ACC3009W Notes
IFRS developments
- IFRS is used everywhere except the USA (they use US GAAP).
- IASB
o Sets accounting standards by first releasing an exposure draft, which is open to
evaluating by the public, it then goes to IFRS or an IAS.
- IFRS Interpretations Committee
o Gives guidance and interpretations for vague standards.
- IAS 1:16
o An entity shall not describe financial statements as complying with IFRSs unless
they comply will all of the requirements of IFRSs.
IFRSs are Standards and Interpretations issued by the International Accounting Standards Board
(IASB). They consist of:
- International Financial Reporting Standards
- International Accounting Standards
o These two are the same, just with a different name; the IASs are older.
- IFRIC interpretations
- SIC interpretations
o These are also the same, the SIC interpretations are older.
Changes to the Conceptual Framework
Measurement
- Can either be at cost or some kind of market value measure (fair value; current cost
etc.)
o Business must decide what is more appropriate.
Prudence
- The definition of prudence has been clarified.
- In the past, we have seen what is referred to as ‘asymmetric prudence’ where assets are
understated, and liabilities are overstated.
- The new definition is more symmetrical; it is more so a prudence of judgement.
Stewardship
- Who/how the entity is directed; this must be commented on in the financial statements.
,Measurement Uncertainty
- Linked to recognition of assets and liabilities; looks to faithful representation (free from
material error).
- High measurement uncertainty: you don’t know if that measurement is free from error.
Objective of Financial Reporting
- To provide financial information that is useful to users in making decisions relating to
providing resources to the entity.
- Creditors and investors have claims against the economic resources of the entity.
- The users of financial statements mainly look at:
o Net cash flows, and
o Stewardship.
Reporting Entity
- An entity that is required or chooses to prepare financial statements.
- Can be a company, group, divisions, etc.
- Consolidated financial statements
o Group (parent and subsidiaries).
- Unconsolidated financial statements
o Just the parent.
- Combined financial statements
o Not a group (e.g. a parent and associate).
Qualitative Characteristics (Chapter 2 of the CF)
- Fundamental characteristics:
o Relevance, and
o Faithful representation.
o The above is influential in decision making; it must be present otherwise the
financial statements will be misleading.
- Enhancing characteristics:
o Comparability,
o Verifiability,
o Timeliness, and
o Understandability.
- Cost constraint
o The benefit of providing this information/achieving these characteristics needs
to justify the cost of providing and using the information.
,New Asset Definition
- “A present economic resource controlled by the entity as a result of past events.”
- An economic resource is a right that has the potential to produce economic benefits.
o Rights can be established by contract, legislation, or similar means.
o The focus here is on the right, not the item.
E.g. the right to use/sell an item or intellectual property.
E.g. a right that creates an obligation for someone else.
o For the potential to exist, you just need to prove that in one circumstance, it
would produce benefits for the entity and not to all other parties.
o The benefit must only be for the entity.
o Note: the signing of a contract is never the past event, the payment made, or
work done is (unless the contract is non-cancellable).
- Control here is the ability to prevent other parties from using the resource.
New Liability Definition
- “A present obligation of the entity to transfer an economic resource as a result of past
events.”
- An obligation is a duty or responsibility that an entity has no practical ability to avoid.
o This duty can be by law or by customary practice.
o Not practical when the cost to avoid > the cost of the obligation/duty, or
o When the only way to avoid is to liquidation or cessation.
- Transfer of an economic resource
o The obligation must have the potential to require the entity to transfer an
economic resource to another party.
- Present obligation, from past events
o Entity has already obtained economic benefits or taken an action, and
o Will or may have to transfer an economic resource that it would not otherwise
have had to transfer.
o An obligation is only present when there is a past event (obligation + PE = PO).
o Law/policy alone does not create a present obligation, there must be a past
event.
Old vs. New Recognition Criteria
- Flow of future economic benefits is probable vs.
- Provides relevant information about the item; no recognition if:
o There is existence uncertainty about the item, or
o The probability of a flow of economic benefits is low.
- Cost or value is reliably measurable vs.
, - Provides faithful representation; no recognition if:
o The level of measurement uncertainty is high.
IAS 8 Hierarchy
- The conceptual framework is not a standard.
1. Look at the current standard, then
2. Look to a similar standard, then
3. Use the conceptual framework.
IAS1: Presentation of Financial Statements
Materiality
- Information is material if omitting, misstating or obscuring it could reasonably be
expected to influence decisions that the primary users of the financial statements make,
on the basis of the financial statements.
- Can be internal (financial reporting) or external (auditing); doesn’t always have to come
to the exact same number.
Profit/loss – gains and losses
Other Comprehensive Income
- Not related to core operations.
- From accountant’s perspective: gains and losses put there to not affect profit; the items
can later be reclassified to profit and loss.
Total comprehensive income = profit and loss + other comprehensive income.
Complete Set of Financial Statements
- Statement of financial position
- Statement of comprehensive income
- Statement of changes in equity
- Statement of cash flows
- Notes.
All of the above must include comparatives.
IAS 1:11
- An entity shall present with equal prominence all of the financial statements in a
complete set of financial statements.
IFRS developments
- IFRS is used everywhere except the USA (they use US GAAP).
- IASB
o Sets accounting standards by first releasing an exposure draft, which is open to
evaluating by the public, it then goes to IFRS or an IAS.
- IFRS Interpretations Committee
o Gives guidance and interpretations for vague standards.
- IAS 1:16
o An entity shall not describe financial statements as complying with IFRSs unless
they comply will all of the requirements of IFRSs.
IFRSs are Standards and Interpretations issued by the International Accounting Standards Board
(IASB). They consist of:
- International Financial Reporting Standards
- International Accounting Standards
o These two are the same, just with a different name; the IASs are older.
- IFRIC interpretations
- SIC interpretations
o These are also the same, the SIC interpretations are older.
Changes to the Conceptual Framework
Measurement
- Can either be at cost or some kind of market value measure (fair value; current cost
etc.)
o Business must decide what is more appropriate.
Prudence
- The definition of prudence has been clarified.
- In the past, we have seen what is referred to as ‘asymmetric prudence’ where assets are
understated, and liabilities are overstated.
- The new definition is more symmetrical; it is more so a prudence of judgement.
Stewardship
- Who/how the entity is directed; this must be commented on in the financial statements.
,Measurement Uncertainty
- Linked to recognition of assets and liabilities; looks to faithful representation (free from
material error).
- High measurement uncertainty: you don’t know if that measurement is free from error.
Objective of Financial Reporting
- To provide financial information that is useful to users in making decisions relating to
providing resources to the entity.
- Creditors and investors have claims against the economic resources of the entity.
- The users of financial statements mainly look at:
o Net cash flows, and
o Stewardship.
Reporting Entity
- An entity that is required or chooses to prepare financial statements.
- Can be a company, group, divisions, etc.
- Consolidated financial statements
o Group (parent and subsidiaries).
- Unconsolidated financial statements
o Just the parent.
- Combined financial statements
o Not a group (e.g. a parent and associate).
Qualitative Characteristics (Chapter 2 of the CF)
- Fundamental characteristics:
o Relevance, and
o Faithful representation.
o The above is influential in decision making; it must be present otherwise the
financial statements will be misleading.
- Enhancing characteristics:
o Comparability,
o Verifiability,
o Timeliness, and
o Understandability.
- Cost constraint
o The benefit of providing this information/achieving these characteristics needs
to justify the cost of providing and using the information.
,New Asset Definition
- “A present economic resource controlled by the entity as a result of past events.”
- An economic resource is a right that has the potential to produce economic benefits.
o Rights can be established by contract, legislation, or similar means.
o The focus here is on the right, not the item.
E.g. the right to use/sell an item or intellectual property.
E.g. a right that creates an obligation for someone else.
o For the potential to exist, you just need to prove that in one circumstance, it
would produce benefits for the entity and not to all other parties.
o The benefit must only be for the entity.
o Note: the signing of a contract is never the past event, the payment made, or
work done is (unless the contract is non-cancellable).
- Control here is the ability to prevent other parties from using the resource.
New Liability Definition
- “A present obligation of the entity to transfer an economic resource as a result of past
events.”
- An obligation is a duty or responsibility that an entity has no practical ability to avoid.
o This duty can be by law or by customary practice.
o Not practical when the cost to avoid > the cost of the obligation/duty, or
o When the only way to avoid is to liquidation or cessation.
- Transfer of an economic resource
o The obligation must have the potential to require the entity to transfer an
economic resource to another party.
- Present obligation, from past events
o Entity has already obtained economic benefits or taken an action, and
o Will or may have to transfer an economic resource that it would not otherwise
have had to transfer.
o An obligation is only present when there is a past event (obligation + PE = PO).
o Law/policy alone does not create a present obligation, there must be a past
event.
Old vs. New Recognition Criteria
- Flow of future economic benefits is probable vs.
- Provides relevant information about the item; no recognition if:
o There is existence uncertainty about the item, or
o The probability of a flow of economic benefits is low.
- Cost or value is reliably measurable vs.
, - Provides faithful representation; no recognition if:
o The level of measurement uncertainty is high.
IAS 8 Hierarchy
- The conceptual framework is not a standard.
1. Look at the current standard, then
2. Look to a similar standard, then
3. Use the conceptual framework.
IAS1: Presentation of Financial Statements
Materiality
- Information is material if omitting, misstating or obscuring it could reasonably be
expected to influence decisions that the primary users of the financial statements make,
on the basis of the financial statements.
- Can be internal (financial reporting) or external (auditing); doesn’t always have to come
to the exact same number.
Profit/loss – gains and losses
Other Comprehensive Income
- Not related to core operations.
- From accountant’s perspective: gains and losses put there to not affect profit; the items
can later be reclassified to profit and loss.
Total comprehensive income = profit and loss + other comprehensive income.
Complete Set of Financial Statements
- Statement of financial position
- Statement of comprehensive income
- Statement of changes in equity
- Statement of cash flows
- Notes.
All of the above must include comparatives.
IAS 1:11
- An entity shall present with equal prominence all of the financial statements in a
complete set of financial statements.
