Chapter14-Accounting Conventions and Police

7/31/2019 Chapter14-Accounting Conventions and Police

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CHAPTER 14

ACCOUNTING CONVENTIONSAND

POLICE


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1 SOURCES OF ACCOUNTING

CONCEPTS AND CONVENTIONS

IAS 1 Presentation of financial statements :the

overall considerations underlying financial

statements, and the structure and content of

financial statements.

The IASBs Framework for the Preparation and

Presentation of Financial Statements.

Generally accepted accounting principles (GAAP)


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2 THE NATURE AND PURPOSE OF

ACCOUNTING CONVENTIONS

Accounting Conventions :principles Or accepted

practice which apply generally to transactions. They

have an influence in determining:

---which assets and liabilities are recorded on abalances sheet

---how assets and liabilities are valued

---what income and expenditure is recorded in the

income statements

---at what amount income and expenditure is

recorded.


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3 IAS1: PRESENTATION OF

FINANCIAL STATMENTS

IAS 1 states that the fundamental accounting

concepts to be followed are:

---fair presentation

---going concern

----accruals

----consistency


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Fair presentation

---Financial statements should be fair presented

---Compliance with IASs goes a long way towardsachieving this.

---Additional disclosures, beyond those required by

IASs, should be made when necessary to achieve a fair

presentation.

---In areas where no IAS exists, the financial statements

should be presented in accordance with the stated

accounting policies of the enterprise, in a manner which

provides relevant, reliable, comparable and

understandable information.


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Going concern

---Going concern: assumption that an

enterprise will continue in operational

existence for the foreseeable future.

---Management must review the going concern

status to confirm it is appropriate for thefinancial statements. They should consider all

available information for the foreseeable future

covering, but not limited to, twelve months fromthe reporting date.


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Accruals (matching)

---Accruals (or matching ) basis of accounting:

assets, liabilities, income and expenses are

recognized when they occur and not when

cash or its equivalent is received or paid

----Cost should be set off against the revenuesthey have contributed to.


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Consistency

---Consistency: presentation and classification

of items in the financial statements should be

retained from one period to the next unless a

significant change in the nature of the

operations of the enterprise or a review of itsfinancial statement presentation demonstrates

that more relevant information is provided by

presenting items in a different way, or a

change is required by a new IAS.


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Other matters dealt with in IAS 1 Selection and disclosure of accounting policies

---where there are no IASs, the policies should be selectedand applied so that the financial statements are:

1 relevant to the decision-making needs of users

2 reliable: i.e. they

Represent faithfully the results and financial

position

Reflect the substance rather than the form of

transactions

Are neutral

Exercise prudence without impairing neutrality

Are complete.

---The accounting policies must be disclosed by note to thefinancial statements.


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Materiality and aggregation

---Similar items should be aggregated together

,but information that is material should not be

aggregated with other items

---Information is material if its non-disclosure

could influence the economic decisions ofusers.


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Offsetting

---Assets and liabilities should be offset unless

this is allowed or required by an IAS

---Income and expense items should not be

offset unless allowed or required by an IAS, or

unless the amounts involved are not material.


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Some other fundamental accounting concepts

These are not stated officially by the IASB but

are generally recognized principles which

underlie accounting and financial statements.

---Historical cost system: all values are based

on the historical costs incurred. ---Stable monetary unit: diverse transactions

are expressed in terns of a common unit of

measurement, namely the monetary unit. ---Money measurement: accounts can only

record items to which a monetary value can be

attributed.


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---Realization: a transaction should be recognized

when the event from which the transaction stems has

taken place and the receipt of cash from thetransaction is reasonably certain.

---Business entity: financial accounting information

relates only to the activities of the business entity and

not to the activities of its owner or any other entity. Theentity is seen as being separate from its owners,

whatever its legal status.

---Duality: every transaction has two effects. This

underpins double entry and the balance sheet.


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---Accounting period convention :the lifetime of

the business is divided into arbitrary periods of

a fixed length. usually one year. At the end ofeach arbitrary period, usually referred to as the

accounting period, two financial statements are

prepared: The balance sheet, showing the position of the

business as at the end of the accounting

period

The income statement for the accounting

period.


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4 IASBS FRAMEWORK FOR THE PREPARETION

AND PRESENTATION OF FINANCIAL

SATEMENTS The frameworksets out the concepts that underlie

financial statements for external users. It is designed to assist:

---The IASB in developing new standard and reviewingexisting ones.

---In harmonizing accounting standards andprocedures

---National standard-setting bodies in developingnational standards

---Preparers of financial statements in applying IASsand in dealing with topics not yet covered by IASs


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---Auditors in forming an opinion as to whether

financial statements conform with IASs

---Users of financial statements in interpreting

financial statements

---In providing those interested in the work of

the IASB with information about its approach tothe formulation of IASs


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The frameworkdeals with:

---The objective of financial statements

---The qualitative characteristics that

determine the usualness of information in

financial statements.

---The definition, recognition andmeasurement of the elements from which

financial statements are constructed

---Concepts of capital and capitalmaintenance.


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The users of financial statements are:

---Investors

---Employees

---Lenders

---Suppliers and other creditors

---Customers

---Governments and other agencies

---The public


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The objective of financial statements: to

provide information about the financial position,

performance and changes in financial positionof an enterprise that is useful to a wide range

of users in making economic decisions.

The Frameworkidentifies two underlyingassumptions (these appear also in IAS 1)

---the accruals basis of accounting

---The going-concern basis Qualitative characteristics: a set of attributes

which together make the information in

financial statements useful to users.


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WHAT MAKESFINANCIALINFORMATIONUSEFULThreshold quality

WHAT MAKES INFORMATION WHAT MAKES INFORMATION

RELEVANT? RELIABLE?

Information that influences decisions information that is fromerror or bias

PREDICTIVE VALUE AND FAITHFUL COMPLETENESS 9

CONFIRMATORY VALUE 3 REPRESENTATION 5 NEUTRALITY 7SUBSTANCE PRUDENCE 8

OVER FORM 6

more of one may mean

less of the other Liability 4Relevance 2

Materiality 1

Information that isnot material cannot

be used


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WHAT QUALITIES MAKE THE PRESENTATION OF FINANCIAL

INFORMATION USEFUL?

COMPARABILITY 10 UNDERSTANDABILITY 13

CONSISTENCY 11 DISCLOSURES 12 USERS ABILITIES 14

e.g. accounting policies and corresponding figures

WHAT LIMITS THE APPLICATION OF THE

QUALITATIVE CHARACTERISTICS?

BALANCE BETWEEN TIMENESS 16 BENEFIT AND

CHARACTERISTICS 15 COST 17


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Materiality (1)

A threshold quality. If information could influence users

decisions taken on the basis of financial statements, itis material.

Relevance (2)

A basis requirement. Financial information is relevant if

it can assist users decision-making by helping them toevaluate past, present or future events or by

confirming, or correcting, their existing evaluations.

Relevant information may have predictive value or

confirmatory value(3): it may help users in assessing

the future of the business or confirming past

predictions.


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Reliability(4)

A basic requirement. To be reliable, financial

information must be free from bias and error. Somecontingent items may by their nature be bound to be

unreliable (see IAS 37).Subsidiary qualities that make

information reliable are:

Faithful representation (5)Information must faithful represent the effects of

transactions and other events.

Substance over form(6)

Some transactions have a real nature (substance) that

differs from their legal form. Whenever it is legally

possible, the real substance prevails over the legal

form.


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Neutrality(7)

Judgments are made without bias in arriving at

items in the financial statements.

Prudence (8)

The right degree of caution must be exercised

in preparing financial statements and inestimating the outcome of uncertain events.

Completeness(9)

Information presented in financial statementsshould be complete, subject to the constraints

of materiality and cost.


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Presentation in financial statements:

---Comparability(10)

Financial statements should be comparable with thefinancial statements of other companies and with thefinancial statements of the same company for earlierperiods.

To achieve comparability we need consistency(11) anddisclosure of accounting policies(12).Accountingstandards contribute to comparability by reducing theoptions available to enterprises in their treatment oftransactions.

---Understandardablity(13)

Dependent upon users abilities(14).The frameworksuggest that a reasonable knowledge of business andaccounting has to be assumed here.


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A liability is a present obligation of the

enterprise arising from past events, thesettlement of which is expected to result in an

outflow from the enterprise of resource

embodying economic benefits.

Equity is the residual interest in the assets of

the enterprise after deducting all its liabilities.


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5 IAS 18:REVENUE5 IAS 18:REVENUE

IAS 18 defines when revenue from various

sources may be recognized. Revenue andassociated costs are recognized

simultaneously in according with the matching

concept. It deals with revenue arising from three types

of transaction or event.

---Sale of goods: should be recognized whenall the following conditions have been satisfied:


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All the significant risks and rewards of

ownership have been transferred to the buyer.

The seller retains to effective control over thegoods sold.

The amount of revenue can be reliably

measured.The benefits to be derived from the transaction

are likely to flow to the enterprise.

The costs incurred or to be incurred for thetransaction can be reliably measured.


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---Rendering of services :the sale usually takes placeat a point of time whereas the provision of the serviceis likely to be spreads over a period of time. Revenuefrom services may be recognized according to thestage of completion of the transaction at the balancesheet date.

The amount of the revenue must b measured

reliably.

The benefits from the transaction must be likely

to flow to the enterprise.

The stage of completion of the work must bemeasured reliably.

The costs incurred or to be incurred for the

transaction must be reliably measured.


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When a partly completed service is in its early

stages, or the outcome of the transaction

cannot be reliably estimated, revenue shouldbe recognized only up to amount of the costs

concurred to date, and then only if it is

probable that the enterprise will recover in

revenue at least as much as the costs.

If it is probable that the costs of the transaction

will not be recovered, no revenue is to be

recognized.


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---Interest, royalties and dividends: If the

amount of revenue can be reliably measured

and the receipt of the income is reasonablyassured, these items should be recognized as

follows:

---Interest: on a time proportion basis takingaccount of the yield on the asset,

---Royalties :on an accruals basis in

accordance with the relevant agreement.

---Dividends :when the shareholders right to

receive payment has been estimated.


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Disclosure requirements of IAS 18:

---Accounting policies for revenue recognition,

including the methods used to determine thestage of completion of transaction involving

services.

---Amount of revenue recognized for each ofthe five categories (sale of goods, rending of

service, interest, royalties and dividends),

where material.

---The amount, if material, in each category

arising from exchanges of goods or services.

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