2017 Topic 1: The International Accounting Environment

Transcription

1 2017 Topic 1: The International Accounting Environment 1. INTRODUCTION TO ACCOUNTING* learning objectives Attachment1: Introductory readings at the end of notes (Background) Accounting: information is to be useful to interested users for the purpose of financing and management. Financial Reporting: to provide general purpose financial reporting (for majority of external users) about the reporting entity that is decision-useful to primary users of the entity s financial reports. (Investors are providers of the risk capital e.g. shareholder/creditors) IFRS Foundation: an independent, not-for profit private sector international body working in the public interest. Develops standards through International Accounting Standards Board (IASB). Entity: a word designed to cover all ways of organizing business operations (sole-trader, partnership, company etc.) GPFS (general purpose financial statements): act as a communicating process to those outside the entity by providing useful information to the users. Audit: A control mechanism designed to provide an external and independent check on the accounting info being published by the entity. Groups of users: -current investors- whether to buy, hold, sell shares -suppliers/lenders- solvency, whether the business can pay back a loan+interest -employees- stability Tier 1: Tier 2: Financial accounting VS management accounting FINANCIAL Reports are published (GPFS) Audit required Diverse groups of users with diverse needs Compliance costs due to regulations MANAGEMENT Reports are not published (info inside) An audit is not required One predominant user-management No compliance costs as no regulation 2. HOW IS THE INFORMATION IN GPFS TO BE DECIDED UPON AND REGULATED (Gain an appreciation of different ways in which to regulate a mixture of 3) 1. Market forces Good and useful information will attract investment at lower interest rates (Market induced incentive) o/w, penalty higher interest rates. 2. Government/Parliament Government creates laws act as mechanism, o/w jail sentences/fines. 3. Private sector - Stock exchange: to be listed, you have to follow the listing rules penalties: delisted - Accounting profession (e.g.ca): 1. Write the accounting standards and rules 2. Monitor ethics and professional competence of its members 3. Act as a qualifying body for new members 4. Conduct audits - Standard setting boards: 1983? IASCommittee produces IAS, 2001 IASBoard produces IFRS 3. DIFFERENCES IN ACCOUNTING REGULATIONS (Explain the 4 major influences on differences in the development and regulation of accounting around the world) 1

2 Countries like UK, US, Australia, NZ can be grouped together 1. Legal system? Roman Law 2.Provider of Finance? Bank/State/Family 3. Difference: tax numbers reporting numbers? No 4. Accounting profession Less need. Countries like Germany, France, Belgium, Spain, Italy can be grouped together 1. Legal system? Roman Law 2.Provider of Finance? Bank/State/Family 3. Difference: tax numbers reporting numbers? No 4. Accounting profession Less need. 1. Legal Systems - Common Law: no all-embracing laws for accounting and financial reporting, limited amount of statute law, many case laws, historically accounting profession provided the details. - Codified Law (Civil/Roman Law): detailed rules and commercial codes for accounting, very standardized, was a branch of law 2. Provider of Finance - Private Investors: capital provided by large number of private investors (institutional + individual investors), so investors do not have access to internal information---they require disclosure, auditing, and decision-useful information to be provided to them - Bank/ State/ Family: act as important owners of shares in companies as well as lenders, can nominate directors and so obtain restricted information and therefore the need for published information reduced and audit reduced. 3. Tax numbers and Financial reporting numbers difference - Many differences exist: to measure performance of entity, profit for accounting profit for tax *Dr Income tax expense is based on accounting profit using accounting rules; Cr Income tax payable is based on your tax profit using tax rules, use another account e.g. deferred assets/liabilities to balance - Little to no difference: to calculate taxable income, profit for accounting = profit for tax 4. The accounting profession (follow from the three major influences) -There are less accounting profession members in Germany, France, Italy, etc. -There are more accounting profession members in New Zealand, UK, Australia, USA, etc. 4. INTERNATIONAL CONTEXT - Since 2001, many countries have adopted full IFRS and made them compulsory for consolidated financial statements of listed companies. - IASB (under IFRS Foundation oversight) developed IFRS with goal: develop a single set of global financial reporting standards that bring transparency, accountability and efficiency to financial markets around the world. Topic 2: Statement of Cash Flows Cash flows: are inflows and outflows of cash + cash equivalents Cash: cash on hand + demand deposits! Cash equivalents: are short-term, highly liquid investments, that are readily convertible to known amounts of cash + which are subject to an insignificant risk of changes in value. Cash on hand: petty cash and accessible cash in bank account Demand deposit: bank account withdraw without prior notice or less than 7 days notice Operating activities: the principal revenue-producing activities of the entity + other activities that are not investing or financing activities Investing activities: the acquisition and disposal of long-term assets and other investments not included in cash equivalents Financing activities: activities that result in changes in the size and composition of contributed equity and borrowings of the entity Why cash flow important? - Operating expenses (wages, electricity, inventory, etc.) / interest and dividends/ to buy new equipment PPE - Timing and knowledge of incoming receipts and outgoing payments 2

3 - B/S & I/S don't tell us about what cash came into the firm and how much left it during the year - profit cash (accrual basis v cash basis) e.g. AR VS Cash Sales, Accrued Expenses VS Cash Expenses * Involuntary failure always due to lack of cash NZIAS 7 Attachment3 at the end of notes What: provides users of financial statements with a basis to access the ability of the entity to generate cash and cash equivalents and the needs of the entity to utilise those cash flows. Objective: to require the provision of info about the historical changes in cash and cash equivalents of an entity by means of a SCF which classifies cash flows during the period from operating, investing and financing activities. Scope: NZ Para 0.1 This standard applies to Tier 1 and Tier 2 ForProfit entities Para 1 An entity shall prepare a SCF in accordance with the requirements of this Standard and shall present it as an integral part of its financial statements for each period. (page5) 1. EXPLAIN THE DEFINITION OF CASH AND CASH EQUIVALENTS - For an investment to qualify as a cash equivalent : 1. held to meet short-term cash commitments 2. readily convertible to a known amount of cash and be subject to an insignificant risk of change in value (e.g.g how volatile the exchange rate) - Features: Normally has a short maturity: 3 months (90 days) from date of acquisition Equity investments excluded unless in substance a cash equivalent---(e.g. Purchased shares in another entity X limited is an equity investment and not cash equivalents. UNLESS the substances are cash convertible, such as redeemable preference shares in two months will be treated as cash equivalents) *Bank borrowings are generally considered to be finance activities (NOT bank overdrafts) Bank overdrafts = cash and cash equivalents = repayable on demand (acctg211 assumption) form an integral part of an entity s cash management - Cash flows exclude: movements between items that constitute cash or cash equivalents because these components are part of cash management and not part of o, i, f activities--- (e.g. transfers from one bank account to another bank account: movement within) Para 45 An entity shall disclose the components of cash and cash equivalents and shall present a reconciliation of the amounts in its SCF with the equivalent items reported in the SFP. Cash and cash equivalents as per the SCF: Cash at bank $100 Bank overdraft (16) Short-term investment 77 $161 Cash and cash equivalents as per the SFP: Cash at bank 100 ST investment 77 $177 Reconciliation: Cash and cash equivalents as per the SCF 161 Add back the bank overdraft as treated as a current liability in SFP 16 Cash and cash equivalents as per the SFP $ EXPLAIN THE CLASSIFICATION OF CASH FLOW ACTIVITIES AND CLASSIFY CASH INFLOWS AND OUTFLOWS INTO OPERATING, INVESTING AND FINANCING ACTIVITIES - OPERATING (CFOA) Para 13 the amount of cash flows from operating activities (CFOA) is a key indicator of the extent to which the operations of the entity have generated sufficient cash flows to: 3

4 1. repay loans 2. maintain the operating capability of the entity (e.g. pay wages) 3. pay dividends 4. make new investments (e.g. purchase of new PPE) without recourse to external sources of financing. Para 14 CFOA are primarily derived from the principal revenue-producing activities of the entity they generally result from the transactions/events that enter into the determination of profit or loss only cash activities.--- (e.g. cash receipts from customers, cash payments and supplies ) *what the principal revenue-producing activities for one entity could be the CFIA for another entity - Gain or loss on sale of PPE (carrying amount=historical cost-accumulated depreciation, proceeds-carrying amount=gain/loss) is items in profit or loss NOT included in CFOA. (depreciation, bad debts, discount allowed, provisions, deferred taxes, unrealized foreign currency gains and losses, and undistributed profits of associates, accrued accounts adjusted) Cash proceeds are classified as investing CFIA, regardless of gain or loss. - Reporting CFOA: direct and indirect method stated in LO3. - INVESTING (CFIA) Para 16 The separate disclosure of CFIA is important because the cash flows represent the extent to which expenditures have been made for resources intended to generate future income and cash flows. * Only expenditures that meets the definition and recognition criteria of assets (reported in the SFP) (e.g. cash outflows to buy PPE, proceeds from sale of PPE) - Reporting CFIA: record separately (do not net off) gross cash receipts and gross cash payments from IA. - FINANCING (CFFA) Para 17 The separate disclosure of CFFA is important because it is useful in predicting claims on future cash flows by providers of capital (shareholders, debenture holders, creditors) to the entity. (e.g. cash outflow: a repayment of a loan/ mortgage; cash inflow: a new loan, an issue of shares to shareholders) - Reporting CFIA: record separately (do not net off) gross cash receipts and gross cash payments from FA. Interest and Dividends (Special treatment in SCF) Para 31 cash flows from interest and dividends received and paid should be each given its own line for separate disclosure. Each shall be classified in a consistent manner by choice (question will say in additional information). Para32 The total amount of interest paid during a period is disclosed in the SCF whether it has been recognized as an expense in profit or loss or capitalized (include the interest in the cost of an asset) e.g. An entity borrows loan to build a factory. Interest on the loan: in the BS, interest can be capitalized dr factory, cr interest expense. HOWEVER, in the SCF, all interest (incl. those capitalized) must be disclosed in the total amount of interest paid. Interest received *because included in the calculation of profit CFOA CFIA CFFA or * return on investment Interest paid * same as above or *cost of obtaining financial resources Dividends received * same as above or * return on equity investment Dividends paid * same as above or *cost of obtaining financial resources * Interest received = interest income (dr cash cr interest income); interest paid = interest expense (dr interest expense cr cash) / Dividends received = dividend income (dr cash cr dividend income); Dividends paid: cash dividends for SCF 1. Dividends are declared: Dr Dividend declared ( create a temporary equity a/c)...xx Cr Dividend payable (create a liability a/c)...xx 2. Dividends are paid (this may happen in the same financial year as 1. or the following): Dr Dividend payable...xx Cr Cash or Share capital (SC)...xx (Cash for a cash dividend and SC for a share dividend) 3. Close off the Dividend declared a/c (happens at year end) Dr REs...xx Cr Dividend declared...xx Taxes on Income Para 35 Cash flows arising from taxes on income shall be separately disclosed and shall be classified as CFOA. (no choice) Non-cash Transactions Para 43 Investing and financing transactions that do not require the use of cash or cash equivalents shall be excluded from a SCF. Para 44 Many investing and financing activities do not have a direct impact on current cash flows although they do affect the capital and asset structure of the company 4

5 e.g. The acquisition of assets (PPE) via 1. A directly related liability specifically arranged: Dr PPE Cr mortgage the bank directly gives the cash to the seller, thus no cash flow through our entity 2. A finance type lease: Dr PPE Cr lease payable no cash involved 3. Dr PPE Cr share capital no cash involved * In general ledger, PPE might have been increased, but this might not be due to cash 3. DISTINGUISH BETWEEN THE DIRECT AND INDIRECT METHODS OF CALCULATING CFOA AND BE ABLE TO DEMONSTRATE THE DIFFERENCES Para 18 Para 19 Recommended Direct method Show gross cash receipts and gross cash payments to arrive at CFOA $ Entities are encouraged to report CFOA using the direct method because: the direct method provides info which may be useful in estimating future cash flows and which is not available under the indirect method Para 18 Criticized Indirect method The profit/loss is adjusted to arrive at the CFOA $ start with profit then adjust it 1. It can confuse the users the heavy depreciation charges generate a strong cash flow (added to reverse) -false 2. Under direct method, the cash flow component cash receipts from customers is commonly identified as the most important cash flow number for investors + a primary indicator of a company s cash generating ability. Under indirect method, info not available. *Profit or loss on sale of PPE will be included in the indirect method calculation not in the direct method Direct method (as encouraged by NZ IAS 7)+ Indirect Method (as allowed by NZ IAS 7) reconciliation in the notes (as required by FRS-44 NZ) - NZ history reporting of CFOA: Before 2011 Change in 2011 NZ Para 18(b) Indirect method is not permitted in NZ. NZBC1 The FRSB has reintroduced the option in IAS 7 NZ Para Required a reconciliation(notes) of Statement of Cash flows allowing the indirect method. The CFOA to reported profit/loss. FRSB, after considering the feedback from constituents, confirmed the proposal to reintroduce the option noting the harmonisation with IFRSs and Australian Accounting Standards outweighs the historical preference of not allowing the indirect method. FRS-44 NZ-specific disclosures: Para 10 When an entity uses the direct method to present its SCF, the financial statements shall provide a reconciliation* of the net CFOA to profit/loss. 4. PREPARE A SCF IN ACCORDANCE WITH NZ IAS 7 example document Requirements - comparative balance sheets: LY (OB) & TS (CB) - this year s income statement - additional information from the accounting records *Remember, we use the accrual basis of accounting in SCI, SCE, SFP, the SCF is only concerned with cash transactions. Attachment 4: Attached example documents and answer and a written detailed guideline Note for Accounts Receivable and Allowance for doubtful debt: 1. Sales-cash never in AR T-account, only Sales-credit 2. Dr DD expense (different form acc102) Cr Allowance for doubtful debt. At this point, unsure if debtor will pay. i.e. we are doubtful so an allowance is created. 3. The doubtful debt may become a bad debt during the year, therefore prepare the journal entry Dr Allwance for dd Cr AR Why? Now have further evidence that the doubtful receivable will not be received, so record the using up of allowance (write-off). 5