Introduction to Accounting - II

Transcription

1 CA BUSINESS SCHOOL EXECUTIVE DIPLOMA IN BUSINESS AND ACCOUNTING SEMESTER 1 : Preparation of Financial Statements Introduction to Accounting - II M B G Wimalarathna (ACA, ACMA, ACIM, SAT, ACPM)(MBA PIM/USJ)

2 Environment of Accounting The environment of accounting is the SCOPE within which overall accounting activities will be carried out by an entity/organization. Recent episodes in corporate collapses and insider trading re-iterate the importance of having well established and strictly monitored environment to carry out accounting function. This essentially helps to protect interest of different stakeholders along with promoting more investment avenues which in turn contributes economic growth of the country. Hence, government itself carries more responsibility to establish strong accounting environment with the assistance of other regulatory bodies such as CA Sri Lanka. This can implement by introducing rules/regulations and other kinds of code of ethics.

3 Key Categories Following are the key categories which represent overall accounting environment; Statutory: this basically consists of companies act no.07 of 2007, Sri Lanka Accounting Standards and Sri Lanka Auditing Standards Professional & Technical: guide to act in line with professional code of ethics and use scares resources with 3Es Political & Economic: key macro economic factors and changes in the financial/fiscal policies of the government Social & Cultural: changes in social/cultural pattern along with the structure of the population Technological: evolution in technology (introduction of MIS/ERP)

4 The Companies Act of no. 07 of 2007 Treated as main source of regulation to control business entities and their overall function including accounting. Act includes such sections as the definition of an entity; the accounting requirements of an entity; exemptions by act; a small business guide; the basic features of a company; registering a company; company powers; annual financial reporting to members and the appointment of an auditor; and specific offence, including false or misleading statements, and obstructing hindering regulators. Two important sections of the act are s.150, which outlines the obligation to prepare annual financial reports and director s reports; and s. 151, which stipulates the contents & form of financial reports.

5 Securities & Exchange Commission (SEC) SEC provides in-depth market data and information to a variety of users. It operates as the primary Sri Lankan exchange for shares, derivatives and fixed interest securities such as debentures. SEC regulates entities through its business rules and listing rules. Department of Inland Revenue (IRD) IRD collects taxes and responsible for overseeing all self-managed superannuation funds. Central Bank of Sri Lanka (CBSL) CBSL is responsible for the stability of the Sri Lankan financial system and for setting monetary policy.

6 Sri Lanka Accounting Standards Board (SLASB) SLASB is responsible for the development of accounting standards for the application purpose to the entities under the companies act. Functions/responsibilities of the board Participating in IASB research projects Providing SLASB staff to the IASB to work on selected projects Establishing and maintaining good relationships with other standard setters.

7 Development of Accounting Standards Following are the key steps to be follow in the event of establishing a new accounting standard. Emerging issues are identified through submissions and other materials from interested parties. An emerging issue could be an exposure draft issued the SLASB, or by a regulatory change in Sri Lanka that has consequences for standard setting. When an emerging issue is added to the SLASB s work program, the SLASB usually invites people with expertise to participate in the process to investigate different opinions, current practices and viewpoints on the issue.

8 An early version of the standard for comment, known as an exposure draft, is prepared and sent to selected entities, user groups, individuals, academics and practitioners for comment. This original draft is reviewed and may be amended after considering the views of the different parties. The actual exposure draft is issued, inviting comment from all interested parties over a pre determined period. This is available for downloading from the SLASB website. The accounting standard is finalized by reviewing the submissions from the exposure draft and the final standard is then prepared.

9 SLASB Framework A reporting entity is identified by reference to users who are dependent on general purpose financial reports for making and evaluating resource allocation decisions. General purpose financial reports are financial reports intended to meet the information needs common to users who are unable to command the preparation of reports tailored to suit their information needs. Hence, the financial statements prepared by the entity (external publish) can be treated as general purpose financial statements.

10 The current SLASB framework includes following key 03 areas; The Objective of Financial Reports The Objective of financial reports is to provide information about the financial position, financial performance & cash flows of an entity that is useful to a wide range of users in making their economic decisions. Financial statements will be used by existing and prospective internal/inter-related/external stakeholders with the aim of making economic decisions which leads to reap benefits. Hence, financial statements prepared by an entity should contain all relevant financial and non-financial information.

11 Qualitative Characteristics Key qualitative characteristic expected from financial statements can be identified as follows; Relevance Information should be of value for users & relevant in making & evaluating economic decisions. The relevant will affect by it s nature & materiality. Reliability The information must be without buyers or due error & must faithfully represent transactions & events. Comparability The users of financial reports must be able to compare aspects of an entity at one time and over time, and between entities at one time & overtime. Ability to Understand The information should present in the most understandable manner to users without sacrificing relevance or reliabilities.

12 Recognizing Elements in Financial Statements Following elements should be identified in line with the provisions available in the accounting standards (LKASs). Assets A resource control by the entity as a result of past events & from which future economics benefits are expected to flow to the entity. E.g. PPE, Investments, Goodwill, Debtors, Inventory, Cash in hand & etc. Liabilities A Present obligations of the entity arising from past events & settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits. E.g. Long term & short term Loan, accrued expenses, provisions & etc.

13 Equity The residual interest in the assets of the entity after eliminating its liabilities. Equity will increase through contributions made by owners & through the excesses of the entity s income over its expenditures & decrease vice versa. E.g. Share capital, capital reserve & revenue reserve (retain earnings) Income Inflows or other enhancements of assets or decreases of liabilities that result in an increase in equity during the reporting period. E.g. Sale of goods/services, interest on investments, dividends, service fee, grants, gain from sale of assets, discount received and etc. Expenses Decrease in economic benefits in the form of outflows or depressions of assets or incurrence of liabilities that result in a decreasing equity during the reporting period. E.g. Cost of sales, salaries & wages, power & electricity, rent, depreciation, interest, bad debts, telephone and etc.

14 Constraints in Relevant and Reliable Information The timelines of reports is important. A timely report is one where there is no undue delay from the reporting date and the date on which the report is made available to users. If there is a delay, the report may lose its usefulness. A major dilemma in providing financial information is whether the costs exceed the benefits of providing certain financial information and with the possible dilution of competitive position when certain information is made public. The benefits of providing information are generally associated with more effective and efficient decision making by various users of financial information.