Financialaccounting 3 Theories Summary Valix

FINANCIAL ACCOUNTING VOL3 SUMMARYVALIX

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When an entity departs from a standard, entity should disclose the ff: Management has concluded that FS is fairly presented It has complied with applicable standards and interpretation, except that it has departed from a particular requirement to achieve fair presentation. The title of the standard or interpretation from which entity has departed. The treatment adopted Financial impact of the departure on each item that would have been reported in complying with the requirement Going concern is relevant when mgt shall make an estimate of the expected outcome of future events, such as recoverability of AR and useful life of noncurrent assets Uncertainties regarding the ability of the entity to continue as a going concern shall be fully disclosed Investment income is presented separately in the income statement Materiality is relativity and nature of an item(bribe) Expenditure related to a provision and any reimbursement from a third party can be offset and only the net expenditure is presented as expense in the income statement Offsetting can be displayed when gains and losses from trading securities are netted against each other Entity shall disclose comparative information in respect of the previous period for all the amounts reported in the current period’s financial statements The outcome of uncertain events at the end of the preceding period and is yet to be resolved, are disclosed in the current period ( legal dispute). Users shall benefit from information that an uncertainty existed at the end of the immediately preceding period, and steps have been taken during the current period to resolve the uncertainty. When entity makes retrospective restatement, 3 statement of FS shall be presented: end of the current period, previous period, beginning of the earliest comparative period. Financial structure-source of financing for assets. Indicates how profits and cash flows will be distributed between creditors and owners Financial flexibility- use its available cash for unexpected requirements and investment opportunities or raise cash through borrowing and sale of securities or sale of assets without disrupting normal operations. Cash equivalents are held for the purpose of meeting short-term cash rather than for investment purposes In cash equivalents, what is important is the date of purchase which should be 3 months or less before maturity Financial asset held for trading or trading securities Nontrade receivable should be classified as current asset if collectible within 1 year, operating cycle notwithstanding Current assets: Cash and cash equivalents Held for trading Expected to be realized within 12months(nontrade receivables) Realized, sold, or consumed(trade receivable, inventory, prepayments)

FINANCIAL ACCOUNTING VOL3 SUMMARYVALIX

Operating cycle- between processing of assets and their realization in cash Noncurrent assets: PPE Long-term investments Intangible assets Other noncurrent assets Exploration, evaluation asset, mineral rights and resources held for sale and biological assets are separate line items. PAS16 on PPE doesn’t apply to them 21 Examples of long-term investments: a. Investment in equity and bond securities b. Joint venture c. Subsidiaries 22. Financial liabilities held for trading are financial liabilities that are incurred with an intention to repurchase them in the near term(quoted debt instrument). 23. Sound value or depreciated replacement cost 18 19 a b c d 20

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General features of financial statements: fair presentation going concern accrual basis materiality and aggregation offsetting frequency of reporting Comparative information Consistency of preparation

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An entity whose financial statements comply with PFRS shall make an explicit and unreserved statement of such compliance in the notes. An entity cannot rectify inappropriate accounting policies either by disclosure of the accounting policies used or by notes or explanatory information

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Reasons for investment: Accretion of wealth(royalties, dividends, rentals, interest) Capital appreciation( fair value changes) Ownership control Store of surplus funds Long-term investments include: Investment property Investment in securities and bonds Cash surrender value preference share redemption fund

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Intangible asset is identifiable if: separable, capable of being transferred, licensed, rented or exchanged Arising from legal or contractual right

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FINANCIAL ACCOUNTING VOL3 SUMMARYVALIX

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Noncurrent receivables fall into other noncurrent assets Abandoned property and long-term refundable deposits are other noncurrent assets Covenants are attached to borrowing arrangements which represents undertakings by the borrower. These are restrictions on the borrower as to undertaking further borrowings, paying dividends, maintaining specified working capital. If breached, the liability becomes payable on demand. 10 Grace period is a period within which the borrower can rectify breach and during which the lender cannot demand immediate payment 11 Current liabilities: a Trade and other payables b Current provisions c Short-term borrowing(loans) d Current portion of a long-term debt e Current tax liability 7 8 9

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Noncurrent liabilities: Noncurrent portion of a long-term debt Finance lease liability Deferred tax liability Long-term obligations to entity officers Long-term deferred revenue\

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Range of outcome may be described as: Probable Reasonably possible Remote

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Contingent asset is only disclosed when it is probable. If it is only possible or remote, no disclosure is required. International term for Surplus is reserve Relationships between parties and subsidiaries shall be disclosed regardless of whether there have been transactions between those related parties If there have been transactions between those related parties, an entity shall disclose the nature of the related party relationship as well as information about the amount of transactions, outstanding balances, provision for doubtful accounts, and expense recognized in the current year necessary for an understanding of the potential effect of the relationship on the FS. Notes to FS shall be highly detailed, precise, complete and easily understood An entity shall not describe FS as complying with PFRS unless they comply with all the requirements of each applicable PFRS Accounting standards set out the required recognition and measurement principles that an entity shall follow in preparing its FS Disclosure of judgements that management has made in the process of applying accounting policies and that have a significant effect on the amounts recognized( whether asset should be measured at FV or amortized cost, finance lease or operating lease) Disclosures(Nonfinancial):

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FINANCIAL ACCOUNTING VOL3 SUMMARYVALIX a b c

Legal form/country of incorporation/address of principal place of business Nature of entitys operations Parent name or ultimate controlling entity

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Control is the power to govern the financial and operating policies of an entity Affiliates- parent, subsidiaries, fellow subsidiaries Key management personnel-POSDICON Close family members of individual are related parties Related party transactions and outstanding balances are eliminated in the preparation of Consolidated FS Accounting recognition of a transfer of resources is normally based on the price agreed upon between the parties. Between unrelated parties, there may be a degree of flexibility in the price setting process Close family members of an individual includes the spouse, children and dependents. Adjusting events: Bankruptcy of customers Sale of inventories gives evidence about NRV Nonadjusting: Business combination after the reporting period Plan to discontinue an operation Abnormally large changes in asset price and foreign exchange rates Change in tax rate enacted An entity shall disclose the date when the FS are authorized for issue and who gave the authorization If the entity’s owners or others have the power to amend the FS after issue, entity shall disclose such fact Development stage entity shall disclose cumulative net losses with a descriptive title, “deficit accumulated during the development stage” in SHE Comprehensive income includes: profit/loss other comprehensive income Profit or loss is the bottom line in the traditional income statement Other comprehensive income comprises items of income and expenses including reclassification adjustments that are not recognized in profit/loss Unrealized gains/loss on investment in equity instruments measured at fair value through other comprehensive income Gain/loss from translating the FS of a foreign operation Change in revaluation surplus Unrealized gain/loss from derivative contracts designated as cash flow hedge Actuarial gains or loss on defined benefit plan in accordance with the full recognition approach Reclassification adjustments are amounts reclassified to profit/loss in the current period that were recognized in other comprehensive income in the current or previous periods. Two options for presenting comprehensive income: Two statements Income statement-components of profit or loss

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FINANCIAL ACCOUNTING VOL3 SUMMARYVALIX b 2 40 41 42 a b 43 44

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Statement of comprehensive income-begins with profit or loss(separate statement) Singe statement of comprehensive income—combined statement showing components of profit/loss and components of other comprehensive income in a single statement Correction of errors and the effect of changes in accounting policies are accounted for as adjustment of the beginning balance of retained earnings. Information about entity’s profitability is useful in predicting the capacity of the entity to generate cash flows from its existing resources. Two approaches for capital maintenance: financial capital-monetary value of net assets. Historical cost Physical capital-quantitative measure. Current cost\ Productive assets include inventories and PPE Transaction approach is the conventional or traditional preparation of FS in conformity with PFRS. It is the matching approach. Offers detailed presentation of all income and expenses. Sources of income: Sale of merchandise Rendering of services Use of entity’s resources Disposal of resources other than products Other income represents the revenue and gains from peripheral or incidental transactions of the entity. Still part of the operating activities of the entity Unusual and infrequent items of income and expenses are considered component of income from continuing operations. separate disclosure of items of income and expense include: Writedowns Reversals Disposals Discontinued operations Litigation settlement Statement of RE is now a part of statement of changes in equity Income statement and statement of comprehensive income include: Gains or loss from derecognition of FS measured at amortized cost Profit or loss Forms of income statement: Functional presentation—traditional and common form of income statement. Cost of sales method (distribution and admin). It provides more relevant information to users. Nature of expense presentation—group all the expenses and income Purpose of comprehensive statement is to provide a more comprehensive income information on financial performance measured more broadly than the income as traditionally computed Net income is included in the determination of RE unappropriated. The Net Other comprehensive income is carried to reserves or shown separately in the statement of changes in equity Associate and joint venture income accounted for using the equity method and Gain or loss from derecognition of financial asset at amortized cost are line items-separately shown.

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A noncurrent asset or disposal group is classified as held for sale if its carrying amount will be recovered principally through a sale transaction rather than continuing use. The group includes goodwill acquired in a business combination if the group is a CGU to which the goodwill belongs. An extension of the 1 year period does not preclude the asset or disposal group from being classified as held for sale if the delay is caused by events or circumstances beyond the entity’s control and there is sufficient evidence that the entity remains committed to its plan to sell the asset. Any cost to sell at classification date should be recognized as impairment loss for the period and deducted from the asset held for sale A plant is temporarily abandoned if a plant is maintained in workable condition and it is expected that it will be brought back into use if demand picks up. An entity shall measure a noncurrent asset that ceases to be classified as held for sale at the lower of carrying amount that would have been recognized if the asset had not been classified as held for sale and recoverable amount at the date of subsequent decision not to sell. The assets and liabilities of the group shall be presented separately and cannot be offset as a single amount (e.g. noncurrent asset classified as held for sale and liabilities directly associated with noncurrent assets held for sale) A discontinued operation is defined as a component of an entity that either has been disposed of or is classified as held for sale and: (1) represents a separate major line of business (2) Is part of single coordinated plan to dispose assets (3) Is a subsidiary acquired exclusively with a view to resale. A component of an entity may be subsidiary, a major line of business or geographical segment whose operations and cash flows can be clearly distinguished operationally from the rest of the entity. It can be clearly distinguished if its assets, liabilities, etc are directly attributable to the component and it is directly attributable if they would be eliminated when the component is disposed of. A discontinued operation occurs when the operations and cash flows of that component have been or will be eliminated from the ongoing operations of the entity and the entity will have no significant continuing involvement in that component after its disposal PFRS 5 prohibits the retroactive classification as a discontinued operation when the discontinued criteria are met after the end of the reporting period. Discontinued operation is accounted for as a “disposal group classified as held for sale” The results of discontinued operation, net of tax including impairment loss, gain or loss from actual disposal and termination cost shall be presented as a single amount in the income statement below the income from continuing operations. If a disposal group is classified as held for sale in the current year, the results of the disposal group fro prior period shall be represented as relating to discontinued operation in the comparative income statement If a disposal group is classified as held for sale in the current year, an entity shall not reclassify or represent the assets and liabilities of the disposal group for the prior period. Presentation of the assets and liabilities of the disposal group in the prior period is not changed. The net cash flows attributable to the activities of the discontinued operation shall be separately presented in the statement of cash flows or disclosed in the notes.

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FINANCIAL ACCOUNTING VOL3 SUMMARYVALIX 71

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If the assets to be abandoned constitute a major line of business or geographical area of operations, they are reported in discontinued operations at the date on which they are actually abandoned. Examples of not changes in accounting policy: Changes in accounting policy for transactions or events that differ in substance Application of new accounting policy for transactions that did not occur previously or that were immaterial A change in reporting entity is a change whereby entities change their nature and report their operations in such a way that the financial statements are in effect those of a different reporting entity. It is actually a change in accounting policy and shall be treated retrospectively to disclose what the statements would have looked like if the current entity had been in existence in the prior year Hierarchy of guidance: Requirements of current standards dealing with similar matters Framework for the preparation and presentation of financial statements Most recent pronouncements of other standard-setting bodies that use similar framework, other accounting literature and accepted industry practices. Interim financial reporting means the preparation and presentation of financial information for a period of less than one year. It may be presented monthly, quarterly or semi-annually. Quarterly interim reports are the most common although public traded entities are encouraged to provide interim financial reports at least semiannually and such reports are to be made available not later than 60 days after the end of interim period 100. PAS34 does not mandate which entities are required to publish interim financial reports, how frequently, or how soon after the end of an interim period 111. SEC and PSC require entities covered by the reportorial requirements of Revised Securities Act and Rules on Commercial Papers and Financing Act to file quarterly interim financial reports within 45 days after the end of each of the first three quarters 112. Two views in financial reporting: a. Integral view—each interim period is an integral part of the annual accounting period. Annual expenses are estimated and then allocated to the interim periods based on forecasted revenue or sales volume. Cost incurred which clearly benefit the entire year are allocated to the interim periods benefited. The results of subsequent interim periods must be adjusted to reflect prior estimation errors. Estimation and allocation are necessary to avoid creating misleading fluctuations in interim period income. It would result to interim income which would be more indicative of the annual income and thus useful in predicting future operations and making informed decisions. b. Independent view—Each interim period is considered a separate accounting period with status equal to a fiscal year. The same expense recognition rules shall apply as under annual reporting and no special interim accruals or deferrals are permitted. No estimations or allocations are made for interim purposes unless such estimations or allocations are allowed for annual reporting. 113. Independent view argued that estimation and allocation may have undesirable effects like a significant drop in an earnings trend during the year may be obscured. 114. Essentially, the standard adopts a mix of the integral and independent views.

FINANCIAL ACCOUNTING VOL3 SUMMARYVALIX

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115. The method of accounting for income tax and the recognition of commission and warranty cost based on sales is an application of the integral view. 116. Direct cost and revenue are best accounted for as incurred and earned which equates an independent view. On the other hand, Indirect costs are more likely to require an allocation process which is suggestive of integral view. 117. PAS34 allows an entity to publish a set of condensed financial statements or complete set of financial statements 118. Condensed means that each of the headings and subtotals presented in the entity's most recent annual financial statement is required but there is no requirement to include greater detail unless this is specifically required by PAS34 119. PAS 34 assumes that financial statement users have an access to the entity's most recent annual report so it is a superfluity to provide the same notes in the interim financial report. 120. At interim date, it would be meaningful to provide only an explanation of the events and transactions that are significant to the understanding of the changes in financial position and financial performance since the last annual reporting. 121. Presentation of comparative interim statements for income and comprehensive statement is current and cumulatively (6 months ending and 3 months ending). Presentation for changes in equity and cash flows is cumulatively only. 122. Major repairs, year-end bonuses, insurance, property taxes and depreciation are allocated. The essence is that, an expense should be allocated to the four quarters if it clearly benefits the interim periods. 123. Depreciation and amortization for an interim period shall be based only on assets owned during the interim period 124. Paid vacation and holiday leave shall be accrued for interim purposes because these are enforceable as legal commitments. 125. Gains or losses shall not be allocated. 126. Many entities diversified their operations to spread the risks of investment over a number of industries and product lines to reduce dependence on any one set of suppliers and customers. 127. The different industry segments in effect operate as separate entities within an overall corporate umbrella. 128. Segment reporting is the disclosure of certain financial information about the products and services an entity produces and the geographical areas in which an entity operates. This is to enable investors and users make better assessment of each business activity leading to the understanding of the performance of the entity as a whole. 129. One segment may be performing well and others may not. It becomes then necessary to not only report total performance but also the individual performance. 130. Segment information is only required in the consolidated financial statements. 131. To be classified as operating segment(distinguishable component), separate financial information must be available about the segment and its operating results shall be regularly reviewed by a chief decision maker. 132. Chief operating decision maker is the one responsible for the allocation of resources and assessing the performance of operating segments. It may be the CEO, COO or a group of executive officers.

FINANCIAL ACCOUNTING VOL3 SUMMARYVALIX

133. Operating segments are identitfied using the management approach. It means that operating segments are identified based on the components of the entity that are considered to be important for internal management reporting. 134. Reportable segment should meet any of the two quantitative thresholds: (1) segment revenue should be atleast 10percent of the combined revenue of all operating segments (2) absolute amount of profit or loss should be atleast 10percent of the greater between the combined profit of all operating segments that reported a profit and combined loss of all operating segment that reported a loss. (3) the assets of the segment are 10 percent or more of the combined assets of all operating segments. 135. Even if a segment does not meet any of the quantitative thresholds, it can still be reported or separately disclosed if management believes that information about the segment would be useful to the users of the financial statements. 136. The total external revenue of the reportable operating segments should constitute 75 percent of the total external revenue of the segments. If the reportable segments do not meet the 75 percent criteria, additional segments which have majority common characteristics should be lumped into one reportable segment and included in the reportable segments to satisfy the 75 percent criteria. 137. PFRS 8 suggests that if the number of reportable segments exceeds ten, it is likely that the information may become too detailed and consequently lose its usefulnes, thus, an entity shall consider whether a practical limit has been reached in the number of segments reported. 138. Whenever a reportable segment no longer meets the 10percent quantitative threshold, it will still be continued to be reported separately if management considers the segment of continuing significance. 139. If an operating segment becomes reportable in the current period, the segment data in the prior period shall be restated to reflect the newly reportable segment for comparative purposes. 140. Prior period segment information shall not be restated if the necessary information is not available and the cost to develop it would be excessive. 141. An entity shall disclose the general information, information about profit/loss, segment assets and liabilities, and reconciliations for each reportable operating segment. 142. An entity shall disclose a measure of profit/loss under all circumstances while the measure of segment assets and liabilities shall only be disclosed if such amount is regularly provided to the chief operating decision maker. 143. The amount of segment revenue and expense, and segment assets and liabilities disclosed for a reportable segment shall be the measure reported to the chief operating decision maker. 144. The items to be disclosed must be specified in PFRS 8 and are included in the measurement or regularly reported to the chief operating decision maker. 145. Entity-wide disclosures or additional information that should be disclosed if it is not provided as part of the reportable segment information: (1) products and services (2) geographical areas (3) major customers 146. A major customer is defined as a single external customer accounting for 10 percent or more of an entity’s external revenue 147. The entity shall disclose only its reliance on major customers, the total amount of revenue from major customers and the identity of the segment(s) reporting the revenue.

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FINANCIAL ACCOUNTING VOL3 SUMMARYVALIX

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