IAS 11 - Construction Contracts

IAS 11 – Construction Contracts – Script Consultants

IAS 11 deals with the accounting treatment of revenue and costs which are associated with construction contracts. Generally, the span of projects in the construction industry exceeds one year which means that the work takes more than one accounting year to get finished. Therefore, the issue that arises is the allocation of contract revenue and contract costs to the accounting periods in which the construction is completed.

IAS 11 provides guidance for recognition of contract revenue as well as the corresponding costs in the statement of Profit and Loss.

Construction Contract

For the construction of an individual property or a group of assets that are interdependent regarding their function, structure or operating use include:

  • Construction contracts for the individual asset or the group of assets.
  • Construction contracts that may involve the demolition or restoration of an old asset.

Types of Contract

There are two types of contracts which are explained below as per the International Accounting Standards 11:

1. Fixed Price Contract

In such construction contracts, the contractor as well as the client can agree on a fixed price per unit output.

2. Cost Plus Contract

In cost-plus contracts, the contractor decides to acquire the allowable cost of a contract plus a specific agreed-upon percentage of the total allowable cost as their profit.

Also Read About: IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors

Combining and Segmenting

An entity needs to confirm whether the contract for construction of a group of assets is going to be treated as a single contract or each asset in the group of assets will be treated as a separate contract. For such cases, IAS 11 prescribes combining and segmenting.

Segmenting

If a group involves a group of assets then each asset shall be treated as a separate contract when:

  • Each asset was accountable to a separate proposal by the contractor.
  • The conditions of each asset were negotiated individually and the contractor as well as the client has the power to approve or reject the contract relating to each asset in the group of assets.
  • Each asset has identifiable revenue along with the cost on an individual basis.

Combining

If a contract comprises of a group of assets then the contract will be treated as an entirety only when:

  • The client and the contractor both have a single contract for the construction of a group of the asset.
  • All the assets which are present in the group of assets are interdependent concerning their design or functionality and also appear to be the elements of a single contract.
  • The segments of the whole contract are going to be fulfilled continuously.

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Amendments

International accounting standard 11 prescribed amendment clauses for both contractors and clients. If the client wishes to put some changes in the original contract to include the construction of an additional asset then it will be considered as a separate contract if:

  • The additional asset is varied in regards to its use or design from the asset or group of assets under the original contract.
  • The contract price for the added asset is prone to a separate negotiation irrespective of the original contract.

IAS 11 Proposes Accounting for Construction Contracts Based on Anticipated Outcomes:

When an outcome of a contract can be measured

Net Profit

If profits are expected under the original contract, revenue and costs shall be acknowledged in the income statement which is based on the stage of completion of the contract. 

Net Loss

In case if a net loss is foreseen in the contract then the entire loss shall be recognized in the income statement immediately.  The cost of revenue, as well as contracts, are acknowledged in the income statement on the basis of stage of completion of the contract.

When an outcome of a contract cannot be measured

Uncertain: No profits are recognized if the outcome of a contract is uncertain. Also, costs are recognized in the period in which they are incurred. However, revenue is acknowledged only to the extent of the cost incurred that is expected to be restored.

Disclosure

The Standard requires certain disclosures regarding the construction contract: 

  • Contract revenue recognized in the current duration.
  • The approach that is used by the entity in the judgment of the revenue reported in the current period.
  • The strategy used by the entire in the judgement of the stage of completion of contracts at the end of the reporting period.

Also, the disclosures should include the cost incurred to date along with advances received from the client to date. The entity shall present the amount due to the customer related to the contract as an asset and amount due to customers as a liability in the financial statement.

Final Words

IAS 11 construction contracts specify accounting for construction contracts on the basis of the expected outcome. It sets the requirements for the treatment of the revenue and costs associated with the long term construction contracts.

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IAS 10 - Events After the Reporting Period

IAS 10 – Events After the Reporting Period – Script Consultants

There may be certain events which arise between the end of the reporting period and the date when financial statements are authorised for issue. Since they may present information that must be assessed in preparation of financial statements, IAS 10 was administered to deal with such cases. IAS 10 states when an entity should modify its financial statements for the events after the reporting period. 

It also prescribes the disclosures that a company has to go give about the date when the financial statements were authorized for issue and about events after the reporting period.

IAS 10 offers direction for the accounting treatment of such events which take place after the reporting period but before the date of authorization of final statements. Plus, these events can be favourable or unfavourable. International Accounting Standard 10 events after the reporting period provide a set of rules which defines both adjusting and non-adjusting events.

Date of Authorization for Issue

The Standard proposes that an entity must not prepare its financial statements on a going concern basis if events after the reporting period demonstrate that the going concern assumption is not relevant. Events that take place after the reporting period are those which occur between the end of the reporting period and when financial statements are authorized for issue.

The date when the board of directors approve the issue of the financial statement is usually considered as the date of authorization for the issue. If the management is required to issue its financial statements to a board or shareholders for their acceptance, the specific authorization is supposed to be complete upon the management’s authorization for the issue of financial statements.

This is better rather than when the supervisor’s board or shareholders give their consent.

Moreover, the entities should disclose the date when the financial statements were authorised for issue and also who gave that authorisation. If there is a possibility that the financial statements may be amended at a later date then the entity should positively disclose this fact too.

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Adjusting Events

The events that occur after the end of the reporting period which provides further evidence of conditions that prevailed at the end of the reporting period, also known as adjusting events then the financial statements have to be modified accordingly.

Here are some examples of adjusting events:

  • Consider a settlement of litigation against the entity after the reporting date, in regard of events that have already happened before the end of reporting period. This may contribute evidence of the existence and amount of liability at the reporting date. Liability of the litigation may be documented in the financial statements if it is not recognized originally or even the amount of liability can be revised.
  • Declaration of bankruptcy by a long receivable after the reporting date may deliver proof that the receivable was impaired at the reporting date. However, impairment can be acknowledged in the financial statements by decreasing the amount of receivable to its recoverable amount, in case if there is any.
  • Detection of frauds or errors after the reporting period can imply that the financial statements are misrepresented. In this case, the financial statements may be modified to examine accounting for those errors that are relevant to the current or prior reporting periods.

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Non-Adjusting Events

In the possibility of non-adjusting events, the entity must not adjust the financial statements in respect of those events after the end of the reporting period that indicates situations that took place after the end of the reporting period.

Here are some examples of non-adjusting events:

  • The announcement of dividends after the reporting date does not indicate the validity of liability to pay dividends at the reporting date. Plus, it shall not provoke the recognition of liability in financial statements which are by IAS 37 Provisions.
  • If floods cause destruction of the assets of an entity after the reporting period then it does not reflect that the assets of the entity were impaired at the end of reporting period. Therefore, in such a case, the financial statements must not be modified to account for the impairment loss that took place after the end of the reporting period.
  • Initiation of litigation against any company originating out of events that happened after the reporting period does not demonstrate the existence of liability at the reporting date. It shall not arouse the recognition of liability in the financial statements by IAS 37 Provisions.

Moreover, the nature of the financial impact of material non-adjusting events must be disclosed in the financial statements.

For non-adjusting events to be considered as material, they shall impact the economic as well as the financial decisions of the users of the financial statements.

Some examples of material non-adjusting events are as follows:

  • The strategy of the management to terminate or curtail its activities in crucial geographic regions.  
  • Initiation of important litigation against the company originating out of events that took place after the reporting period.
  • Losses suffered as an outcome of a natural calamity occurring after the end of the reporting period.
  • Business combinations or disposal of subsidiaries, purchases and disposal of assets, classification of assets as held for sales of operations, restructurings, declaration of dividends, changes in law enacted or announced after the reporting period and entering into significant commitments or contingent liabilities are all examples of material non-adjusting events according to IAS 10.

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Going Concern

The judgment of whether the going concern assumption is relevant needs to be evaluated by each entity. However, the assessment of going concerned is of more applicability for individual entities rather than for a government.

An entity must not prepare its financial statements on a going concern basis if those accountable for the preparation of the financial statements determine after the reporting date either that there is an intention to liquidate the entity or to terminate operating or that there is no rational alternative but to do so.

To evaluate whether the going concern assumption is appropriate for an individual entity, those responsible for this must consider a wide range of factors. The factors include the existing and anticipated performance of the entity, any announced and probable restructuring of organizational units and if vital, potential sources of replacement funding.

For entities whose procedures are budget funded, going concern issues arise only if the government declares its intention to cease funding the entity. Also, if the going concern is no longer relevant then this Standard needs to be reflected in the financial statements of an entity. The influence of this change depends upon the circumstances of any entity.

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Scope

An entity which organizes and presents financial statements under the basis of accounting shall apply this standard in the accounting for, and disclosure of, events after the reporting date.

Moreover, the Standard applies to all public sector entities, Government enterprises are exceptions. Also, IAS 10 prescribes that in the events after the reporting period, entities are required to distinguish between subsequent events IFRS that are adjusting and those which are non-adjusting.

Final Words

IAS 10 contains requirements and guidance for the times when events occur between the end of the reporting period and date when final statements were authorized. These should be modified in the financial statements.

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IAS 8 - Accounting Policies, Changes in Accounting Estimates and Errors

IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors

IAS 8 establishes the criteria for selection and changing accounting policies, changes in accounting estimates and correction of prior period errors. Accounting policies can be considered as the ground rules, principles or practices which are involved in preparing as well as presenting financial statements.

When an IFRS standard is applied to a transaction or any other condition then the entity must apply that Standard. In absence of IFRS standard which applies to that transaction, the management adopts its judgement in formulating and applying an accounting policy that explains the information which is relevant.

While making this decision, the judgement must refer to the necessities and advice in IFRS standards which deal with similar issues.

Next, it should also refer to the definitions, liabilities, recognition criteria, income and expenses in the Conceptual Framework. Changes in accounting policy are applied until it is irrelevant or there are other IFRS standard sets specific transitional conditions.

Change in Accounting Estimate

The adjustment of carrying amount of an asset or a liability or amount of periodic consumption of an asset that concludes in new information or developmental is known as a change in accounting estimate.

However, they are not a correction of errors. Therefore, the effect of a change in accounting estimate is acknowledged by including it in profit or loss in the period of change, only if the change affects that period.

Also, it can be recognized by the period of change and future periods if the change affects both. Prior period errors are omissions and misstatements in an entity’s financial statements. 

This is for one or more prior periods arising from a failure to use or misuse of available reliable information.

If it is impractical to determine the effects of error, the entity corrects material prior period errors by rephrasing the comparable amounts for prior periods presented when the error occurred. For instance, errors like the effects of mistakes in applying accounting policies, mathematical errors and fraud are included in such errors.

Corrections of prior period error and changes in accounting policies are affected in retrospect.

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Exemption From Accounting Policy

Retrospective application of a change in accounting policy is exempted in such cases. If a change in accounting policy is needed by a new IFRS or even an existing IFRS and the transitional provisions of these standards require the prospective application of a new accounting policy.

Also, the application of a new accounting policy is in respect of events, circumstances and transactions which are different from those that were developed earlier.

Another circumstance is when the effect of the retrospective application is immaterial of a change in accounting policy. If an entity is unable to collect a sufficient amount of data to allow the objective inspection of a change in account estimate then the retrospective application is impracticable. 

Plus, if the entity is unable to apply a change in the accounting policy due to impracticability, the new accounting policy must be applied from the beginning of the earliest period which is possible.

When changes are implemented in the accounting policy, the financial statement of the accounting period should consist of the title of IFRS, nature of change in the policy, reasons for the change in an accounting policy, amount of modifications in the current as well as prior period presented along with the conditions that cause impracticality.

Also Read: IAS 2 – Inventories

Consistency of Accounting Policies

An entity must choose and assign its accounting policies consistently for comparable transactions, other events and conditions unless an Interpretation or a Standard permits categorisation of items for which several policies may be relevant.

An accounting policy must be selected and applied to each category if a Standard or an Interpretation needs or authorizes categorisation. A company can only change its accounting policies and methods if there are one or more acceptable justifications and also the modification indicates the entity’s financial position in a better way. 

Also, if accounting policies are consistently applied, it results in financial reports of the same structure of different accounting periods. Moreover, an entity is not entitled to change the accounting policies for one transaction for continuous periods.

The concept of consistency of accounting policies comes in handy at times of comparability and enables users of financial statements to compare the financial statements of an entity. However, the consistency principle does not specify that an entity must use an accounting policy forever.

Disclosures

Some companies disclose an entire set of IFRS along with amendments to them whereas others focus only on entity-specific material matters. Yet another considerable thing is how the entities disclose relevant information to assess the possible impact that application of the new IFRS will have on the entity’s financial statements. The disclosure must be entry specific and should explain how the new IFRS or amendment will affect accounting for transactions which are carried out by the entity. It must be mentioned that even if the quantified impact is unknown.

Immaterial Impact of Changes in Accounting Policies

It may be possible that the impact of a change in an accounting policy is immaterial. If it is so then the entities do not have to follow retrospective application. In such cases, one of these two approaches is accepted in practice:

  • In the first approach, the assets or liabilities as per opening balance of the current year are recognised or derecognized in line with the new accounting policy. In this case, the related impact is included in current year P/L in line with the operating income, finance costs and more such assets. The total impact on current period P/L should be immaterial to change this accounting policy into immaterial.
  • Under this approach, assets or liabilities as per opening balance are not remeasured or recognised in line with the new accounting policy. In this case, no P/L is recognized and the new accounting policy is not completely in practice until the assets or liabilities according to the opening balance are derecognized. Here, materiality is established on questions like what is the materiality of the elements that are missing and what would be the impact of recognising and re-measuring.

Errors

IAS 8 clearly states that errors are misstatements in financial statements which result from numerous kinds of mistakes, acquiring the policies that are against IFRS requirements.

IAS 8 consists of impracticability of his retrospective statement, however, it does not include a condition to state if an error was made. Some changes in estimates can be errors while the rest can’t so it is vital to consider if and if yes, then to what extent the previous estimate was affected by the omission of facts.

In such cases, the change in the estimated amount is a correction of an error which requires retrospective adjustment along with a relevant disclosure. Moreover, while changing an accounting policy or creating a reclassification, it is important to take into account whether the previous policy was in line with IFRS and if it was not then this is a correction of error.

Final Words

International accounting standard 8, adopted by IFRS selects changes in accounting policies, accounting for changes in estimates as well as reflects corrections of prior period errors. It requires that the changes in accounting policies must be applied retrospectively.

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IAS 7 - Statement of Cash Flows

IAS 7 – Statement of Cash Flows | Sustainability Reporting

IFRS suggests that for a set of financial statements to be complete, there should be five statements which are presented with equivalent importance. One of these 5 statements is the statement of cash flows. The success of an entity does not only depend on its profit but also by the ability to generate and receive cash flows.

To understand how an entity generates, uses or obtains cash and to determine its future cash flows, the statement of cash flow is a must.

IAS 7 deals with the statement of cash flows which presents inflows and outflows of cash.

The main objective of IAS 7 is to expect the presentation of historical changes in cash equivalents of any entity.

Cash flows are classified into operating, investing as well as financing activities. Here is some information that will help you in understanding this better.

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Cash and Cash Equivalents

Cash equivalents are held for meeting short term commitments. They are highly liquid, readily convertible to the recognized amounts of cash and are subject to an insignificant risk of changes in value. To meet the short term agreements, IAS 7 specifies that an investment has a maturity of three months maximum from the date of obtainment.

This time period is generally considered as a criterion and there is no hard and fast rule for this in the IAS 7. Initially, the classification is unchanged when any investment approaches its maturity date.

Also, if a deposit has a maturity that exceeds 3 months but there is no interest loss for its early withdrawal then it is probable to treat such cases as a cash equivalent.

However, it should be held for fulfilling short term cash commitments and not investments or other purposes. It is clear that cash equivalents cannot include equity investments. Plus, they are presented in the statement of the final position within cash and cash equivalents. The numbers of cash and cash equivalents in the statement of the final position may not always be the same for which the statements of cash flow has come up with reconciliation.

Debt Instruments

The Institutional money market funds association specifies that triple-A-rated money market funds can be recognised as cash equivalents. Debt instruments like government bonds or corporate bonds can meet the standards of cash equivalent by using market funds in their cash management procedure. Money market funds must uphold amounts of overnight and one week’s security which should not be less than the prescribed minimum.

It should neither exceed the maximum laden average maturity nor the maximum laden average life to mitigate liquidity risk. Moreover, IRFIC clearly states that the amount of cash that is obtained should be identified at the time of initial investment.

If a unit is converted into cash at a given time then it will not be considered as a cash equivalent. To ensure that there is an insignificant risk of changes in value, an entity can select a fund that invests in debt instruments with the highest level of rating and also has a maturity of only 3 months.

These statements were laid down because auditors evaluate every situation based on individual merits and there is no one statement which can clarify if a market fund is going to be considered as cash equivalent or not.

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Central Pooling Arrangements

Intergroup cash pooling of cash and cash equivalents which leave subsidiaries with cash deposited with other companies can be classified as cash equivalents. Factors like terms and conditions of the intergroup pooling arrangements, the credit rating of the group, liquidity as well as the access to external financial resources should be taken into consideration.

When it comes to gold and cryptocurrencies, they cannot be assessed as a cash equivalent since they can’t be converted to known amounts of cash.

In order to determine the cash and cash equivalent along with the elements that comprise the overall balance, it is a must for the entities to disclose the policy. When the cash and cash equivalent balance has some restrictions on its use, it is known as restricted cash. Generally, the restrictions are disclosed on cash and cash equivalents but it is not quite specific in the IAS 7.

Operating Activities

A cash flow that impacts from a transaction or any other event that may have a direct effect on P/L comes under operating activities. These are the core profit-producing activities of a particular entity. From normal trading activities to provisions of services by an entity, everything comes under operating activities.

In simple words, all those activities that do not fall under-investing or financing activity classification are presented in operating activities. Such activities gain revenue and add to the profits of entities.

Be it cash receipts and payments from contractors held for trading purposes, related to loans and depositions or rendering of services, operating activities comprises all of them. Also, cash inflows and profits are not the same things. This is so because the entity may give long credit terms and the money will receive months or even years later.

Cash flow statement presentation from operating activities can be reported using direct or indirect methods.

Investing Activities

All the activities that are undertaken by an entity for the investment of long term assets fall under investing activities. However, the investments are not a part of a cash equivalent.

According to IAS 7, cash flows that are investing should conclude in a recognised asset in the statement of financial position. Some elements may relate to investing activities but if they are not recognized assets then they cannot be included in this category.

For instance, development expenditures can be operating if they are expensed but will fall under investing activities if they are capitalized.

Cash payments to acquire long term assets like property and plants, payments related to internally generated property or loans made to other parties in a non-financial institution and cash receipts from sales of property are some examples of investing activities.

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Financing Activities

Activities that relate to the changes in size, as well as the composition of the contributed equity and borrowing of the entity, are financing activities. Such activities enable you to see the financial structure of any entity, how much equity they have and also how much debt they are in.

This enables you to easily estimate the future necessities to either service this debt or deliver returns to the shareholders. Examples of financing activities include Cash outflows to pay dividends, cash inflows from the sale of equity and cash outflows from buying back equity.

Interest and Dividends

Cash flows from interests and dividends received and paid must be presented separately from time to time. Plus, interests and dividends paid can be categorized as operating or financing cash flow. It can be done either way but it has to be done consistently. To be more precise, interests paid are generally considered as a cash flow from operating activities.

On the other hand, dividends are usually financing activities as they are a source of gaining financial resources. Also, if you relate loans as to what interests they are for, it would be more suitable to categorize them in financing activities.

When it comes to dividends, only include those who have made a full payment during the year in the IAS 7 statement of cash flows. For instance, if any dividend has been submitted but not yet paid then do not include it in the statement of cash flow.

Direct and Indirect Method

For reporting cash flows, a company can choose either the direct method or the indirect method. In the direct method, information about major classes of gross receipts and gross cash payments are disclosed. This can be done from accounting records or by adjusting sales and other items in the statement. It provides you with more information that is understandable and is not disclosed under the indirect method.

Alongside, under the indirect method, the net cash flow from operating activities is speculated by modifying profit. Also, it can be presumed by changes during the period in inventories, undistributed profits of associates and also non-cash items such as depreciation and provisions.

Foreign Currency and Taxes

Foreign currency cash flows must be translated using the exchange rate at the date of cash flow. Whenever a foreign currency is involved, it has to be converted to the functional currency. The effect of exchange rate changes on cash as well as cash equivalents is indicated in the cash flow statement to reconcile opening and closing balances of cash and cash equivalents.

Also, unrealised year-end foreign exchange gains or losses cannot be included in the cash flows. These amounts have to be separately reconciled if they pertain to cash or cash equivalent. If you can individually identify taxes with investing or financing activities then those have to be reported too.

Final Words

These were the highlights on the IAS 7 statement of cash flows. It defines how to present information in a statement of cash flow regarding cash and cash equivalent to an entity.

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IAS 2 - Inventories

IAS 2 – Inventories

The International Accounting Standards Board (IASB) created International Accounting Standards 2 (IAS 2) for the valuation of inventories. IAS 2 prescribes the accounting methods for inventories. According to the requirement, the inventories must be measured at lower of the cost and net realizable value. The guidelines for determining the cost are also provided by International Accounting Standard 2. This leads to recognition of expenses, including any write-down to net realizable value.

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Inventories

The Following Items Can Be Considered As Inventory: [IAS 2.6]

  • The assets for sale in the normal course of business. These are finished goods.
  • The assets used in the production process for sale.
  • It is the material and supplies used in production. These are the raw materials.

The Following Inventories Fall Outside The Scope of IAS 2

  • Any ‘work in process’ asset under construction contracts.
  • Different financial instruments
  • Biological assets which are associated with agricultural activity.

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IAS 2 Is Not Applicable For The Inventories That Are Held By

  • Producers of forest and agricultural products, minerals and mineral products and produce after harvest. When the inventories are measured at net realisable value, the changes in the values will be considered as profit or loss.
  • Commodity brokers and dealers. They measure the inventory at fair value less costs to sell. In this case, changes in the fair value less cost to sell are considered as profit or loss for the period of change.

Measurement of IAS 2 Inventories

In IAS 2.10, it is stated that the cost includes costs of purchase, costs of conversion and other costs that were incurred for transporting the inventories to the current location.

Purchase costs may include non-refundable duties and taxes plus if there is any cost of acquisition. Discount is deducted when calculating the cost of acquisition.

Cost of conversion may include the cost of labour and other overheads that are incurred to convert the raw material to finished goods.

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There Are Two Categories of Conversion Costs

1. Direct Cost

The costs that are directly associated with the product such as labour.

2. Fixed Overhead Cost

These are the indirect costs that the enterprise has incurred regardless of the production volume. Examples of such cost can be building maintenance cost, depreciation and administration cost.

Storage costs, selling costs, abnormal costs, administrative overheads, foreign exchange differences, and interest cost should not be included as inventory cost. [IAS 2.16 and 2.18]

While measuring the actual cost, the standard cost and retail methods can be used. In the standard technique, the value of inventory is calculated at the standard cost per unit while in retail technique, the relevant gross profit margin is deducted from the sales value of inventory. [IAS 2.21-22]

The specific cost is recorded for an individual item if it is non-interchangeable. [IAS 2.23]

The FIFO or weighted average cost formula is applicable to items that are interchangeable. [IAS 2.25]

According to First-In, First-Out method, the oldest purchased or manufactured inventory is supposed to be sold first and the newer ones remain unsold. While the weighted average cost formula is the total cost of inventory to total units of inventory.

For inventories with similar characteristics, the same cost formula can be used. Different cost formulas can be used for a group of inventories with different characteristics. [IAS 2.25]

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Write Down To Net Realizable Value

Net realizable value is the estimated selling price excluding the cost of completion and other costs that were essential to making the sale. This should be recognized as an expense. Any reversal has to be recorded in the income statement for the period in which the reversal is done.

Recognition of Expenses

When the revenue is not recognized even after the inventories are sold, the carrying amount for such inventories will be considered as an expense. Write-down to NRV and any losses in inventory also come under expenses when they occur. It is mentioned in IAS 2.34.

Required Disclosures

The following disclosures are important to be done: [IAS 2.36]

  • The accounting policies used by the entity for inventories.
  • The carrying amount must be disclosed. It is usually classified as supplies, finished goods, work in progress and merchandise. Different entities can use different classifications according to their requirements.
  • The cost of inventories that are recognized as expenses.
  • Carrying amount of inventories that are held as securities.
  • Any reversal amount.
  • Any write-down of inventories.

The above mentioned are the guidelines set by IAS 2 in order to evaluate and classify the inventories. Different disclosures are necessary on the part of the entity to maintain transparency and consistency in reporting. These guidelines are important to determine the costs and which costs can be recognized as expenses.


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IAS 1 — Presentation of Financial Statements

IAS 1 – Presentation of Financial Statements

Requirements for preparing the financial statements are prescribed by IAS 1 Presentation of Financial Statements. As per the standard set by IAS 1, complete set of financial statements should include a statement of profit and loss, a statement of financial position, a statement of cash flows and a statement of changes in equity. These guidelines for presentation make it easier to make a comparison between the financial statements of one entity with another over the previous years. International accounting standards 1 has set clear guidelines regarding the structure of financial statements and different concepts like going concerns, current/non-current distinction and the accrual basis for accounting.

Scope of IAS 1

International accounting standard 1 applies to all financial statements and must comply with International Financial Reporting Standards (IFRS). [IAS 1.2]

What Is The Objective of IAS 1 Financial Statements?

According to Script Consultants, The purpose of IAS 1 financial statements is to give information about an entity’s financial position, financial performance and cash flows. The financial statements are prepared for different users to help them in making their economic decisions. Financial statements include assets, liability, equity, income and expenses, contributions by and distributions to owner and cash flows. [IAS 1.9]

Different Components of Financial Statements

As per IAS 1.10, the following makes a complete set of financial statements:

  • Balance sheet or a statement of financial position.
  • A statement of profit or loss.
  • A statement of changes in equity.
  • Cash flows statement.
  • Notes.
  • Information for comparison.

Presentation of Financial Statements and Its Compliance with IFRS

There must be a fair presentation of all the components of financial statements. Fair representation includes an honest representation of:

  • Effects of transactions.
  • All conditions related to assets, incomes, expenses and liabilities according to international accounting standards.
  • Application of IFRSs to financial statements.

The compliance with IFRS needs the financial statements means that the entity must follow the requirements such as International Financial Reporting Standards, International Accounting Standards, IFRIC Interpretations and SIC Interpretations. The IFRS financial statements must include notes stating the compliance. [IAS 1.6]

If the compliance with IFRS requirement does not allow the entity to present the financial statement according to their objective or it can misleading, in such extreme or rare cases, the entity can avoid IFRS requirement. But the entity is required to disclose the reason, nature and impact of this departure from IFRS Foundation.

This is mentioned in IAS 1.19-21.

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Different Concepts of Accounting By IAS

Going Concerned

While preparing the financial statements, it is assumed that the company will remain in operation in foreseeable future. [Conceptual Framework, para 4.1]

Here the management has to:

  • Make an assessment of an entity’s ability to continue.
  • Disclose the uncertainties.
  • Disclose if the entity is not a going concern.

Accrual Basis of Accounting

According to this concept, the business may recognize revenue when earned and expenses are recognized when the assets are consumed. IAS 1.27 mentions that entity can prepare its financial statements, expect for cash flow information.

Consistency Concept

When a business decides to use a specific presentation method, it should continue using that for next years as well. This ensures easy comparison of financial statements for various years. They must change the method only because of certain circumstances or change in IRFS’s requirement. [IAS 1.45]

Materiality and Aggregation Concept

The transactions that have the capacity to alter the decision of the readers must be recorded by the entity. [IAS 1.7]

There should be a segregation of different material classes with similar items. In case the items are individually immaterial, they can be aggregated together.

Offsetting

The assets cannot offset liabilities and income cannot offset expenses until and unless permitted by IFRS. [IAS 1.32]

Also See: International Accounting Standards Board (IASB)

Comparative Information of IAS 1

All the comparative information must be disclosed as per the requirement of IAS 1. All the transactions of all the amounts for the previous year must be reported in financial statements and notes.

At least two of the given financial statements are required for providing comparative information: [IAS 1.38]

  • Financial position statement.
  • Profit or loss statement.
  • Separate statements of profit or loss.
  • Cash flows statement.
  • Changes in equity.
  • Notes related to above-given items.

IAS 1 Prescribed Structure and Content For Financial Statements

According to IAS 1.49-51, the entity is required to identify:

  • The financial statements, which must be different from other information-containing documents.
  • Each financial statement and the notes related to them.

In addition, the content must have:

  • Name of an entity or even if there is some change in the name.
  • Information whether the financial statement is an individual entity or a group of entities.
  • Details about the reporting period.
  • The currency used.
  • Level of rounding used such as thousands or millions.

Reporting Period

It is assumed that the financial statements are prepared annually. In case the business decides to change this period, it has to mention the reason for the change. [IAS 1.36]

Balance Sheet or Statement of Financial Position

Current and Non-Current Classification

There should be a clear classification of current and non-current assets and liabilities in a financial statement.

Current assets [IAS 1.66] are the assets that will be realized in normal operating cycle of the entity. These assets are used for the purpose of trading. They can be cash or cash equivalents. Within 12 months after the reporting period, they are expected to be realized. Assets that do not fulfil these criteria are categorized as non-current assets.

Current liabilities [IAS 1.69] are due to be settled within 12 months. Just like current assets, they are expected to be settled within the normal operating cycle of the entity and are used for trading purpose. There is no right of the entity on current liabilities at the end of the reporting period.

  • The long term debt is classified as non-current if it is expected to be refinanced under any current loan facility.
  • The liability is considered to be current if it becomes payable on demand. It can happen if the entity breaches a long-term loan agreement.
  • Liability is classified as non-current, of the lender provides a period of at least 12 months grace period.

Line Items

The line items mentioned in IAS 1.54 are property, plant and equipment, intangible assets, investment property, financial assets, biological assets, inventories, trade and other receivables, cash and cash equivalents, assets for sale, trade and other payables, provisions, financial liabilities, current tax liabilities and assets, deferred tax liabilities and assets, disposal groups liabilities, non-controlling interests and issued capital and reserves.

In the financial statement or in notes, the sub-classification of line items can be: disaggregation of receivables, classes of property, plant and equipments, disaggregation of inventories, classes of equity and reserves and disaggregation of provisions for benefit of employees.

 Format of Statement

There is no specific format for preparing the financial statement. When it comes to assets, current or non-current assets, anything can come first. Similarly the position of current and non-current can be determined as per the requirement of business. One widely used format is fixed assets+ current assets-short term payables= long-term debt+ equity.

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Disclosures Required Regarding Share Capitals and Reserves [IAS 1.79]

  • Par value of shares
  • Number of shares (authorized, issued and fully paid, issued but not fully paid)
  • Rights, preferences and restrictions
  • Number of outstanding shares
  • Treasury shares
  • Shares that are kept in reserve for issuance under options and contracts
  • Nature and purpose of each reserve

Profit or Loss Statement

The total of income minus expenses determines the profit or loss. The components of other comprehensive income are excluded while calculating the profit or loss. The other comprehensive income includes the items (income or expenses) that are not considered as profit or loss by IFRSs. Total comprehensive income for a given time period is equal to profit or loss plus other comprehensive income.

Choices available for presentation of profit or loss statement

There are two choices of presentation that an entity can choose:

  • Financial position of an entity can be presented through a single statement of profit or loss and other comprehensive income. In this there can be two sections for profit or loss and other comprehensive income.
  • Two statements can also be chosen by an entity i.e. a separate statement of profit or loss and a separate statement of comprehensive income.

The line items such as revenue, finance costs, tax expense, any gain or loss due to de-recognition financial assets, any gain or loss due to reclassification of financial assets must be included in profit or loss section. [IAS 1.82-82 A]

Disposals of investments, litigation settlements, discontinuing operations, disposals of items of plant, property and equipment, restructuring of activities and other reversals of provisions are some of the examples of items that must be disclosed in the comprehensive income statement or in notes separately.

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Statement of changes in equity

According to the requirement of IAS 1, a statement of equity must show:

  • Total comprehensive income for the period.
  • Any effects of the application of accounting policies and restatements.
  • The reconciliation of amounts for each component of equity that were recorded in the beginning and end of the period should disclose profit or loss, other comprehensive income and transactions with owners.
  • In the statement of change in equity or notes, amount of dividends and related amount per share can also be presented.

Notes to the financial statements

According to IAS 1.112, the notes:

  • Contain all the information related to basis of preparation of financial statement and the use of accounting policies.
  • Disclose the important information that cannot be found anywhere in the financial statement.
  • Provide any additional information, if required.

According to IAS 1.114, the order of the notes can be presented in the following manner:

Firstly, the statement that financial statement complies with IFRSs.

  • Summary of used accounting policies.
  • Supporting information related to balance sheet, profit or loss statement, cash flow statement and so on.
  • Disclosures such as contingent liabilities and non-financial aspects like financial risk management policies and objectives.

Judgments and Key Assumptions

The judgment made by the management while applying the accounting policies in the presentation of financial statements and its effect on the amounts should be disclosed. [IAS 1.122]

Dividends

The entity must disclose the following information in the statement of change in equity: [IAS 1.137]

  • The proposed amounts of dividends that were declared before preparing the financial statement but not recognized as a distribution to the owner.
  • Total cumulative preference dividends.

Disclosures Related To Capital

According to IAS 1.135, the entity must disclose the following details about the capital:

  • What is the objective, processes and policies of entity in order to manage the capital?
  • What changes happened from one period to another?
  • What is the nature and description of capital requirement?
  • How the entity is meeting its objectives?
  • Is the entity complying with all the requirements?
  • What is the quantitative data available for the capital?

Other Information To Be Disclosed:

While presenting the financial position of entity through financial statements, the following information can also be disclosed:

  • Information related to principal activities and operations
  • Legal form of entity
  • Country and address of the registered office
  • Name of the parent group, if any.
  • Length of life, if the entity has a limited life

International accounting standards 1 has set some requirements for the proper presentation of the financial position of any entity. The above-mentioned points can be helpful in understanding the requirements for different financial statements in an easy and concise way.

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International Integrated Reporting Council (IIRC)

International Integrated Reporting Council (IIRC)

All You Need To Know About IIRC

In August 2010, the International Integrated Reporting Council (IIRC) was formed with the motive of creating a framework that is accepted globally. This process made it easy for organisations to communicate their performance to their stakeholders.

IIRC has representatives from different sectors like investment, academic, securities, corporate and other so on. It chiefly consists of a Steering Committee, three task forces related to content development, communication and governance and lastly a working group.

The very first version of the International Integrated Reporting Framework was published on 9 December 2013 that provided guidelines for communicating value creation by the companies over the years. It is considered to be a milestone in corporate reporting.

The Concept of Integrated Reporting

The Concept of Integrated Reporting

As per IIRC, Integrated Reporting was created to bring a change in the reporting method of organisations to the stakeholders. This reporting method supports integrated thinking and decision making. When it comes to vision, IIRC wants an integrated reporting framework as a system in which integrated thinking is amalgamated with the business practices followed in public and private sectors.

Now that you know “what is IIRC”, let’s have a look at the fundamental concepts of integrated reporting:

1. Value Creation

To ensure capital usage in a continuous manner, it is important to keep a check on the impact of the company’s activities, relationships and interaction with available capital. More value creation is a clear indication of efficient usage of resources.

2. Capitals

Integrated reporting framework focuses on different types of capitals that are relevant to the organisation.

3. The Process of Value Creation

Every business model operates on a procedure of using the inputs, processing them with different activities and then finally producing the output. This reporting framework enables the entity to analyse the performance.

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Objectives of Integrated Reporting

IIRC integrated reporting was published with the following objectives:

  • To improve the communication of information and data to the investors. This helps in more efficient capital allocation.
  • To promote accountability for different types of capitals such as financial, social, human, manufactured and natural.
  • To provide an efficient reporting framework containing a wide range of factors that could be communicated to the stakeholders.
  • To support value-creating integrated thinking and actions.

Must Read About: What Is The Objective of IAS 1 Financial Statements?

Requirements of Integrated Reporting

  • The report should contain identifiable communication.
  • Integrated reports must fulfil all the set requirements of the framework. In case the data is not available and it is not essential to disclose, it can be skipped. But all other essential information must be included in the report to maintain transparency.
  • A statement from the head of governance in the entity must be included in the report. This acknowledgement of responsibility is important as that person is answerable to the internal and external stakeholders.

Also See: What are Sustainability Reporting Requirements in Singapore?

IIRC Framework Guiding Principles

1. Connection of All Information

Different factors are responsible for the success of any organisation. These factors are interrelated and must be synchronized with each other to ensure smooth functioning. The integrated report shows the holistic picture of the interconnection of different factors contributing to the growth of the organisation.

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2. Strategic Focus and Future Orientation

Integrated report contains all the information that reflects the current strategy and future planning of any company. The opinion of investors and employees about the performance is based on this aspect of integrated reporting.

3. Stakeholder Relationships

The integrated reporting also gives clarity about the quality and nature of relationships companies have with their stakeholders.

4. Materiality

The ability of the company to create value must be communicated through the integrated report. Organisations are supposed to disclose all the information that can be of importance for the concerned people.

5. Conciseness

The content must be relevant and short. Major points must be showcased in a way that everyone is able to analyse the data easily without wasting much time.

6. Reliability

Any discrepancy in the conveyed information must be avoided. Be it positive or negative, there has to be transparency in the information given in the integrated report.

7. Consistency and Comparability

There should be a consistency over time in the reporting method of any organisation. In order to show the value and strength of the company, a comparison can also be done with other organisations in the industry. This has a great impact on the decision making of investors.

Must Check: International Accounting Standards Board (IASB)

Content Elements of Integrated Report

1. Overview of Organisation and External Environment

This section includes the introduction of an organisation. The nature of work and its operations are explained in short. Impact of circumstances due to the external environment is also mentioned in this part.

2. Governance

The structure of governance responsible for the functioning of the organisation is included in this section.

3. Business Model

This element of content contains the explanations of the model on which the business operates.

4. Risks and Opportunities

External environment has both risks and opportunities. The integrated report contains risks that challenge the growth of the business. Companies also mention the scope of improvement by pointing out the opportunities in their relevant industry.

5. Strategy and Resource Allocation

The goals and strategic planning of the company is included in this section. The utilization of resources in different activities and its impact on the environment is included in this part.

6. Performance

All the data that indicates the performance of the company over the years comes under the performance section.

7. Outlook

It is an important section as it determines the future planning and strategies of the company. If the company is hopeful in overcoming the challenges, it is more preferred by the stakeholders.

8. Basis of Preparation and Presentation

This section specifies the matters that are important for the organisation and the process of their evaluation.

IIRC formed the framework of integrated reporting as it helps the businesses to think, plan and report their value creation capability to the stakeholders in a clear and concise way.

This reporting framework is now followed globally by companies. This has effectively helped the businesses in building public trust, gaining the confidence of investors and allocating the resources more efficiently. This framework by IIRC has compelled the businesses to make more sustainable decisions that can provide benefit in the long run.


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International Accounting Standards Board

International Accounting Standards Board (IASB)

International Accounting Standards Board which is generally known as IASB, is an independent body consisting of various members. The primary function of this body is to derive standards about accounting. It is overseen by another foundation by the name of IFRS. The full form of IFRS is International Financial Reporting Standards. Similar to IASB, its primary task includes developing IFRS standards. IASB operates throughout the world and establishes all measures related to IFRS.

Btw, you can read about GRI Sustainability Reporting Standards here.

International Financial Reporting Standards

What is IASB?

For the International Accounting Standards Board definition, we can say that it is an upgraded version of the Financial Accounting Standards Board. The only difference is that IASB works on the international level and establishes all rules and principles globally. The standards that this organisation approves get implemented worldwide and everyone follows it.

IASB was first established in 2001. The purpose of establishing such an organisation was to replace a similar body by the name of the International Accounting Standards Committee. After its inception, many members have become part of it, and the foundation is still active. There are various things that IASB overlooks. Let’s see each of them one by one.

Must Read About: IAS 1 – Presentation of Financial Statements

Functions of The International Accounting Standards Board

1. Preparing and Issuing IFRSs

This is the most basic thing that the board has to accomplish. The preparation phase requires extensive research and help from the experts. The committee that operates this consists of high aptitude and experience. They take all the necessary steps and prepare IFRSs. A lot of things go into play whenever preparing these standards. Many factors are responsible for this so that reports and standards come out full-fledged. Any flaw in these can lead to setbacks and careful examination is necessary here. If sometimes it is essential to revisit previously formed standards, IASB has to take care of that as well. You can say that the accounting standards board is the backbone in setting IFRS.

2. Approving Interpretations

Just like the International Accounting Standards Board, there is another committee called IFRS Interpretation Committee. When IASB accounting issues any standard, it gets transferred to this interpretation committee. This committee performs the function of interpreting this given report. By analysing it means that it will see through the proposed clauses and standards by IASB and fill the required gaps. You could say that both IASB and the interpretation committee are inter-related and operate on the same level.

Now once this interpretation along with the report is complete, it again gets back to the International Accounting Standards Board. Over here the function of the board is pretty simple. They just need to approve the interpretation provided by the interpretation committee. This interpretation goes through examination by the members. For it to proceed into the final interpretation phase, it needs the approval of at least 9 members from the panel. If it fails then in such a scenario, revamping is essential. So the entire process is to and fro between both IASB and Interpretation Committee. You could even say that both of them work with the input of each other.

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3. Keeping Complete Transparency

International Accounting Standards Board has to keep transparency with the public and trustees regarding their on-going or past projects. It gives a much better sense of the reliability of the organization. With everything in front of the public eye, it becomes easier for them to proceed with the projects. One of the examples of this transparency comes in the form of meeting between members of IASB. Whenever a meeting occurs, it gets broadcasted live. This allows the general audience to see what exactly is going on in the establishment of standards. It also gives an idea about the agenda and what the future holds for IASB accounting.

Members

As of present, there are 14 members in the International Accounting Standards Board. In the past few reforms have occurred in regards to the number of members. At some point, they were 16 but later on got changed to 14. The members include reputed people that have a strong background in the finance and accounting sector. The members get selected from various countries based on different factors. Right now Hans Hoogervorst, who is a former minister of health as well as finance for the Netherlands is acting as chairman.

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General Structure of International Accounting Standards Board (IASB)

While IASB doesn’t work on some predefined structure, it does have a certain pattern whenever performing respective tasks. Generally, the whole process takes place in a few steps.

1. Establishing Agenda

In the very first step members have to establish an agenda for how to technically approach the proposed standard. This step usually informs background research and future effects of the standard on the global level.

2. Plan

For the second step, the board needs to assign members to carry out different segments. This plan acts as a skeleton for whatever research is necessary about the proposed standard.

3. Publish

Now after the research phase is over, the board creates an outline for the standard. This standard gets published on the public forum so that everyone can see it. It drives in some public comments over the standard and some opinions can even help in forming the standard.

4. Exposure Draft

This step involves getting feedback from the public on the actual standard. The exposure draft consists of the actual project and is mainly published to ask for public opinion.

5. Development

After getting input from the public the standard starts its development.

6. Issuing IFRS

Finally, when everything comes into fruition, the IFRS standard gets issued.

We hope that this article by team Script Consultants has provided you all the necessary information and details about International Accounting Standards Board (IASB).

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