FINANCIAL REPORTING NOTE

Compiled by
JIMOH ABDULKABIR
ACCA, ACFE AHRP AAT

*note: this is 50% of the note and the rest will be forwarded to you my mail before the class.

JIMOH ABDULKABIR, ACCA, ACFE, AHRP, AAT.

Conceptual framework
Fundamental Qualitative characteristics

Faithful presentation (i.e the FS would be complete, neutral and free from errors)
Relevance (i.e the FS could be used to make important decision because a predictive value and
confirmatory value exits.)

Enhancing Qualitative characteristics

Comparability
Verifiability
Timeliness
Understandability

Underlining Assumptions
Going Concern the assumption that an entity will continue in operation for the foreseeable future.
The element of the financial statements
Assets: an asset is a resource own or controlled by an entity as a result of a past event and from which
future economic benefit will flow to the entity
Liability: this is a present obligation as a result of past event, the settlement of which is expected to
result in an outflow from the entity resources embodying economic benefits.
Equity: the residual interest in the assets of the entity after deducting all of its liabilities
Income: increase in economic benefit in the form of enhancement of assets or decreases of Liability that
result in the increases in equity, other than those relating to contributions from equity holders.
Expenses: decreases in economic benefit during the accounting period in the form of outflows or
depletion in assets or incurrences of liability that result in decreases in equity, other than relating to
distribution to equity holders.
Capital and capital maintenance
Concepts of capital maintenance are important as only income earned in excess of amounts needed to
maintain capital may be regarded as profit. The existing Conceptual Framework describes the following
concepts of capital maintenance:

Financial capital maintenance. Under this concept a profit is earned only if the financial (or
money) amount of the net assets at the end of the period exceeds the financial (or money)
amount of net assets at the beginning of the period, after excluding any distributions to, and
contributions from owners during the period. Financial capital maintenance can be measured in
either nominal monetary units or units of constant purchasing power.

JIMOH ABDULKABIR, ACCA, ACFE, AHRP, AAT.

Physical capital maintenance. Under this concept a profit is earned only if the physical
productive capacity (or operating capacity) of the entity (or the resources or funds needed
to achieve that capacity) at the end of the period exceeds the physical productive capacity
at the beginning of the period, after excluding any distributions to, and contributions from
owners during the period

Most entities adopt a financial concept of capital maintenance. However, the existing Conceptual
Framework does not prescribe a particular model of capital maintenance. The existing Conceptual
Framework notes that management of an entity should exercise judgement and select the concept
of financial maintenance that provides the most useful information to the users of financial
statements
The concepts of capital maintenance are used in IAS 29 Financial Reporting in Hyperinflationary
Economies
IAS 1 Presentation of financial statements

Statement of profit or loss and other comprehensive income

=N=

Revenue
Cost of sale
Gross profit
Other income
Distribution cost
Administrative expenses
Profit before interest and tax
Finance cost
Profit before tax
Taxation
Profit after tax
Other comprehensive income
Items that will not be classified to profit or loss
Gain on revaluation
Investment through profit or loss
Items that will be subsequently reclassified to profit or loss
Exchange difference on foreign currency
Cash flow hedge
Total comprehensive income for the year

Xx
(Xx)
Xx
xx
(Xx)
(Xx)
Xx
(Xx)
Xx
(Xx)
xx
Xx

JIMOH ABDULKABIR, ACCA, ACFE, AHRP, AAT.

Xx
Xx
Xx
Xx
xx

Statement of changes in Equity for the year ended .

Bal b/f
Right issue
Share
premium
Revaluation
gain/(loss)
Transfer to
retained
earning
dividend
Profit after
tax
Bal C/d

Share
capital
=N=
Xx
Xx
-

Share
premium
=N=
xx
xx

Revaluation
reserve
=N=
xx
-

Retained
earnings
=N=
xx
-

Equity
option
=N=
xx
-

total

Xx/(xx)

Xx/(xx)

(xx)

xx

(xx)
xx

(xx)
xx

Xx

xx

xx

xx

xx

xx

Statement of financial position as at ..

Asset

=N=

Non-current asset
Property plant and equipment
Investment
Goodwill

Xx
Xx
Xx

Current asset
Inventories
Trade receivable
Cash and cash equivalent
Asset held for sale

Xx
Xx
Xx
Xx

Total asset

xx

Equity and liability

Equity
Share capital
Share premium
Retained earnings
Revaluation reserve
Equity option

Xx
Xx
Xx
Xx
Xx

Non-controlling interest

Xx

Non-current liability
Long term liability
Long term provision

Xx
Xx

JIMOH ABDULKABIR, ACCA, ACFE, AHRP, AAT.

=N=
Xx
Xx
xx

Long term lease obligation

Deferred tax

Xx
Xx

Current liability
Trade payable
Short term borrowing
Current tax
Short term provision
Short term lease obligation

Xx
Xx
Xx
Xx
Xx

Total equity and liabilities

xx

*Any material item should be treated on a line by line basis on the face of the financial statement.
IAS 2- Inventory
Inventories are assets:

Held for sale in the ordinary course of business (finished goods).

In the process of production for such sales (work in progress).
In the form of materials or supplies to be consumed in the production process or in the
rendering of services. (Raw materials).

Accounting treatment
Inventory is valued at the lower of cost and net realizable value
Inventory can be valued on the FIFO basis or weighted average method.
Disclosures

Accounting policies adopted

Any inventories at fair value less cost of sell
The write-down of inventories and the reversal of any write-down.

JIMOH ABDULKABIR, ACCA, ACFE, AHRP, AAT.

IAS 8 Changes in Accounting Polices, Changes in Accounting Estimate and Errors.

Changes in Accounting Polices
In line with IAS 8, accounting policies are the specific principles, bases, conventions, rules and practices
applied by an entity in preparing and presenting financial statements.
in correcting for changes accounting policy, the adjustment must be treated retrospectively that is the
change must occur as if it the new policies where used from the inception of the account and in a case
where this is not possible then the adjustment will be treated as a prior period adjustment in the SOCE
under retained earnings
Examples of changes in accounting polices

Changes in legislation
A new accounting standard
Changing the way in which an itm is presented in the accounts
Changes in inventory valuation
Changes in revenue recognition etc.

Changes in accounting estimates

A change in estimate occurs if new information becomes available that was not previously known.
In correcting for changes in accounting estimate, the adjustment should be treated prospectively- apply
new policy, but do not restate the financial statement of a prior period.
Examples of changes in estimate

Bad debt
Inventory obsolescence
Provision etc.

Errors
These are omissions from, and misstatement in, the entitys FS for one or more periods arising from a
failure to use, or misuse of, reliable information.
This should also be treated Retrospectively just the way we are treating changes in accounting policies.

JIMOH ABDULKABIR, ACCA, ACFE, AHRP, AAT.

IAS 10 Events after the reporting periods

These are events, both favorable and unfavorable, that occur between the end of reporting period and
when the financial statements are authorized for issues
Adjusting events: These are event that should indications of occurrence during the accounting period
but occurs at the end of the accounting period.
Non-Adjusting events: these are events that do not show signs of occurrence during the accounting
period but occurs at the end of the accounting period.

IAS 11- Construction contract

Steps in treating construction contract issues
1. Expected profit or (loss)
=N=
Xxx

Contract price / value

Less
Cost to date
Further cost to completion
Expected profit/(loss)

xxx
xxx
Xx/(xx)

2. percentage of completion
Value of work certified

Vale of work satisfied

X 100
Contract price
1
Or
Cost to date
Total estimated cost of contract

100
1

3. SOPL
Revenue (contract price x % of completion)
Cost of Sales (total estimated cost of contract x % of completion)
Profit or loss recognized (estimated profit x % of completion)
SOFP
CA
Amount due from customer WK1

xxx

CL
Amount due to customer WK1

xxx

JIMOH ABDULKABIR, ACCA, ACFE, AHRP, AAT.

=N=
Xxx
(xx)
xxxx

WK 1
i.
Cost to date Vs cost of sales
Cost to date
xxx
Cost of sales
xxx
WIP/ (amount due to suppliers)

xx/ (xx)

ii.
Revenue vs progress billings or cash received
Revenue
xxx
Cash received
xxx
Amount due (to) / from customer
xx/ (xx)
Or
Amount due to / from Customer
Cost to date
Add: Profit recognized
Less: cash received
Amount due (to) /from customer

amount due (to) and from customer

xx
xx
(xx)
xx/ (xx)

IAS 12- Income Tax and Deferred tax

Current tax
Is the amount of income taxes payable (recoverable) in respect of the taxable profit (tax loss ) for a
period.
Temporary difference
Are differences between the carrying amount of an asset or liability in the statement of financial
position in the accountant books and its tax base in the tax authority books. Temporary difference may
be either taxable (giving raise to a deferred tax liabilities or deductible (giving raise to deferred tax
assets).
Tax base
This is also called tax written down value i.e the balance of asset or liability in the tax authority book for
tax purpose.

Current tax
(Over) provision / under provision
Deferred charge/ (credit)
Income tax

=N=
Xx
(Xx)/xx
Xx/(xx)
xx

Over provision occurs when excess provision has been paid over the actual estimated tax to be paid for
the previous year.
Under provision occurs when less provision has been made over the actual estimated tax to be paid for
the previous year.
JIMOH ABDULKABIR, ACCA, ACFE, AHRP, AAT.

Current tax will be recognized in the (current liability in SOFP)

Income tax will be recognized in the (SOPL)

Deferred tax

Opening deferred tax (temporary difference x tax rate)

Deferred charge / (credit) (balancing figure)
Closing deferred tax (temporary difference x tax rate)

=N=
Xx
Xx/(xx)
xx

IAS 16 Tangible non-current assets or Property, Plant and Equipment

In line with IAS16, it defined a tangible non-current asset in line with the conceptual framework.
That is a resource own or controlled by an entity as a result of past events from which economic benefit
is expected to flow to the entity which is expected to span for more than one accounting period.
Accounting treatments
Initial recognition
In line with IAS16 the initial recognition of a tangible non-current asset will be the purchase cost and any
other cost associated to bringing the asset to functional use e.g
Installation cost
Transportation cost etc.
Note
Repair cost, maintenance cost and training cost cannot be regarded as part of the initial cost.
Subsequent recognition
In line with the standard, PPE is to be carried at either historical cost or revaluation model
Historical cost
This is when the asset is been depreciated over its useful life or depreciated over as a
percentage on reducing balance basis which will the give of the carrying amount for the end of
the period.
=N=
Cost
Xx
Depreciation
(xx)
Carrying value
xx
Treatments:
Initial
Dr Non-current asset
Cr cash consideration

xx

JIMOH ABDULKABIR, ACCA, ACFE, AHRP, AAT.

xx

Depreciation
Dr cost of sales (SOPL)
Cr non-current assets

xx
xx

Revaluation model
The model I used when the PPE is being revalued at every end of the year, and this revaluation
will result to a revaluation surplus or revaluation deficit and this will lead to creating a
revaluation reserve in the SOCE.
A revaluation surplus will occur if the carrying value is less than the revalued amount and on the
other hand a revaluation deficit will occur if the carrying value is more than the revalued
amount.
Revaluation surplus
Dr NCA
Cr Revaluation reserve (RR)
Revaluation deficit
Dr RR
CR NCA

xx
xx
xx
xx

Capitalization of subsequent cost

Before a cost can be capitalized it must be
Measured reliable
Probable that economic benefit will flow to the entity
Increase the useful life of the asset or enhance the production capacity of the asset

IAS 17 Leases
A lease is an arrangement whereby a lessor conveys to the lessee in return for a series of payments
the right to use an asset for an agreed period of time.
Finance lease is a lease that substantially transfers all the risks and rewards incidental to ownership
of an asset to the lessee.
While an operating lease is a lease other than a finance lease.
Indicators for a finance lease
The lessee has the use of the asset for the substantial useful life.
The lease transfer legal title at the end of the lease term.
The present value of the minimum lease payment amount to at least substantially all of the
fair value of the leased asset.

JIMOH ABDULKABIR, ACCA, ACFE, AHRP, AAT.

Accounting treatment for finance lease

Asset side
=N=
Xx
(xx)
xx

Cost
Depreciation
Carrying value
In arrears

=N=
Xx
(xx)
xx
Xx
(Xx)
Xx
Xx
(xx)
xx

Cost
Less initial deposit
Interest
Installment
Total obligation
Interest
Installment
Non-current liability

*The difference between total obligation and noncurrent liability will result to current liability
obligation
In Advance
=N=
Xx
(xx)
xx
(Xx)
Xx
Xx
(Xx)
Xx
Xx

Cost
Less initial deposit
Installment
Interest
Total obligation
Installment
interest
Non-current liability
Operating lease
Dr SOPL
Cr consideration

xx

In Advance
Dr SOPL
Dr Current asset
Cr consideration

xx
xx

xx

xx

In Arrears
Dr SOPL
xx
Cr consideration
xx
JIMOH ABDULKABIR, ACCA, ACFE, AHRP, AAT.

Cr current liability

xx

IAS 18 - Revenue Recognition

Revenue is the gross inflow of economic benefits during the period arising in the course of the ordinary
activities of an entity when those inflows result in increases relating to contribution from equity
participants.
Revenue can be recognitions if the following criterias are met for goods sold
The entity has transferred to the buyer the significant risks and rewards of ownership of the
goods.
The enterprise retains neither continuing managerial involvement to the degree normally
associated with ownership nor effective control over the goods sold
Probable that economic benefit will flow to the entity
It must be measured reliable
The cost incurred can be measured reliably.
Revenue can be recognitions if the following criterias are met for services rendered
It must be measured reliably.
It is probable that economic benefit will flow to the entity
The costs to complete the transaction can be measured reliably
The stage of completion can be measured reliably at the end of the accounting period.
IAS 20 government grants and disclosure of government assistance
Government grant are assistance by government given to the entity in return for past or future
compliance with certain conditions relating to the operating activities of the entity.
Government assistance is action by government designed to provide an economic benefit specific to an
entity or range of entities qualifying under certain criteria.
Accounting treatment
Government grants, including non-monetary grants at fair value, shall not be recognized until there is
reasonable assurance that:
The entity will comply with the condition attaching to them.
The grants will be received.
There are two approaches to treating government grant
Capital grant approach
Recurrent approach
JIMOH ABDULKABIR, ACCA, ACFE, AHRP, AAT.

IAS 23 Borrowing cost

Borrowing costs are interest and other costs incurred by an enterprise in connection with the borrowing
of funds.
Qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its
intended use or sale.
Criterias to be met before borrowing cost can be capitalized if not it should be expenses are as follows
The borrowing cost can be capitalized if the fund borrowed is in used for the project It was
borrowed for.
Borrowing cost should be expense if the projects stop. That is the project is completed
Borrowing cost should be expense if the project seize and can be capitalized if the project
continues.
When a project stops and the fund is used to generate income, such income will be used to
reduce the expensed cost
When a project is ongoing and the fund is used to generate income, such income should be used
to reduce the capitalized cost.
IAS 24 Related party disclosure
A related party is a person or entity that is related to the entity that is preparing its financial statements.
A related party transaction is a transfer of resources, services or obligations between a reporting entity
and a related party, regardless of whether a price is charged.
Persons and entity that constitute a related party
Key management staffs and the relative
Directors families
Friends and other families
Group companies
Subsidiaries
Associates
Joint ventures

JIMOH ABDULKABIR, ACCA, ACFE, AHRP, AAT.

IAS 33 - Earning per Share

The basic earnings per share =

earnings
Shares

Basic EPS is calculated by dividing the profit or loss attributable to ordinary equity holders of the parent
(the numerator) by the weighted average number of ordinary share ranking for dividend (the
denominator) during the period.
Diluted EPS is calculated where potential ordinary shares have been outstanding during the period
which would cause EPS to fall if exercised (dilutive instruments). It is calculated in addition to basic EPS.
Basic EPS
Right issue
Bonus issue
New issue of shares
Rights issue bonus fraction = market price
T.E.R.P
Diluted EPS
Convertible bonds
Calculation of revised earnings or PAT
PAT
Notional Interest (face value of bond x nominal %)
Notional tax (notional interest x tax rate
Revised earnings or PAT
Calculate additional shares
Face value of bond
Unit of bond

shares

=N=
Xx
Xx
(xx)
xx

= additional shares

Options
Step 1 Share option given x exercise price = share option at exercise price
Step 2 share option at exercise price
= share option per market price
Average market price
Step 3 share option given - share option per market price
=
additional shares

JIMOH ABDULKABIR, ACCA, ACFE, AHRP, AAT.

IAS 32 financial instrument: presentation

IAS 39 financial instrument: measurement and recognition (old)
IFRS 9 financial instrument: the basics (new)
IFRS 7 financial instrument: disclosures
The fundamental principle of IAS 32 is that when a company raises finance by issuing a financial
instrument, the instrument should be classified as either a financial liability or an equity instrument
according to the substance of the contract, not its legal form.
Financial instrument
Any contract that give rise to a financial asset of one entity and a financial liability or equity instrument
of another entity.
Financial asset
Any asset that is:
Cash
A contractual right to receive cash or another financial asset from another entity
A contractual right to exchange financial instruments with another entity under conditions that
are potentially favorable.
An equity instrument of another entity
Financial liability
A liability that is a contractual obligation:
To deliver cash or another financial asset to another entity
To exchange financial instrument with another entity under conditions that are potentially
unfavorable
Equity instrument
Any contract that evidence a residual interest in the asset of an entity after deducting all of its liabilities
Compound instrument
These are financial instrument that as both equity and debt embedded in it and split accounting is used
in treating it
Step 1: identify the face value of the bond
Step 2: Identify the nominal interest attached to the bond
Step 3: multiply the nominal interest with the face value to get the cash flow annually.
Step 5: identity the effective interest rate and get there discount rate
Step 6: multiply the discount rate got from step 5 with the cash flow to get there present value
Step 7: add up the present value for the given years and this will give you present value of liability
Step 8: subtract the face value of the bond from the present value of liability to get the equity options.

JIMOH ABDULKABIR, ACCA, ACFE, AHRP, AAT.

Initial recognition
Dr Consideration
Cr present value of liability
Cr equity option

xx
xx
xx

Subsequent recognition (amortized cost)

Opening
effective
nominal
closing
Xx
xx
(xx)
xx
IFRS 9 provide two test for classifying financial instrument:
Cash flow test
Business model test
If this two test are met then, the financial instrument should be treated at amortized cost if not be
treated as fair value through profit or loss or other comprehensive income.
This applies to both financial asset and financial liability.
IAS 36 Impairment of assets
In line with IAS 36, impairment occurs when the carrying value of assets is greater than the recoverable
amount which is the higher of the net realizable value NRV (sales less selling expenses) and the value in
use VIU ( the remaining cash flow generated from the asset).

impairment

higher
off

VIU

NRV

Impairment is tested annually on all assets in the same class. that is a cash generating unit
JIMOH ABDULKABIR, ACCA, ACFE, AHRP, AAT.

Steps to follow when testing for impairment in a cash generating unit

On identifiable assets
On goodwill (intangible assets)
The remaining on a pro-rata basis on non-current asset.

IAS 37 Provision, contingent liability and contingent asset.

A provision is a liability of uncertain timing or amount
A liability is a present obligation as a result of past event to transfer economic resources to settle it
obligation.
A legal obligation is an obligation that could:
Be contractual or
Arise due to a legislation
Result from other operation of law.
Contingent liability is a possible obligation that arises from past events whose outcome is based on
uncertain future events or an obligation that is not recognized because it is not probable, or cannot be
measured reliably.
A contingent asset is a possible asset that arises from past event and whose existence will only
confirmed by uncertain future events not wholly within the control of the entity.
Provision should be recognized is the following criterias are met
Has a present obligation (either legal or contructive) arising as a result of past event.
It is probable that a transfer of economic benefit will be required to settle the obligation.
The obligation can be measured reliably

Certain
Probable
Possible
Remote

Contingent liability
Provide
Provide
disclose
Do nothing

JIMOH ABDULKABIR, ACCA, ACFE, AHRP, AAT.

Contingent asset
recognize
Disclose
Do nothing
Do nothing

IAS 38 Intangible assets

An intangible asset is an identifiable non-monetary asset without physical substance. Assets are
identifiable because they are separate, or because they are identifiable through legal or contractual
rights.
Research is original and planned investigation undertaken with the prospect of gaining new scientific
knowledge and understanding.
Development is the application of research findings or other knowledge to a plan or design for the
production of new or substantially improved materials, devices, products, processes, systems or services
prior to the commencement of commercial production or use.

Criteria to be met before recognizing intangible asset are:

It is probable that future economic benefit will flow to the entity
The cost of the asset can be measured reliably.
Internally generated intangible assets criteria to capitalized it:
Technically feasible
Intention to complete and use or sell the asset
Ability to use or sell the asset
Measured the cost reliably
Existence of a market or demonstration of usefulness of intangible asset
Purchase intangible asset
Examples
Customer list
Order or production backlogs
Employment contract below market rate
Goodwill etc.
IAS 40 Investment property
Investment property is a property (land or building or part of a building or both) held (by the owner
or by the lessee under a finance lease) to earn rentals or for capital appreciation or both, rather than
for:
a. Sale in the ordinary course of business
b. Use in the production or supply of goods and services or for administration purposes
Initial recognition is at the cost of acquiring the property
JIMOH ABDULKABIR, ACCA, ACFE, AHRP, AAT.

subsequent measurement
choice

fair value model

(no depreciation)

in line with IAS 16 (historical

cost) depreciation like any
other asset

Reference:

A students guide to international financial reporting standards by Clare Finch Kaplan

ACCA financial reporting study text.

JIMOH ABDULKABIR, ACCA, ACFE, AHRP, AAT.