the significance of financial instruments for an entity's financial position and performance. [IFRS 7.7] This includes disclosures for each of the following categories: [IFRS 7.8]
    * Financial assets measured at fair value through profit and loss, showing separately those held for trading and those designated at initial recognition.
    * Held-to-maturity investments.
    * Loans and receivables.
    * Available-for-sale assets.
    * Financial liabilities at fair value through profit and loss, showing separately those held for trading and those designated at initial recognition.
    * Financial liabilities measured at amortised cost.

    # Other balance sheet-related disclosures:

    * Special disclosures about financial assets and financial liabilities designated to be measured at fair value through profit and loss, including disclosures about credit risk and market risk and changes in fair values [IFRS 7.9-10]
    * Reclassifications of financial instruments from fair value to amortised cost or vice versa [IFRS 7.12]
    * Disclosures about derecognitions, including transfers of financial assets for which derecogntion accounting is not permitted by IAS 39 [IFRS 7.13]
    * Information about financial assets pledged as collateral and about financial or non-financial assets held as collateral [IFRS 7.14-15]
    * Reconciliation of the allowance account for credit losses (bad debts). [IFRS 7.16]
    * Information about compound financial instruments with multiple embedded derivatives. [IFRS 7.17]
    * Breaches of terms of loan agreements. [IFRS 7.18-19]

    Source : IFRS

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  • Financial statement Objective :
    is to prescribe the basis for presentation of general purpose financial statements, to ensure comparability both with the entity's financial statements of previous periods and with the financial statements of other entities.

    The objective of general purpose financial statements is to provide information about the financial position, financial performance, and cash flows of an entity that is useful to a wide range of users in making economic decisions. To meet that objective, financial statements provide information about an entity's: [IAS 1.7]

    * Assets.
    * Liabilities.
    * Equity.
    * Income and expenses, including gains and losses.
    * Other changes in equity.
    * Cash flows.

    That information, along with other information in the notes, assists users of financial statements in predicting the entity's future cash flows and, in particular, their timing and certainty.

    Components of Financial Statements

    A complete set of financial statements should include: [IAS 1.8]

    * a statement of financial position at the end of the period,
    * a statement of comprehensive income for the period,
    * a statement of changes in equity for the period
    * statement of cash flows for the period, and
    * notes, comprising a summary of accounting policies and other explanatory notes.

    When an entity applies an accounting policy retrospectively or makes a retrospective restatement of items in its financial statements, or when it reclassifies items in its financial statements, it must also present a statement of financial position as at the beginning of the earliest comparative period.

    An entity may use titles for the statements other than those stated above.

    Reports that are presented outside of the financial statements -- including financial reviews by management, environmental reports, and value added statements -- are outside the scope of IFRSs. [IAS 1.9-10]

    Sources : International Accounting Standard

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  • International Financial Accounting Standard- Framework Objective of financial statements

    A framework is the foundation of accounting standards. The framework states that the objective of financial statements is to provide information about the financial position, performance and changes in the financial position of an entity that is useful to a wide range of users in making economic decisions, and to provide the current financial status of the entity to its shareholders and public in general.

    Underlying assumptions

    The underlying assumptions used in IFRS are:
    * Accrual basis - the effect of transactions and other events are recognized when they occur, not as cash is received or paid
    * Going concern - the financial statements are prepared on the basis that an entity will continue in operation for the foreseeable future.


    Qualitative characteristics of financial statements

    The Framework describes the qualitative characteristics of financial statements as having

    * Understandability
    * Relevance
    * Reliability
    * Comparability and compatibility

    Elements of financial statements

    The Framework sets out the statement of financial position (balance sheet) as comprising:-
    * Assets - resources controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity
    * Liabilities - a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits
    * Equity - the residual interest in the assets of the entity after deducting all its liabilities and the statement of comprehensive income (income statement) as comprising:
    o Revenue is increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or reductions in liabilities.
    o Expenses are decreases in such economic benefits.

    Recognition of elements of financial statements

    An item is recognized in the financial statements when:
    * it is probable that a future economic benefit will flow to or from an entity and
    * when the item has a cost or value that can be measured with reliability.

    Measurement of the Elements of Financial Statements

    Measurement is how the responsible accountant determines the monetary values at which items are to be valued in the income statement and balance sheet. The basis of measurement has to be selected by the responsible accountant.Accountants employ different measurement bases to different degrees and in varying combinations. They include, but are not limited to:

    * Historical cost
    * Current cost
    * Realisable (settlement) value
    * Present value

    Historical cost is the measurement basis chosen by most accountants.

    Concepts of Capital and Capital Maintenance

    Concepts of Capital

    A financial concept of capital, e.g. invested money or invested purchasing power, means capital is the net assets or equity of the entity. A physical concept of capital means capital is the productive capacity of the entity.

    Concepts of Capital Maintenance and the Determination of Profit

    Accountants can choose to measure financial capital maintenance in either Nominal monetary units or units of constant purchasing power

    Physical capital is maintained when productive capacity at the end is greater than at the start of the period.The main difference between the two concepts is the way asset and liability price change effects are treated.Profit is the excess after the capital at the start of the period has been maintained.

    When accountants choose nominal monetary units, the profit is the increase in nominal capital. When accountants choose units of constant purchasing power, the profit for the period is the increase in invested purchasing power. Only increases greater than the inflation rate are taken as profit. Increases up to the level of inflation maintain capital and are taken to equity.

    Source : Wikipedia

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  • Annual report.. learning more about the company Public listed companies send thousands of annual reports to their shareholders every year as they are required to disclose material information, meaning information that are important and affect the decision making of investor, and it is therefore up to the individual investor to pick up such information fro the quarterly and annual report.

    According to the requirements of a disclosure-based, directors and accountants of a company are required to disclosed information that affect the decision making of the investing public read and pick up such information.

    By the law, the directors must give a true and fair view of company's affairs and they must omit or misstate important information. While there are accounting standards to guide the presentation of financial statement, it takes experience, knowledge and skill for investor to sieve through all the information in the annual report.


    It is not easy to read annual report, to make profit as an investor, your judgment must be made on the basis on fact not hope. An annual report contain both.The important detail are sometimes hidden, and you need to know how to read between the lines to benefit.

    The main purpose of annual report is for the company to inform its share holders and potential investors, how it was performed for the past 12 months. For potential investor, the annual report provides important information that can be used to access if a company is worth - while investing in.

    A complete financial statement should include
    a. Balance sheet
    b. Income statement
    c. a statement showing
    (i) all change in equity
    (ii) changes in equity other than those arising from capital transactions with owner and distribution to owner
    d. Cash flow statement
    e. Accounting policies and explanatory notes

    The financial statement will give an overall picture of the company's financial well-being, while the front section will probably tell you about company's strategies, products and competitive positioning. This information may be incorporated into the chairmain's statement or message to shareholders.

    professional analyst and accountants would look at the audit commitee's report. There is also an independent auditor's report that should clearly set out the auditor's opinion on the presentation of financial statement of the company's financial position and the result of its operation.

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