Chapter 7 - Reporting Financial Performance Flashcards
When selecting an accounting policy, we should apply the specific IFRS Standard. If this cannot be done, we must select a policy that is compliant with Conceptual Framework, that being?
One that considers substance over form, freedom from bias and prudence
Accounting policies are kept the same period to period, they can only be changed if
The policy results in a more reliable and relevant presentation in FS, or if it is required by an IFRS standard
To account for this change in policy, we must perform a retrospective application for the previous period, as if the new policy has always been in place. How would we do this?
Does the decision to change depreciation charge from COS to admin expense a change in accounting policy?
We would restate the opening balance of retained earnings in the SOCIE, and restate comparative info (in SFP).
Yes
What disclosures are required when changing accounting policies?
If it has a material effect on the current or previous period, one must disclose
- the reason for change
- the amount of adjustments in made to the current and previous year’s figure
How are accounting estimates treated differently?
They have prospective application, i.e change is applied to transactions as at the date of change
Whilst sometimes we may choose the wrong treatment, we have times where we make prior period errors. These are defined to be?
These are omissions or mis-statements due to a failure mis-use of reliable information which could reasonably have been expected to have been taken into account.
Thus what is the accounting treatment for prior period errors, and what disclosures if any are required
Retrospective correction is required (same as change in accounting policy), and disclosure of the nature of the error and the amount of correction required
It has been discovered that 100,000 units of inventory, recognised in COS at a cost of 30p, were actually sold for 25p, and the directors were fully aware of this. RE’s b’f were 50,000.
How do we react to this?
Directors fully aware = a prior period error due to a mistatement of information which could have been accounted for
Thus we need to reduce COS by (100,000 * 5p), which in turn will reduce profit for year by £5000
Thus £5000 needs to be deducted from the b/f figure on RE in SOCIE.
A discontinued operation is part of an entity that has been disposed of or is classified as held for sale. It must be part of a ?
Single co-ordinated plan to dispose of it.
Users of FS are more interested in future profits than post profits, hence they need to be informed about discontinued operations. Thus what disclosure is required?
How will this look in the SPL?
A single amount is required to be disclosed separately from continuing operations on the face of the SPL, including the total of the post tax profit/loss
Continuing operations
-Revenue
- COS
etc
Profit for year from continuing operations
Discontinued operations
Profit for year from discontinued operations
A related party can be either a family/person in relation to the reporting entity, or another entity. What are the requirements?
Family member;
- Has control/join control over reporting entity OR
- Significant influence (this needs to be evidenced) OR
- A member of key management personnel
Entity;
- Members of same group
- Associate or joint venture of the other entity
- Both joint venture of same third party
- Both either joint venture/associate of same party
-
We must consider substance over form when it comes to related partys, i.e is there really any influence? E.g Boots owns 80% of Superdrug. Clarks also owns 20% of Superdrug. Are they a related party?
At first glance we may think so, but substance over form kicks in here, as clarks doesnt have much influence over Superdrug due to the parent entity having 80% ownership i.e full control.
Disclosure of third party relationships must include?
The nature of the relationship
The description and value of transactions with this third party
Why do we disclose third party relationships?
Some may carry innate COI, and mis use may result in fraud
Events can be adjusting or non adjusting. What is the difference?
Adjusting = present at ye
Non adjusting = not present at ye
