Accounting 102
Module 1 – The Financial Reporting Environment
Ø Purpose of accounting is to identify, record and communicate the economic events
of an entity to interested users
Ø GAAP – Generally Accepted Accounting Principles
Ø Financial accounting information is mainly targeted at external users
Ø IRFS covers many different types of entities – including non-profit – we focus on
large public profit companies as they are required by law to comply with GAAP
Ø Financial statements need to comply with Financial Reporting Act (2013) (FRA) – in
order to make sure all companies comply with the same standards and don’t
manipulate their reports
Ø The entities that are a part of the rule-making process are IASB, XRB and NZASB
Ø Prior to IASB each country had their own GAAP – this did not work when comparing
multinational companies – besides US every developed country uses the IFRS
(International Financial Reporting Standards)
How new standards/revised standards become part of NZ Law
Ø IASB – researchers’ topics and discussion papers – draft reports on how they plan to
implement this
Ø Due process – they issue it to different entities and conduct an analysis on how it will
affect them
Ø Exposure Drafts – give a draft report of what the final standards will look like
Ø Due process
Ø IFRS standard is issued if 9/14 members approve
Ø NZASB receives it and gives it to IFRS and XRB for approval – they may tweak it a
little bit – not a major change
Who must follow GAAP?
Ø If you are publicly accountable – this means an entity that issues securities to the
public – they have taken money from the public markets – issuing bonds and
debentures you take on debt, then you are accountable
Ø Large – Companies Act 1993 – defines large companies as those with revenue more
than $30 million or assets more than $60 million
Ø Tier I – includes those who are publicly accountable or have expenses of more than
$30 million – as if you fail it will have a big impact on the market – this is the IFRS
known as the Gold Standard
Ø Tier II – reduced disclosure IFRS – these include companies who are not publicly
accountable and have revenue under $30 million but more than $2 million
Conceptual Framework
Purpose
Ø To assist standard setters – when IRS is trying to create new standards or revising
old standards, they make sure that is consistent with the conceptual framework
Ø To assist preparers
Ø To assist all in understanding/interpreting Standards
,Objective of General-Purpose Financial Reporting
Ø To provide financial information about the reporting entity – it is used by many
external users – it is much less specific than what managers use on a day-to-day
basis
Ø You don’t want to give away commercially sensitive information but can still be used
by investors, lenders and other creditors to assess the prospects of future net cash
inflows and management’s stewardship
Ø In these reports you mention the general how much you receive and pay but you
don’t mention the suppliers, employees or customers in detail
Qualitative Characteristics of Financial Information
Relevance
Ø The information must be able to influence the decision of the
user – it needs to be produced timely
Ø Materiality is relative – depending on the size of the company
certain errors will not affect the statement – such as
Warehouse them missing few hundred dollars’ worth of socks
is not a material
Ø Materiality can also depend on the substance/nature of the transaction – if the
employee steals $100 worth of stuff it wouldn’t be a big deal – but if it is the CEO it
would make a difference
Neutrality and Prudence
Ø Prudence means we should take a conservative approach – sales you under-estimate
and for costs you over-estimate
Ø This is because if your income comes at a lower level you can still cover your
expenses
Ø IFRS – this idea has been removed – as there is a judgement bias involved in this –
the conceptual framework says you have to have neutrality – you can’t be bias
Ø The new CFW introduced it has cautious prudence – you are very careful in choosing
and verifying your estimates
Ø You only put in the higher value of the product once you are able to sell it
Ø Cautious prudence allows you value inventory at a higher value if it is justified
Enhancing qualitative characteristics of financial information
Ø Comparability – easy to compare one company to another – and compare against
previous years
Ø Verifiability – if today we report $2 billion revenue we can go back and see $2 billion
dollars’ worth of receipts and sales
Ø Timeliness – it should not be outdated – companies have to release annual reports
Ø Understandability – reasonable person can understand the information – should not
need an expert
CFW Elements
Ø NZ IAS 1 – when we apply GAAP – we are operating under accrual accounting –
assets, liabilities, equity, income and expenses…when they satisfy the…criteria for
those elements in the NZ Framework
, Ø Accrual accounting looks at the substance of the transaction – the substance of cash
accounting looks at the exchange of cash – in the modern society there is a lot of
transaction where there is absence of cash
Ø Accrual accounting – transaction is recognized when there has been an exchange of
economic benefit (does not have to be bilateral) irrespective of whether there has
been an exchange of cash
Ø Cash accounting – transaction is only recognized when there has been an exchange
of cash
Asset
Ø Because of a past event, the entity controls an economic resource,
– An economic resource is a right that has the potential to produce economic
benefit
– Control links the resource to the entity
Liability
Ø Because of a past event, the entity has a present obligation to transfer an economic
resource
Equity
Ø Defined:
– Owners’ residual interest in assets, meaning
– After deducting all liabilities
– Income increases and expenses decrease equity
Income and Expenses
Ø Income is recognised if, during the period,
– There is an increase to total assets and/or a decrease to total liabilities
– So that net assets (and therefore equity) increases
– From events other than owner contributions
Ø Expenses are recognised if, during the period,
– There is a decrease to total assets and/or an increase to total liabilities
– So that net assets (and therefore equity) decreases
– From events other than owner distributions
CFW Assumptions
Ø Explicit assumption – going concern – the assumption is that the entity is going to
continue their operation in the foreseeable future
Ø Implicit assumption – periodicity – divide up the accounting periods into equal
lengths
CFW – Measurement Base
Ø Historical cost – the value is recorded at the time the transaction occurred
Ø Current value – Current Value: the asset or liability value is updated to reflect
conditions at the measurement date. Fair value. Value in use (assets) or fulfilment
value (liabilities)
Ø Fair value is applying the market value to land
Economic Events
Ø Accounting transactions exchange of something of value between accounting entity
and another entity
Module 1 – The Financial Reporting Environment
Ø Purpose of accounting is to identify, record and communicate the economic events
of an entity to interested users
Ø GAAP – Generally Accepted Accounting Principles
Ø Financial accounting information is mainly targeted at external users
Ø IRFS covers many different types of entities – including non-profit – we focus on
large public profit companies as they are required by law to comply with GAAP
Ø Financial statements need to comply with Financial Reporting Act (2013) (FRA) – in
order to make sure all companies comply with the same standards and don’t
manipulate their reports
Ø The entities that are a part of the rule-making process are IASB, XRB and NZASB
Ø Prior to IASB each country had their own GAAP – this did not work when comparing
multinational companies – besides US every developed country uses the IFRS
(International Financial Reporting Standards)
How new standards/revised standards become part of NZ Law
Ø IASB – researchers’ topics and discussion papers – draft reports on how they plan to
implement this
Ø Due process – they issue it to different entities and conduct an analysis on how it will
affect them
Ø Exposure Drafts – give a draft report of what the final standards will look like
Ø Due process
Ø IFRS standard is issued if 9/14 members approve
Ø NZASB receives it and gives it to IFRS and XRB for approval – they may tweak it a
little bit – not a major change
Who must follow GAAP?
Ø If you are publicly accountable – this means an entity that issues securities to the
public – they have taken money from the public markets – issuing bonds and
debentures you take on debt, then you are accountable
Ø Large – Companies Act 1993 – defines large companies as those with revenue more
than $30 million or assets more than $60 million
Ø Tier I – includes those who are publicly accountable or have expenses of more than
$30 million – as if you fail it will have a big impact on the market – this is the IFRS
known as the Gold Standard
Ø Tier II – reduced disclosure IFRS – these include companies who are not publicly
accountable and have revenue under $30 million but more than $2 million
Conceptual Framework
Purpose
Ø To assist standard setters – when IRS is trying to create new standards or revising
old standards, they make sure that is consistent with the conceptual framework
Ø To assist preparers
Ø To assist all in understanding/interpreting Standards
,Objective of General-Purpose Financial Reporting
Ø To provide financial information about the reporting entity – it is used by many
external users – it is much less specific than what managers use on a day-to-day
basis
Ø You don’t want to give away commercially sensitive information but can still be used
by investors, lenders and other creditors to assess the prospects of future net cash
inflows and management’s stewardship
Ø In these reports you mention the general how much you receive and pay but you
don’t mention the suppliers, employees or customers in detail
Qualitative Characteristics of Financial Information
Relevance
Ø The information must be able to influence the decision of the
user – it needs to be produced timely
Ø Materiality is relative – depending on the size of the company
certain errors will not affect the statement – such as
Warehouse them missing few hundred dollars’ worth of socks
is not a material
Ø Materiality can also depend on the substance/nature of the transaction – if the
employee steals $100 worth of stuff it wouldn’t be a big deal – but if it is the CEO it
would make a difference
Neutrality and Prudence
Ø Prudence means we should take a conservative approach – sales you under-estimate
and for costs you over-estimate
Ø This is because if your income comes at a lower level you can still cover your
expenses
Ø IFRS – this idea has been removed – as there is a judgement bias involved in this –
the conceptual framework says you have to have neutrality – you can’t be bias
Ø The new CFW introduced it has cautious prudence – you are very careful in choosing
and verifying your estimates
Ø You only put in the higher value of the product once you are able to sell it
Ø Cautious prudence allows you value inventory at a higher value if it is justified
Enhancing qualitative characteristics of financial information
Ø Comparability – easy to compare one company to another – and compare against
previous years
Ø Verifiability – if today we report $2 billion revenue we can go back and see $2 billion
dollars’ worth of receipts and sales
Ø Timeliness – it should not be outdated – companies have to release annual reports
Ø Understandability – reasonable person can understand the information – should not
need an expert
CFW Elements
Ø NZ IAS 1 – when we apply GAAP – we are operating under accrual accounting –
assets, liabilities, equity, income and expenses…when they satisfy the…criteria for
those elements in the NZ Framework
, Ø Accrual accounting looks at the substance of the transaction – the substance of cash
accounting looks at the exchange of cash – in the modern society there is a lot of
transaction where there is absence of cash
Ø Accrual accounting – transaction is recognized when there has been an exchange of
economic benefit (does not have to be bilateral) irrespective of whether there has
been an exchange of cash
Ø Cash accounting – transaction is only recognized when there has been an exchange
of cash
Asset
Ø Because of a past event, the entity controls an economic resource,
– An economic resource is a right that has the potential to produce economic
benefit
– Control links the resource to the entity
Liability
Ø Because of a past event, the entity has a present obligation to transfer an economic
resource
Equity
Ø Defined:
– Owners’ residual interest in assets, meaning
– After deducting all liabilities
– Income increases and expenses decrease equity
Income and Expenses
Ø Income is recognised if, during the period,
– There is an increase to total assets and/or a decrease to total liabilities
– So that net assets (and therefore equity) increases
– From events other than owner contributions
Ø Expenses are recognised if, during the period,
– There is a decrease to total assets and/or an increase to total liabilities
– So that net assets (and therefore equity) decreases
– From events other than owner distributions
CFW Assumptions
Ø Explicit assumption – going concern – the assumption is that the entity is going to
continue their operation in the foreseeable future
Ø Implicit assumption – periodicity – divide up the accounting periods into equal
lengths
CFW – Measurement Base
Ø Historical cost – the value is recorded at the time the transaction occurred
Ø Current value – Current Value: the asset or liability value is updated to reflect
conditions at the measurement date. Fair value. Value in use (assets) or fulfilment
value (liabilities)
Ø Fair value is applying the market value to land
Economic Events
Ø Accounting transactions exchange of something of value between accounting entity
and another entity
