Conceptual Framework

a. Matching/accruals
transaction recognised when occur, revenue when earned, cost
when incurred

b. Substance over form

record transaction according to economic reality, not legal reality

c. Prudence
being cautious as to not overstate asset and understate liability
d. Comparability
FS has to be prepared using consistent accounting policies to
enable users make
over time

comparison on the companys performance

e. Materiality
an item is material if its omission can affect the economic
decision of users. Not just monetary but also in nature

Accounting for inventory

a. Matching/accruals = closing inventories
cost of closing inventory should not be charged to the I/S becos
the cost incurred cannot be matched with the revenue since the
inventories have not been sold

b. Substance over form = consignment inventories

legal title remain with supplier till payment, but the risk and
rewards lie with the buyer. Must recognise as asset for the buyer
and appear on the buyers SOFP

c. Prudence = closing inventory valuation

lower of cost and NRV, as to not overstate the asset. If expect to
make profit, defer the profit till sold but if expect loss recognise
immediately

d. Comparability = inventory valuation method

apply consistent valuation method (FIFO or LIFO)

e. Materiality = inventories
for most companies, inventories are material. So if treatment or
valuation of inventory is omitted, it could affect the economic
decision of users.

JUNE 2010
4 (a) substance over form
= For FS to be of use to users, it has to be reliable faithfully
representation transactions
substance over form(accounted for according to their economic
reality instead of legal
form)
- control of an asset differs from ownership
- sold asset to 3rd party but still enjoy benefit from the asset(dnt
record as sale)
-

JUNE 2011
4 (B) IFRS disclosure in helping prediction

Disclosure of continuing and discon operation users can focus on part

of biz that will generate future income

Separate disclosure of assets held for sale tell users those asset do

not form part of operating assets in future

separate disclosure of material items income/expenses(gain disposal

property) tell users these are one off event only, wont happen in
future
consistent presentation of comparative info users can make trend
analysis to predict future trend
definition of asset and liability future economic inflow and outflow

IASB'S CONCEPTUAL FRAMEWORK FOR

FINANCIAL REPORTING

accounting standards have a consistent approach to problem solving and do not

represent a series of ad hoc
rather acts as a guide to the preparers of financial statements

helps users understand the purpose of, and limitations of, financial reporting

OVERVIEW OF THE CONTENTS OF THE

FRAMEWORK

FS are prepared to provide financial information that is useful to potential and

existing investors and creditors

Useful info
relevance = capable of making a difference to decision made by users
faithful rep = complete, neutral and free from error, sub over form
Comparable, verifiable, understandable, timely

THE FIVE ELEMENTS

ASSET
= resource controlled by entity as as result of past event and from which
future economic benefit expected to flow in. Control is the key issue.
Some assets will not be legally owned by entity, but all the risk and
rewards are on transferred to the entity must recognise as
asset(substance over form). E.g IAS 17 Leases, under finance lease the
legal title remains with the lessor, but all the risk and rewards are
transferred to the lessee. So the lessee must recognise this asset in its
SOFP. The economic reality of this asset is that it is under loan.

Liability
= present obligation arising from past event, settlement of which is
expected to result in economic outflow. Not just liability due on demand,
but present obligation arising from the entitys action. E.g IAS 37
Provision, Contingent Liabilities and Contingent Asses oil rig
decommissioning. As soon as a company erects an oil rig which needs to be
dismantled at the end of its useful life, the company will have a present
obligation in respect of the decommissioning costs. The liability will be
recognised in full in the year of the oil rig erection, and measured at
present value taking into account the time value of money. The past event
that gave rise to the obligation is the oil rig erection

Equity
= residual interest in an entity after deducting liabilities from asset.
Icludes share capital, share premium, retained earning, unrealised gain

Income
= increase in economic benefit of the asset in the form of inflows,
enhancement of asset or decrease in liability that result in increase in
equity other than contribution from owner. Income from normal course of
biz is shown in p/l while incomes from enhancement of asset is shown in
the reserve and OCI section

Expenses
= decrease in economic benefit in the form of outflow, depletion of asset
or increase in liability tat results in decreasein equity, other than due to
distribution to equity participants

THE RECOGNITION CRITERIA FOR ELEMENTS

Meets the definition of the element

Cost can be measured reliably

Probable future economic benefit inflow or outflow

APPLYING THE FRAMEWORK

A company is about to enter into a three-year lease to rent a building.
The lease cannot be cancelled and there is no certainty of renewal.
The landlord retains responsibility for maintaining the premises in
good repair. The directors are aware that in accordance with IAS 17
that technically the lease is classified as an operating lease, and that
accordingly the correct accounting treatment is to simply expense the
statement of profit or loss with the rentals payable.
Required

Explain how such a lease can be regarded as creating an asset and

liability per the Framework.

= This is an operating lease. Under IAS 17, op lease the rents are charged to p/l and no asset
or liability is recognised.
Using the Framework, an asset and liability can recognised from operating lease. Liability
is recognised when a past event results in a present obligation. Signing of the lease is the past
event that gives rise to rental payment. The lessee controls the building and has the benefts it
brings. On entering the lease, a liability is recognised, measured at present value of the future
rental payment to reflect time value of money. Then the discount is unwinded every year by
charging finance cost in p/l. Annual cash rental payment accounted for as reduction in
liability

PERFORMANCE APPRAISAL
EXAMPLE

Disposal of a major asset

Improve cash flow, operating margin
Improves asset turnover (revenue spread over smaller asset base)
Improves ROCE

1.PROFITABILITY
A) ROCE =

Profit before interest and tax

Shareholders' equity + debt

shows how well a biz generates profit from its long term financing
relates to profit margin and asset turnover

Revenue

B) Asset Turnover =

Total assets - current liabilities

shows how mgmt. utilised asset to generate revenue
linked to changes in revenue and net asset
improved by increasing revenue and entering into operating lease

C)

Profit margins =

Gross or Operating profit

Revenue

looks at the performance of the biz at the direct trading level

affected by selling price, sales volume, changes in COS
changes in COS = write down off inventories, forex risk, import duties
operating profit margin shows how well biz control its indirect costs. If gross
profit margin falls, op profit margin also falls

2.

Liquidity

A)

Current assets

Current ratio =

Current liabilities
shows how well biz can cover its current liabilities with its current asset
ideal ratio is 1.5/2, but depends on industry
service industries very less current asset

B)

Quick ratio = current asset inventories / current liabilities

becos inventories can take long time to turn into cash

consider if the company has overdraft, becos very expensive
C) Receivables collection period = Receivables
x 365
Credit sales
preferable short period but some biz very long like furniture
compare with prior period, if gets longer means credit control deteriorating
of gets shorter means good credit control or settlement discount offered

D) Payables collection period =

Payables

x 365

Credit purchases
increase means company having CF problem and using delaying payments
to supplier as free source of finance
but must pay within the credit period to avoid conflict with suppliers
if period reducing means paying faster, taking settlement discount

E) Inventory days = Closing (or average) inventory x 365

Cost of sales
lower is better, means company achieving sales faster
slower means CF constrain, also inventories will be subject to theft,
damage or obsolescence

F) Gearing = Debt
Equity

or

Debt
Debt + equity

indicates how risky a company is, based on its borrowing

borrowing increase, risk increase becos liable for the capital and interest
payment
if company has high level of tangible NCA for collateral and can cover its
interest comfortably, no concern

NOT-FOR-PROFIT ORGANISATIONS

1.

WHAT IS A NOT-FOR-PROFIT ORGANISATION?

Dont have external sharehoders to provide capital

Surpluses are retained as further source of capital

ACCOUNTING FOR PROPERTY, PLANT AND

EQUIPMENT
1. Initial recognition
Measured at cost
Capitalise all costs incurred to bring the asset to present
location
purchase price less trade discount
direct cost such as
- site prep
- initial delivery and handling
- installation and testing
- professional fee
- direct overhead
borrowing cost (IAS 23) = only the borrowing cost specific
to the asset
cost to restore the site (IAS 37)
cannot include abnormal cost
only capitalise till asset ready to use, not till asset actually
put to use

2. Subsequent cost
Can be capitalised if probable future economic inflow and
measured reliably

Upgrade to machine can be capitalised becos it will lead to the

machine performing better(better economic inflow) and the
cost can be measured reliably

3. Revaluation
Cost model cost acc depn
Revaluation model fv at revaluation acc depn

 Revaluation gain = Dr PPE Cost

Dr Acc depn

Cr Rev

Reserve

Revaluation loss = Dr Rev Res(max)

Dr Income stat

Cr PPE

IFRS 3 BUSINESS COMBINATION

1. Acquisiton cost
must be expensed
cost of issuing debt are accounted for under IAS 39 Financial
Instrument

2. Contingent consideration
Recognised at fair value
If there is a change in FV, equity is not adjusted
Onlyadjust the asset/liability with the resulting gain/loss
charged to P/L

IAS 20 GOVERNMENT GRANTS

1. Entity should not recognise a grant until there is a reasonable
assurance that the entity will comply with any conditions attached
and it will actually receive the grant
2. Recognised as income over the relevant period and match with the
relevant cost
3. For grant relating to asset, can set up as deferred income or deduct
the grant in arriving at the carrying amt of asset
4. For grant relating to income, can disclose as a separate credit or
under the heading of other income or deduct from the relevant
expense

IFRS 5 Held For Sale and Discontinued

Operation
1. The asset must be immediately available for sale and the sale is
highly proabable
2. For the sale to be highly probable =
Actively locate buyer
Commited to sell
Marketed at a fair price
Within 1 year of classifying must sell
Cancellation is not possible
3. Asset is measured at lower of carrying amount and FVLCTS

IFRS 15 REVENUE
1. Step 1 = identify the contract

2.

Contract must be enforceable, have commercial substance

and enforced by the parties to the contract.
Step 1 is after identifying payment terms and the company
expects to receive consideration
Each partys right to the goods or service must be identifiable
Contract modification can be accounted as a separate
contract or a modification to the original one

Step 2 = identifying separate performance

obligation

Look for the distinctiveness of goods or services in the

contract

3.

The good/service is distinct if

the customer can benefit on its own, or together with other
readily
available resources
separate from other elements in the contract
Series of distinct goods with the same pattern of transfer is
considered as 1 performance obligation
Goods/services are not considered disntinct if it cannot be
used without another good/services that has not been
delivered

Step 3 = Determine transaction price

Amount of consideration the entity expects to receive in

exchange for the goods/services (excludes amount collected
on behalf of 3rd party)
If the time period is more than a year, must take into account
the time value of money if a significant financing component
is present

4. Step 4 = Allocation of transaction price to separate

performance obligation

5.

Based on the relative standalone selling price of the goods,

made at the inception, cannot be adjusted
Standalone selling price = observable selling price of the
goods separately
If no observable price, an estimate is made using market data

Step 5 = Recognise revenue as each

performance obligation is satisfied

Revenue is recognised when controls over the goods are

transferred over time or at any point
Control means preventing others from directing the use of
asset and obtaining benefits from the asset