ACCOUNTING CONVENTIONS PPT _ MBA FINANCE

							ACCOUNTING
CONVENTIONS
    AND
   POLICY
     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 IASB’s Framework for the Preparation
  and Presentation of Financial Statements.
 Generally accepted accounting principles
  (GAAP)
       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 a balances
   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.
      3 IAS1: PRESENTATION OF
       FINANCIAL STATMENTS
 IAS 1 states that the fundamental accounting
  concepts to be followed are:
 ---fair presentation
 ---going concern
 ----accruals
 ----consistency
 Fair presentation
  ---Financial statements should be ‘fair presented’
  ---Compliance with IASs goes a long way towards
   achieving 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.
 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
  the financial statements. They should consider
  all available information for the foreseeable
  future covering, but not limited to, twelve
  months from the reporting date.
 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 revenues
  they have contributed to.
 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 its
  financial 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.
    Other matters dealt with in IAS 1
    Selection and disclosure of accounting policies
    ---where there are no IASs, the policies should be selected and
     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.
 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 of
  users.
 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.
 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
    ---Realization: a transaction should be recognized when
     the event from which the transaction stems has taken
     place and the receipt of cash from the transaction 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. The
     entity 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.

  ---Accounting period convention :the lifetime
  of the business is divided into arbitrary
  periods of a fixed length. usually one year. At
  the end of each 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.
4 IASB’S FRAMEWORK FOR THE PREPARETION
  AND PRESENTATION OF FINANCIAL
  SATEMENTS
 The framework sets out the concepts that underlie
    financial statements for external users.
 It is designed to assist:
   ---The IASB in developing new standard and reviewing
    existing ones.
   ---In harmonizing accounting standards and procedures
   ---National standard-setting bodies in developing national
    standards
   ---Preparers of financial statements in applying IASs and
    in dealing with topics not yet covered by IASs
---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
to the formulation of IASs
 The framework deals with:
  ---The objective of financial statements
  ---The qualitative characteristics that
  determine the usualness of information in
  financial statements.
  ---The definition, recognition and
  measurement of the elements from which
  financial statements are constructed
  ---Concepts of capital and capital
  maintenance.
 The users of financial statements are:
  ---Investors
  ---Employees
  ---Lenders
  ---Suppliers and other creditors
  ---Customers
  ---Governments and other agencies
  ---The public
 The objective of financial statements: to
  provide information about the financial
  position, performance and changes in
  financial position of an enterprise that is
  useful to a wide range of users in making
  economic decisions.
 The Framework identifies two underlying
  assumptions (these appear also in IAS 1)
  ---the accruals basis of accounting
  ---The going-concern basis
                                            Information that is
        WHAT        MAKESFINANCIALINFORMATIONUSEFUL
                                            not material cannot
Materiality 1
   ？                                             be used
Threshold quality
                            more of one may mean
Relevance 2                    less of the other                Liability 4




WHAT MAKES INFORMATION                  WHAT MAKES INFORMATION
         RELEVANT?                            RELIABLE?

Information that influences decisions    information that is from
                                             error or bias
      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?
 Materiality (1)
  A threshold quality. If information could influence users’
   decisions taken on the basis of financial statements, it is
   material.
 Relevance (2)
  A basis requirement. Financial information is relevant if it
   can assist users’ decision-making by helping them to
   evaluate 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.
 Reliability(4)
  A basic requirement. To be reliable, financial information
   must be free from bias and error. Some contingent 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
 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 in
  estimating the outcome of uncertain events.
 Completeness(9)
  Information presented in financial statements
 Presentation in financial statements:
  ---Comparability(10)
  Financial statements should be comparable with the
   financial statements of other companies and with the
   financial statements of the same company for earlier
   periods.
  To achieve comparability we need consistency(11) and
   disclosure of accounting policies(12).Accounting
   standards contribute to comparability by reducing the
   options available to enterprises in their treatment of
   transactions.
  ---Understandardablity(13)
  Dependent upon users’ abilities(14).The framework
 Limiting factors
  Where there is conflict between
  characteristics, a balance between
  characteristics(15) needs to be achieved.
  Timeliness (16) is another limiting factor.
  Benefit and cost (17):the benefits from
  presenting the information should exceed the
  cost of providing it.
 The elements of financial statements
  An asset is a resource controlled by an
A liability is a present obligation of the
enterprise arising from past events, the
settlement 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.
5 IAS 18:REVENUE
 IAS 18 defines when revenue from various
   sources may be recognized. Revenue and
   associated 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 when
   all the following conditions have been
◇All the significant risks and rewards of
 ownership have been transferred to the buyer.
◇The seller retains to effective control over the
 goods 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 the
 transaction can be reliably measured.
---Rendering of services :the sale usually takes place at a
 point of time whereas the provision of the service is
 likely to be spreads over a period of time. Revenue from
 services may be recognized according to the stage of
 completion of the transaction at the balance sheet 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 be
    measured reliably.
   ◇The costs incurred or to be incurred for the
 When a partly completed service is in its early
  stages, or the outcome of the transaction
  cannot be reliably estimated, revenue should
  be 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.
 ---Interest, royalties and dividends: If the
 amount of revenue can be reliably measured
 and the receipt of the income is reasonably
 assured, these items should be recognized as
 follows:
---Interest: on a time proportion basis taking
 account of the yield on the asset,
---Royalties :on an accruals basis in
 accordance with the relevant agreement.
---Dividends :when the shareholder’s right to
 Disclosure requirements of IAS 18:
 ---Accounting policies for revenue recognition,
  including the methods used to determine the
  stage of completion of transaction involving
  services.
 ---Amount of revenue recognized for each of
  the five categories (sale of goods, rending of
  service, interest, royalties and dividends),
  where material.
 ---The amount, if material, in each category