5. Accounting policies based on IFRS

Question 1

IAS 1

Answer 1

IAS 1 – Presentation of Financial Statements

Sets overall framework for presentation of financial statements.

Ensures comparability over time and between entities.

Question 2

IAS 2

Answer 2

Inventories

Objective: Prescribes treatment for inventories regarding cost measurement and expense recognition.
Key Points:
Measured at lower of cost and NRV (Net Realisable Value).

Cost includes purchase costs, conversion costs, and other costs to bring inventories to their present condition.

Write-downs to NRV are recognized as an expense.

Reversals of write-downs are allowed if NRV increases.

Question 3

IAS 7

Answer 3

Statement of Cash Flows

Requires presentation of changes in cash and cash equivalents over the period.

Divides cash flows into operating
investing, and
financing activities

Question 4

IAS 8

Answer 4

Accounting Policies, Changes in Accounting Estimates, and Errors

Objective: Sets criteria for selecting and changing accounting policies and correcting errors.

Key Points:
Apply changes in accounting policy retrospectively, unless impractical.

Material errors are corrected retrospectively.

Changes in accounting estimates are applied prospectively.

Question 5

IAS 10

Answer 5

Events After the Reporting Period

Objective: Distinguish between adjusting and non-adjusting events.

Adjusting Events: Provide evidence of conditions at the reporting date → Adjust financial statements.

Non-Adjusting Events: Occur after reporting date → Disclose in notes if material.

Question 6

IAS 16

Answer 6

Property, Plant and Equipment

Objective: Prescribes accounting for tangible non-current assets.

IAS 16 sets out how companies should report their investment in property, plant and equipment (PPE).

Recognition:
Measured at cost or cash equivalent.

Includes inspection or major replacement costs if they meet asset recognition criteria.

This cost would include: * purchase price, including duties and non-refundable purchase taxes, after deducting trade discounts; * costs directly attributable to bringing the asset to the location and condition necessary for it to operate in the manner intended by management; and * the estimated costs of dismantling and removing the item and restoring the site on which it is located.

In terms of subsequent measurement, recognise the cost of replacement of components of the plant in its the carrying amount (where these are deemed to improve its operating capability) but to charge day-to-day or on-going repairs and maintenance to the statement of profit or loss as an expense.

Subsequent Measurement Options:

Cost Model: Carrying amount = cost – accumulated depreciation/impairment.

Revaluation Model: Fair value (revalued amount) – subsequent depreciation/impairment.

Depreciation Methods:
straight-line method - spread the cost of the plant evenly over the plant’s useful economic life.

Reducing balance sees depreciation amounts higher at the first years of the life of the asset then reducing over time as the asset gets old

Impairment (linked with IAS 36):
Test if there’s indication of impairment.

Recoverable amount = higher of FV less costs to sell or value in use.

Derecognition:
Remove asset upon disposal or retirement.

Revaluation - Record loss in profit or loss and gain in SoFP

An asset cannot be carried in the financial statements at a value higher than its recoverable amount. An asset is impaired when its carrying amount exceeds its recoverable amount. Can happen if technology moves on quickly.

Question 7

IAS 37

Answer 7

Provisions, Contingent Liabilities & Contingent Assets

Objective: Ensure appropriate recognition and disclosure of provisions and contingencies.

Potential incomes / obligations arising uncertain future events

Provisions:

Recognized if:
Present obligation from past events.
Probable outflow of resources.
Amount can be estimated reliably.

Measured using best estimate, discounted if material.

Reviewed and adjusted at each reporting date.

Reversals treated as changes in estimates (IAS 8).

Contingent Liabilities:
Not recognised, only disclosed (unless remote).

Contingent Assets:
Recognised only when virtually certain.
Disclosed when probable.

Question 8

IFRS 15

Answer 8

Contracts with Customerrs

Revenue recognised in year probable future economic benefits will flow to utility

Nature amount and timing, nature of control - no goods no right - eg retail return period - 1 months cant be recognised until that point

Must recognise revenue only as the obligation is performed - e.g. mobile phone contract over 3 yrs

5 Steps:
Identify the contract
Performance Obligations
Transaction price
Allocate transaction price to performance eg 3 yr phone contract
Recognise revenue AS the obligation is performed

Question 9

IFRS 16

Answer 9

Leases

Standard for lessees
Lessors still go by IAS 17
Lecka Airways financial fail 1980s
IAS 17 - they developed IFRS 16
Substance over form - title still with legal owner but the lessee must show asset as if owns it
Didnt used to need to show in SoFP but now has to under this standard
Still used to be disguised as operating lease as an off balance sheet
Revised again and now cannot do this!
If over 12 months lease, show in SoFP

Question 10

What is substance over form?

Answer 10

This is referring to the accounting concept of “substance over form”, which
means the transactions recorded in financial statements must reflect the
economic (or commercial) substance rather than its legal form. (1)

The financial statements of a business should reflect the underlying realities
of its accounting transactions. (1)

This entails the use of judgement on the part of the preparers of financial
statements. This makes this area of accounting subjective. (1)

Award up to 2 marks for any one of the following examples:
* Leases – as per IFRS 16 the lessee has to recognise assets,
representing its right to use the assets, even though it does not own
them;

• Sale and leaseback arrangements – does the transfer of an asset to
  another entity and then leasing it back qualify as a sale under IFRS
  15, or is its nature that of a lease, and accounted for under IFRS 16;
• Preference shares – although legally equity, they may be treated as
  debt rather than equity for accounting purposes when they carry a
  fixed rate of dividend or a clear arrangement for repayment;
• Debt factoring – is this just a collection process or have the risks
  and rewards in the receivables substantially transferred from the
  company (which sold the goods and services) to the factor.