International Accounting Standards Overview

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Questions and Answers

What is the primary objective of IAS 1 concerning general purpose financial statements?

To limit the number of financial statements that need to be prepared.

To ensure comparability with the entity’s financial statements and those of other entities. (correct)

To provide a detailed analysis of all financial transactions.

To maximize the entity’s income statement figures.

Which component is NOT part of the minimum content required in financial statements?

Statement of Financial Analysis (correct)

Statement of Changes in Equity

Statement of Cash Flow

Statement of Financial Position

In the classification of current and non-current assets, which condition must be met for an asset to be classified as current?

It must produce income in the next fiscal year.

It should be expected to be realized within 12 months after the reporting period. (correct)

It must be usable for more than 12 months.

It needs to be an investment that yields a return.

What method of presenting financial information is preferred according to IAS 1?

Current/non-current distinction. Signup and view all the answers

Which of the following is classified as a current liability according to IAS 1?

Payables expected to be settled within 12 months. Signup and view all the answers

What must disclosures about each asset and liability include?

The amount expected to be recovered or settled after more than 12 months. Signup and view all the answers

Regarding the income statement, what information is emphasized for expenses?

Details of nature and function should both be reported. Signup and view all the answers

Which item is NOT typically located on the Statement of Financial Position (balance sheet)?

Finance costs Signup and view all the answers

What kind of classification is considered easier in the context of expense analysis?

Classification by nature. Signup and view all the answers

Which condition would lead to a liability being classified as non-current?

It is expected to be settled after 12 months. Signup and view all the answers

Which of the following describes a minimum content requirement for the income statement?

Finance costs. Signup and view all the answers

Which presentation method is used when liquidity is preferred and more relevant?

Classification based on liquidity. Signup and view all the answers

What represents a tendency regarding the income statement according to past practices?

To ignore gains that are not realized in cash. Signup and view all the answers

Which method is typically used to assign costs to inventories that are interchangeable?

Weighted Average Cost (WAC) Signup and view all the answers

What constitutes Net Realisable Value (NRV) for work in progress?

Estimated selling price less costs of completion Signup and view all the answers

Which of the following best describes the relationship between cost and net realisable value in inventory valuation?

Inventories are measured at the lower of cost and NRV Signup and view all the answers

In the context of financial assets, how are investments classified?

According to their duration and purpose Signup and view all the answers

What assumption is needed when the physical units' identification is not possible in inventory management?

Costs must be assigned using FIFO, LIFO, or WA Signup and view all the answers

What is required for an entity to change its cost formula for inventories?

A change in nature or use for the inventory Signup and view all the answers

How are financial assets categorized beyond tangible and intangible types?

According to their liquidity and investment duration Signup and view all the answers

Which of the following is NOT included in the cost measure for inventories?

Administrative overhead Signup and view all the answers

What is the primary objective of financial reporting as per the IASB Conceptual Framework?

To aid capital providers in making informed decisions about resource allocation Signup and view all the answers

Which of the following is NOT considered a fundamental characteristic of useful financial information?

Comparability Signup and view all the answers

According to the IASB Framework, what constitutes an asset?

A present economic resource controlled by the entity due to past events Signup and view all the answers

Which of the following best describes the term 'liability' in the context of the IASB Framework?

A present obligation to transfer an economic resource due to past events Signup and view all the answers

What is the definition of 'expenses' as per the IASB Framework?

Decreases in assets or increases in liabilities that reduce equity Signup and view all the answers

What conditions must be met for the recognition of elements in financial reports according to the IASB?

They must provide relevant information and faithful representation Signup and view all the answers

What is fair value as defined by the IASB?

The amount that an asset could be exchanged for between knowledgeable parties Signup and view all the answers

Which of the following is NOT an enhancing characteristic of useful financial information?

Completeness Signup and view all the answers

What distinguishes cash from investments?

Cash is readily available and does not involve maturity periods. Signup and view all the answers

How are receivables measured?

At their nominal value less allowances for bad debts. Signup and view all the answers

What is a bond primarily considered as in the context of financial instruments?

A loan agreement obligated to repayment on a specific date. Signup and view all the answers

What is the impact of issuing an equity instrument on a company's finances?

It raises funds by increasing the company's equity capital. Signup and view all the answers

Which of the following statements is true regarding cash equivalents?

They include investments with a maturity of less than three months. Signup and view all the answers

How is a company's long-term receivable valued?

At its present value based on the amount expected over time. Signup and view all the answers

What characterizes a financial instrument?

It represents both a financial asset and a liability or equity of another entity. Signup and view all the answers

What do debt instruments primarily increase for a company?

The company's debt capital or liabilities. Signup and view all the answers

What begins a statement of Other Comprehensive Income (OCI)?

Balance from the income statement Signup and view all the answers

Which of the following is NOT typically found in a statement of comprehensive income?

Cost of sales Signup and view all the answers

Which method is NOT used for classifying expenses in the income statement?

By financial impact Signup and view all the answers

What is the correct formula for calculating Profit for the period in an income statement?

Profit before tax - Income tax expense Signup and view all the answers

Which of the following items is NOT included in equity on the balance sheet?

Long-term provisions Signup and view all the answers

What is typically the first step in measuring assets and liabilities at recognition according to IAS standards?

Determining historical cost Signup and view all the answers

Which component is added back to Profit before tax to compute the final profit of the period?

Income tax expense Signup and view all the answers

What does EBIT stand for in the context of income statements?

Earnings Before Interest and Tax Signup and view all the answers

Which of the following characteristics does NOT apply to the notes to financial statements?

Present a summary of cash flows Signup and view all the answers

Which of the following components does NOT typically affect the comprehensive income calculation?

Dividends received Signup and view all the answers

What happens to the rights associated with financial instruments when they are sold in the market?

They transfer to the acquiring company that bought them. Signup and view all the answers

How are financial assets held to maturity valued under IFRSs?

At cost, with gains/losses recorded only upon sale. Signup and view all the answers

Which of the following statements is true regarding financial assets available for sale?

Unrealized gains and losses are shown in the OCI. Signup and view all the answers

What distinguishes liabilities classified as current from non-current?

Whether they are due to be repaid within one year. Signup and view all the answers

What is the primary way that liabilities are valued?

At their face value, potentially including interest. Signup and view all the answers

In the context of financial instruments, what does 'held for trading purposes' imply?

They are valued at fair value, with unrealized gains/losses recorded directly in profit. Signup and view all the answers

What characterizes the primary obligation of a liability?

The expectation of a future resource outflow. Signup and view all the answers

Which type of financial instrument has no maturity date?

Equity instruments. Signup and view all the answers

Study Notes

IAS- International Accounting Standards & IFRS- International Financial Reporting Standards

IAS and IFRS are international accounting standards
Chiara Saccon presented an overview of these standards

IFRS Conceptual Framework

It provides a framework for financial reporting
An overview of the framework given by Chiara Saccon

IASB Conceptual Framework: Objectives

The objective of financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the entity.
This involves decisions about buying, selling, or holding equity and debt instruments and providing or setting loans.
Focus is on information needs of capital providers (investors and creditors).

IASB Conceptual Framework: Qualitative Characteristics

Fundamental Characteristics:
- Relevance (Materiality): Information must be important to make decisions.
- Faithful Representation: Information must be complete, neutral, and free from errors.
Enhancing Characteristics:
- Comparability: Information should be comparable across different entities and periods.
- Verifiability: Information should be capable of being independently confirmed by others.
- Timeliness: Information should be available in time to be useful in decisions.
- Understandability: Information should be presented in a clear and concise manner.

IASB Framework (2018) - Elements of Financial Statements

Asset: A present economic resource controlled by the entity as a result of past events. An economic resource is a right that has the potential to produce economic benefits.
Liability: A present obligation of the entity to transfer an economic resource as a result of past events. An obligation is a duty or responsibility that the entity has no practical ability to avoid.
Income: Increases in assets, or decreases in liabilities, that result in increases in equity, other than those relating to contributions from holders of equity claims.
Expenses: Decreases in assets, or increases in liabilities, that result in decreases in equity, other than those relating to distributions to holders of equity claims.

IASB Conceptual Framework (2018) - Recognition

Recognition (inclusion in financial report) of the elements (that meet definitions) is appropriate if it results in both:
- Relevant information about assets, liabilities, equity, income, and expenses.
- Faithful representation of those items.

IASB Framework - Measurement of Elements

This section defines the various measurement bases available, including:
- Historical cost (as a measurement base).
- Current cost measurement basis, including fair value, value in use, and current value.
- Fair value. Fair value is the amount at which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's-length transaction.

IASB definition, recognition, and measurement stages

The stages are (definition), (recognition), (measurement).

IAS 1 - Presentation of Financial Statements

The standard prescribes the basis for presentation of general-purpose financial statements to ensure comparability between the entity's financial statements of previous periods and those of other entities.
Includes financial statements structure and content.

IAS 1 - Structure and Content

Components of financial statements include the statement of financial position (BS), statement of comprehensive income, statement of changes in equity, statement of cash flow, and notes.

IAS 1 - Statement of Financial Position (BS)

Structure and Content: No prescribed format or order. Minimum content includes a list of items with sufficiently different nature or function. Additional line items, headings, and subtotals should also be included. Further subclassifications of line items can be disclosed in the balance sheet or notes.
Minimum content for Balance Sheet: lists specific items, such as property, plant and equipment, investment property, and intangible assets.

IAS 1 - Structure and Content (continued)

Methods of presentation:
- Current/non-current distinction (preferred).
- Based on liquidity (if reliable and more relevant).
Current vs. Non-Current distinctions: Specific criteria for classifying assets and liabilities as current or non-current, depending on the nature of the assets and their expected timing of realisation or settlement.
Important disclosures include those assets and liabilities that are expected to be realised or settled within 12 months after the reporting period.

IAS 1 - Income Statement:

Structure and content: Additional line items, headings, and subtotals to accurately present financial performance may be required. The nature and materiality of the entity's operations may lead to other adjustments.
Expenses analysis by nature (or function) are necessary.

IAS 1 - Income Statement (continued): Income Statement minimum content

Income statement minimum content includes revenues, finance costs, share of profit or loss of associates & JV, tax expense, post-tax gain or loss on discontinued operations, disposal of assets/liabilities, profit or loss (allocation to non-controlling interests, the parent entity).

IAS 1 - Income Statement Evolution

A trend in the past focused on the income statement and final profit figures (mostly from a creditor perspective).
However, other changes in assets and liabilities contribute meaningful information. This has prompted an evolution to include a statement of recognised gains and losses (and others).

IAS 1 - Statement of Changes in Equity

Presents the changes in equity of the entity during a period, including components of comprehensive income and the effect of transactions such as contributions, distributions of dividends, profit or loss transfers.

IAS 1 - Statement of Comprehensive Income

A single statement of profit or loss with comprehensive income is presented or; two statements presenting the components of profit or loss and comprehensive income separately. A standard format is identified for these statements.

IAS 1 - Statement of Other Comprehensive Income

Shows changes in the entity's equity during the reporting period that are not included in profit or loss. Examples include changes in revaluation surplus, actuarial gains and losses on defined benefit plans, and gains and losses from the translation of foreign currency financial statements.

IAS 16, 38 - Measurement of Tangible and Intangible Assets

Tangible and intangible assets differ in their recognition and measurement requirements.
Tangible assets often pose simpler recognition and measurement issues given their physical substance and readily ascertainable costs.
Intangible assets, which lack physical substance, require a focus on the probable future economic benefits and reliable cost measurements.

IAS 16 - Measurement of Tangible Assets (at Recognition)

The cost comprises: purchase price, costs directly attributable (delivery/installation), initial estimates of dismantling and restoration.

IAS 16 - Tangible Assets

Tangible assets include property, plant, and equipment, (PPE) such as land, buildings, plant, machinery, and equipment.

IAS 38 - Intangible Assets

Intangible assets don't have physical substance; examples include research & development, patents, licenses, trademarks, brand names, and software.

Recognition of Fixed Assets

Tangible recognition is typically easier since physical identification and valuation is possible. Capitalizing intangible assets is required if purchased from another entity, otherwise determining a reliable cost measurement is difficult.

IAS 16 - Depreciation of Tangible Assets

Depreciable amount (cost - residual value) is allocated systematically over useful life, with appropriate methods employed to fairly reflect the consumption of economic benefits.

IAS 38 - Amortization of Intangible Assets

Amortisation (finite useful life) and accounting treatment of assets with indefinite useful life, which aren't amortized(but are reviewed periodically to identify any potential change in useful life).

Impairment - Loss of Value

Carrying amount of an asset may exceed its recoverable amount (due to rapid economic obsolescence or physical damage) as an accounting impairment
This is determined by the higher of the value-in-use and net realizable values (DCF and selling price) as detailed in IAS 36.

Tangible/Intangible Assets - Measurement after Recognition

Cost model: The asset is carried at cost less accumulated depreciation and accumulated impairment losses.
Revaluation model: Assets are carried at their fair value at the revaluation date, minus subsequent depreciation and impairment losses. Revaluation is important to maintain the assets at their fair market value.

Arguments for Cost or Revaluation Models

Historical cost is a simpler, cheaper method, but may not be the most relevant to economic decisions.
Fair value is more relevant, but involves greater subjectivity in valuation. Active markets provide better support for reliable fair value estimations.

IAS 2 - Inventories

Inventories are assets held:
- For sale in the ordinary course of business.
- In the process of production for such sale.
- As raw materials or supplies in the production process.
Inventory categories: Finished goods, work in progress, raw materials, etc

IAS 2 - Inventory Valuation

Inventory valuation is crucial for income and balance sheet statements, and affects profitability. There is an important matching process of the value of the inventory used with sales.

IAS 2 - Inventory Valuation Criterion

Inventories must be measured at the lower of cost and net realisable value.

IAS 2 - Cost – Input Value

Cost comprises purchase price and costs to bring inventory to its current location and condition, including direct costs (direct labor, material, production overhead). Indirect costs (factory management, administration) aren't included in cost.

Cost - input value (continued)

Issues arise in determining costs when multiple similar units are acquired at different times and costs, requiring the use of suitable cost formulas.

IAS 2 - Cost Formula (FIFO, Weighted-Average)

Specific identification, FIFO (first-in, first-out), and weighted-average cost can be used to allocate costs to inventory (when items are interchangeable).

IAS 2 - Net Realizable Value

Net realizable value is the estimated selling price less costs to make the sale, such as completion, marketing, and distribution costs.

IFRS Inventory Valuation

IFRS standards dictate that inventories should be measured at the lower of cost and net realizable value. Examples are provided to demonstrate the application of lower of cost and NRV criteria to valuation methods.

Financial Assets, Liabilities, & Equity

Financial Assets: Assets that arise from a contractual right to receive cash or another financial asset. Includes tangible assets such as inventory, PPE, and intangible assets; it also includes financial assets such as cash, receivables, and investments. Current and non-current classifications are important.
Investments : Investments can be current or non-current, depending on whether they are for continuing use or trading purposes.
Cash: Easily recognizable and measurable; important to distinguish cash versus investment.
Receivables: Represents a contractual right to receive cash; measured at their nominal amounts less allowances for bad debts; long-term receivables are valued at present value.
Financial Instruments: Instruments that typically include debt (e.g., bonds) and equity (e.g., shares) instruments; instruments that can potentially facilitate tradability with other entities. Debt instruments have a maturity date. equity instruments may or may not.

Financial Instruments (continued)

Investors can purchase debt instruments with an intention of holding until maturity or selling them. Equity instruments can be traded without a specified maturity.
Classification of instruments based on an intention to sell or to hold them until maturity, or as investments for trading purposes.

Investments on financial assets

Financial Assets Held to Maturity: Valued at cost, gains/losses are recorded only at the time of sale in the income statement.
Financial Assets Available for Sale: Valued at fair value, unrealized gains/losses are recorded in the OCI (other comprehensive income).
Financial Assets Held for Trading: Valued at fair value, unrealized gains/losses are recorded in the profit or loss statement.

Liabilities

Liabilities are present obligations of an entity arising from past events, the settlement of which is expected to result in an outflow of resources from the entity.
Payables/creditors are categorized as current and non-current. Include important details about the creditors identity, the due date and amount. They are typically valued at face value except in unusual circumstances.

Liabilities: Provisions

Liabilities of uncertain timing or amount (best estimate). Examples include provisions for pensions, cleaning/dismantling expenses, repair costs of warranted products.

Equity

Equity represents the ownership interest in an entity's assets remaining after deducting liabilities.

Equity: Components

Lists of components such as subscribed capital, share premium, legal reserve, and profit/loss reserves.

Equity: Subscribed Capital

Subscribed capital is the authorized share capital subscribed by shareholders, with a nominal value (or par value) which is often displayed per share. Subscribed capital not yet paid can be displayed as a receivable. Shares bought back from the public and held by the company are categorized as treasury shares and often presented in the accounting reports as a negative value in equity.

The difference between the selling price and the nominal value/par value of an issued share, is called share premium, presented as a credit.

Equity: Reserves (Legal Reserve)

Reserve legally mandated to be set aside by law, usually 5% of profits until it equals 20% of share capital in some countries. This legal reserve acts as a buffer, protecting creditors.

Equity: Reserves (Profit or Loss)

Retained profits (or reserves) are the profit elements not transferred to any other form of reserve but retained for use in the company.

Measurement of Inventories in detail

How to measure the cost of the inputs value
Different situations that result in the use of various cost formulas, such as: FIFO (First In, First Out), LIFO (Last-In, First Out), WA (Weighted Average).
Criteria for valuation (cost), or using net realizable value (output value).

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Explore the key concepts of International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS) as introduced by Chiara Saccon. This quiz also covers the objectives and qualitative characteristics essential for effective financial reporting. Learn how these standards aid investors and creditors in decision-making.