Module 2 (formats for different statements & calculation of cash flows)

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1 Module 2 (formats for different statements & calculation of cash flows) Statement of Profit & Loss and Other Comprehensive Income Revenue Other Income Expense excluding finance cost Operating Profit Finance cost Profit before tax Profit for the year Items that will not be reclassified to P&L: Revaluation decrement asset revaluation surplus Other comprehensive income for the year, net of tax Total comprehensive income for the year Statement of financial position Current assets Cash & cash equivalent Trade & other receivables Inventories Other current assets Total current assets Non-current assets Trade & other receivables Financial assets Property Plant & Equipment Intangible assets Total non-current assets Current liabilities Trade & other payables Current tax payable Dividend Payable Borrowings Provisions Non-current liabilities Borrowings Provision Total liabilities Shareholder s equity Issued capital Reserves 54(i) 54(h) 54(g) 54(h) 54(d) 54(a) 54(c) 54(k) 54(n) 54(m) 54(l) 54(m) 54(l) 54(r) 54(r) 54(r)

2 Statement of changes in equity (example) Share Capital Asset Revaluation Total Surplus Balance 1,050, , ,240 2,593,240 OCI (80,000) 903, ,041 Dividends paid or (450,000) (450,000) declared Closing Balance 1,050, ,000 1,296,281 2,996,281 Cash flow statement Cash flow from operating activities (1) Cash paid to suppliers Accrual basis cost of sales + Increase in Inventory Accrual basis of purchase -Decrease in Inventory Accrual basis purchases + Decrease in acct. payable Cash paid to suppliers -Increase in acct. payable Inventory Balance b/d Purchases Cost of sales Balance c/d Accounts Payable Cash Payment Balance c/d Balance b/d Purchases (2) Cash paid to supplier of services & labor Accrual Basis Expense + Increase in prepaid expense -Decrease in prepaid expense + Decrease in accrued expense -Increase in accrued expense Cash Paid For Service

3 (3) Cash receipt from customers Accrual basis Sale + Decrease in gross receivable - Bad Debts + Increase in AFDD -Increase in gross receivable Bad Debts = Doubtful debt expense + (-) Decrease (Increase) in AFDD Gross receivable change = change in net receivable + Increase in AFDD (4) Income tax payment Accrual basis tax expense -Increase in current tax liability = Cash paid for tax + Decrease in current tax liability Cash flow from investing activities (1) Acquisition of equipment Equipment Balance b/d Purchase: -Cash -Loan Carrying amount of equipment sold Acc. Depr. equipment Balance c/d (2) Disposal of equipment Cash flow from financing activities (1) Issue of shares (2) Borrowings (3) Repayment of borrowings

4 Reconciliation from profit to cash Add to cash Deduct from cash Assets Decrease Increase Liabilities Increase Decrease Reconciliation from cash to profit Add to profit Deduct from profit Assets Increase Decrease Liabilities Decrease Increase

5 Module 4 Common items Asset Carrying Amount Future Deductible Amount Future Taxable Amount Tax Base Deductible temporary difference Taxable Temporary Difference Cash Asset 97, , Accounts Receivable (Net) 234,000 11, ,000 11,000 Prepaid Rent 4, , ,000 Inventory 228, , , , Equipment (net) 48,000 40,000 48,000 40,000 8,000 Liabilities Carrying Amount Future Deductible Amount Future Taxable Amount Tax Base Accounts Payable 67, , Revenue received in advance 18, ,000 Bank Loan 100, , Foreign Currency Payable 32, ,000 33,000 1,000 Employee Benefits Liability 65,000 65, ,000 94,000 13,000 Calculation of taxable temporary difference if CGT applies Sale proceeds Less: Tax written-down value Less: Exempt capital gain (capital gain tax base initial cost) Taxable temporary difference Calculation of taxable temporary difference if CGT not applicable Sale proceeds Less: Capital Gain Less: Tax-written down value Taxable temporary difference

6 Module 6 consolidation adjustment (1) Intra group sale of inventory Sales COGS Inventory (Profit made in selling to subsidiary) (2) Remaining inventory in previous period sold in this period Cost of Sale (3) Inventory in previous period remained on hand Cost of sale Inventory

7 (4) Loss on sale of plant (occurred 1 day before current year opening financial date) Plant Deferred Tax Liability Depreciation Expense Acc. Depr Deferred Tax liability (5) Sale of assets to subsidiary in previous period Asset Acc. Depreciation Depreciation expense

8 (4) Gain on sale of asset to subsidiary in current period Gain on sale Asset Acc. Depr. Depreciation expense (5) Loss on sale of asset Plant Loss on sale Deferred Tax Liability Depreciation Expense Acc. Depr. Deferred Tax Liability (6) Sale of machine that is used as inventory Inventory Loss on sale Deferred Tax liability

9 (7) Sale of inventory that is used as machine Sales COGS Machinery Acc. Depr. Depreciation expense

10 Module 1 The role and importance of financial reporting -prepared by entities to provide information to users about financial position, performance and cash flow of entity Purpose of financial reporting -provide useful information for decision-making -it also provides stewardship or accountability role by requiring manager to give an account of how they have used resources Special purpose reporting -users who can command tailoring of financial statement to meet their needs General purpose reporting -catering for users who do not have authority to demand special report Different information needs -IASB s approach to resolving conflicting user information need is to seek to provide information that will meet needs of maximum number of primary users. -conceptual framework also states that focusing on common information needs does not prevent an entity from providing additional information that may be useful to a group of users. -different demands may give rise to different preferences for measurement of assets or timing of recognition of revenue Limitation of decision-usefulness objective -there are limitations to decision-usefulness criterion in judging whether information should be included or required in financial statement Lack of familiarity with new types of information -if users of financial statement are not familiar with an item of information, it is difficult to assess its usefulness to user s decision making process. Decision usefulness may vary among users -difference in what users find relevant Capable of multiple interpretation -decision-usefulness criterion appears to be capable of supporting too many different measurement bases -using fair value may support capital market assessment and value-in-use may be consistent with management s plan -these competing user needs are difficult to reconcile

11 Professional judgment Definition -combination of conceptual and practical knowledge and is described as ability to diagnose and solve unstructured, value-based problems Areas in making professional judgment -trade-off between relevance and faithful representation -selection and application of accounting policies Who should prepare GPFS? Conceptual framework -silent on who should prepare GPFS Australia Corporation Act Part 2M.3 outlines reporting obligations for companies -s.292: specifies that financial reports must be prepared by all disclosing entities, public companies, large proprietary companies and registered scheme Stated-based Incorporate Association Act -for associations New Zealand -New Zealand laws on financial reporting 2013 provide an example of more specific legislation guiding who should prepare financial report -there has been introduction of several tiers or levels of financial reporting -this has led to reduction in who must prepare GPFS with many smaller and medium organizations being excluded from this requirement Ifrs reporting IFRS and International Accounting Standard (IAS) -IFRS are accounting standards issued by IASB -IAS are accounting standard issued by predecessors of IASB and was adopted by IASB at Board s inception IFRIC and SIC Interpretation -IFRIC: official interpretation of IFRS -SIC: official interpretation of IAS

12 IFRS Interpretation Committee Agenda Decision -it may issue agenda decision if it decides that the issue raised does not require further consideration -agenda decisions do not have authority of IFRS but they may be used as guidance Non-IFRS reporting -not all entities are required to prepare financial report in accordance with IFRS -in Malaysia, private entities comply with Malaysian Private Entities Reporting Standard rather than IFRS -entity that is not required to report separately in accordance with IFRS may still need to provide information to parent entity in a set of consolidated financial statement that must comply with IFRS International initiative to decrease complexity of financial reporting -reducing differences in reporting standards between entities -reducing reporting requirements of specific organization -catering to information needs of multiple stakeholders Reducing difference in reporting standard between entities -complexity in financial reporting has reduced due to acceptance of IFRS in most part of the world -global acceptance of IFRS has led to commitment of US Financial Accounting Standard to work with IASB to explore possibilities of convergence of US GAAP with IFRS Reducing reporting requirement of specific organization -specify less complex standard for some entities International Accounting Standard Board -IASB has introduced IFRS for SMEs Topics not relevant to SMEs are omitted. Examples are Earnings Per Share Many principles for recognizing and measuring assets, liabilities, income and expenses in full IFRS are simplified. For example, amortize goodwill, expense all borrowing costs Fewer disclosure Standard written in clear and translatable language Revisions are limited to once every three year Australian Accounting Standard Board (AASB) -introduced Tier 1 and Tier 2 Reduced Disclosure Requirement -Tier 2 RDR: For-profit private entities that do not have public accountability All not-for-profit private sector Public sector entities other than Australian Government & State, Territory and Local Government

13 External Reporting Standard Board (XRB), New Zealand -Tier 1: publicly accountable or large for-profit organization -Tier 2: non-publicly accountable and non-large for profit organization follows NZ-IFRS RDR -Tier 3: non-publicly accountable and either all of its owners are entity s governing body or not large follows PSFR-A -Tier 4: non-publicly accountable, not required to file financial statement and not large follows old GAAP Catering the need for multiple stakeholders -measure performance from multiple perspective that cannot be met simply by reporting financial statement -increase in reporting of non-mandatory information in annual report leads to questions about whether financial reporting has become merely a compliance exercise International Accounting Standard Board (IASB) (a) Implementation phase Proposed amendment to IAS 7 Statement of Cash Flows -reconciliation of opening and closing balance of liabilities that form a part of financing activities -improved disclosure with regards to restriction on cash Proposed amendment to IAS 8 Accounting Policies, change in accounting estimate -change in measurement bases is change in accounting policies -change in input, assumption and method is change in accounting estimate (b) Research project Materiality -whether assessment of materiality is restricted to financial statements only or includes notes to financial statement -materiality of disclosure in reporting standard -removing language from IAS 1 that has been perceived as prescribing order of notes to financial statement -whether flexibility should be given to entities with regard to location of disclosing accounting policies in financial statement Principle of disclosure -disclosure standard that binds together financial statement and their contents Standard review of disclosure

14 (c) Completed projects -amendment to IAS 1 Presentation of Financial Statement Financial Reporting Council (UK) -introduced financial reporting lab as a forum for companies and investors to solve contemporary needs Interaction between financial reporting and regulatory environment -process of creating rule is not purely technical because it is exposed to political influence Regulatory capture -regulated parties are able to exert influence on standard-setting body -capacity of various private interests to exert influence on standard setter Conceptual framework for financial reporting The purpose and application of conceptual framework -accounting standards do not cover all areas or transactions -when they do not provide guidance, it is the role of the Framework to provide guidance to facilitate consistency in reporting transaction Development of conceptual framework by IASB -objective of the project is to improve financial reporting by providing IASB with complete and updated set of concepts to use when it develops or revises IFRS Use by different parties -used by standard-setting bodies to develop accounting standard -used by those prepare financial statement when issues arise are not covered by accounting standard -auditors may use the framework to help them when forming opinion on compliance with framework Authority of conceptual framework -neither an accounting standard nor interpretation -when there is conflict with IFRS, IFRS override Framework

15 Objective of general purpose reporting Limitation of general purpose reporting -there are limitations to the extent that general purpose reporting can provide useful information to all users -it recommends the use of other sources (para OB6) to help gain clearer understanding -it also states that reports are not designed to show value of organization but to help decision maker to make their own estimate as to its value (para OB7) How general purpose financial report may be used -GPFS provides financial information about an entity s financial position and effects of transactions and other events that give rise to changes in financial position -the presentation of financial statement is comparable with entity s previous financial statement and with financial statement of other entities Assumptions of GPFS Accrual basis -recognize effect of transactions and other events when they occur Going concern -presume that entity will continue in foreseeable future -some assets such as property and plant may be stated at amounts that exceed disposal value because entity expects to obtain greater benefits through continued use of such asset Qualitative characteristics of useful financial information -to be useful, financial information must be relevant and provide faithful representation -usefulness of financial information is enhanced if it is comparable, verifiable, understandable Relevance -information is relevant when it is capable of influencing decisions of users (QC 6) -this influence can occur through predictive value or confirmatory value of information Relevance & Materiality -information is material if omitting it could influence decisions of users -quantitative threshold is not used because application of concept of materiality is entity-specific (QC 11) Entity may engage in transactions with its directors that involve amounts that are not significant

Module 1: The role and importance of financial reporting

MODULE 1: The role and importance of financial reporting Part A: The role and importance of financial reporting The role of financial reporting The importance of financial reporting Who must prepare general