+44 (0) International Accounting Standards (IAS) Guidance: Terminology and Presentation

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1 +44 (0) International Accounting Standards (IAS) Guidance: Terminology and Presentation

2 Contents Introduction 3 1 First Level Terminology Format of the Income Statement and Statement of Financial Position 1.3 Treatment of discount Summary 5 2 Second Level 2.1 Preface Partnerships Fourth Level 4.1 Preface Components of financial statements Format of the Statement of Financial Position Statement of Comprehensive Income Statement of Changes in Equity Financial statements IAS Standards Limited liability companies Manufacturing Accounts Non-trading organisations Statement of Comprehensive Income Summary 11 3 Third Level 3.1 Preface Terminology Accounting treatment of goodwill Format of Consolidated Income Statement and Consolidated Statement of Financial Position Cash flows IAS standards Summary 15

3 Introduction The International Accounting Standards (IAS) and the International Financial Reporting Standards (FRS) are widely used throughout the world. Since 2001, almost 120 countries have required or permitted the use of IFRS. All remaining major economies have established time lines to converge with or adopt IFRS in the near future. 3

4 1. First Level 1.1 Terminology 4 UK Fixed Assets Stock Trade Debtors Prepayments Trade Creditors Accruals Trading Profit and Loss Account Sales Balance Sheet Provision for Doubtful Debts Net Book Value Creditors amounts falling due within 1 year Creditors amounts falling due after more than 1 year Long term Debenture IAS Non-current Assets Inventory Trade Receivables Other Receivables Trade Payables Other Payables Income Statement Revenue Statement Of Financial Position Allowance For Doubtful Debts Carrying Amount Current Liabilities Non-current Liabilities Loan Note 1.2 Format of the Income Statement and the Statement of Financial Position Whilst there are no compulsory requirements for the presentation of the accounts of sole traders, it is recommended that candidates become familiar with preparing accounts in the IAS format.

5 1.2.1 Format of Financial Statements for a sole trader Peter Piper Income Statement for the year ended 31 March 20x0 Revenue 18,300 Cost of goods sold Opening inventory 2,200 Peter Piper Statement of Financial Position at 31 March 20x0 Non-cuurent Assets Plant and equipment 4,560 Motor vehicles 2,500 Add Purchases 13,100 15,300 Less Closing inventory (2,100) 13,200 Gross profit 5,100 Less Expenses: Current Assets Inventories 2,100 Trade receivables 4,200 Other receivables 150 7,060 Motor expenses 1,000 Rent and rates 1,500 Light and heat 1,300 Loan interest 50 Sundry expenses 200 (4,050) Profit for the year 1,050 Cash 70 6,520 Total Assets 13,580 Capital Opening balance 4,150 Add Profit for the year 1,050 5,200 Less Drawings ( 400) 4,800 Non-current Liabilities 5 Bank loan 5,000 Current Liabilities Trade payables 2,400 Other payables 400 Bank overdraft 980 3,780 Total equity and liabilities 13, Treatment of Discount Discount allowed should be deducted from revenue, Discount received should be deducted from purchases. 1.4 Summary The impact of international accounting standards at this level is mainly presentational. Candidates preparing accounts under recognisable formats will not be penalised as IAS does not apply to sole traders. However, candidates wishing to progress to higher levels would be encouraged to use these formats.

6 2. Second Level 2.1 Preface Practices and principles raised at the First Level will be relevant at the Second Level, reflecting the cumulative requirements of the LCCI syllabuses. 2.2 Partnerships Terminology UK Trading, Profit and Loss and Appropriation Account Balance Sheet IAS Income Statement and Appropriation Account Statement of Financial Position 6

7 2.2.2 Format of Financial Statements for a partnership Peter and Pope Income Statement and Appropriation Account for the year ended 31 March 20x0 Revenue 18,300 Cost of goods sold Opening inventory 2,200 Peter and Pope Statement of Financial Position at 31 March 20x0 Non-cuurent Assets Plant and equipment 4,560 Motor vehicles 2,500 Add Purchases 13,100 15,300 Less Closing inventory (2,100) 13,200 Gross profit 5,100 Less Expenses: Current Assets Inventories 2,100 Trade receivables 4,200 Other receivables 150 7,060 Motor expenses 1,000 Rent and rates 1,500 Light and heat 1,300 Loan interest 50 Sundry expenses 200 (4,050) Profit for the year 1,050 Interest on Drawing Peter 100 Pope ,200 Salary-Pope ( 500) Interest on capital Peter 100 Pope 100 ( 200) 500 Share of Profits Peter (1/2 x 500) 250 Pope (1/2 x 500) 250 ( 500) Cash 70 6,520 Total Assets 13,580 Capital Accounts Peter 1,550 Pope 1,550 3,100 Current Accounts Peter 1,000 Pope 700 1,700 4,800 Non-current Liabilities Bank loan 5,000 Current Liabilities Trade payables 2,400 Other payables 400 Bank overdraft 980 3,780 Total equity and liabilities 13,580 7

8 2.3 Limited liability companies The accounts of limited liability companies are affected much more substantially, and candidates preparing for examinations under IAS will be expected to comply with the basic layouts to be given in sections and Terminology UK GAAP Limited Company (Ltd) Public Limited Company Preference share Capital Ordinary shares Profit & loss/accumulated profits IAS equivalent Private Company Public Company Preferred share capital Equity shares Retained earnings Treatment of prefered share capital 8 UK GAAP Redeemable preferred share capital Irredeemable preferred share capital IAS equivalent Shown in Non Current liability Shown in Shareholder s equity

9 2.3.2 Format of Financial Statements for companies Hill Traders Income Statement for the year ended 31 March 20x0 Revenue 18,300 Cost of goods sold Opening inventory 2,200 Add Purchases 13,100 15,300 Less Closing inventory (2,100) 13,200 Gross profit 5,100 Less Expenses: Motor expenses 1,000 Rent and rates 1,500 Hill Traders Statement of Financial Position at 31 March 20x0 Non-current Assets Plant and equipment 17,600 Motor vehicles 2,500 Current Assets Inventories 2,100 Trade receivables 4,200 Other receivables ,100 Cash 70 6,520 Total Assets 26,620 Light and heat 1,300 Loan interest 50 Less: Sundry expenses 200 (4,050) Profit for the year 1,050 Equity and Liabilities Capital and reserves Ordinary share capital 10,000 Share premium 5,000 Retained earnings 4,000 9 Equity 19,000 Non-current Liabilities Bank loan 3,000 Current Liabilities Trade payables 2,400 Other payables 400 Bank overdraft 1,820 4,620 Total equity and liabilities 26,620

10 2.3.3 Presentation of Dividends Dividends paid by limited companies are no longer reported in the Income Statement. They are included in the Statement of Changes in Equity, as shown in 2.5. Only dividends paid before the yearend are included Statement of Changes in Equity The Statement of Changes in Equity reports information about the increase/decrease in net assets or wealth of equity shareholders. The items that are likely to appear in the Statement of Changes in Equity at this level are: Profit for the year Additional shares issued during the year Dividends paid during the year Transfers between reserves (for example, transfer from retained earnings to general reserve) Format of the Statement of Changes in Equity of companies 10 Trotters Statement of Changes in Equity For the year ended 31 March 20x0 Share capital Share Premium Retained earning General reserve Total equity $000 $000 $000 $000 $000 Balance at 1 April 1, ,800 Changes in Equity for 20x0 Issue of share capital Transfers (200) 200 Profit for the period Dividends (300) (300) Balance at 31 March 1, , Manufacturing accounts The layout of manufacturing accounts will be unchanged, however, although the terminology will be consistent with IAS, and for example stock will be referred to as inventory.

11 2.5 Non-trading organisations The layout of the accounts of non-trading organisations will remain unchanged, although the terminology will be consistent with IAS. However, the Statement of Financial Position will be laid out similarly to Hill Traders, in the Statement of Financial Position shown in The Accumulated Fund will be shown above Non Current Liabilities. 2.6 Statement of Comprehensive Income The Statement of Comprehensive Income will be examined at Level Summary Changes at this level are mainly presentational and specific formats only apply to company accounts. However, once again, candidates wishing to progress to higher levels would be encouraged to become used to the formats. 11

12 3. Third Level 3.1 Preface Practices and principles raised at the First and Second Levels will be relevant at the Third Level, reflecting the cumulative requirements of the LCCI syllabi. 3.2 Terminology UK Minority interest IAS Non-controlling interest 3.3 Accounting treatment of goodwill There are two methods of calculating goodwill, the partial and full methods. The partial method is the method that is currently examined in the syllabus and is therefore currently the only method that is examined Accounting treatment of positive goodwill 12 Goodwill arising from the acquisition of a subsidiary is not amortised. After the initial measurement and recognition, the group is expected to measure the goodwill at cost less any accumulated impairment losses since acquisition. The goodwill impairment loss should be charged to the Income Statement Accounting treatment of negative goodwill Negative goodwill should be credited to the Income Statement. It does not appear in the Consolidated Statement of Financial Position.

13 3.4 Format of the Consolidated Income Statement and Consolidated Statement of Financial Position Peter Pope Group Consolidated Income Statement for the year ended 31 March 20x0 Revenue 18,300 Cost of sales 13,200 Gross profit 5,100 Less: Distibution costs 1,200 Less: Administrative expense 1,000 (2,200) 2,900 Other operating income 1,100 Profit from operations 4,000 Interest payable 500 Profit for the year 3,500 Profit attributable to: $ Owners of the Parent 3,200 Non-controlling interest 300 3,500 Peter Pope Group Consolidated Statement of Financial Position at 31 March 20x0 Non-cuurent Assets Goodwill 5,000 Plant and equipment 17,600 Motor vehicles 2,500 Current Assets Inventories 2,100 Trade receivables 4,200 Other receivables ,100 Cash 70 6,520 Total Assets 31,620 Equity and Liabilities Capital and reserves Ordinary share capital 10,000 Share premium 5,000 Retained earnings 2,000 17, Non-controlling Interest 1,000 Equity 18,000 Non-current Liabilities Redeemable preferred share capital 5,100 Bank loan 5,000 10,100 Current Liabilities Trade payables 1,400 Other payables 400 Bank overdraft 1,720 3,520 Total equity and liabilities 31,620

14 3.5 Cash Flows (IAS 7) Format of the Statement of Cash Flow IAS 7 requires reporting of cash flows to be shown under three headings. These are Operating activities; investing activities and Financing activities. Whellars Statement of Cash flows for the year ended 31 March 20x1 14 Cash flows from operating activities Profit for the year 7,600 Adjustments for: Depreciation of non-current assets 120 Interest expense 10 Investment income ( 12 ) Operating profit before working capital changes 7,718 Decrease in trade receivables 4,210 Increase in inventories ( 1,100 ) Decrease in trade payables ( 1,800 ) 1,310 cash generated from operations 9,028 Interest paid ( 80 ) Net cash flow from operating activities 8,948 Cash flows form investing activities Cash paid for non-current assets (4,000 ) Cash received from the sale of non-current assets 1,400 Interest received 300 Dividends received 200 Net cash used in investing activities (2,100) Cash flows from financing activities Proceeds from issue of shares 100 Proceeds from long term borrowing 200 Dividends paid ( 400 ) Net cash used in financing activities ( 100 ) Net increase in cash and cash equivalents 6,748 Cash and cash equivalents at 1 April 20x0 1,200 Cash and cash equivalents at 31 March 20x1 7,948 The example is designed to show the possibilities likely in an LCCI examination and contains more figures than a typical question. However, as in previous sittings, examiners may ask for separate calculations of the cash flow from operating activities, cash flow from investing activities and cash flow from financing activities.

15 3.6 Relevant international accounting standards IAS 2 (Inventories) Inventories are valued at the lower of cost and net realisable value. Costs include purchase cost, conversion costs and other costs incurred in bringing the inventory to its present location and condition. No different from the UK standards IAS 7 (Statement of Cash Flows) Cash flows are reported under three main headings: operating activities, investing activities and financing activities IAS 16 (Non-current Assets) Tangible non-current assets are assets that have a physical substance and are held for use in the production or supply of goods or services, for rental to others or for administrative purposes and are expected to be utilised in more than one reporting year. A tangible non-current asset should be depreciated over its useful economic life. No different from the UK standards IAS 27 (Consolidated Financial Statements) Consolidated financial statements are financial statements of a group (parent and subsidiary) presented as those of a single entity. Non-controlling interests are reported in equity in the Consolidated Statement of Financial Position. This standard will be superseded by IFRS 10 from IFRS 3 (Business Combinations) 15 Goodwill arising from consolidation is measured as the difference between the cost (fair value of the purchase consideration) of an acquired entity and the aggregate of the fair values of the entity s identifiable assets and liabilities. No different to the UK standards. 3.7 Summary Changes at this level are once again mainly presentational, most notably with regards to the Statement of Cash Flow.

16 4. Fourth Level 4.1 Preface The issues raised in the First, Second and Third Levels will be relevant at the Fourth Level, reflecting as such, the cumulative requirements of LCCI syllabi. 4.2 Components of financial statements IAS 1, states that a complete set of financial statements should include the following: A Statement of Financial Position at the end of the reporting period. A Statement of Comprehensive Income for the period. A Statement of Changes in Equity for the period A Statement of Cash Flows for the period. Notes to the accounts, which include accounting policies and relevant explanatory notes. 4.3 Format of the Statement of Financial Position IAS 1 does not prescribe a format of the statement of financial position. However, it stipulates the minimum information that has to be disclosed on the face of the statement of financial position. 16 This information is: Cash and cash equivalents Intangible assets Inventories Issued capital and reserves attributable to the owners of the firm Non-controlling interest (minority interest) presented within equity Payables (trade and other) Provisions Property, plant and equipment Receivables (trade and other)

17 4.4 Statement of Comprehensive Income Comprehensive Income for a period includes profit or loss for that period and Other Comprehensive Income recognised during the period. The only item reported under Other Comprehensive Income that is examinable at this level is a gain/loss on the revaluation of a non-current asset during the reporting period Minimum Information required on the Statement of Comprehensive Income The minimum information on the face of the statement of comprehensive Income required by IAS 1 includes: Revenue Finance costs Profit or loss for the period Each component of other comprehensive income classified by nature Total comprehensive income Profit or loss attributable to non-controlling Profit or loss attributable to equity holders of the parent company Total comprehensive income attributable to non-controlling interests Total comprehensive income attributable to the parent company 4.5 Statement of Changes in equity 17 The Statement of Changes in Equity reflects information about the increase or decrease in net assets or wealth of equity shareholders. The minimum information on the face of the statement of changes in equity includes: Profit or loss for the period Each item of other comprehensive income Additional shares issued during the period Dividends paid during the year Purchase of shares during the period Effects of changes in accounting policy Effects of correction of errors

18 4.6 Financial statements Statement of Comprehensive Income classifying expenses by function Hayes Metals Statement of Comprehensive Income for the year ended 31 March 20x0 Revenue 18,300 Cost of sales 13,200 Gross Profit 5,100 Less: Distribution costs 1,200 Less: Administrative expense 1,000 (2,200) 2,900 Other operating income 1,000 Profit from operations 3,900 Finance costs ( 200 ) Profit for the year 3,700 Other comprehensive income Gains on revaluation of property 1,000 Total comprehensive income 4, Statement of Comprehensive Income classifying expenses by nature Hayes Metals Statement of Comprehensive Income for the year ended 31 March 20x0 Revenue 18,300 Change in inventories of finished 1,000 goods and WIP Own work capitalised 1,500 Other operating income 1,000 3,500 Raw materials and consumables 3,000 Staff costs 5,000 Depreciation and amortisation 6,900 21,800 Other operating expenses 3,000 (17,900 ) Profit from operations 3,900 Finance costs ( 200 ) Profit for the year 3,700 Other comprehensive income Gains on revaluation of property 1,000 Total comprehensive income 4,700

19 4.6.3 Consolidated Statement of Comprehensive Income Hayes Metals Consolidated Statement of Comprehensive Income for the year ended 31 March 20x0 Revenue 18,300 Cost of sales 13,200 Gross Profit 5,100 Less: Distribution costs 1,200 Less: Administrative expense 1,000 (2,200) 2,900 Other operating income 1,100 Profit from operations 4,000 Interest payable ( 600 ) Profit for the year 3,400 Other comprehensive income Gains on revaluation of property 200 Total comprehensive income 3,600 Profit attributale to: Owners of the Parent 3, Non-controlling interest 300 3,400 Total comprehensive income attributable to: Owners of the Parent 3,250 Non-controlling interest 350 3,600 Questions at this level would not combine group accounts with the presentation of accounts in accordance with IAS 1, although candidates would be expected to prepare their answers in a clear and well-presented way.

20 4.7 Relevant international accounting standards IAS 8 - Accounting policies Accounting policies Accounting policies are specific principles, bases, conventions and practices used by an entity in preparing and presenting its financial statements. They explain the way a firm treats items within its financial statements. Changes in accounting policies Accounting policies should only be changed where a new accounting standard requires such a change or where the new policy will result in more relevant and reliable information being presented. Changes in accounting estimates An example of a change in accounting estimate is a change in the percentage used to estimate allowance for doubtful debts. The effect of the change is recognised in the income statement for the year in which the change takes place. Another example of a change in accounting estimate is a change in the useful economic life of an asset. Prior period errors A prior period error is where an error has occurred even though reliable information was available when those financial statements were authorised for issue. Examples are mathematical errors, mistakes in applying accounting policies, misinterpretation of facts and fraud IAS 10 - Events after the reporting period 20 IAS 10 with events that occur between the year-end date and the date the financial statements are authorised for issue by the directors. The events that occur are either adjusting events or non-adjusting events. Adjusting events are those that provide evidence about conditions that existed at the end of the reporting date. Non-adjusting events are those that are indicative of conditions that arose after the reporting date IAS 11 Construction contracts There are minor differences between IAS 11 and SSAP 9, but they will not affect examination questions set at this level IAS 16 Accounting for property, plant and equipment IAS 16 deals with the recognition of non-current assets, initial measurement, subsequent measurement and depreciation. There are no major differences between IAS 16 and FRS 15, the equivalent UK standard IAS 20 - Government grants Grants must not be recognised until conditions have been complied with and there is reasonable certainty that the grant will be received (prudence). Government grants received must be matched with expenditure for which the grant is intended (accruals). This standard is not materially different from the equivalent UK standard.

21 4.7.6 IAS 37 - Provisions, contingent liabilities and assets A liability is an obligation of an entity to transfer economic benefits as a result of past transactions or events. A provision is a liability of uncertain timing or amount. A provision should be recognised when: A firm has a present obligation as a result of a past event. The obligation may be legal or constructive It is probable that an outflow of resources will be required to settle the obligation A reliable estimate can be made of the amount If a firm through its future actions can avoid an obligation, a provision cannot be set up Contingent liability If one or more of the conditions required for a provision is not met a contingent liability may exist. A contingent liability should be disclosed unless the possible outflow to meet the obligation is remote. If outflow of resources is remote do not disclose in the accounts. Contingent assets A contingent asset is a possible asset that arises from past events and whose existence will be confirmed only by the occurrence of one or more uncertain future events not wholly within the entity s control. A contingent asset should be disclosed when the expected inflow of economic resources is probable IAS 38 Intangible assets Intangible non-current assets are identifiable non-monetary assets that do not have a physical substance. IAS 38 deals with all intangible non-current assets, including development expenditure. Under SSAP 13 development expenditure may be capitalised after certain conditions have been satisfied. However, under IAS 38, development expenditure must be capitalised after certain conditions have been satisfied. 21

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