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Lecture Sheet-1

The Regulatory Framework

Contents
1. The Regulatory Systems 2. Regulatory Bodies i. IASC ii. IASB iii. IFRIC iv. SAC 3. The Objectives of the IASC Foundation & IASB 4. The Role of Regulatory Bodies 5. Standard Setting Process

Prepared By:

KAMRUL HASAN
Cell: 01911-563569 E-mail: kamrul.acca@yahoo.com

1. THE REGULATORY FRAMEWORK

The Regulatory System Regulatory Bodies The Role of Regulatory Bodies Standard Setting Process

THE INTERNATIONAL ACCOUNTING STANDARDS COMMITTEE (IASC):

The International Accounting Standards Committee (IASC) was set up in 1973. It consists of representative from accountancy organizations from around the world. In 2001 a new Constitution and structure came into force. Presently it is called IASC Foundation. THE REGULATORY SYSTEM Structure of the international regulatory system THE IASC FOUNDATION (Controlling/Supervisory body)

IASB (Issue IFRSs)

SAC (Advisory body)

IFRIC (Provide Interpretation of IFRS)

International Accounting Standards committee (IASC) Foundation The IASC Foundation: y is the supervisory body for the new structure y has 22 trustees y 6 trustees are appointed from North America, 6 from Europe and 6 from Asia or Oceania. The remaining 4 can be appointed from any part of the world y is responsible for governance issues and ensuring each body is properly funded y The trustees appoint the members of the IASB, the International Financial Reporting Interpretations Committee(IFRIC) and the Standards Advisory Council (SAC) The objectives of the IASC Foundation are to: y develop a set of global accounting standards which of are high quality, are understandable and are enforceable y which require high quality, transparent and comfortable information in financial statements to help those in the worlds capital markets and other users make economic decisions y promote using and applying these standards y bring about the convergence of national and international accounting International Accounting Standards Board (IASB) The IASB: y is solely responsible for issuing International Accounting standards (IASs) y standards now called International Financial Reporting Standards(IFRSs) y is made up of 14 members y the IASB has 14 members, of which 12 are full time. Each member has one vote y has the same objectives as the IASC Foundation Expandable Knowledge The IASB is solely responsible for issuing new IASs. The IASB has announced that its new standards will be called IFRSs, but the existing standards will continue to be called IASs. Note that now the term IASC Foundation is used to refer to the whole structure of the new organizations in the above diagram, while the IASB is just the standard setting body.

Internati nal inancial eporting Interpretations Committee (IFRIC)

The IFRIC:
y i es rapi gui ance on acc ounting matters interpretations of IFR s have arisen y Issues interpretations called IFRIC 1, IFRIC 2, etc. y Its previous name was SIC. y SIC changed in to IFRIC in 2002. E pandable Knowledge

where di ergent

In 1997 the IASC formed the Standing Interpretations Committee (SIC to ensure proper compliance with IFRSs by considering point s of contention where divergent interpretations have emerged and issuing an authoritative view; 33 interpretations (entitled SIC 1, SIC 2, etc) were issued by the SIC before its change of name SICs are important because IAS 1 (revised) states that financial statements cannot be described as complying with IFRSs unless they comply with each IAS/IFRS and each interpretation from the SIC /IFRIC. In 2002 the SIC changed its name to the International Financial Reporting Interpretations Committee (IFRIC). Interpretations are now designated IFRIC 1, IFRIC 2, etc.

Standard Advisory Council (SAC)

The Standard Advisory Council (SAC) advises the IASB on its agenda, its work program and its standard settings projects (with particulars emphasis on practical issues). It consists to individuals and representatives of organi ations affected by the IASB s work. There are at least 30 members and these are drawn from a wide range of geographical areas and professional backgrounds including user groups, preparers, financial analysts, academics, auditors, regulators and professional accounting bodies.

T e Development of an IFRS (Standard setting process)

The procedure for the development of an IFRS is as follows:


y The IASB identifies subjects/issues and appoints an advisory committee to advice on the issues. y The IASB publishes an exposure draft for public comment, being a draft version of the intended standard. y Following the consideration of comments received on the draft, the IASB publishes the final text of the IFRS. y At any stage the IASB may issue a discussion paper to encourage comment. y The publication of an IFRS interpretation requires the votes of at least eight of the 14 IASB members. E pandable Knowledge

Neither the IASC Foundation, the IASB nor the accountancy profession has the power to enforce compliance with IFRSs. Nevertheless, some countries adopt IFRSs and their local standards and others ensure that there is minimum difference between their standards and IFRSs. In recent years, the status of the IASB and its standards has increased; So IFRSs carry considerable persuasive force worldwide.

T e Role of IASC, IASB, IFRIC & SAC Role of IASC: The role of the IASC Foundation is to oversee the IASB and related bodies and to raise the fund needed. Role of IASB: The role of the IASB is to develop and issue global accounting standards. Role of IFRIC: The role of IFRIC is to provide timely guidance on the application of IFRSs where unsatisfactory interpretations exist or new processes arise. Role of SAC: The role of SAC is to provide a formal forum where the IASB can consult individuals and representatives of organi ations affected by its work.

Lecture Sheet-2 & 3


The Conceptual Framework

Contents
1. 2. 3. 4. 5. 6. Definition of the conceptual framework Advantage & Disadvantage of framework Purpose of the framework Qualitative characteristics of financial information Element of the financial statement Reorganization of assets, liabilities, income & expenses 7. Summary

Prepared By:

KAMRUL HASAN
Cell: 01911-563569 E-mail: kamrul.acca@yahoo.com

THE CONCEPTUAL FRAMEWORK The word Conceptual came from the word Concept. Her Concept means Coherent system  Principles  Rules & regulations AND The word Framework means Structure  Boundary  Limit So, Conceptual Framework is a boundary of principles, rules & regulations which are derived from IASB or national regulatory body e.g. The Stock Exchange that an entity may how to follow to achieve its objectives. What is a conceptual framework? A conceptual framework is: y a coherent system of interrelated objectives and fundamental principles y a framework which prescribes the nature, function and limits of financial accounting and financial statements The conceptual framework should ultimately provide a basic structure for answering some of the fundamental questions of financial reporting. These questions include: y Why produce financial statements? y Who are the statements prepared for? y What information do they require? y What statements should be produced? The conceptual framework should also standardize accounting rules and practices, thus preventing the profession from establishing conflicting rules and practices. Benefits y Provides a framework for developing and setting accounting standards. y Provides a basis for resolving disputes over the accounting treatment of items. y Fundamental principles do not have to be repeated in accounting standards. y Influence of vested interests is minimized. Drawbacks y Framework may be too general and therefore unhelpful when producing accounting standards. y People may not be an agreement as to the content of the framework.

The Framework

The conceptual framework published by the IASB is called the framework. It includes guidance with regard to
y the qualitative characteristics of financial information y the elements of financial statement y recognition of the elements The purpose of the framework

The main purposes of IASB s Framework for the preparation and presentation of financial statements are to:
y assists in the development of future accounting standards and in the review of existing standards y provide a basis for reducing the number of alternative accounting treatments permitted by international standards y assists preparers of financial statements in applying international standards and in dealing with issues not covered by international standards y assist auditors in forming an opinion on whether financial statements conform to international standards y assist users of financial statements in interpreting information y provide information about the IASB s approac h to standard setting
Conceptual Framework

The Framework

Qualitative Characteristics of Financial Information

Elements of Financial Statements

Materiality

Recognition of Elements of Financial Statements

Reliability

Comparability

8 Understandability

Relevance

Qualitative Characteristics of Financial Information Introduction

Qualitative Characteristics are the attributes that make information provided in financial statements useful to others. The framework identifies four Qualitative Characteristics:
y y y y

relevance reliability comparability understandability

All are subject to a threshold quality of materiality.

What makes financial information useful Threshold Quality Materiality Information that is not material cannot be useful

Content

Relevance

Reliability

What makes information relevant

Information that influences decisions

Predictive Value

Confirmatory Value

Inter-related

What makes information reliable?

Information that is free from error or bias

Faithful Representation Neutrality Substance

Completeness Prudence

What qualities make the presentation of financial information useful?

Comparability
Consistency Disclosure e.g. accounting policies and corresponding figures

Understandability
Users abilities Aggregation and Classification

What limits the application of the qualitative characteristics?

Constrains
Balance between characteristics Timeliness Benefit and cost

Relevance- Information is relevant if it has the ability to influence the economic decisions of users and if provided in time to influence those decisions. Reliability- Information is reliable if:

i.

ii. iii.

it can be depended on by users to represent faithfully what is either purports to represented or could reasonably be expected to represent, and therefore reflects the substance of the transaction and other events that have taken place it is free from deliberate or systematic bias and material error and is complete in its preparation under conditions of uncertainty a degree of caution has been applied in exercising the necessary judgments.

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Comparability- Information in financial statements needs to be prepared and presented in a way that enables users to discern and evaluate similarities in, and differences between, the nature and effects of transactions and other events overtime and across different reporting entities. Understandability- Information is understandable if its significance can be perceived by users who have reasonable knowledge of business and economic activities and accounting and a willingness to study with reasonable diligence the information provided. Expandable Knowledge Faithful representation In information is to represent faithfully the transactions and other events that is purports to represent, they must be accounted for and presented in accordance with their substance and economic reality and not merely their legal form. Neutrality Information must be natural, i.e. free from bias. Financial statements are not natural if, by the selection or representation of information, they influence the making of a decision or judgment in order to achieve a predetermined result of outcome. Completeness Information must be complete and free from error within the bounds of materiality. A material error or an omission can cause the financial statements to be false or misleading and thus unreliable and deficient in terms of their relevance. Prudence Uncertainly surrounds many of the events and circumstances that are reported on in financial statements. It is dealt with in those statements by disclosing the nature and extent of the uncertainty involved and by exercising prudence. Prudence means exercising a degree of caution in making judgments about estimates required under conditions of uncertainty, such that gains and assets are not overstated and losses and liabilities are not understated. The existence of assets and gains requires more confirmatory evidence and greater reliability of measurement than are required for liabilities and losses. It is not necessary to exercise prudence there is no uncertainty. Nor is it appropriate to use prudence as a reason for, e.g. creating hidden reserves or excessive provisions, deliberately understanding assets or gains, or deliberately over standing liabilities or losses. That would mean that the financial statements are not neutral and, therefore, are not reliable.

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Elements of the financial statements Assets Assets are: y resources controlled by the entity y as a result past events y from which future economic benefits are expected to flow to the entity Liabilities Liabilities are: y an entitys obligations y to transfer economic benefits y as a result of past transactions events. Equity interest Equity interest is the residual amount found by deducting all liabilities of the entity from all of the entitys assets. E pandable Knowledge Assets An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to follow to the entity.

To Explain further the parts of the definition of an asset:


y Controlled by the entity- control is the ability to obtain the economic benefits and to restrict the access of others (e.g. by a company being the sole user of its plant and machinery, or by selling surplus plant and machinery). y Past events- the event must be past before an asset can arise. For example, equipment will only become an asset when there is the right to demand delivery or access to the assets potential. Dependent on the terms of the contract, this may be on acceptance of the order or on delivery. y Future economic benefits- these are evidenced by the prosp ective receipt of cash. This could be cash itself, a debt receivable or any item which may be sold (on a going-concern basis) it houses the manufacturer of goods. When these goods are sold the economic benefit resulting from the use of the factory is reali ed as cash.

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Liabilities Liabilities are an entitys obligations to transfer economic benefits as a result of past transactions or events.

To explain further the parts of the definition of a liability:


y Obligations- these may be legal and constructive. A constructive obligation is an obligation which is the result of expected practice rather than required by law or a legal contract. y Transfer economic benefits-this could be a transfer of cash, or other property, the provision of a service, or the refraining from activities which would otherwise be profitable. y Past transactions or event- similar points are made here to those under assets. Complementary nature of assets and liabilitiesas should be evident from the above, assets and liabilities are seen as mirror images of each other. Sometimes they are offset, e.g. a credit note issued to a customer will be set against his debt rather than be recorded as a separate liability. Equity interest Equity interest is the residual amount after deducting a ll liabilities of the entity from all of the entitys assets.

The definition describes the residual nature of equity interest. Owners wealth can be increased whether or not a distribution is made. The sharing may be in different proportions. Equity interest is usually analyzed on financial statements to distinguish interest arising from owners contributions from that resulting from other events. The latter is split into different reserves which may have different applications or legal status.
Income Income is: y an increase in economic benefits during the accounting period in the form of inflows or enhancements of asset or decreases in liabilities y Transactions that result increases in equity, other than those relating to contributions from equity participants. E penses Expenses are: y decreases in economic benefits during the accounting period in the form of out follows or depletions of assets or incurrences of liabilities y Transactions that result in decreases in equity, other than those relating to distributions to equity participants.

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Recognition of assets, liabilities, income and expenses Recognition Criteria y Economic Benefit y Reliable measurement y Evidence Recognition of assets An asset will only be recognized if: y It gives right or other access to future economic benefits controlled by an entity as a result of past transactions or events y it can be measured with sufficient reliability y there is sufficient evidence of its existence. Recognition of liabilities A liability will only be recognized if: y there is an obligation to transfer economic benefits as a result of past transactions or events y it can be measured with sufficient reliability y there is sufficient evidence of its existence. Recognition of income Income is recognized in the income statement when: y an increase in future economic benefits arises from an increase in an asset (or a reduction in a liability), and y the increase can be measured reliably. Recognition of Expenses Expenses are recognized in the income statement when: y a decrease in future economic benefits arises from a decrease in an asset or an increase in a liability, and y can be measured reliably.

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Test your understandability

Bellow is listed four situations. (1) M has paid $3 million towards the cost of a new hospital in the nearby town, on condition that the hospital agrees to give priority treatment to its employees if they are injured at work. (2) N is the freehold legal owner of a waste disposal tip. It has charg ed customers for the right to dispose of their waste for many years. The tip is now full and heavily polluted with chemicals. If cleaned up, which would cost $8 million, the site of the tip could be sold for housing purposes for $ million. (3) P has signed a contract to pay its finance director $300,000 pay for the next five years. He has agreed to work full time for the firm over that period. (4) Q has paid $25,000 to buy a patent right, giving the right to sole use for 8 years, of a manufacturing method whic h saves costs. For each solution, state whether an asset or a liability is created.
Solution

(1) The framework defines an asset as resources controlled by the entity as a result of past events and from which future economic benefits are expected to follow to the entity. M cannot control the actions of the hospital, nor is it certain that there is access to future economic benefits. Therefore M does not have an asset. (2) N controls the tip as the result of a past transaction, but there does not appear to be any access to future economic benefits, as the tip cannot be sold in its present state and no further income can be obtained from it. Therefore the site of the tip is not is not an asset. It is possible that N has a liability for the cost of cleaning up the tip. A liability is an obligation to transfer economic benefits as a result of past transactions or events. In practice, N may be legally obliged to clean up the tip so that it is no longer in a dangerous condition. If this were the case, there would be a liability of $8 million and a corresponding asset for $ million. (3) At first sight, the contract between P and its finance director may appear to give P a liability. However, the salary is paid as a result of the directors work during the next five years. Until this work is executed, no liability arises. (4) It is clear that Q has acquired rights to future economic benefits (through cost savings) through a past transaction (the purchase) and that is controls the benefits (it has sole use of the method for 8 years). The patent rights are an asset of Q.

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SUMMARY:

Conceptual Framework y Definition y Advantage y Disadvantage

The Framework Purpose of the framework

QUALITATIVE CHARACTERISTICS OF FINANCIAL INFORMATION

Materiality = threshold quality above which Financial information must be:

Elements of financial statements y asset y liability y equity y income y expenses

Recognition of elements of financial statements y economic benefits y measure reliably y evidence (asset/liability)

y y y y

Reliable faithful representation neutral error free complete prudent

y y

Comparable time-to-time company-tocompany

Understandable = users perceive Significance

Relevant = influences economic Decisions of users.

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Lecture Sheet-4
Accounting Concept Policies & Assumption

Contents
1. 2. 3. 4. 5. 6. 7. 8. Underlying assumption Accounting concept and principles Historical cost accounting (HCA) Advantage and disadvantage of HCA Alternative to HCA Deprival value Capital maintenance concept User group

Prepared By:

KAMRUL HASAN
Cell: 01911-563569 E-mail: kamrul.acca@yahoo.com

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User Group:
Investors and potential investors: are interested in information that helps them to make decisions about their investment or potential investment in the entity. In other words, they need information about the entitys financial performance (profitability and dividends) and financial position that helps them to assess its ability to generate cash and to adapt to new opportunities or challenges when these occur. Lenders: are interested in information that enables them to determine whether their loans will be repaid, and whether the related interest will be paid. Potential lenders are interested in information that helps them to decide whether to lend to the entity. They need information about profitably, management), asset valuations and cash flows. liquidity (working capital

Suppliers and other trade payables : are interested in information that enables them to decide whether to sell to the entity and to assess the likelihood that amounts owing to them will be paid when due. They need information about profitably, cash flows and working capital management. Employees: are interested in information that helps them to assess their employers ability to provide remuneration, employment opportunities and retirement benefits. They need information about profitability, stability, level of borrowings and cash flows. Customers: need to be able to predict whether the entity will continue to trade, particularly when they are dependent on the entity (for example where it provides specialized replacement parts that the customer needs for its own activities). They need information about profitability and cash flows. Governments and their agencies: need information about the activities of business that helps them to allocate resources. They also require information in order to regulate the activities of organizations, assess taxation and provide a basis for national statistics. Taxation authorities are primarily interested in an entitys profit and the way in which this has been arrived at; other authorities may be interested in more general information about an in entitys activities. The public is interested in information about trends and recent developments in an entitys profitability and in the range of its activities. For example, an entity may contribute to a community by providing employment and using local suppliers. It may also have a negative effect on a community, for example by polluting the natural environment.

Note: Candidates NORMALY are required to identify FOUR of the above.

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Accounting concept, policies and underlying assumption : Underlying assumptions

The underlying assumptions governing financial statements are:


y The accrual basis

The accrual basis of accounting means that the effects of transactions and other events are recognized as they occur and not as cash or its equivalent is received or paid.
y Going concern

The going concern basis assumes that the entity has neither the need nor the intention to liquidate or curtail materially the scale of its operations. Accounting concepts in IAS 1: i. ii. iii. iv. v. vi. vii. viii. Accrual concept Going concern concept consistency Materiality & aggregation Prudence Duality Substance over form Offsetting

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HIST RICAL COST ACCOUNTING (Traditional Approach) The traditional approach to accounting has the following features:
y y y

Accounting transactions are recorder at their original historical monetary cost. Items or events for which no monetary transaction has occurred are usually ignored altogether. Income for each period is normally taken into account only when revenue is realized in the form of cash or in some form which will soon be converted into cash. Profit for the period is found by matching income against the cost of items consumed in generating the revenue for the period (such items includes noncurrent assets which depreciate through use, obsolescence or the past of time).

These features of accounting have served users well over many years in accounting for the stewardship of the directors. Advantage of Historic Cost Accounting The advantages of historic cost accounting include:
y y y y

Records are based on objectively verifiable amounts (actual cost of assets. etc). It is simple and cheap. The profit concept is well understood. Within limits, historic cost figures provide a basis of comparison with the results of other companies for the same period or similar periods, with the results of the same company for previous periods and with budgets. Lack of competition- no acceptable alternative has been developed.

Deficiencies of historical cost accounts In periods in which prices change significantly, historical cost accounts have grave deficiencies:
y y y y

Carrying value (CV) of non-current assets is often substantially below current value. Inventory in the statement of financial position reflects prices at the date of purchase or manufacture rather than those current at the year end. Income statement expenses do not reflect the current value of assets consumed so profit in real terms is overstated. The overstatement of profits and the understatement of assets prevent a meaningful calculation of return on capital employed (ROCE)

As a result of the above, users of accounts find it extremely difficult to assess a companys progress from year to year or to compare the results of different operations.

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Expandable Knowledge- Alternative to historical cost

The alternative to historical cost accounting is a form of current value accounting, either: y Constant purchasing power (CPP), or y Current cost accounting (CCA).
Constant purchasing power accounting (CPP):

Key features
y Accounting figures are adjusted to show all figures in terms of money with the same purchasing power. y A general price index use for this. y Use CPP factors. y Consider inflation Current Cost Accounting (CCA):

The key features of CCA are as follows:


y y y y

It is based on deprival values or value to the business . Inventory and non-current assets are valued at deprival value. Monetary assets (cash, receivables, payables, loans) are not adjusted. Cost of sales and depreciation also automatically adjusted at deprival value.

Deprival value

Value to the business

Lower of

Replacement Cost

Recoverable Amount

Higher of

NRV = fair value cost to sale

Economic value in use

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CAPITAL MAINTENANCE CONCEPT: Expandable Knowledge- Capital Maintenance

There are two main concepts of capital maintenance:


y financial capital maintenance y physical capital maintenance FINANCIAL CAPITAL MAINTENANCE

Under this concept a profit is earned only if the financial (or money) amount of the net assets at the end of a period exceeds the financial (or money) amount of net assets at the beginning of the period .

Historical cost accounting combines the historic basis with financial capital maintenance.

PHYSICAL CAPITAL MAINTENANCE

Under this concept a profit is earned only if the physical productive capacity at the business at the end of the period exceeds the physical productive capacity at the beginning of the period. The physical capital maintenance concept requires the adoption of the current cost basis of measurement.

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Lecture Sheet-5
Company (PLC)

Contents
1. 2. 3. 4. Classification of company Characteristics of a company Method of formation of a company Presentation of FINANCIAL STATEMENT according to IAS 1 i. Statement of comprehensive income ii. The statement of financial position iii. Statement of change in e uity 5. Notes and workings according to IAS 1 i. Cost allocation for Income Statement ii. Asset schedule 6. Comprehensive math for company final account according to ACCA

Prepared By:

KAMRUL HASAN
Cell: 01911-563569 E-mail: kamrul.acca@yahoo.com

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Statement of comprehensive income

A recommended format is as follows:


XYZ Group: statement of comprehensive income of the year ended 31 December 200X2

$ Revenue Cost of sales Gross profit Other income Distribution costs Administrative-expenses X (X) X X (X) (X)

Profits from operations Finance costs

X (X)

Profits before tax Income tax expense Profits for the year
Other comprehensive income

X (X) X

Gains on property revaluation


Income tax retailing to components of other comprehensive income

X (X)

Other comprehensive incomes for the year, net of tax

Total comprehensive incomes for the year

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Income Statement plus statement of comprehensive income

A recommendation format for the income statement is as follows:


XYZ Group Income statement for the year ended 31 December 200X2

$ Revenue Cost of sales Gross profit Other income Distribution costs Administrative-expenses Profits from operations Finance costs Profits before tax Income tax expense Net profits for the period X (X) X X (X) (X) X (X) X (X) X

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A recommended format for the presentation of other comprehensive income is:

XYZ Group Income statement for the year ended 31 December 200X2

$ Profits for the year


Other comprehensive income

X Income tax relating to components of other comprehensive income (X) Other comprehensive income of the year, net of tax
Other comprehensive income

Gains on property revaluation

Gains on property revaluation


Income tax retailing to components of other comprehensive income

X (X) X

Other comprehensive incomes for the year, net of tax

Total comprehensive incomes for the year

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The statement of financial position as at 31 December 200X2 Assets

Non-current assets: Property, plant and equipment Goodwill Other intangible assets e.g. (Patent, Trade mark, Development cost, Brands)
Current Assets:

X X X X

Inventories Trade receivable Cash and cash equivalents

X X X X

Total Assets

Equity & liabilities Capital & reserves

Share capital Retained earnings Other components of equity e.g. revaluation reserve General reserve Total equity

X X X X X

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Non-current liabilities

Long-term borrowings Deferred tax

X X X

Non-current liabilities

Long-term borrowings Deferred tax

X X X

Current liabilities

Trade & other payables Short-term borrowings Current tax payable Short-term provisions

X X X X X

Total equity and liability

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XYZ Group

Statement of changes in equity for the year ended 31 December 20 X2

Balance at 31 December 20X1 Change in accounting policy Restated balance


Issue of share Capital

Share capital $ X

Share premium $ X

Revaluation surplus $ X

General Retained reserve earnings $ $ X (X)

Total equity $ X (X)

Bonus issue Dividends

X X X

X X (X)

X X (X) X X

Total Comprehensive Income for the year

Transfer to retained earnings Balance at 31 December 20X2 X X

X (X) X

(X)

(X) X X X

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An example of a property, plant and equipment note is shown bellow.

Land Plant and and Machinery buildings

$000 Coat of valuation: At 1 January 200X4 Additions Disposal At 31 December 200X4 871 74 945

$000 998 809 (23) 1784

Fixtures, Payments Fittings, on account tools and and assets equipment in course of construction $000 $000 207 25 (5) 227 27 13 40

Total

$000 2103 921 (28) 299

Accumulated description: At 1 January 200X4 33 Provision for the 11 year Disposals At 31 December 44 200X4 Carrying value: at 901 31 December 200X4 At 31 December 838 200X3

292 22 (4) 910 874

25 27 (4) 48 179

8 8 32

350 8 (8) 1010 198

70

182

27

1753

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Property, Plant and equipment

Land $000 8000

Building $000 5000 2000 250

Cost at beginning and end of year Depreciation at beginning of year charge for year: (5000 X 5%) ((1 0- 0) X 25%) ((700-240) X 20%) Description at end of year (Accumulated Description)
Net book value at end of year

Motor Plant & vehicles machinery $000 $000 1 0 700 0 240

Total $000 138 0 2300 250 25 92 2 7 11193

25 92 2250 2750 85 75 332 3 8

Tangible non-current assets

Land

Buildings

Motor vehicles $000 1 0 1 0

$000 Cost From TB Revaluation Closing Description Opening Charge for the year Revaluation Closing Net book value 550 550

$000 2,500 200 2,700

Furniture and equipment $000 1,500 1500

Total

$000 4,710 200 4,910

550

330 125 (455) 2,700

0 20 80 80

300 300 00 900

90 445 (455) 80 4,230

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ALLOCATIONS OF EXPRESSES:

Cost of sales $000 X X (X) X X X X X X

Distribution Cost $000

Admin Cost $000

Opening inventories Purchase Purchase return Factory wages Wages and salaries Depreciation: Plant & Machinery Delivery Vehicle Building Office equipment Rent & Rates Advertising Carriage inwards Irrecoverable debt Expense Doubtful debt allowance (increase/Decrease) Audit Fee General Expenses Heat & light Discount allowed Discount Received Closing inventories Total

X X X X X

X X X

X X/(X) X X X X

X X (X) (X) X

X X

Note: In question paper candidates normally are referred where the cost/expenses should be allocated.

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SONDAW (JUN 04 EXAM) You have been provided with the following trial balance as at 31 May 20X4 for a limited liability company called Sondaw.
Dr. $000 50 1,200 00 90 248 490 5,000 1 0 700 Cr. $000

Bank Inventory at 1 June 20X3 General expenses Heating & Lighting Marketing and advertising expenses Wages Buildings at cost Motor vehicle at cost Plant and equipment at cost Accumulated profits at 1 June 20X3 Trade receivables Purchases Lone note interest paid 5% Loan note Revenue Discount received Trade Payable $ 1 Ordinary Shares Accumulated depreciation at 1 June 20X3 Buildings Motor vehicles Plant and equipment

280 438 2,200 30 00 5,87 150 500 1,500 2000 0 240 11,20

11,20

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The following notes are relevant:


(1) Inventory at 31 May 200X4 was valued at $800,000. (2) Marketing and advertising expenses include $ ,000 paid in advance for a marketing campaign which will begin in June 20X4. Marketing and advertising expenses should be allocated to administrative expenses. (3) There are wages outstanding of $10,000 for the year ended 31 May 20X4. (4) A customer ceased trading owing the company $38,000; the debt is not expected to be recovered. (5) An allowance for doubtful debts is to be established amounting to 5% of trade receivables. ( ) Depreciation to be provided for as follows

i.

Buildings at 5% per annum on their original cost, allocated 50% to cost of sales, 20% to distribution costs and 30% to administration expenses.

ii. Motor vehicle at 25% per annum of their written down value, allocated to distribution costs. iii. Plant and equipment at 20% per annum of their written down value, allocated to cost of sales. (7) No dividends have been paid or declared. (8) Income tax of $ 250,000 is to be provided for the year. (9) The audit fee is estimated to be $20,000. (10) The expenses listed below should be apportioned as follows: Cost of sales General expenses Heating and Lighting Wages and salaries Required: (a) Prepare the following financial statement for the year ended 31 May 20X4 for Sondaw in accordance with IAS 1 Presentation of Financial Statements: 10% 50% 0%

Distribution costs 40% 30% 30%

Administrative Expenses 50% 20% 10%

(i) (ii)

an income statement a statement of financial position

(18 marks) (14 marks)

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(b) Briefly explain the purpose of providing for depreciation, and identify the factors to be taken into account when deciding which depreciation method to use.

(3 marks) (Total: 35 marks)

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Company

Chartered Company

Statutory Company

Register Company

Others Company Foreign Company Non-Trading Company

Limited Company

Unlimited Company

Limited by Guarantee

Limited by Share

Private Limited Co.

Public Limited Co.

Quoted/Listed Plc
Unquoted/Unlisted Plc

According to Ownership
 Government Company  Non-Govt. Company

According to control
 Holding Company  Subsidiary Company  Associate Company  Investment Company

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1. Chartered Company :

Company Act was first passed in UK as well as in world in 1844. Before passing company Act, Company was formed by royal mandate. Those types of companies are called Chartered Company. For Example: i. ii. East India Company Chartered Bank of England

2. Statutory Company:

If a company is formed by Parliament or Presidents special ordinance then it is called statutory company. For Example: i. ii. Bangladesh Bank WASA

3. Registered Company:

It is formed by company act. a. Unlimited company: If liabilities are unlimited for shareholders, that are called unlimited company.  This type of company is rare in Bangladesh. b. Limited company: Liabilities are limit up to share capital for shareholder. i. ii. Limited by Guarantee. Limited by Share. a) Privet Limited Company. b) Public Limited Company.

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PUBLIC LIMITED COMPANY: 1. Govt. Company:

If Govt. owes 51% - 100% share of the company.


2. Non Govt. Company :

If non Govt. organization owes 51% - 100% Holding Company: If one company owes more than 50% of ordinary share of another company. The 1st company control 2 nd company 1st company 2nd company
Characteristics of a company: a) Legislative Characteristics: b) General Characteristics:

Holding company Subsidiary company

i. Law created concern and separate entity ii. Corporate artificial personality iii. Perpetual succession iv. Number of share holder v. Common Seal vi. Share capital vii. Transferability of share viii. Statutory responsibility ix. Limited liability

i. Voluntary association ii. Much capital iii. Efficient Management iv. Taxation v. Following democratic norm iv. Profit distribution as dividend.

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Method of the formation of a company:

Preparatory Stage Initial Promoter Stage of documents preparation (1) Memorandum of association (2) Articles of association Stage of collection of certificate of incorporation Prospectus issue
In this stage private limited company can commence its activities.

Certificate of commencement

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Accruals Concept

The accruals concept means that transactions and events are recognized when they occur, not when cash is received or paid for them. Expenses are recognized in profit or loss on the basis of direct association between the costs incurred and the earning of the related income. Revenue is usually recognized when it is realized. The realization of revenue is usually taken to occur on the date of sale rather than on the date when the cash relating to the sale is received.
Example Going concern concept

The going concern concept assumes that a business (or entity) will continue in operational existence for the foreseeable future.
Example Consistency of presentation

A business should be consistent in its accounting treatment of similar items, both within a particular accounting period and between one accounting period and the next. For example in the case of depreciation of assets, there is more than one accepted accounting treatment. One business may use one method, another business may use another. As far as the consistency concept is concerned, once a business has selected a method, it should use this method consistently for all assets in that class and for all accounting periods. Only in this way can users of financial statements draw meaningful conclusions from reported results. If a business were to change any of its accounting policies (e.g. the basis of depreciation) it must have a good reason for doing so and in addition, the financial effect of such a change should be quantified and, it material, reported to the shareholders. IAS 1 states that the presentation and classification of items in the financial statements should be retained from one period to th e next unless:
y It is clear that a change will result in a more appropriate presentation, or y A change is required by an IAS, IFRS or an interpretation.

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Materiality and aggregation

An item is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements. Financial statements should show material items separately, but immaterial items may be aggregated with amounts of a similar nature.
Offsetting

Assets and liabilities should not be offset except when required or permitted by another IAS. Example: Items of income and expenses should only be offset in an IAS requires or permits it, or they arise from similar transactions or events and are not materials.
Prudence

Prudence is caution when making estimates under conditions of uncertainty, so that income and assets are not overstated and expenses and liabilities are not understated. Revenues and profits are not reported and recognized in the financial statements unless the likelihood of conversion to cash is high. In most cases this means that revenues are recognized on the date of sale. By way of contrast, immediate provision is made for anticipated losses, provided that these losses meet the definition of liabilities.
Example

An example of the prudence concept is the situation in which a liability has been estimated to be between $500 & $ 00. Some accountants will make provision for the highest estimate on the grounds of prudence. Modern accounting thought though would make provisio n for the most likely value, high or low.

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Duality

The duality concept underpins double entry and statement of financial position. For each entry in the accounting records, there is an equal and opposite entry.
Substance over form

Financial statements Should reflect the economic substance of a transaction, rather than its legal form, where these are different. A good example of this convention is that of assets acquired on hire purchase terms under certain types of lease agree ment. Despite the fact that such assets are not owned by the user until the financial statement has been paid, an asset is recorder in the accounts at the start of the agreement. This is because the user has the benefit of the asset, as he or she owned it. The hire purchase agreement (or the lease) is simply a way of financing the purchase.

Test Your Understandability State the accounting concept(s) being applied in each of these situations: (1) Plant and machinery has a carrying value of $24m, but it would only fetch $15m if it were to be sold (2) The plant and machinery is being depreciated over five years. (3) Inventory is valued at $23m, even though it will probably sell for $35m. (4) Jhon Ltd has just bought the trade and assets of a sa lly, rival unincorporated business. Jhon has changed Sallys accounting policies, bringing them into line with the rest of the business.

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