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INTERNATIONAL ACCOUTING STANDARDS
(Note: These are only notes for students and cannot be used as substitute for the original standards. Atiq ur Rahman)

Standards. International Accounting Standards (IASs) were issued by the IASC from 1973 to 2000. The IASB replaced the IASC in 2001. Since then, the IASB has amended some IASs and has proposed to amend others, has replaced some IASs with new International Financial Reporting Standards (IFRSs), and has adopted or proposed certain new IFRSs on topics for which there was no previous IAS. Through committees, both the IASC and the IASB also have issued Interpretations of Standards. Compliance with Standards. Financial statements may not be described as complying with IFRSs unless they comply with all of the requirements of each applicable standard and each applicable interpretation. IASB Framework. While not a standard, the IASB Framework for the Preparation and Presentation of Financial Statements serves as a guide to resolving accounting issues that are not addressed directly in a standard. Moreover, in the absence of a standard or an interpretation that specifically applies to a transaction, IAS 8 requires that an entity must use its judgement in developing and applying an accounting policy that results in information that is relevant and reliable. In making that judgement, IAS 8.11 requires management to consider the definitions, recognition criteria and measurement concepts for assets, liabilities, income, and expenses in the Framework. The IASB adopted the Framework in April 2001. It had originally been adopted by the IASC in 1989. Currently, the IASB is working on a Project to Revise the Framework Preface to IFRSs. Sets out IASB's objectives, the scope of IFRSs, due process, and policies on effective dates, format, and language for IFRSs. The term 'IFRSs'. The term International Financial Reporting Standards (IFRSs) has both a narrow and a broad meaning. Narrowly, IFRSs refers to the new numbered series of pronouncements that the IASB is issuing, as distinct from the International Accounting Standards (IASs) series issued by its predecessor. More broadly, IFRSs refers to the entire body of IASB pronouncements, including standards and interpretations approved by the IASB and IASs and SIC interpretations approved by the predecessor International Accounting Standards Committee.

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Page 2 THE FRAMEWORK FOR THE PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS

PURPOSE AND STATUS OF THE FRAMEWORK The IASB's Framework for the Preparation and Presentation of Financial Statements describes the basic concepts by which financial statements are prepared. The Framework serves as a guide to the Board in developing accounting standards and as a guide to resolving accounting issues that are not addressed directly in an International Accounting Standard or International Financial Reporting Standard or Interpretation. In the absence of a Standard or an Interpretation that specifically applies to a transaction, management must use its judgement in developing and applying an accounting policy that results in information that is relevant and reliable. In making that judgement, IAS 8.11 requires management to consider the definitions, recognition criteria, and measurement concepts for assets, liabilities, income, and expenses in the Framework. This elevation of the importance of the Framework was added in the 2003 revisions to IAS 8.

General Purpose Financial Statements The Framework addresses general purpose financial statements that a business enterprise (including a state-owned business enterprise) prepares and presents at least annually to meet the common information needs of a wide range of users external to the enterprise. Therefore, the Framework does not necessarily apply to special purpose financial reports such as reports to tax authorities, reports to governmental regulatory authorities, prospectuses prepared in connection with securities offerings, and reports prepared in connection with business combinations.

Users and their Information Needs The principal classes of users of financial statements are present and potential investors, employees, lenders, suppliers and other trade creditors, customers, governments and their agencies and the general public. All of these categories of users rely on financial statements to help them in decision making. The Framework also concludes that because investors are providers of risk capital to the enterprise, financial statements that meet their needs will also meet most of the general financial information needs of other users. Common to all of these user groups is their interest in the ability of an enterprise to generate cash and cash equivalents and of the timing and certainty of those future cash flows.

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Page 3 The Framework notes that financial statements cannot provide all the information that users may need to make economic decisions. For one thing, financial statements show the financial effects of past events and transactions, whereas the decisions that most users of financial statements have to make relate to the future. Further, financial statements provide only a limited amount of the non-financial information needed by users of financial statements. While all of the information needs of these user groups cannot be met by financial statements, there are information needs that are common to all users, and general purpose financial statements focus on meeting these needs. Responsibility for Financial Statements The management of an enterprise has the primary responsibility for preparing and presenting the enterprise's financial statements. The Objective of Financial Statements The objective of financial statements is 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. Financial Position The financial position of an enterprise is affected by the economic resources it controls, its financial structure, its liquidity and solvency, and its capacity to adapt to changes in the environment in which it operates. Performance Performance is the ability of an enterprise to earn a profit on the resources that have been invested in it. Information about the amounts and variability of profits helps in forecasting future cash flows from the enterprise's existing resources and in forecasting potential additional cash flows from additional resources that might be invested in the enterprise. Changes in Financial Position Users of financial statements seek information about the investing, financing and operating activities that an enterprise has undertaken during the reporting period. This information helps in assessing how well the enterprise is able to generate cash and cash equivalents and how it uses those cash flows.

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Page 4 Notes and Supplementary Schedules The financial statements also contain notes and supplementary schedules and other information that (a) explains items in the balance sheet and income statement, (b) discloses the risks and uncertainties affecting the enterprise, and (c) explains any resources and obligations not recognised in the balance sheet. Underlying Assumptions The Framework sets out the underlying assumptions of financial statements:




Accrual Basis. The effects of transactions and other events are recognised when they occur, rather than when cash or its equivalent is received or paid, and they are reported in the financial statements of the periods to which they relate. Going Concern. The financial statements presume that an enterprise will continue in operation indefinitely or, if that presumption is not valid, disclosure and a different basis of reporting are required.

Qualitative Characteristics of Financial Statements These characteristics are the attributes that make the information in financial statements useful to investors, creditors, and others. The Framework identifies four principal qualitative characteristics:
   

Understandability Relevance Reliability Comparability

Understandability Information should be presented in a way that is readily understandable by users who have a reasonable knowledge of business and economic activities and accounting and who are willing to study the information diligently. Relevance Information in financial statements is relevant when it influences the economic decisions of users. It can do that both by (a) helping them evaluate past, present, or future events relating to an enterprise and by (b) confirming or correcting past evaluations they have made. Materiality is a component of relevance. Information is material if its omission or misstatement could influence the economic decisions of users.

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Page 5 Timeliness is another component of relevance. To be useful, information must be provided to users within the time period in which it is most likely to bear on their decisions. Reliability Information in financial statements is reliable if it is free from material error and bias and can be depended upon by users to represent events and transactions faithfully. Information is not reliable when it is purposely designed to influence users' decisions in a particular direction. There is sometimes a tradeoff between relevance and reliability - and judgement is required to provide the appropriate balance. Reliability is affected by the use of estimates and by uncertainties associated with items recognised and measured in financial statements. These uncertainties are dealt with, in part, by disclosure and, in part, by exercising prudence in preparing financial statements. Prudence is the inclusion of a degree of caution in the exercise of the judgements needed in making the estimates required under conditions of uncertainty, such that assets or income are not overstated and liabilities or expenses are not understated. However, prudence can only be exercised within the context of the other qualitative characteristics in the Framework, particularly relevance and the faithful representation of transactions in financial statements. Prudence does not justify deliberate overstatement of liabilities or expenses or deliberate understatement of assets or income, because the financial statements would not be neutral and, therefore, not have the quality of reliability.

Comparability Users must be able to compare the financial statements of an enterprise over time so that they can identify trends in its financial position and performance. Users must also be able to compare the financial statements of different enterprises. Disclosure of accounting policies is essential for comparability. The Elements of Financial Statements Financial statements portray the financial effects of transactions and other events by grouping them into broad classes according to their economic characteristics. These broad classes are termed the elements of financial statements. The elements directly related to financial position (balance sheet) are:
  

Assets Liabilities Equity

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Page 6 The elements directly related to performance (income statement) are:
 

Income Expenses

The cash flow statement reflects both income statement elements and changes in balance sheet elements.

Definitions of the elements relating to financial position
 



Asset. An asset is a resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise. Liability. 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 resources embodying economic benefits. Equity. Equity is the residual interest in the assets of the enterprise after deducting all its liabilities.

Definitions of the elements relating to performance




Income. Income is increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants. Expense. Expenses are decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants.

The definition of income encompasses both revenue and gains. Revenue arises in the course of the ordinary activities of an enterprise and is referred to by a variety of different names including sales, fees, interest, dividends, royalties and rent. Gains represent other items that meet the definition of income and may, or may not, arise in the course of the ordinary activities of an enterprise. Gains represent increases in economic benefits and as such are no different in nature from revenue. Hence, they are not regarded as constituting a separate element in the IASC Framework. The definition of expenses encompasses losses as well as those expenses that arise in the course of the ordinary activities of the enterprise. Expenses that arise in the course of the ordinary activities of the enterprise include, for example, cost of sales, wages and depreciation. They usually take the form of an outflow or depletion of assets such as cash and cash equivalents, inventory, property, plant and equipment. Losses represent other items that meet the definition of expenses and may, or may not, arise in the course of the ordinary activities of the enterprise. Losses represent decreases in economic benefits and

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Page 7 as such they are no different in nature from other expenses. Hence, they are not regarded as a separate element in this Framework.

Recognition of the Elements of Financial Statements Recognition is the process of incorporating in the balance sheet or income statement an item that meets the definition of an element and satisfies the following criteria for recognition:
 

It is probable that any future economic benefit associated with the item will flow to or from the enterprise; and The item's cost or value can be measured with reliability.

Based on these general criteria:








An asset is recognised in the balance sheet when it is probable that the future economic benefits will flow to the enterprise and the asset has a cost or value that can be measured reliably. A liability is recognised in the balance sheet when it is probable that an outflow of resources embodying economic benefits will result from the settlement of a present obligation and the amount at which the settlement will take place can be measured reliably. Income is recognised in the income statement when an increase in future economic benefits related to an increase in an asset or a decrease of a liability has arisen that can be measured reliably. This means, in effect, that recognition of income occurs simultaneously with the recognition of increases in assets or decreases in liabilities (for example, the net increase in assets arising on a sale of goods or services or the decrease in liabilities arising from the waiver of a debt payable). Expenses are recognised when a decrease in future economic benefits related to a decrease in an asset or an increase of a liability has arisen that can be measured reliably. This means, in effect, that recognition of expenses occurs simultaneously with the recognition of an increase in liabilities or a decrease in assets (for example, the accrual of employee entitlements or the depreciation of equipment).

Measurement of the Elements of Financial Statements Measurement involves assigning monetary amounts at which the elements of the financial statements are to be recognised and reported. The Framework acknowledges that a variety of measurement bases are used today to different degrees and in varying combinations in financial statements, including:

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   

Historical cost Current cost Net realisable (settlement) value Present value (discounted)

Historical cost is the measurement basis most commonly used today, but it is usually combined with other measurement bases. The Framework does not include concepts or principles for selecting which measurement basis should be used for particular elements of financial statements or in particular circumstances. The qualitative characteristics do provide some guidance, however.

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INTERNATIONAL ACCOUNTING STANDARD 1
SUMMARY OF IAS 1 Presentation of Financial Statements

Objective of IAS 1
The objective of IAS 1 (revised 1997) is to prescribe the basis for presentation of general purpose financial statements, to ensure comparability both with the entity's financial statements of previous periods and with the financial statements of other entities. IAS 1 sets out the overall framework and responsibilities for the presentation of financial statements, guidelines for their structure and minimum requirements for the content of the financial statements. Standards for recognising, measuring, and disclosing specific transactions are addressed in other Standards and Interpretations.

Scope
Applies to all general purpose financial statements based on International Financial Reporting Standards. [IAS 1.2] General purpose financial statements are those intended to serve users who do not have the authority to demand financial reports tailored for their own needs. [IAS 1.3]

Objective of Financial Statements
The objective of general purpose financial statements is to provide information about the financial position, financial performance, and cash flows of an entity that is useful to a wide range of users in making economic decisions. To meet that objective, financial statements provide information about an entity's: [IAS 1.7]

     

Assets. Liabilities. Equity. Income and expenses, including gains and losses. Other changes in equity. Cash flows.

That information, along with other information in the notes, assists users of financial statements in predicting the entity's future cash flows and, in particular, their timing and certainty.

Components of Financial Statements
A complete set of financial statements should include: [IAS 1.8]

    

a statement of financial position at the end of the period, a statement of comprehensive income for the period, a statement of changes in equity for the period statement of cash flows for the period, and notes, comprising a summary of accounting policies and other explanatory notes.

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When an entity applies an accounting policy retrospectively or makes a retrospective restatement of items in its financial statements, or when it reclassifies items in its financial statements, it must also present a statement of financial position as at the beginning of the earliest comparative period.

An entity may use titles for the statements other than those stated above. Reports that are presented outside of the financial statements -- including financial reviews by management, environmental reports, and value added statements -- are outside the scope of IFRSs. [IAS 1.9-10]

Fair Presentation and Compliance with IFRSs
The financial statements must "present fairly" the financial position, financial performance and cash flows of an entity. Fair presentation requires the faithful representation of the effects of transactions, other events, and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the Framework. The application of IFRSs, with additional disclosure when necessary, is presumed to result in financial statements that achieve a fair presentation. [IAS 1.13] IAS 1 requires that an entity whose financial statements comply with IFRSs make an explicit and unreserved statement of such compliance in the notes. Financial statements shall not be described as complying with IFRSs unless they comply with all the requirements of IFRSs (including Interpretations). [IAS 1.14] Inappropriate accounting policies are not rectified either by disclosure of the accounting policies used or by notes or explanatory material. [IAS 1.16] IAS 1 acknowledges that, in extremely rare circumstances, management may conclude that compliance with an IFRS requirement would be so misleading that it would conflict with the objective of financial statements set out in the Framework. In such a case, the entity is required to depart from the IFRS requirement, with detailed disclosure of the nature, reasons, and impact of the departure. [IAS 1.17-18]

Going Concern
An entity preparing IFRS financial statements is presumed to be a going concern. If management has significant concerns about the entity's ability to continue as a going concern, the uncertainties must be disclosed. If management concludes that the entity is not a going concern, the financial statements should not be prepared on a going concern basis, in which case IAS 1 requires a series of disclosures. [IAS 1.23]

Accrual Basis of Accounting
IAS 1 requires that an entity prepare its financial statements, except for cash flow information, using the accrual basis of accounting. [IAS 1.25]

Consistency of Presentation
The presentation and classification of items in the financial statements shall be retained from one period to the next unless a change is justified either by a change in circumstances or a requirement of a new IFRS. [IAS 1.27]

Materiality and Aggregation
Each material class of similar items must be presented separately in the financial statements. Dissimilar items may be aggregated only if the are individually immaterial. [IAS 1.29]

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Page 11 Offsetting>
Assets and liabilities, and income and expenses, may not be offset unless required or permitted by a Standard or an Interpretation. [IAS 1.32]

Comparative Information
IAS 1 requires that comparative information shall be disclosed in respect of the previous period for all amounts reported in the financial statements, both face of financial statements and notes, unless another Standard requires otherwise. [IAS 1.36] If comparative amounts are changed or reclassified, various disclosures are required. [IAS 1.38]

Structure and Content of Financial Statements in General
Clearly identify: [IAS 1.46]

     

the financial statements the reporting enterprise whether the statements are for the enterprise or for a group the date or period covered the presentation currency the level of precision (thousands, millions, etc.)

Reporting Period
There is a presumption that financial statements will be prepared at least annually. If the annual reporting period changes and financial statements are prepared for a different period, the enterprise must disclose the reason for the change and a warning about problems of comparability. [IAS 1.49]

Statement of Financial Position
An entity must normally present a classified statement of financial position, separating current and noncurrent assets and liabilities. Only if a presentation based on liquidity provides information that is reliable and more relevant may the current/noncurrent split be omitted. [IAS 1.51] In either case, if an asset (liability) category commingles amounts that will be received (settled) after 12 months with assets (liabilities) that will be received (settled) within 12 months, note disclosure is required that separates the longer-term amounts from the 12-month amounts. [IAS 1.52] Current assets are cash; cash equivalent; assets held for collection, sale, or consumption within the enterprise's normal operating cycle; or assets held for trading within the next 12 months. All other assets are noncurrent. [IAS 1.57] Current liabilities are those to be settled within the enterprise's normal operating cycle or due within 12 months, or those held for trading, or those for which the entity does not have an unconditional right to defer payment beyond 12 months. Other liabilities are noncurrent. [IAS 1.60] Long-term debt expected to be refinanced under an existing loan facility is noncurrent, even if due within 12 months. [IAS 1.64] If a liability has become payable on demand because an entity has breached an undertaking under a longterm loan agreement on or before the reporting date, the liability is current, even if the lender has agreed, after the reporting date and before the authorisation of the financial statements for issue, not to demand payment as a consequence of the breach. [IAS 1.65] However, the liability is classified as non-current if the

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lender agreed by the reporting date to provide a period of grace ending at least 12 months after the reporting date, within which the entity can rectify the breach and during which the lender cannot demand immediate repayment. [IA 1.66] Minimum items on the face of the statement of financial position [IAS 1.68]

               

(a) property, plant and equipment; (b) investment property; (c) intangible assets; (d) financial assets (excluding amounts shown under (e), (h) and (i)); (e) investments accounted for using the equity method; (f) biological assets; (g) inventories; (h) trade and other receivables; (i) cash and cash equivalents; (j) trade and other payables; (k) provisions; (l) financial liabilities (excluding amounts shown under (j) and (k)); (m) liabilities and assets for current tax, as defined in IAS 12; (n) deferred tax liabilities and deferred tax assets, as defined in IAS 12; (o) minority interest, presented within equity; and (p) issued capital and reserves attributable to equity holders of the parent.

Additional line items may be needed to fairly present the entity's financial position. [IAS 1.69] IAS 1 does not prescribe the format of the balance sheet. Assets can be presented current then noncurrent, or vice versa, and liabilities and equity can be presented current then noncurrent then equity, or vice versa. A net asset presentation (assets minus liabilities) is allowed. The long-term financing approach used in UK and elsewhere – fixed assets + current assets - short term payables = long-term debt plus equity – is also acceptable. Regarding issued share capital and reserves, the following disclosures are required: [IAS 1.76]

      

numbers of shares authorised, issued and fully paid, and issued but not fully paid par value reconciliation of shares outstanding at the beginning and the end of the period description of rights, preferences, and restrictions treasury shares, including shares held by subsidiaries and associates shares reserved for issuance under options and contracts a description of the nature and purpose of each reserve within owners' equity

Statement of Income
In the 2003 revision to IAS 1, the IASB is now using "profit or loss" rather than "net profit or loss" as the descriptive term for the bottom line of the income statement. All items of income and expense recognised in a period must be included in profit or loss unless a Standard or an Interpretation requires otherwise. [IAS 1.78] Minimum items on the face of the statement of income should include: [IAS 1.81]

  

revenue finance costs share of the profit or loss of associates and joint ventures accounted for using the equity method

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  
a single amount comprising the total of (i) the post-tax profit or loss of discontinued operations and (ii) the post-tax gain or loss recognised on the disposal of the assets or disposal group(s) constituting the discontinued operation tax expense profit or loss

The following items must also be disclosed on the face of the income statement as allocations of profit or loss for the period: [IAS 1.82]

 

profit or loss attributable to minority interest profit or loss attributable to equity holders of the parent

Additional line items may be needed to fairly present the enterprise's results of operations. No items may be presented on the face of the statement of income or in the notes as "extraordinary items". [IAS 1.85] Certain items must be disclosed either on the face of the statementof income or in the notes, if material, including: [IAS 1.87]

      

write-downs of inventories to net realisable value or of property, plant and equipment to recoverable amount, as well as reversals of such write-downs restructurings of the activities of an entity and reversals of any provisions for the costs of restructuring disposals of items of property, plant and equipment disposals of investments discontinuing operations litigation settlements other reversals of provisions

Expenses should be analysed either by nature (raw materials, staffing costs, depreciation, etc.) or by function (cost of sales, selling, administrative, etc.) either on the face of the statement of income or in the notes. [IAS 1.88] If an enterprise categorises by function, additional information on the nature of expenses – at a minimum depreciation, amortisation, and staff costs – must be disclosed. [IAS 1.93]

Statement of Cash Flows
Rather than setting out separate standards for presenting the cash flow statement, IAS 1.102 refers to IAS 7, Cash Flow Statements

Statement of Changes in Equity
IAS 1 requires an entity to present a statement of changes in equity as a separate component of the financial statements. The statement must show: [IAS 1.96]

   

profit or loss for the period each item of income and expense for the period that is recognised directly in equity, and the total of those items; total income and expense for the period (calculated as the sum of (a) and (b)), showing separately the total amounts attributable to equity holders of the parent and to minority interest for each component of equity, the effects of changes in accounting policies and corrections of errors recognised in accordance with IAS 8

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The following amounts may also be presented on the face of the statement of changes in equity, or they may be presented in the notes: [IAS 1.97]

  

capital transactions with owners the balance of accumulated profits at the beginning and at the end of the period, and the movements for the period a reconciliation between the carrying amount of each class of equity capital, share premium and each reserve at the beginning and at the end of the period, disclosing each movement

Notes to the Financial Statements
The notes must: [IAS 1.103]

  

present information about the basis of preparation of the financial statements and the specific accounting policies used; disclose any information required by IFRSs that is not presented on the face of the balance sheet, income statement, statement of changes in equity, or cash flow statement; and provide additional information that is not presented on the face of the balance sheet, income statement, statement of changes in equity, or cash flow statement that is deemed relevant to an understanding of any of them.

Notes should be cross-referenced from the face of the financial statements to the relevant note. [IAS 1.104] IAS 1.105 suggests that the notes should normally be presented in the following order:

 

 

a statement of compliance with IFRSs a summary of significant accounting policies applied, including: [IAS 1.108] o the measurement basis (or bases) used in preparing the financial statements o the other accounting policies used that are relevant to an understanding of the financial statements supporting information for items presented on the face of the balance sheet, income statement, statement of changes in equity, and cash flow statement, in the order in which each statement and each line item is presented other disclosures, including: o contingent liabilities (see IAS 37) and unrecognised contractual commitments o non-financial disclosures, such as the entity's financial risk management objectives and policies (see IAS 32)

Disclosure of judgements. New in the 2003 revision to IAS 1, an entity must disclose, in the summary of significant accounting policies or other notes, the judgements, apart from those involving estimations, that management has made in the process of applying the entity's accounting policies that have the most significant effect on the amounts recognised in the financial statements. [IAS 1.113] Examples cited in IAS 1.114 include management's judgements in determining:

   

whether financial assets are held-to-maturity investments when substantially all the significant risks and rewards of ownership of financial assets and lease assets are transferred to other entities whether, in substance, particular sales of goods are financing arrangements and therefore do not give rise to revenue; and whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity

Disclosure of key sources of estimation uncertainty. Also new in the 2003 revision to IAS 1, an entity must disclose, in the notes, information about the key assumptions concerning the future, and other key sources of estimation uncertainty at the balance sheet date, that have a significant risk of causing a material

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adjustment to the carrying amounts of assets and liabilities within the next financial year. [IAS 1.116] These disclosures do not involve disclosing budgets or forecasts. The following other note disclosures are required by IAS 1.126 if not disclosed elsewhere in information published with the financial statements:

    

domicile of the enterprise country of incorporation address of registered office or principal place of business description of the enterprise's operations and principal activities name of its parent and the ultimate parent if it is part of a group

Other Disclosures
Disclosures about Dividends The following must be disclosed either on the face of the income statement or the statement of changes in equity or in the notes: [IAS 1.95]

 

the amount of dividends recognised as distributions to equity holders during the period, and the related amount per share.

The following must be disclosed in the notes: {IAS 1.125]

 

the amount of dividends proposed or declared before the financial statements were authorised for issue but not recognised as a distribution to equity holders during the period, and the related amount per share; and the amount of any cumulative preference dividends not recognised.

Capital Disclosures In August 2005, as part of its project to develop IFRS 7 Financial Instruments: Disclosures, the IASB also amended IAS 1 to add requirements for disclosures of:

   

the entity's objectives, policies and processes for managing capital; quantitative data about what the entity regards as capital; whether the entity has complied with any capital requirements; and if it has not complied, the consequences of such non-compliance.

These disclosure requirements apply to all entities, effective for annual periods beginning on or after 1 January 2007, with earlier application encouraged. Illustrative examples are provided as guidance.

Disclosures about Puttable Shares and Obligations Arising Only on Liquidaiton In February 2008, the IASB published an amendment to IAS 1 that requires the following additional disclosures if an entity has a puttable instrument that is presented as equity:

   

summary quantitative data about the amount classified as equity; the entity's objectives, policies and processes for managing its obligation to repurchase or redeem the instruments when required to do so by the instrument holders, including any changes from the previous period; the expected cash outflow on redemption or repurchase of that class of financial instruments; and information about how the expected cash outflow on redemption or repurchase was determined.

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If an instrument is reclassified into and out of each category (financial liabilities or equity) the amount, timing and reason for that reclassification must be disclosed. If an entity is a limited-life entity, disclosure is also required regarding the length of its life. The foregoing disclosures are required for annual periods beginning on or after 1 January 2009, with earlier application permitted.

September 2007 Revised IAS 1 Is Issued
On 6 September 2007, the IASB issued a revised IAS 1 Presentation of Financial Statements. The main changes from the previous version are to require that an entity must:



  

Present all non-owner changes in equity (that is, 'comprehensive income' – see box below) either in one statement of comprehensive income or in two statements (a separate income statement and a statement of comprehensive income). Components of comprehensive income may not be presented in the statement of changes in equity. Present a statement of financial position (balance sheet) as at the beginning of the earliest comparative period in a complete set of financial statements when the entity applies an accounting policy retrospectively or makes a retrospective restatement. Disclose income tax relating to each component of other comprehensive income. Disclose reclassification adjustments relating to components of other comprehensive income.

IAS 1 changes the titles of financial statements as they will be used in IFRSs:

  

'balance sheet' will become 'statement of financial position' 'income statement' will become 'statement of comprehensive income' 'cash flow statement' will become 'statement of cash flows').

Entities are not required to use the new titles in their financial statements. All existing Standards and Interpretations are being amended to reflect the new terminology. The revised IAS 1 resulted in consequential amendments to 5 IFRSs, 23 IASs, and 10 Interpretations. The revised IAS 1 is effective for annual periods beginning on or after 1 January 2009. Early adoption is permitted. Click for Press Release (PDF 17k). Comprehensive Income Comprehensive income for a period includes profit or loss for that period plus other comprehensive income recognised in that period. The components of other comprehensive income include:

   

changes in revaluation surplus (IAS 16 and IAS 38). actuarial gains and losses on defined benefit plans recognised in accordance with paragraph 93A of IAS 19. gains and losses arising from translating the financial statements of a foreign operation (IAS 21). gains and losses on remeasuring available-for-sale financial assets (IAS 39).

the effective portion of gains and losses on hedging instruments in a cash flow hedge (IAS 39).

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INTERNATIONAL ACCOUNTING STANDARD 2
SUMMARY OF IAS 2 Inventories

Objective of IAS 2
The objective of IAS 2 is to prescribe the accounting treatment for inventories. It provides guidance for determining the cost of inventories and for subsequently recognising an expense, including any write-down to net realisable value. It also provides guidance on the cost formulas that are used to assign costs to inventories.

Scope
Inventories include assets held for sale in the ordinary course of business (finished goods), assets in the production process for sale in the ordinary course of business (work in process), and materials and supplies that are consumed in production (raw materials). [IAS 2.6] However, IAS 2 excludes certain inventories from its scope: [IAS 2.2]

  

work in process arising under construction contracts (see IAS 11, Construction Contracts financial instruments (see IAS 39, Financial Instruments) biological assets related to agricultural activity and agricultural produce at the point of harvest (see IAS 41, Agriculture).

Also, while the following are within the scope of the standard, IAS 2 does not apply to the measurement of inventories held by: [IAS 2.3]





producers of agricultural and forest products, agricultural produce after harvest, and minerals and mineral products, to the extent that they are measured at net realisable value (above or below cost) in accordance with well-established practices in those industries. When such inventories are measured at net realisable value, changes in that value are recognised in profit or loss in the period of the change. commodity brokers and dealers who measure their inventories at fair value less costs to sell. When such inventories are measured at fair value less costs to sell, changes in fair value less costs to sell are recognised in profit or loss in the period of the change.

Fundamental Principle of IAS 2
Inventories are required to be stated at the lower of cost and net realisable value (NRV). [IAS 2.9]

Measurement of Inventories
Cost should include all: [IAS 2.10]

  

costs of purchase (including taxes, transport, and handling) net of trade discounts received costs of conversion (including fixed and variable manufacturing overheads) and other costs incurred in bringing the inventories to their present location and condition

Inventory cost should not include: [IAS 2.16-2.18]

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     
abnormal waste storage costs administrative overheads unrelated to production selling costs foreign exchange differences arising directly on the recent acquisition of inventories invoiced in a foreign currency interest cost when inventories are purchased with deferred settlement terms.

The standard cost and retail methods may be used for the measurement of cost, provided that the results approximate actual cost. [IAS 2.21-22] For inventory items that are not interchangeable, specific costs are attributed to the specific individual items of inventory. [IAS 2.23] For items that are interchangeable, IAS 2 allows the FIFO or weighted average cost formulas. [IAS 2.25] The LIFO formula, which had been allowed prior to the 2003 revision of IAS 2, is no longer allowed. The same cost formula should be used for all inventories with similar characteristics as to their nature and use to the enterprise. For groups of inventories that have different characteristics, different cost formulas may be justified. [IAS 2.25]

Write-Down to Net Realisable Value
NRV is the estimated selling price in the ordinary course of business, less the estimated cost of completion and the estimated costs necessary to make the sale. [IAS 2.6] Any write-down to NRV should be recognised as an expense in the period in which the write-down occurs. Any reversal should be recognised in the income statement in the period in which the reversal occurs. [IAS 2.34]

Expense Recognition
IAS 18, Revenue, addresses revenue recognition for the sale of goods. When inventories are sold and revenue is recognised, the carrying amount of those inventories is recognised as an expense (often called cost-of-goods-sold). Any write-down to NRV and any inventory losses are also recognised as an expense when they occur. [IAS 2.34]

Disclosure
Required disclosures: [IAS 2.36]

      

accounting policy for inventories. carrying amount, generally classified as merchandise, supplies, materials, work in progress, and finished goods. The classifications depend on what is appropriate for the enterprise. carrying amount of any inventories carried at fair value less costs to sell. amount of any write-down of inventories recognised as an expense in the period. amount of any reversal of a writedown to NRV and the circumstances that led to such reversal. carrying amount of inventories pledged as security for liabilities. cost of inventories recognised as expense (cost of goods sold). IAS 2 acknowledges that some enterprises classify income statement expenses by nature (materials, labour, and so on) rather than by function (cost of goods sold, selling expense, and so on). Accordingly, as an alternative to disclosing cost of goods sold expense, IAS 2 allows an enterprise to disclose operating costs recognised during the period by nature of the cost (raw materials and consumables, labour costs, other operating costs) and the amount of the net change in inventories for the period). This is consistent with IAS 1, Presentation of Financial Statements, which allows presentation of expenses by function or nature.

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INTERNATIONAL ACCOUNTING STANDARD 7
SUMMARY OF IAS 7 Statement of Cash Flows

Objective of IAS 7
The objective of IAS 7 is to require the presentation of information about the historical changes in cash and cash equivalents of an enterprise by means of a statement of cash flows, which classifies cash flows during the period according to operating, investing, and financing activities.

Fundamental Principle in IAS 7
All enterprises that prepare financial statements in conformity with IFRSs are required to present a statement of cash flows. [IAS 7.1] The statement of cash flows analyses changes in cash and cash equivalents during a period. Cash and cash equivalents comprise cash on hand and demand deposits, together with short-term, highly liquid investments that are readily convertible to a known amount of cash, and that are subject to an insignificant risk of changes in value. Guidance notes indicate that an investment normally meets the definition of a cash equivalent when it has a maturity of three months or less from the date of acquisition. Equity investments are normally excluded, unless they are in substance a cash equivalent (e.g. preferred shares acquired within three months of their specified redemption date). Bank overdrafts which are repayable on demand and which form an integral part of an enterprise's cash management are also included as a component of cash and cash equivalents. [IAS 7.7-8]

Presentation of the Statement of Cash Flows
Cash flows must be analysed between operating, investing and financing activities. [IAS 7.10] Key principles specified by IAS 7 for the preparation of a statement of cash flows are as follows:

     

operating activities are the main revenue-producing activities of the enterprise that are not investing or financing activities, so operating cash flows include cash received from customers and cash paid to suppliers and employees [IAS 7.14] investing activities are the acquisition and disposal of long-term assets and other investments that are not considered to be cash equivalents [IAS 7.6] financing activities are activities that alter the equity capital and borrowing structure of the enterprise [IAS 7.6] interest and dividends received and paid may be classified as operating, investing, or financing cash flows, provided that they are classified consistently from period to period [IAS 7.31] cash flows arising from taxes on income are normally classified as operating, unless they can be specifically identified with financing or investing activities [IAS 7.35] for operating cash flows, the direct method of presentation is encouraged, but the indirect method is acceptable [IAS 7.18] The direct method shows each major class of gross cash receipts and gross cash payments. The operating cash flows section of the statement of cash flows under the direct method would appear something like this:

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Cash receipts from customers Cash paid to suppliers Cash paid to employees Cash paid for other operating expenses Interest paid Income taxes paid Net cash from operating activities xx,xxx xx,xxx xx,xxx xx,xxx xx,xxx xx,xxx xx,xxx

The indirect method adjusts accrual basis net profit or loss for the effects of non-cash transactions. The operating cash flows section of the statement of cash flows under the indirect method would appear something like this: Profit before interest and income taxes Add back depreciation Add back amortisation of goodwill Increase in receivables Decrease in inventories Increase in trade payables Interest expense xx,xxx xx,xxx xx,xxx xx,xxx xx,xxx xx,xxx xx,xxx

Less Interest accrued but not yet paid xx,xxx Interest paid xx,xxx Income taxes paid xx,xxx Net cash from operating activities xx,xxx

  







the exchange rate used for translation of transactions denominated in a foreign currency and the cash flows of a foreign subsidiary should be the rate in effect at the date of the cash flows [IAS 7.25] cash flows of foreign subsidiaries should be translated at the exchange rates prevailing when the cash flows took place [IAS 7.26] as regards the cash flows of associates and joint ventures, where the equity method is used, the statementof cash flows should report only cash flows between the investor and the investee; where proportionate consolidation is used, the cash flow statement should include the venturer's share of the cash flows of the investee [IAS 7.37-38] aggregate cash flows relating to acquisitions and disposals of subsidiaries and other business units should be presented separately and classified as investing activities, with specified additional disclosures. The aggregate cash paid or received as consideration should be reported net of cash and cash equivalents acquired or disposed of [IAS 7.39] cash flows from investing and financing activities should be reported gross by major class of cash receipts and major class of cash payments except for the following cases, which may be reported on a net basis: [IAS 7.22-24] o cash receipts and payments on behalf of customers (for example, receipt and repayment of demand deposits by banks, and receipts collected on behalf of and paid over to the owner of a property) o cash receipts and payments for items in which the turnover is quick, the amounts are large, and the maturities are short, generally less than three months (for example, charges and collections from credit card customers, and purchase and sale of investments) o cash receipts and payments relating to fixed maturity deposits o cash advances and loans made to customers and repayments thereof investing and financing transactions which do not require the use of cash should be excluded from the statementof cash flows, but they should be separately disclosed elsewhere in the financial statements [IAS 7.43]

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 

the components of cash and cash equivalents should be disclosed, and a reconciliation presented to amounts reported in the statement of financial position [IAS 7.45] the amount of cash and cash equivalents held by the enterprise that is not available for use by the group should be disclosed, together with a commentary by management [IAS 7.48]

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