Financial Reporting
Module 1: The role and importance of financial reporting 1
Module Objectives 1
1.1 The role and importance of financial reporting 1
1.2 The conceptual framework for Financial Reporting 2
1.3 Qualitative characteristics of useful financial information 2
1.4 Elements of financial statement 3
Module 2: Presentation of Financial statements 7
Module Objectives 7
Part A: Presentation of Financial Statements 7
Part B: Statement of Profit or loss and Other comprehensive income 9
Part C: Statement of Changes in Equity 10
Part D: Statement of financial position 10
Part E: Statement of cash flows (For calculations look at exercise 2.11 and assumed knowledge) 11
Module 3: Revenue from contracts with customers, Provisions, Contingents 13
Module Objectives 13
Part A: Revenue from contracts with customers 13
Part B: Provision 17
Part C: Contingent liabilities and contingent assets 18
Module 4: Income Taxes 20
Module Objectives 20
Part A: Income tax fundamentals 20
Part B: Recognition of DTA and DTL (Step 4) 23
Part C: Special considerations for assets measured at revalued amounts 25
Part D: Financial statement presentation and disclosure 26
Module 5: Business Combinations and Group Accounting 28
Part A: Business Combinations 28
Part B: Consolidated financial statements 30
Part C: Investment in associates 33
Part D: Joint arrangements - Overview 35
Module 6: Financial Instruments 36
Part A: What are financial instruments? 36
Part B: Recognition and derecognition of financial assets and liabilities 38
Part C: Classification of financial assets and financial liabilities 40
Part D: Measurement 42
Part E: Hedging accounting 44
Module 7: Impairment of assets 49
Part A: Overview 49
Part B Impairment of individual assets 50
Part C: Impairment of cash-generating units 52
Part D: Disclosure 54
,Module 1: The role and importance of financial reporting
Module Objectives
● 1.1 explain the role and importance of financial reporting
● 1.2 explain the role of the IASB Conceptual Framework in financial reporting and accounting standards
● 1.3 describe the objective and limitations of general purpose financial reporting as identified in the Conceptual Framework
● 1.4 explain the definitions of the elements of financial statements and recognition criteria adopted by the Conceptual
Framework
● 1.5 explain the application of the standards to the financial reporting process and apply specific standards
● 1.6 discuss and demonstrate the importance of professional judgment in the financial reporting process
● 1.7 explain the implications of using cost and fair value accounting
● 1.8 explain how materiality is assessed and determine the materiality of transactions.
1.1 The role and importance of financial reporting
● The role of FR is to provide users with information to enable them to achieve effective decision making. Another role of FR
also include stewardship or accountability role which is particularly important when management and ownership are
separate
● Types of financial statements
○ Statement of financial position
○ Statement of profit or loss and other comprehensive income
○ Statement of cash flow
○ Statement of changes in equity
● According to IASB, primary users are those that provide equity or debt finance to the entity
● FR is important because of the often significant level of resources under the responsibility of the manager and the financial
impact of the decisions that the users make from relying on the information provided in the financial reports
● Decision usefulness limitations
○ Lack of familiarity with new types of information
○ Decision usefulness may vary among users
○ Capable of multiple interpretations
○ Time and cost constraints
● In Australia, for-profit entities are subject to the conceptual framework and must prepare GPFR if they
○ Have public accountability
■ It has debt or equity instruments that are traded in a public market or
■ Holds assets in a fiduciary capacity for a broad group of outsiders as one of its primary business
○ Are required by legislation to comply with AAS
● AASB’s two-tier model of GPFR
○ Tier 1: Australian accounting standards
■ Applies to for-profit private sector entities with public accountability and Australian government
○ Tier 2: Australian accounting standards - Reduced Disclosure Requirements
■ Applies to entities in respect of which it is reasonable to expect existence for users dependent on GPFD
for information which will be useful to them for making and evaluating decisions about the allocation of
scarce resources
■ RDR is available for
● For-profit private sectors that do not have public accountability
● Not-for-profit private sector entities
● Public sector entities other than the Australian government and state, territory, local
governments
1
,● International initiatives to decrease FR complexity
○ Reducing differences in reporting standards among countries
○ Reducing reporting requirement for SME
○ Catering information needs of multiple stakeholders
○ Improving content and structure
○ Clarifying disclosure requirements and improving the usefulness of disclosures
○ Improving understanding of the existing requirements
○ Considering management commentary outside the GPFR
○ Delivered in electronic format
1.2 The conceptual framework for Financial Reporting
● The conceptual framework provides formal frame of reference for accounting for, recognising, measuring, summarising
and presenting transactions and events in the financial statements
● IFRS override the conceptual framework when conflict is present
● Objectives of GPFR
○ Stewardship function
○ Decision-usefulness
● Limitations of GPFR
○ Lack of familiarity with new types of information
○ Decision usefulness may vary among user
○ Capable of multiple interpretation
○ Time and cost constraints in preparing GPFR
1.3 Qualitative characteristics of useful financial information
● Qualitative characteristics
○ Fundamental characteristics
■ Relevance
● Predictive and confirmatory value
● Materiality
○ Can be quantitative (a dollar amount) or qualitative (eg. fraud)
○ If omitting, misstating or obscuring information will impact the decision making of
users, it is material
■ Faithful representation
● Complete, neutral and error-free
■ Steps of application
● Identify an economic event that has the potential to be useful
● Identify the type of information that would be most relevant if it is available and can be faithfully
represented
● If it is not available ot cant be faithfully represented, repeat the process with the next most
relevant type of information
○ Enhancing characteristics
■ Comparability
● Ability to compare with other company in a various financial year consistently
■ Verifiability
● Third-person test - if knowledgeable and independent observers can reach a consensus that the
information is faithfully represented
● Form of verification can be direct or indirect
■ Timeliness
● The information should be available at the appropriate time to be useful for decision making
■ Understandability
● Clear and concise classification and presentation of information
2
,1.4 Elements of financial statement
● Elements of the financial statement
○ Asset
■ A present economic resource controlled by the entity as a result of a past event
● An economic resource is a right that has the potential to produce economic benefits
○ Liability
■ Present obligation of an entity to transfer an economic resource as a result of a past event
○ Equity/ Net asset
■ The residual interest in assets after deducting all its liabilities
○ Income
■ Increase in economic benefits during the accounting period in the form of inflows or enhancements of
assets or decrease of liabilities that result in an increase in equity other than those relating to
contribution form equity participants
○ Expense
■ Decrease in economic benefits during the accounting period in the form of outflow or depletion of assets
or incurrences of liabilities that result in a decrease in equity other than those relating to contribution
form equity participants
● In order to recognise the elements of FS,
○ Determine whether an item meets the definition of an element
○ Does an item that meets the definition also meet the recognition criteria
■ Probability of an inflow or outflow of economic benefits related to the relevance of the information
■ Reliability of the measurement in regards to the amount recognised relates to the faithful representation
○ Asset and liabilities are derecognised when the control of asset is lost or if present obligation no longer present for
the recognised liability
● Derecognition of assets and liabilities occurs then the item no longer meets the definition
● Constraints on the application of the recognition criteria in the conceptual framework
○ Economic
○ Social and political
○ Human resource and cost
● Measurements of elements
○ Cost/ historical cost
■ The value of cost incurred in acquiring or creating the asset, comprising the consideration paid to acquire
the asset plus transaction cost
■ It is easy to understand reliable and inexpensive
■ But often of limited relevance, undermines comparability and not always reliable
3
, ○ Amortised cost
■ The amount at which the financial asset or financial liability is measured at initial recognition minus the
principal repayments, plus or minus the cumulative amortisation using the effective interest method of
any difference between that initial amount and the maturity amount, and, for financial assets, adjusted
for any loss allowance
■ Calculated using effective interest method
○ Fair value
■ The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date
● Should not be RPT or forced transaction
■ It is more relevant than cost-based measure
■ But lack of relevance to some decision (if you have no intention of selling) and reliability issues if no
active markets
■ Exit price focus
○ Current cost
■ The cost of an equivalent asset at the measurement date, comprising the consideration that would be
paid at the measurement date plus the transaction costs that would be incurred at that date
■ It can be
● Reproduction cost - identical asset
● Replacement cost - equivalent productive capacity or service potential
■ Entry price focus
■ Only used in hyperinflationary economies
○ Net realisable value
■ While fair value is the amount obtained from selling, net realisable value is the benefit expected to be
realised in the ordinary course of business
○ Fulfillment value
■ Fulfillment value of a liability reflect entity specific assumptions rather than assumptions by market
participants
○ Value in use
■ Referred to as the entity-specific value
■ It is considered as more relevant as management is in the best position to judge the entity and
management would be held more accountable
■ However, it has a reliability and understandability problems
○ Present value as a valuation technique
■ It can be used to estimate other measurement bases
■ But some issues include uncertainty of future cash flows and selection of appropriate discount rate
4
Module 1: The role and importance of financial reporting 1
Module Objectives 1
1.1 The role and importance of financial reporting 1
1.2 The conceptual framework for Financial Reporting 2
1.3 Qualitative characteristics of useful financial information 2
1.4 Elements of financial statement 3
Module 2: Presentation of Financial statements 7
Module Objectives 7
Part A: Presentation of Financial Statements 7
Part B: Statement of Profit or loss and Other comprehensive income 9
Part C: Statement of Changes in Equity 10
Part D: Statement of financial position 10
Part E: Statement of cash flows (For calculations look at exercise 2.11 and assumed knowledge) 11
Module 3: Revenue from contracts with customers, Provisions, Contingents 13
Module Objectives 13
Part A: Revenue from contracts with customers 13
Part B: Provision 17
Part C: Contingent liabilities and contingent assets 18
Module 4: Income Taxes 20
Module Objectives 20
Part A: Income tax fundamentals 20
Part B: Recognition of DTA and DTL (Step 4) 23
Part C: Special considerations for assets measured at revalued amounts 25
Part D: Financial statement presentation and disclosure 26
Module 5: Business Combinations and Group Accounting 28
Part A: Business Combinations 28
Part B: Consolidated financial statements 30
Part C: Investment in associates 33
Part D: Joint arrangements - Overview 35
Module 6: Financial Instruments 36
Part A: What are financial instruments? 36
Part B: Recognition and derecognition of financial assets and liabilities 38
Part C: Classification of financial assets and financial liabilities 40
Part D: Measurement 42
Part E: Hedging accounting 44
Module 7: Impairment of assets 49
Part A: Overview 49
Part B Impairment of individual assets 50
Part C: Impairment of cash-generating units 52
Part D: Disclosure 54
,Module 1: The role and importance of financial reporting
Module Objectives
● 1.1 explain the role and importance of financial reporting
● 1.2 explain the role of the IASB Conceptual Framework in financial reporting and accounting standards
● 1.3 describe the objective and limitations of general purpose financial reporting as identified in the Conceptual Framework
● 1.4 explain the definitions of the elements of financial statements and recognition criteria adopted by the Conceptual
Framework
● 1.5 explain the application of the standards to the financial reporting process and apply specific standards
● 1.6 discuss and demonstrate the importance of professional judgment in the financial reporting process
● 1.7 explain the implications of using cost and fair value accounting
● 1.8 explain how materiality is assessed and determine the materiality of transactions.
1.1 The role and importance of financial reporting
● The role of FR is to provide users with information to enable them to achieve effective decision making. Another role of FR
also include stewardship or accountability role which is particularly important when management and ownership are
separate
● Types of financial statements
○ Statement of financial position
○ Statement of profit or loss and other comprehensive income
○ Statement of cash flow
○ Statement of changes in equity
● According to IASB, primary users are those that provide equity or debt finance to the entity
● FR is important because of the often significant level of resources under the responsibility of the manager and the financial
impact of the decisions that the users make from relying on the information provided in the financial reports
● Decision usefulness limitations
○ Lack of familiarity with new types of information
○ Decision usefulness may vary among users
○ Capable of multiple interpretations
○ Time and cost constraints
● In Australia, for-profit entities are subject to the conceptual framework and must prepare GPFR if they
○ Have public accountability
■ It has debt or equity instruments that are traded in a public market or
■ Holds assets in a fiduciary capacity for a broad group of outsiders as one of its primary business
○ Are required by legislation to comply with AAS
● AASB’s two-tier model of GPFR
○ Tier 1: Australian accounting standards
■ Applies to for-profit private sector entities with public accountability and Australian government
○ Tier 2: Australian accounting standards - Reduced Disclosure Requirements
■ Applies to entities in respect of which it is reasonable to expect existence for users dependent on GPFD
for information which will be useful to them for making and evaluating decisions about the allocation of
scarce resources
■ RDR is available for
● For-profit private sectors that do not have public accountability
● Not-for-profit private sector entities
● Public sector entities other than the Australian government and state, territory, local
governments
1
,● International initiatives to decrease FR complexity
○ Reducing differences in reporting standards among countries
○ Reducing reporting requirement for SME
○ Catering information needs of multiple stakeholders
○ Improving content and structure
○ Clarifying disclosure requirements and improving the usefulness of disclosures
○ Improving understanding of the existing requirements
○ Considering management commentary outside the GPFR
○ Delivered in electronic format
1.2 The conceptual framework for Financial Reporting
● The conceptual framework provides formal frame of reference for accounting for, recognising, measuring, summarising
and presenting transactions and events in the financial statements
● IFRS override the conceptual framework when conflict is present
● Objectives of GPFR
○ Stewardship function
○ Decision-usefulness
● Limitations of GPFR
○ Lack of familiarity with new types of information
○ Decision usefulness may vary among user
○ Capable of multiple interpretation
○ Time and cost constraints in preparing GPFR
1.3 Qualitative characteristics of useful financial information
● Qualitative characteristics
○ Fundamental characteristics
■ Relevance
● Predictive and confirmatory value
● Materiality
○ Can be quantitative (a dollar amount) or qualitative (eg. fraud)
○ If omitting, misstating or obscuring information will impact the decision making of
users, it is material
■ Faithful representation
● Complete, neutral and error-free
■ Steps of application
● Identify an economic event that has the potential to be useful
● Identify the type of information that would be most relevant if it is available and can be faithfully
represented
● If it is not available ot cant be faithfully represented, repeat the process with the next most
relevant type of information
○ Enhancing characteristics
■ Comparability
● Ability to compare with other company in a various financial year consistently
■ Verifiability
● Third-person test - if knowledgeable and independent observers can reach a consensus that the
information is faithfully represented
● Form of verification can be direct or indirect
■ Timeliness
● The information should be available at the appropriate time to be useful for decision making
■ Understandability
● Clear and concise classification and presentation of information
2
,1.4 Elements of financial statement
● Elements of the financial statement
○ Asset
■ A present economic resource controlled by the entity as a result of a past event
● An economic resource is a right that has the potential to produce economic benefits
○ Liability
■ Present obligation of an entity to transfer an economic resource as a result of a past event
○ Equity/ Net asset
■ The residual interest in assets after deducting all its liabilities
○ Income
■ Increase in economic benefits during the accounting period in the form of inflows or enhancements of
assets or decrease of liabilities that result in an increase in equity other than those relating to
contribution form equity participants
○ Expense
■ Decrease in economic benefits during the accounting period in the form of outflow or depletion of assets
or incurrences of liabilities that result in a decrease in equity other than those relating to contribution
form equity participants
● In order to recognise the elements of FS,
○ Determine whether an item meets the definition of an element
○ Does an item that meets the definition also meet the recognition criteria
■ Probability of an inflow or outflow of economic benefits related to the relevance of the information
■ Reliability of the measurement in regards to the amount recognised relates to the faithful representation
○ Asset and liabilities are derecognised when the control of asset is lost or if present obligation no longer present for
the recognised liability
● Derecognition of assets and liabilities occurs then the item no longer meets the definition
● Constraints on the application of the recognition criteria in the conceptual framework
○ Economic
○ Social and political
○ Human resource and cost
● Measurements of elements
○ Cost/ historical cost
■ The value of cost incurred in acquiring or creating the asset, comprising the consideration paid to acquire
the asset plus transaction cost
■ It is easy to understand reliable and inexpensive
■ But often of limited relevance, undermines comparability and not always reliable
3
, ○ Amortised cost
■ The amount at which the financial asset or financial liability is measured at initial recognition minus the
principal repayments, plus or minus the cumulative amortisation using the effective interest method of
any difference between that initial amount and the maturity amount, and, for financial assets, adjusted
for any loss allowance
■ Calculated using effective interest method
○ Fair value
■ The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date
● Should not be RPT or forced transaction
■ It is more relevant than cost-based measure
■ But lack of relevance to some decision (if you have no intention of selling) and reliability issues if no
active markets
■ Exit price focus
○ Current cost
■ The cost of an equivalent asset at the measurement date, comprising the consideration that would be
paid at the measurement date plus the transaction costs that would be incurred at that date
■ It can be
● Reproduction cost - identical asset
● Replacement cost - equivalent productive capacity or service potential
■ Entry price focus
■ Only used in hyperinflationary economies
○ Net realisable value
■ While fair value is the amount obtained from selling, net realisable value is the benefit expected to be
realised in the ordinary course of business
○ Fulfillment value
■ Fulfillment value of a liability reflect entity specific assumptions rather than assumptions by market
participants
○ Value in use
■ Referred to as the entity-specific value
■ It is considered as more relevant as management is in the best position to judge the entity and
management would be held more accountable
■ However, it has a reliability and understandability problems
○ Present value as a valuation technique
■ It can be used to estimate other measurement bases
■ But some issues include uncertainty of future cash flows and selection of appropriate discount rate
4
