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- 1CONCEPTUAL FRAMEWORKThe IFRS Framework describes the basic concepts that underlie the preparation and presentation of
financial statements for external users. A - 2Advantages of a conceptual frameworkFinancial statements are more consistent with each other
Avoids firefighting approach and a has a proactive approach in determining best policy
Less open to criticism of political/external pressure
Has a principles based approach - 3Disadvantages of a conceptual frameworkA single conceptual framework cannot be devised which will suit all users
Need for a variety of standards for different purposes
Preparing and implementing standards may still be difficult with a framework - 4THE FIVE ELEMENTSasset
Liability
Equity
Income
Expenses - 5RecognitionAn item that meets the definition of an element
It is probable that any future economic benefit associated with the item will flow to or from the
entity and
The item‘s cost or value can be measured with reliability. - 6HISTORICAL COST ACCOUNTINGThe application of historical cost accounting means that assets are recorded at the amount they originally
cost, and liabilities are recorded at the proceeds received in exchange for the obligation. - 7AdvantageSimple to understand
Figures are objective, reliable and verifiable
Results in comparable financial statements
There is less possibility for manipulation by using 'creative accounting' in asset valuation. - 8Disadvantages The carrying value of assets is often substantially different to market value
No account is taken of inflation meaning that profits are overstated and assets understated
Financial capital is maintained but not physical capital
Ratios like Return on capital employed are distorted
It does not measure any gain/loss of inflation on monetary items arising from the impact
Comparability of figures is not accurate as past figures are not restated for the effects of inflation - 9Financial capitalA financial concept of capital is whereby the capital of the entity is linked to the net assets, which is the
equity of the entity - 10FormulaAssets – Liabilities = Equity
- 11Physical capitalA physical concept of capital is one where the capital of an entity is regarded as its production capacity,
which could be based on its units of output. - 12Fundamental qualitative characteristicsRelevance
Faithful representation - 13Enhancing qualitative characteristicsComparability
Verifiability
Timeliness
Understandability - 14basic underlying assumption.going concern assumption
- 15Rules-based accounting system Likely to be very descriptive
Relies on a series of detailed rules or accounting requirements that prescribe how financial
statements should be prepared
Considered less flexible, but often more comparable and consistent, than a principles-based
system
Can lead to looking for ‗loopholes - 16Principles-based accounting systemIt relies on generally accepted accounting principles that are conceptually based and are normally
underpinned by a set of key objectives
More flexible than a rules-based system
Require judgment and interpretation which could lead to inconsistencies between reporting
entities and can sometimes lead to the manipulation of financial statements - 17IAS 1 Presentation of financial statementsPresentation of financial statements
A statement of financial position
A statement of profit or loss and other comprehensive income
A statement of changes in equity
A statement of cash flows
Accounting policies and explanatory notes - 18IAS 16 – PROPERTY, PLANT AND EQUIPMENTThe statement of changes in equity provides a summary of all changes in equity arising from transactions
with owners in their capacity as owners.
This includes the effect of share issues and dividends - 19Property plant and equipment Are held for use in the production or supply of goods or services ,for rental to others, or for
administrative purposes; and
Are expected to be used during more than one period. - 20Carrying amountt is the amount at which an asset is recognized after deducting any accumulated
depreciation and accumulated impairment losses - 21Depreciationis systematic allocation of the depreciable amount of assets over its useful life
- 22Depreciable amountis the cost of an asset less its residual value
- 23Residual Valueis the estimated amount that an entity can obtain when disposing of an asset after its
useful life has ended. When doing this the estimated costs of disposing of the asset should be deducted. - 24PPE are recognized if It is probable that future economic benefits associated with the item will flow to the entity; and
The cost of the item can be measured reliably. - 25Aggregation and segmenting. It may be appropriate to aggregate individually insignificant items, such as moulds, tools dies,
etc.
ii. It may be appropriate to allocate total expenditure on an asset to its component parts and
iii. Account for each component separately e.g. an aircraft and its engines, parts of a furnace - 26MEASUREMENT CRITERIAInitial measurement:
PPE are initially recognized at the cost - 27Cost of self-constructed assets cost?will be the cost of its production
- 28If an asset is exchanged, the cost will be measured at the fair value unlessThe exchange transaction lacks commercial substance or
The fair value of neither the asset received nor the asset given up is reliably measurable. If the
acquired item is not measured at fair value, its cost is measured at the carrying amount of the
asset given up. - 29SUBSEQUENT COSTS It is probable that future economic benefits associated with the extra costs will flow to the
entity
The cost of the item can be reliably measured. - 30IAS 16 permits two accounting models: Cost Model
Revaluation Model - 31Carrying value:Amount at which the asset is recognised after deducting any accumulated depreciation and accumulated
impairment losses. - 32DEPRECIATION OF PPEIAS 16 defines depreciation as ‗the systematic allocation of the depreciable amount of an asset over its
useful life‘.
‗Depreciable amount‘ is the cost of an asset, cost less residual value, or other amount. - 33Straight line• % on cost, or
• Cost – residual value
Useful economic lif - 34Reducing balanceReducing balance
- 35Impairment:An item of PPE shall not be carried at more than recoverable amount. ).
- 36Recoverable amountt is the higher of
an asset's fair value less costs to sell and its value in use - 37Cost ModelThe asset is carried at cost less accumulated depreciation and impairment
- 38Revaluation ModelThe asset is carried at a revalued amount, being its fair value at the date of revaluation less subsequent
depreciation and impairment, provided that fair value can be measured reliably.
The change from cost model to revaluation model is a change in accounting policy but is dealt with
prospectively. - 39Gain on revaluationshould be credited to other comprehensive income and accumulated in equity
under the heading "revaluation surplus" unless it represents the reversal of a revaluation decrease of the
same asset previously recognized as an expense, in which case it should be recognized as incom - 40Double entry: Dr Non-current asset cost (difference between valuation and original cost/valuation)
Dr Accumulated depreciation (with any historical cost accumulated depreciation)
Cr Revaluation reserve (gain on revaluation) - 41A loss on revaluation should be recognized as an expense to the extent that it exceeds any amount previously credited to the revaluation surplus relating to the same asset.Dr Revaluation reserve (to maximum of original gain)
Dr Statement of profit or loss (any residual loss)
Cr Non-current asset (loss on revaluation) - 42Reserves transferDouble entry: Dr Revaluation
reserve
Cr Retained earnings - 43Disposal of previously revalued assetsDr Revaluation reserve
Cr Retained earnings - 44IAS 38 - INTANGIBLE ASSETS An intangible assetn intangible asset is an identifiable non-monetary asset without physical substance held for use in the
production or supply of goods or services, for rental to others, or for administrative purposes - 45IAS 38 - INTANGIBLE ASSETSIdentifiability
control (power to obtain benefits from the asset)
future economic benefits (such as revenues or reduced future costs - 46An intangible asset can be termed identifiable if itis separable or
arises from contractual or other legal rights - 47RECOGNITION CRITERIAIt is probable that the expected economic benefits that are attributable to the asset will flow
to the entity; and
The cost of the asset can be measured reliably - 48There are two types of intangible assets:those that are purchased and those that are internally generated.
- 49Separate rules for recognition and initial measurement exist for intangible assets depending on whether they were: Acquired separately: At cost
Acquired as part of a business combination: At fair value
Acquired by way of a government grant: As per IAS 20
Obtained in an exchange of assets: At fair value
Generated internally (Discussed later) - 50Separate acquisition) Its purchase price, including import duties and non-refundable purchase taxes after deducting
trade discounts and rebates; and
b) Professional fees arising directly from bringing the asset to its working condition; and
c) Costs of testing whether the asset is functioning properly - 51Acquisition as part of business combination) Is not separable; or
b) Is separable, but there is no history or evidence of exchange transactions for the same or similar
assets, and otherwise estimating fair value would be depended on immeasurable variables. - 52Reason for spending money on R&DMany businesses in the commercial world spend vast amounts of money, on an annual basis, on the
research and development of products and services. These entities do this with the intention of developing
a product or service that will, in future periods, provide significant amounts of income for years to come - 53Researchis original and planned investigation undertaken with the prospect of gaining new scientific or
technical knowledge and understanding. - 54Developmentis the application of research findings or other knowledge to a plan or design for the
production of new or substantially improved materials, devices, products, processes, systems or services
before the start of commercial production or use - 55ESEARCH PHASEAs a result, IAS 38 states that all expenditure incurred at the research
stage should be written off to the statement of profit or loss as an expense when incurred, and will
never be capitalised as an intangible asset - 56DEVELOPMENT PHASEAn intangible asset arising from development (or from the development phase of an internal project)
should be recognized as asset (capitalized) if, and only if, an enterprise can demonstrate all of the
following: - 57COST MODELAfter initial recognition, an intangible asset shall be carried at its cost less any accumulated amortization
and any accumulated impairment loss. - 58REVALUATION MODELAfter initial recognition an intangible asset whose fair value can be determined with reference to the
active market shall be carried at revalued amount, less subsequent accumulated amortization and
subsequent accumulated impairment losses. - 59Indefinite life:: no foreseeable limit to the period over which the asset is expected to generate
net cash inflows for the entity. - 60Finite life:a limited period of benefit to the entity.
- 61DISPOSALemove from statement of financial position when disposed of or abandoned. Recognize any gain or loss
in the statement of profit or loss. - 62GOODWILLGoodwill is not normally recognised in the accounts of a business at all. The reason for this is that
goodwill is considered inherent in a business and it does not have any objective value - 63Purchased goodwillThere is one exception to the principle that goodwill has no objective value, this is when a business is sold.
Purchased goodwill is shown in the statement of financial position because it has been paid for. It has no
tangible substance, and so it is an intangible non-current asset. It is dealt with under IFRS 3 Business
Combinations - 64SUBSEQUENT EXPENDITUREDue to the nature of intangible assets, subsequent expenditure will only rarely meet the criteria for being
recognised in the carrying amount of an asset. Subsequent expenditure on brands, mastheads, publishing
titles, customer lists and similar items must always be recognised in profit or loss as incurred. - 65IMPAIRMENT OF ASSETSThe objective of this IAS is to set rules to ensure that the assets of an enterprise are carried at no more
than their recoverable amount. - 66Recoverable amountis the higher of an asset‘s net selling price and its value in use
- 67Value in uses the present value of estimated future cash flows expected to arise from the
continuing use of an asset and from its disposal at the end of its useful life - 68Net selling pricethe amount obtainable from the sale of an asset in an arm‘s length transaction
between knowledgeable, willing parties, less the costs of disposal. - 69An impairment lossis the amount by which the carrying amount of an asset exceeds its recoverable
amount. - 70cash-generating unitis the smallest identifiable group of assets that generates cash inflows from
continuing use that are largely independent of the cash inflows from other assets or groups of assets. - 71Corporate assetsare assets other than goodwill that contribute to the future cash flows of both the
cash-generating unit under review and other cash-generating units. - 72Measurement of net selling price (Value in sale)Price in Binding Sale Agreement less Disposal Cost.
Cost of disposal includes legal costs, stamp duty and similar transaction taxes, costs of removing
the asset, and direct incremental costs to bring an asset into condition for its sale. - 73Measurement of Value in UseEstimating the value in use of an asset involves the following steps:
Estimating the future cash inflows and outflows to be derived from continuing use of the asset
and from its ultimate disposal; and
Applying the appropriate discount rate to these future cash flows - 74Discount Rate The discount rate should be a pre-tax rate.
It should reflect the current market assessments of the time value of money and the risks that
relate to the asset for which the future cashflows have not yet been adjusted. - 75An impairment lossn impairment loss should be recognized as an expense in the statement of profit or loss
immediately, unless the asset is carried at revalued amount. - 76The recoverable amount of a cash-generating unit is the higher of the cash-generating unit‘s net selling
price and value in use - 77RECOGNITION OF IMPAIRMENT LOSS OF CASH-GENERATING UNIT First to any asset that is impaired (e.g. if an asset was specifically damaged)
Second, to goodwill in the cash generating unit
Third, to all other assets in the CGU on a pro rata basis based on carrying value - 78Investment propertynvestment property is property held to earn rentals or for capital appreciation or both, rather than
for:
a) Use in the production or supply of goods or services or for administrative purposes; or
b) Sale in the ordinary course of business - 79wner-occupied propertyOwner-occupied property is property held (by the owner or by the lessee under a finance lease) for
use in the production or supply of goods or services or for administrative purposes - 80Investment property shall be recognized as an asset when(a) It is probable that the future economic benefits that are associated with the investment property will
flow to the entity; and
(b) The cost of the investment property can be measured reliably. - 81nitial measurement An investment property shall be measured initially at its Cost + Transaction costs.
The cost of a purchased investment property = Purchase price + any directly attributable
expenditure. - 82Subsequent expenditureThis should be added to the carrying amount of the investment property when it is probable that future
economic benefits in excess of the originally assessed standard of performance of the existing investment
property will flow to the enterprise - 83IAS 40 permits entities to choose betweenA fair value model, and
A cost model. - 84COST MODEL:Under cost model, investment property should be measured at depreciated cost, less any accumulated
impairment losses - 85FAIR VALUE MODEL Under the fair value model the entity should:Revalue all its investment property to 'fair value' (open market value) at the end of each financial
year, and
Take the resulting gain or loss to profit or loss for the period in which it arises - 86COST MODELThe cost model is the same treatment in IAS 16. Investment property should be measured at cost less
accumulated depreciation less any accumulated impairment losses. An enterprise that chooses the cost
model should disclose the fair value of its investment property. - 87INVENTORIES Net Realizable Valueis the estimated selling price in the ordinary course of business less the estimated
costs of completion and the estimated cost necessary to make a sale - 88Inventory shall be measured atthe lower of cost and net realizable value
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