IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors

Technical Summary
This extract has been prepared by IASC Foundation staff and has not been approved by the IASB.For the requirements reference must be made to International Financial Reporting Standards.

IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors

OBJECTIVE: To prescribe the criteria for selecting and changing accounting policies, together with the accounting treatment and disclosure of changes in accounting policies, changes in accounting estimates and corrections of errors. The Standard is intended to enhance the relevance and reliability of an entity’s financial statements, and the comparability of those financial statements over time and with the financial statements of other entities.

Accounting policies

Accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements. When an IFRS specifically applies to a transaction, other event or condition, the accounting policy or policies applied to that item shall be determined by applying the IFRS and considering any relevant Implementation Guidance issued by the IASB for the IFRS.

In the absence of a Standard or an Interpretation that specifically applies to a transaction, other event or condition, management shall use its judgement in developing and applying an accounting policy that results in information that is relevant and reliable. In making the judgement management shall refer to, and consider the applicability of, the following sources in descending order:

(a) the requirements and guidance in IFRSs dealing with similar and related issues; and


(b) the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses in the Framework.

An entity shall select and apply its accounting policies consistently for similar transactions, other events and conditions, unless an IFRS specifically requires or permits categorisation of items for which different policies may be appropriate. If an IFRS requires or permits such categorisation, an appropriate accounting policy shall be selected and applied consistently to each category.

An entity shall change an accounting policy only if the change:
(a) is required by an IFRS; or
(b) results in the financial statements providing reliable and more relevant information about the effects of transactions, other events or conditions on the entity’s financial position, financial performance or cash flows.

An entity shall account for a change in accounting policy resulting from the initial application of an IFRS in accordance with the specific transitional provisions, if any, in that IFRS. When an entity changes an accounting policy upon initial application of an IFRS that does not include specific transitional provisions applying to that change,or changes an accounting policy voluntarily, it shall apply the change retrospectively. However, a change in accounting policy shall be applied retrospectively except to the extent that it is impracticable to determine either the period-specific effects or the cumulative effect of the change.

Change in accounting estimate

The use of reasonable estimates is an essential part of the preparation of financial statements and does not undermine their reliability. A change in accounting estimate is an adjustment of the carrying amount of an asset or a liability, or the amount of the periodic consumption of an asset, that results from the assessment of the present status of, and expected future benefits and obligations associated with, assets and liabilities. Changes in accounting estimates result from new information or new developments and, accordingly, are not corrections of errors. The effect of a change in an accounting estimate, shall be recognised prospectively by including it in profit or loss in:
(a) the period of the change, if the change affects that period only; or
(b) the period of the change and future periods, if the change affects both.

Prior period errors

Prior period errors are omissions from, and misstatements in, the entity’s financial statements for one or more prior periods arising from a failure to use, or misuse of, reliable information that:
(a) was available when financial statements for those periods were authorised for issue; and
(b) could reasonably be expected to have been obtained and taken into account in the preparation and presentation of those financial statements.

Such errors include the effects of mathematical mistakes, mistakes in applying accounting policies, oversights or misinterpretations of facts, and fraud.

Except to the extent that it is impracticable to determine either the period-specific effects or the cumulative effect of the error, an entity shall correct material prior period errors retrospectively in the first set of financial statements authorised for issue after their discovery by:
(a) restating the comparative amounts for the prior period(s) presented in which the error occurred; or
(b) if the error occurred before the earliest prior period presented, restating the opening balances of assets, liabilities and equity for the earliest prior period presented.

Omissions or misstatements of items are material if they could, individually or collectively, influence the economic decisions of users taken on the basis of the financial statements.

Source: International Accounting Standards Board

IAS 7 Statement of Cash Flows

Technical Summary
This extract has been prepared by IASC Foundation staff and has not been approved by the IASB.For the requirements reference must be made to International Financial Reporting Standards.

IAS 7 Statement of Cash Flows

The objective of this Standard is to require the provision of information about the historical changes in cash and cash equivalents of an entity by means of a statement of cash flows which classifies cash flows during the period from operating, investing and financing activities.

Cash flows are inflows and outflows of cash and cash equivalents. Cash comprises cash on hand and demand deposits. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.

Information about the cash flows of an entity is useful in providing users of financial statements with a basis to assess the ability of the entity to generate cash and cash equivalents and the needs of the entity to utilise those cash flows. The economic decisions that are taken by users require an evaluation of the ability of an entity to generate cash and cash equivalents and the timing and certainty of their generation.

The statement of cash flows shall report cash flows during the period classified by operating, investing and financing activities.

Operating activities

Operating activities are the principal revenue-producing activities of the entity and other activities that are not investing or financing activities. Cash flows from operating activities are primarily derived from the principal revenue-producing activities of the entity. Therefore, they generally result from the transactions and other events that enter into the determination of profit or loss.

The amount of cash flows arising from operating activities is a key indicator of the extent to which the operations of the entity have generated sufficient cash flows to repay loans, maintain the operating capability of the entity, pay dividends and make new investments without recourse to external sources of financing.

An entity shall report cash flows from operating activities using either:

(a) the direct method, whereby major classes of gross cash receipts and gross cash payments are disclosed; or

(b) the indirect method, whereby profit or loss is adjusted for the effects of transactions of a non-cash nature, any deferrals or accruals of past or future operating cash receipts or payments, and items of income or expense associated with investing or financing cash flows.

Investing activities

Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents. The separate disclosure of cash flows arising from investing activities is important because the cash flows represent the extent to which expenditures have been made for resources intended to generate future income and cash flows.

The aggregate cash flows arising from obtaining and losing control of subsidiaries or other businesses shall be presented separately and classified as investing activities.

Financing activities

Financing activities are activities that result in changes in the size and composition of the contributed equity and borrowings of the entity. The separate disclosure of cash flows arising from financing activities is important because it is useful in predicting claims on future cash flows by providers of capital to the entity.

An entity shall report separately major classes of gross cash receipts and gross cash payments arising from investing and financing activities.
Investing and financing transactions that do not require the use of cash or cash equivalents shall be excluded from a statement of cash flows. Such transactions shall be disclosed elsewhere in the financial statements in a way that provides all the relevant information about these investing and financing activities.

Foreign currency cash flows

Cash flows arising from transactions in a foreign currency shall be recorded in an entity's functional currency by applying to the foreign currency amount the exchange rate between the functional currency and the foreign currency at the date of the cash flow.

The cash flows of a foreign subsidiary shall be translated at the exchange rates between the functional currency and the foreign currency at the dates of the cash flows.

Unrealised gains and losses arising from changes in foreign currency exchange rates are not cash flows. However, the effect of exchange rate changes on cash and cash equivalents held or due in a foreign currency is reported in the statement of cash flows in order to reconcile cash and cash equivalents at the beginning and the end of the period.

Cash and cash equivalents

An entity shall disclose the components of cash and cash equivalents and shall present a reconciliation of the amounts in its statement of cash flows with the equivalent items reported in the statement of financial position.
An entity shall disclose, together with a commentary by management, the amount of significant cash and cash equivalent balances held by the entity that are not available for use by the group.

Source: International Accounting Standards Board

Review Question: IAS 1 and IAS 2

It is not enough to just read and gather information, you should also test yourself and measure how much you've learned. Anyways, here are some of the simple review questions based on IAS 1 Presentation of FS and IAS 2 Inventories. This are just a few questions based on those accounting standards.

1. Which of the following is NOT an attribute of relevance?

a. Predictive value
b. Feedback value
c. Timeliness
d. Neutrality

2. Whenever there is a conflict between the economic substance of a certain transaction and its legal form, what shall prevail is the economic substance. What concept is this?

a. Form over substance
b. Substance over form
c. Faithful presentation
d. Completeness

3. Inventories are accounted for by applying the lower of cost or net realizable value. This is in accordance of what concept?

a. Materiality
b. Conservatism
c. Consistency
d. Comparability

4. Objectivity is assumed to be achieved when an accounting transaction

a. Is recorded in a fixed amount of pesos
b. Involves the payment or receipt of cash
c. Involves an arm's length transaction between two independent parties
d. Allocates revenue or expenses in a rational and systematic manner

5.Which of the following is most likely to prepare the most accurate financial forecast for a corporate entity based on empirical evidence?

a. Investors using statistical models to generate forecasts
b. corporate management
c. Financial analysts
d. Independent certified public accountants

6. The cost of inventories includes purchase price and all other costs that are incurred in bringing the inventories to their present location and condition are capitalized as cost of inventories and these include

a. cost of designing products for specific customers
b. abnormal amount of wasted material, labor and production cost
c. selling cost
d. storage cost not necessary in the production process before a further production stage

7.What is Net realizable value?

a. Estimated selling price
b. current replacement cost
c. Estimated selling price less estimated cost to complete
d. Estimated selling price less estimated cost to complete and estimated cost to sell.

8.Inventories of a service provider may simply be described as

a. work in progress
b. unbilled services
c. billed services
d. services inventory

9. Which of the following would not be reported as inventory?

a. Land acquired for resale by a real estate firm
b. Shares and bonds held for resale by a brokerage firm
c. Partially completed goods held by a manufacturing company
d. Machinery acquired by a manufacturing company for the use in the production process

10.Theoretically, cash discounts permitted on purchased raw materials should be

a. Added to other income, whether taken or not
b. Added to other income, only if taken
c. Deducted from inventory, whether taken or not
d. Deducted from inventory, only if taken


Answers:

1. d
2. b
3. b
4. c- An arms's length transaction is a transaction between two independent parties and therefore objective
5. b
6. a
7. d
8. a
9. d
10.c

SOURCE: (Source: Theory of Accounts by Conrado Valix, AICPA Adapted)

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IAS 2 Inventories

Technical Summary
This extract has been prepared by IASC Foundation staff and has not been approved by the IASB.For the requirements reference must be made to International Financial Reporting Standards.

IAS 2 Inventories

OBJECTIVE: To prescribe the accounting treatment for inventories. A primary issue in accounting for inventories is the amount of cost to be recognised as an asset and carried forward until the related revenues are recognised. This Standard provides guidance on the determination of cost and its subsequent recognition as an expense, including any write-down to net realisable value. It also provides guidance on the cost formulas that are used to assign costs to inventories.

MEASUREMENT OF INVENTORIES: Lower of cost and net realisable value.

Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.

COMPOSITION OF COST OF INVENTORIES:
A. costs of purchase
B. costs of conversion
C. other costs incurred in bringing the inventories to their present location and condition.

The cost of inventories shall be assigned by using the first-in, first-out (FIFO) or weighted average cost formula. An entity shall use the same cost formula for all inventories having a similar nature and use to the entity. For inventories with a different nature or use, different cost formulas may be justified. However, the cost of inventories of items that are not ordinarily interchangeable and goods or services produced and segregated for specific projects shall be assigned by using specific identification of their individual costs.

When inventories are sold, the carrying amount of those inventories shall be recognised as an expense in the period in which the related revenue is recognised. The amount of any write-down of inventories to net realisable value and all losses of inventories shall be recognised as an expense in the period the write-down or loss occurs. The amount of any reversal of any write-down of inventories, arising from an increase in net realisable value, shall be recognised as a reduction in the amount of inventories recognised as an expense in the period in which the reversal occurs.

SOURCE: International Accounting Standards Board

IAS 1 Presentation of Financial Statements

Technical Summary
This extract has been prepared by IASC Foundation staff and has not been approved by the IASB.For the requirements reference must be made to International Financial Reporting Standards.

IAS 1 Presentation of Financial Statements
This Standard prescribes the basis for presentation of general purpose financial statements to ensure comparability both with the entity’s financial statements of previous periods and with the financial statements of other entities. It sets out overall requirements for the presentation of financial statements, guidelines for their structure and minimum requirements for their content.

A complete set of financial statements comprises:
(a) a statement of financial position as at the end of the period;
(b) a statement of comprehensive income for the period;
(c) a statement of changes in equity for the period;
(d) a statement of cash flows for the period;
(e) notes, comprising a summary of significant accounting policies and other explanatory information; and
(f) a statement of financial position as at the beginning of the earliest comparative period when an entity applies an accounting policy retrospectively or makes a retrospective restatement of items in its financial statements, or when it reclassifies items in its financial statements.

An entity whose financial statements comply with IFRSs shall make an explicit and unreserved statement of such compliance in the notes. An entity shall not describe financial statements as complying with IFRSs unless they comply with all the requirements of IFRSs. The application of IFRSs, with additional disclosure when necessary, is presumed to result in financial statements that achieve a fair presentation.

When preparing financial statements, management shall make an assessment of an entity’s ability to continue as a going concern. An entity shall prepare financial statements on a going concern basis unless management either intends to liquidate the entity or to cease trading, or has no realistic alternative but to do so. When management is aware, in making its assessment, of material uncertainties related to events or conditions that may cast significant doubt upon the entity’s ability to continue as a going concern, the entity shall disclose those uncertainties.

An entity shall present separately each material class of similar items. An entity shall present separately items of a dissimilar nature or function unless they are immaterial.

An entity shall not offset assets and liabilities or income and expenses, unless required or permitted by an IFRS.

An entity shall present a complete set of financial statements (including comparative information) at least annually.

Except when IFRSs permit or require otherwise, an entity shall disclose comparative information in respect of the previous period for all amounts reported in the current period’s financial statements. An entity shall include comparative information for narrative and descriptive information when it is relevant to an understanding of the current period’s financial statements.

When the entity changes the presentation or classification of items in its financial statements, the entity shall reclassify comparative amounts unless reclassification is impracticable.

An entity shall clearly identify the financial statements and distinguish them from other information in the same published document.
IAS 1 requires an entity to present, in a statement of changes in equity, all owner changes in equity. All non-owner changes in equity (ie comprehensive income) are required to be presented in one statement of comprehensive income or in two statements (a separate income statement and a statement of comprehensive income).

Components of comprehensive income are not permitted to be presented in the statement of changes in equity.

An entity shall recognise all items of income and expense in a period in profit or
loss unless an IFRS requires or permits otherwise.

The notes shall:
(a) present information about the basis of preparation of the financial statements and the specific accounting policies used in accordance with paragraphs 117–124;
(b) disclose the information required by IFRSs that is not presented elsewhere in the financial statements; and
(c) provide information that is not presented elsewhere in the financial statements, but is relevant to an understanding of any of them.

An entity shall disclose, in the summary of significant accounting policies or other notes, the judgements, apart from those involving estimations (see paragraph 125), that management has made in the process of applying the entity’s accounting policies and that have the most significant effect on the amounts recognised in the financial statements.

An entity shall disclose information about the assumptions it makes about the future, and other major sources of estimation uncertainty at the end of the reporting period, that have a significant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities within the next financial year.

An entity shall disclose information that enables users of its financial statements to evaluate the entity’s objectives, policies and processes for managing capital.

Source: International Accounting Standards Board

IFRS 8 Operating Segments

Technical Summary
This extraction has been prepared by IASC Foundation staff and has not been approved by the IASB. For the requirements reference must be made to International Financial Reporting Standards.

IFRS 8 Operating Segments

Core principle—An entity shall disclose information to enable users of its financial statements to evaluate the nature and financial effects of the business activities in which it engages and the economic environments in which it operates.

This IFRS shall apply to:

(a) the separate or individual financial statements of an entity:

(i) whose debt or equity instruments are traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local and regional markets), or

(ii) that files, or is in the process of filing, its financial statements with a securities commission or other regulatory organisation for the purpose of issuing any class of instruments in a public market; and

(b) the consolidated financial statements of a group with a parent:
(i) whose debt or equity instruments are traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local and regional markets), or

(ii) that files, or is in the process of filing, the consolidated financial statements with a securities commission or other regulatory organisation for the purpose of issuing any class of instruments in a public market.

The IFRS specifies how an entity should report information about its operating segments in annual financial statements and, as a consequential amendment to IAS 34 Interim Financial Reporting, requires an entity to report selected information about its operating segments in interim financial reports. It also sets out requirements for related disclosures about products and services, geographical areas and major customers.

The IFRS requires an entity to report financial and descriptive information about its reportable segments. Reportable segments are operating segments or aggregations of operating segments that meet specified criteria. Operating segments are components of an entity about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Generally, financial information is required to be reported on the same basis as is used internally for evaluating operating segment performance and deciding how to allocate resources to operating segments.

The IFRS requires an entity to report a measure of operating segment profit or loss and of segment assets. It also requires an entity to report a measure of segment liabilities and particular income and expense items if such measures are regularly provided to the chief operating decision maker. It requires reconciliations of total reportable segment revenues, total profit or loss, total assets, liabilities and other amounts disclosed for reportable segments to corresponding amounts in the entity’s financial statements.

The IFRS requires an entity to report information about the revenues derived from its products or services (or groups of similar products and services), about the countries in which it earns revenues and holds assets, and about major customers, regardless of whether that information is used by management in making operating decisions. However, the IFRS does not require an entity to report information that is not prepared for internal use if the necessary information is not available and the cost to develop it would be excessive.

The IFRS also requires an entity to give descriptive information about the way the operating segments were determined, the products and services provided by the segments, differences between the measurements used in reporting segment information and those used in the entity’s financial statements, and changes in the measurement of segment amounts from period to period.

SOURCE: International Accounting Standards Board

IFRS 7 Financial Instruments: Disclosures

Technical Summary
This extract has been prepared by IASC Foundation staff and has not been approved by the IASB.For the requirements reference must be made to International Financial Reporting Standards.

IFRS 7 Financial Instruments: Disclosures

OBJECTIVE OF IFRS 7:

To require entities to provide disclosures in their financial statements that enable users to evaluate:

(a) the significance of financial instruments for the entity’s financial position and performance; and

(b) the nature and extent of risks arising from financial instruments to which the entity is exposed during the period and at the end of the reporting period, and how the entity manages those risks. The qualitative disclosures describe management’s objectives, policies and processes for managing those risks. The quantitative disclosures provide information about the extent to which the entity is exposed to risk, based on information provided internally to the entity's key management personnel. Together, these disclosures provide an overview of the entity's use of financial instruments and the exposures to risks they create.

The IFRS applies to all entities, including entities that have few financial instruments (eg a manufacturer whose only financial instruments are accounts receivable and accounts payable) and those that have many financial instruments (eg a financial institution most of whose assets and liabilities are financial instruments).

When this IFRS requires disclosures by class of financial instrument, an entity shall group financial instruments into classes that are appropriate to the nature of the information disclosed and that take into account the characteristics of those financial instruments. An entity shall provide sufficient information to permit reconciliation to the line items presented in the statement of financial position.

The principles in this IFRS complement the principles for recognising, measuring and presenting financial assets and financial liabilities in IAS 32 Financial
Instruments: Presentation and IAS 39 Financial Instruments: Recognition and Measurement.

SOURCE: International Accounting Standards Board

IFRS 6 Exploration for and Evaluation of Mineral Resources

Technical Summary
This extract has been prepared by IASC Foundation staff and has not been approved by the IASB.For the requirements reference must be made to International Financial Reporting Standards.

IFRS 6 Exploration for and Evaluation of Mineral Resources

OBJECTIVE OF IFRS 6;

To specify the financial reporting for the exploration for and evaluation of mineral resources.

Exploration and evaluation expenditures are expenditures incurred by an entity in connection with the exploration for and evaluation of mineral resources before the technical feasibility and commercial viability of extracting a mineral resource are demonstrable. Exploration for and evaluation of mineral resources is the search for mineral resources, including minerals, oil, natural gas and similar non-regenerative resources after the entity has obtained legal rights to explore in a specific area, as well as the determination of the technical feasibility and commercial viability of extracting the mineral resource.
Exploration and evaluation assets are exploration and evaluation expenditures recognised as assets in accordance with the entity’s accounting policy.

The IFRS:

(a) permits an entity to develop an accounting policy for exploration and evaluation assets without specifically considering the requirements of paragraphs 11 and 12 of IAS 8. Thus, an entity adopting IFRS 6 may continue to use the accounting policies applied immediately before adopting the IFRS. This includes continuing to use recognition and measurement practices that are part of those accounting policies.

(b) requires entities recognising exploration and evaluation assets to perform an impairment test on those assets when facts and circumstances suggest that the carrying amount of the assets may exceed their recoverable amount.

(c) varies the recognition of impairment from that in IAS 36 but measures the impairment in accordance with that Standard once the impairment is identified.

An entity shall determine an accounting policy for allocating exploration and evaluation assets to cash-generating units or groups of cash-generating units for the purpose of assessing such assets for impairment. Each cash-generating unit or group of units to which an exploration and evaluation asset is allocated shall not be larger than an operating segment determined in accordance with IFRS 8 Operating Segments.

Exploration and evaluation assets shall be assessed for impairment when facts and circumstances suggest that the carrying amount of an exploration and evaluation asset may exceed its recoverable amount. When facts and circumstances suggest that the carrying amount exceeds the recoverable amount, an entity shall measure, present and disclose any resulting impairment loss in accordance with IAS 36.

One or more of the following facts and circumstances indicate that an entity should test exploration and evaluation assets for impairment (the list is not exhaustive):

(a) the period for which the entity has the right to explore in the specific area has expired during the period or will expire in the near future, and is not expected to be renewed.

(b) substantive expenditure on further exploration for and evaluation of mineral resources in the specific area is neither budgeted nor planned.

(c) exploration for and evaluation of mineral resources in the specific area have not led to the discovery of commercially viable quantities of mineral resources and the entity has decided to discontinue such activities in the specific area.

(d) sufficient data exist to indicate that, although a development in the specific area is likely to proceed, the carrying amount of the exploration and evaluation asset is unlikely to be recovered in full from successful development or by sale.

An entity shall disclose information that identifies and explains the amounts recognised in its financial statements arising from the exploration for and evaluation of mineral resources.

Source: International Accounting Standards Board

IFRS 5 Non-current Assets Held for Sale and Discontinued Operations

Technical Summary
This extract has been prepared by IASC Foundation staff and has not been approved by the IASB.For the requirements reference must be made to International Financial Reporting Standards.


IFRS 5 Non-current Assets Held for Sale and Discontinued Operations

OBJECTIVE OF IFRS 5:
To specify the accounting for assets held for sale, and the presentation and disclosure of discontinued operations.

In particular, the IFRS requires:

(a) assets that meet the criteria to be classified as held for sale to be measured at the lower of carrying amount and fair value less costs to sell, and depreciation on such assets to cease; and

(b) assets that meet the criteria to be classified as held for sale to be presented separately in the statement of financial position and the results of discontinued operations to be presented separately in the statement of comprehensive income.

The IFRS:
(a) adopts the classification ‘held for sale’.

(b) introduces the concept of a disposal group, being a group of assets to be disposed of, by sale or otherwise, together as a group in a single transaction, and liabilities directly associated with those assets that will be transferred in the transaction.

(c) classifies an operation as discontinued at the date the operation meets the criteria to be classified as held for sale or when the entity has disposed of the operation.

An entity shall classify a non-current asset (or disposal group) as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use.

For this to be the case, the asset (or disposal group) must be available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets (or disposal groups) and its sale must be highly probable.

For the sale to be highly probable, the appropriate level of management must be committed to a plan to sell the asset (or disposal group), and an active programme to locate a buyer and complete the plan must have been initiated. Further, the asset (or disposal group) must be actively marketed for sale at a price that is reasonable in relation to its current fair value. In addition, the sale should be expected to qualify for recognition as a completed sale within one year from the date of classification, except as permitted by paragraph 9, and actions required to complete the plan should indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.

A discontinued operation is a component of an entity that either has been disposed of, or is classified as held for sale, and

(a) represents a separate major line of business or geographical area of operations,

(b) is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations or

(c) is a subsidiary acquired exclusively with a view to resale.

A component of an entity comprises operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity. In other words, a component of an entity will have been a cash-generating unit or a group of cash-generating units while being held for use.

An entity shall not classify as held for sale a non-current asset (or disposal group) that is to be abandoned. This is because its carrying amount will be recovered principally through continuing use.

Source: International Accounting Standards Board

IFRS 4 Insurance Contracts

Technical Summary

This extract has been prepared by IASC Foundation staff and has not been approved by the IASB.For the requirements reference must be made to International Financial Reporting Standards.

IFRS 4 Insurance Contracts

OBJECTIVE OF IFRS4:

To specify the financial reporting for insurance contracts by any entity that issues such contracts (described in this IFRS as an insurer) until the Board completes the second phase of its project on insurance contracts.

Requirements of IFRS 4:

(a) limited improvements to accounting by insurers for insurance contracts.

(b) disclosure that identifies and explains the amounts in an insurer’s financial statements arising from insurance contracts and helps users of those financial statements understand the amount, timing and uncertainty of future cash flows from insurance contracts.

Insurance contract - contract under which one party (the insurer) accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder.

The IFRS applies to all insurance contracts (including reinsurance contracts) that an entity issues and to reinsurance contracts that it holds, except for specified contracts covered by other IFRSs. It does not apply to other assets and liabilities of an insurer, such as financial assets and financial liabilities within the scope of IAS 39 Financial Instruments: Recognition and Measurement. Furthermore, it does not address accounting by policyholders.

The IFRS exempts an insurer temporarily (ie during phase I of this project) from some requirements of other IFRSs, including the requirement to consider the Framework in selecting accounting policies for insurance contracts. However, the IFRS:

(a) prohibits provisions for possible claims under contracts that are not in existence at the end of the reporting period (such as catastrophe and equalisation provisions).

(b) requires a test for the adequacy of recognised insurance liabilities and an impairment test for reinsurance assets.

(c) requires an insurer to keep insurance liabilities in its statement of financial
position until they are discharged or cancelled, or expire, and to present insurance liabilities without offsetting them against related reinsurance assets.

The IFRS permits an insurer to change its accounting policies for insurance contracts only if, as a result, its financial statements present information that is more relevant and no less reliable, or more reliable and no less relevant. In particular, an insurer cannot introduce any of the following practices, although it may continue using accounting policies that involve them:

(a) measuring insurance liabilities on an undiscounted basis.

(b) measuring contractual rights to future investment management fees at an amount that exceeds their fair value as implied by a comparison with current fees charged by other market participants for similar services.

(c) using non-uniform accounting policies for the insurance liabilities of subsidiaries.

The IFRS permits the introduction of an accounting policy that involves remeasuring
designated insurance liabilities consistently in each period to reflect current market interest rates (and, if the insurer so elects, other current estimates and assumptions). Without this permission, an insurer would have been required to apply the change in accounting policies consistently to all similar liabilities.

The IFRS requires disclosure to help users understand:

(a) the amounts in the insurer’s financial statements that arise from insurance contracts.

(b) the amount, timing and uncertainty of future cash flows from insurance contracts.

Source: International Accounting Standards Board

IFRS 3 Business Combinations

Technical Summary

This extract has been prepared by IASC Foundation staff and has not been approved by the IASB.For the requirements reference must be made to International Financial Reporting Standards.

IFRS 3 Business Combinations

OBJECTIVE OF IFRS 3

To enhance the relevance, reliability and comparability of the information that an entity provides in its financial statements about a business combination and its effects. It does that by establishing principles and requirements for how an acquirer:

(a) recognises and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree;

(b) recognises and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and

(c) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.

Core principle

An acquirer of a business recognises the assets acquired and liabilities assumed at their acquisition-date fair values and discloses information that enables users to evaluate the nature and financial effects of the acquisition.

Applying the acquisition method

A business combination must be accounted for by applying the acquisition method, unless it is a combination involving entities or businesses under common control. One of the parties to a business combination can always be identified as the acquirer, being the entity that obtains control of the other business (the acquiree). Formations of a joint venture or the acquisition of an asset or a group of assets that does not constitute a business are not business combinations.

The IFRS establishes principles for recognising and measuring the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree. Any classifications or designations made in recognising these items must be made in accordance with the contractual terms, economic conditions, acquirer’s operating or accounting policies and other factors that exist at the acquisition date.

Each identifiable asset and liability is measured at its acquisition-date fair value. Any non-controlling interest in an acquiree is measured at fair value or as the non-controlling interest’s proportionate share of the acquiree’s net identifiable assets.

The IFRS provides limited exceptions to these recognition and measurement principles:

(a) Leases and insurance contracts are required to be classified on the basis of the contractual terms and other factors at the inception of the contract (or when the terms have changed) rather than on the basis of the factors that exist at the acquisition date.

(b) Only those contingent liabilities assumed in a business combination that are a present obligation and can be measured reliably are recognised.

(c) Some assets and liabilities are required to be recognised or measured in accordance with other IFRSs, rather than at fair value. The assets and liabilities affected are those falling within the scope of IAS 12 Income Taxes, IAS 19 Employee Benefits, IFRS 2 Share-based Payment and IFRS 5 Non-current Assets Held for Sale and Discontinued Operations.

(d) There are special requirements for measuring a reacquired right.

(e) Indemnification assets are recognised and measured on a basis that is consistent with the item that is subject to the indemnification, even if that measure is not fair value.

The IFRS requires the acquirer, having recognised the identifiable assets, the liabilities and any non-controlling interests, to identify any difference between:

(a) the aggregate of the consideration transferred, any non-controlling interest in the acquiree and, in a business combination achieved in stages, the acquisition-date fair value of the acquirer’s previously held equity interest in the acquiree; and

(b) the net identifiable assets acquired.

The difference will, generally, be recognised as goodwill. If the acquirer has made a gain from a bargain purchase that gain is recognised in profit or loss.

The consideration transferred in a business combination (including any contingent consideration) is measured at fair value.

In general, an acquirer measures and accounts for assets acquired and liabilities assumed or incurred in a business combination after the business combination has been completed in accordance with other applicable IFRSs. However, the IFRS provides accounting requirements for reacquired rights, contingent liabilities, contingent consideration and indemnification assets.

Disclosure

The IFRS requires the acquirer to disclose information that enables users of its financial statements to evaluate the nature and financial effect of business combinations that occurred during the current reporting period or after the reporting date but before the financial statements are authorised for issue. After a business combination, the acquirer must disclose any adjustments recognised in the current reporting period that relate to business combinations that occurred in the current or previous reporting periods.

Source: International Accounting Standards Board

IFRS 2 Share-based Payment

Technical Summary
This extract has been prepared by IASC Foundation staff and has not been approved by the IASB.For the requirements reference must be made to International Financial Reporting Standards.

IFRS 2 Share-based Payment

OBJECTIVE OF IFRS 2:

To specify the financial reporting by an entity when it undertakes a share-based payment transaction. In particular, it requires an entity to reflect in its profit or loss and financial position the effects of share-based payment transactions, including expenses associated with transactions in which share options are granted to employees.

The IFRS requires an entity to recognise share-based payment transactions in its financial statements, including transactions with employees or other parties to be settled in cash, other assets, or equity instruments of the entity. There are no exceptions to the IFRS, other than for transactions to which other Standards apply.
This also applies to transfers of equity instruments of the entity’s parent, or equity instruments of another entity in the same group as the entity, to parties that have supplied goods or services to the entity.

The IFRS sets out measurement principles and specific requirements for three types of share-based payment transactions:

(a) equity-settled share-based payment transactions, in which the entity receives goods or services as consideration for equity instruments of the entity (including shares or share options);

(b) cash-settled share-based payment transactions, in which the entity acquires goods or services by incurring liabilities to the supplier of those goods or services for amounts that are based on the price (or value) of the entity’s shares or other equity instruments of the entity; and

(c) transactions in which the entity receives or acquires goods or services and the terms of the arrangement provide either the entity or the supplier of those goods or services with a choice of whether the entity settles the transaction in cash or by issuing equity instruments.

For equity-settled share-based payment transactions, the IFRS requires an entity to measure the goods or services received, and the corresponding increase in equity, directly, at the fair value of the goods or services received, unless that fair value cannot be estimated reliably. If the entity cannot estimate reliably the fair value of the goods or services received, the entity is required to measure their value, and the corresponding increase in equity, indirectly, by reference to the fair value of the equity instruments granted. Furthermore:

(a) for transactions with employees and others providing similar services, the entity is required to measure the fair value of the equity instruments granted, because it is typically not possible to estimate reliably the fair value of employee services received. The fair value of the equity instruments granted is measured at grant date.

(b) for transactions with parties other than employees (and those providing similar services), there is a rebuttable presumption that the fair value of the goods or
services received can be estimated reliably. That fair value is measured at the date the entity obtains the goods or the counterparty renders service. In rare cases, if the presumption is rebutted, the transaction is measured by reference to the fair value of the equity instruments granted, measured at the date the entity obtains the goods or the counterparty renders service.

(c) for goods or services measured by reference to the fair value of the equity instruments granted, the IFRS specifies that vesting conditions, other than market conditions, are not taken into account when estimating the fair value of the shares or options at the relevant measurement date (as specified above). Instead, vesting conditions are taken into account by adjusting the number of equity instruments included in the measurement of the transaction amount so that, ultimately, the amount recognised for goods or services received as consideration for the equity instruments granted is based on the number of equity instruments that eventually vest. Hence, on a cumulative basis, no amount is recognised for goods or services received if the equity instruments granted do not vest because of failure to satisfy a vesting condition (other than a market condition).

(d) the IFRS requires the fair value of equity instruments granted to be based on market prices, if available, and to take into account the terms and conditions upon which those equity instruments were granted. In the absence of market prices, fair value is estimated, using a valuation technique to estimate what the price of those equity instruments would have been on the measurement date in an arm’s length transaction between knowledgeable, willing parties.

(e) the IFRS also sets out requirements if the terms and conditions of an option or share grant are modified (eg an option is repriced) or if a grant is cancelled, repurchased or replaced with another grant of equity instruments. For example, irrespective of any modification, cancellation or settlement of a grant of equity instruments to employees, the IFRS generally requires the entity to recognise, as a minimum, the services received measured at the grant date fair value of the equity instruments granted.

For cash-settled share-based payment transactions, the IFRS requires an entity to measure the goods or services acquired and the liability incurred at the fair value of the liability. Until the liability is settled, the entity is required to remeasure the fair value of the liability at each reporting date and at the date of settlement, with any changes in value recognised in profit or loss for the period.

For share-based payment transactions in which the terms of the arrangement provide either the entity or the supplier of goods or services with a choice of whether the entity settles the transaction in cash or by issuing equity instruments, the entity is required to account for that transaction, or the components of that transaction, as a cash-settled share-based payment transaction if, and to the extent that, the entity has incurred a liability to settle in cash (or other assets), or as an equity-settled share-based payment transaction if, and to the extent that, no such liability has been incurred.

The IFRS prescribes various disclosure requirements to enable users of financial statements to understand:

(a) the nature and extent of share-based payment arrangements that existed during the period;

(b) how the fair value of the goods or services received, or the fair value of the equity instruments granted, during the period was determined; and

(c) the effect of share-based payment transactions on the entity’s profit or loss for the period and on its financial position.

Source: International Accounting Standards Board

IFRS 1 First-time Adoption of International Financial Reporting Standards

Technical Summary

This extract has been prepared by IASC Foundation staff and has not been approved by the IASB.For the requirements reference must be made to International Financial Reporting Standards.

OBJECTIVE OF IFRS 1:
To ensure that an entity’s first IFRS financial statements, and its interim financial reports for part of the period covered by those financial statements, contain high quality information that:

(a) is transparent for users and comparable over all periods presented;

(b) provides a suitable starting point for accounting under International Financial Reporting Standards (IFRSs); and

(c) can be generated at a cost that does not exceed the benefits to users. (cost beneficial)

An entity shall prepare and present an opening IFRS statement of financial position at the date of transition to IFRSs. This is the starting point for its accounting under IFRSs.

An entity shall prepare an opening IFRS balance sheet at the date of transition to IFRSs. This is the starting point for its accounting under IFRSs.

An entity need not present its opening IFRS balance sheet in its first IFRS financial statements.

In general, the IFRS requires an entity to comply with each IFRS effective at the end of its first IFRS reporting period. In particular, the IFRS requires an entity to do the following in the opening IFRS statement of financial position that it prepares as a starting point for its accounting under IFRSs:

(a) recognise all assets and liabilities whose recognition is required by IFRSs;
(b) not recognise items as assets or liabilities if IFRSs do not permit such recognition;
(c) reclassify items that it recognised under previous GAAP as one type of asset, liability or component of equity, but are a different type of asset, liability or component of equity under IFRSs; and
(d) apply IFRSs in measuring all recognised assets and liabilities.

The IFRS grants limited exemptions from these requirements in specified areas where the cost of complying with them would be likely to exceed the benefits to users of financial statements. The IFRS also prohibits retrospective application of IFRSs in some areas, particularly where retrospective application would require judgements by management about past conditions after the outcome of a particular transaction is already known.

The IFRS requires disclosures that explain how the transition from previous GAAP to IFRSs affected the entity’s reported financial position, financial performance and cash flows.

Source: IASC Education Foundation

Framework for the Preparation and Presentation of Financial Statements (Technical Summary)

Technical Summary

This extract has been prepared by IASC Foundation staff and has not been approved by the IASB.For the requirements reference must be made to the Framework.

Framework for the Preparation and Presentation of Financial Statements
The IASB Framework was approved by the IASC Board in April 1989 for publication in July 1989, and adopted by the IASB in April 2001.
This Framework sets out the concepts that underlie the preparation and presentation of financial statements for external users.

The Framework deals with:
(a) the objective of financial statements;
(b) the qualitative characteristics that determine the usefulness of information in financial statements;
(c) the definition, recognition and measurement of the elements from which financial statements are constructed; and
(d) concepts of capital and capital maintenance.

The objective of financial statements is to provide information about the financial position, performance and changes in financial position of an entity that is useful to a wide range of users in making economic decisions. Financial statements prepared for this purpose meet the common needs of most users. However, financial statements do not provide all the information that users may need to make economic decisions since they largely portray the financial effects of past events and do not necessarily provide non-financial information.

In order to meet their objectives, financial statements are prepared on the accrual basis of accounting.

The financial statements are normally prepared on the assumption that an entity is a going concern and will continue in operation for the foreseeable future.Qualitative characteristics are the attributes that make the information provided in financial statements useful to users.In practice a balancing, or trade-off, between qualitative characteristics is often necessary.

Qualitative Characteristics:
1. understandability
2. relevance
3. reliability
4. comparability


The elements directly related to the measurement of financial position are:

1. Assets- resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.

2. Liabilities- present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.

3. Equity - residual interest in the assets of the entity after deducting all its liabilities.

Simply speaking, the formula is:

Asset = Liabilities + Equity

The elements of income and expenses are defined as follows:

(a) Income is increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants

(b) Expenses are decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants.

An item that meets the definition of an element should be recognised if:

(a) it is probable that any future economic benefit associated with the item will flow to or from the entity; and

(b) the item has a cost or value that can be measured with reliability.

Measurement is the process of determining the monetary amounts at which the elements of the financial statements are to be recognised and carried in the balance sheet and income statement. This involves the selection of the particular basis of measurement.

The concept of capital maintenance is concerned with how an entity defines the capital that it seeks to maintain. It provides the linkage between the concepts of capital and the concepts of profit because it provides the point of reference by which profit is measured; it is a prerequisite for distinguishing between an entity’s return on capital and its return of capital; only inflows of assets in excess of amounts needed to maintain capital may be regarded as profit and therefore as a return on capital. Hence, profit is the residual amount that remains after expenses (including capital maintenance adjustments, where appropriate) have been deducted from income. If expenses exceed income the residual amount is a loss.

The Board of IASC recognises that in a limited number of cases there may be a conflict between the Framework and an International Accounting Standard. In those cases where there is a conflict, the requirements of the International Accounting Standard prevail over those of the Framework. As, however, the Board of IASC will be guided by the Framework in the development of future Standards and in its review of existing Standards, the number of cases of conflict between the Framework and International Accounting Standards will diminish through time.

Source: International Accounting Standards Board

P.S. I have made some modifications so that we can easily remember the key points. But there are no major changes made as to the content.

Tips of Becoming a Certified Public Accountant

I have listed some of my simple ways of passing the CPA board exam. These were the things I did that somehow made me pass the board exam. I have subdivided it into two, the first one is about a person's manner and the next group is about study tools and techniques.

Here are my tips:

1. Have a good time management.

I made myself a study schedule and I followed it strictly. I always see to it to have enough time to study and time to rest and relax. Similarly, make a schedule of your activities and keep it balanced. Remember, 'All work and no play makes Jack a dull boy.'

2. Stay focused

It is true that there should be time to relax and unwind even during the review period, but most of your time must be to study. Remember, focus your mind to your goal--to be a CPA.

3. Study well and have best quality of study period.

It doesn't matter if you read ALL the Accounting books and didn't retain it in your head. What is more important is the best study quality. Know the test pointers and focus mainly on these. Also, study the basic and most importantly the standards.

4. Be humble and ask help.

If there are certain things that you don't understand or are not clear to you, be humble and ask help. Don't pretend that you understand ALL. but instead, ask help from reliable persons, like your professors, if you are confused even in the littlest accounting matter.

5. Be observant and resourceful.

Always know the latest review books. You don't have to buy all of it but you can always find ways to secure a copy of these (you may perhaps borrow from someone or from the library). Research and seek for previous actual exam questions. In certain cases, there are old exam questions which are repeated. The probability is 50:50. But there is nothing to lose.

6. Know your BEST time to study.

There are people who are nocturnal, others are diurnal. As for your case, know yourself. There are people who can memorize well or retain study materials on daytime and others prefer nighttime. KNOW YOURSELF. As for me, I prefer to study at night until dawn. Honestly, I am nocturnal.

Study Tips

7. Read, understand and take notes.

Read the accounting books not just those review books which are often summarized. If possible, read it more than once. Apply the concepts in problem-solving questions to test yourself if you've understand something. Take notes of what you've read so that you can read it some other time for simple recall.

8. Test yourself.

Study those review books and previous actual exam questions. But first of all, remember to read the standards and go back to the basic. Then, apply the concepts in certain theory or analytical questions. Answer the questions and explain to yourself why you come up with those answers. If confused, relax...just study that certain topic or seek others' help. Don't pressure yourself since it will hinder you from retaining the topic.

9. Good study tools usage.

As I've said, when reading certain topics, take down notes. Write it at the space of the books near that important key points. If possible, summarize those topics your OWN WAY. Read it wherever you go (if possible). Possible write it in a small index card. For those topics which requires memorization (formula, laws, standards) write it on 'post-it' memo pads (sticky notes) and put it in your room. Stick it on the wall where you can always see it. In my own personal experience, the capital budgetting formula were written on those sticky note pads and I posted it on the wall near my bed so that I can easily see it when i wake up.

10. Be inspired.

As for me, I always trust in God and I bear in mind that my family will be happy if I succeed.

Actually, i also did some techniques that others call 'DUMMIES TECHNIQUES'

Dummies' Technique that works( this is not accurate)

1. Color Coding Technique

I associate my study progress with colors. Before I study, I look at closely anything that is colored YELLOW.

Reason is, YELLOW, means caution. According to my review instructor, looking at this color can prepare the brain for retention. Just imagine the color yellow in traffic light. It prepares the drivers either to stop or go.

If I am tired of studying, I look at the color GREEN to relax my eyes

If taking down notes, I use different colors. Most importantly I use RED pen for items that confuses me.

2. Icons Technique

In writing notes, I draw icons that can give me a clue about that certain topic or accounting standard.

3. Desperados' Technique in answering questions.

According to my review instructor, in desperate situations we have no chose but to use this technique.

Elimination Technique-Since the exam is a multiple choice question, we can use this technique. If there are 4 choices, we have 25% in of getting the right answer. Still, understand and examine the question. Then, eliminate the very obvious wrong choices. Then choose the nearest choice based on what you know so far.

2.Over-the-top Technique-Here you just have to read and understand the questions. Sometimes the answers are just found in the questions itself and there is no need in solving it. (Examples are certain Management Services questions

Anyway, what matters most is to study well and have much preparation. Taking the CPA board exam is like going out of war. Obviously, we DON'T want to go to a battle with no weapon nor training. Similarly, in taking the exam, you have to be very well prepared and well equipped. Don't forget to be physically and mentally prepared. Be inspired, study well but stay healthy.

How I became a CPA (Certified Public Accountant)

It was May 2000 and everyone from my batch were busy enrolling to the course they desire for college. Some enrolled in Engineering, others in Medical Course and some in Commerce or Business-related field. As for me, I have not made up my mind which path to follow. My parents kept bugging me to enroll to any course. They gave me money to pay for the enrollment. So, finally, I decided to go to a school near our place and took an entrance exam. Luckily, I passed. Still, I don't have any idea what course to take. It is because deep in my heart I want to be an archaeologist or a writer. But the course are offered some other place so I have no choice but to choose any course from a nearby school's course list.

So, I went to the school nearby. My cousin who was also about to enter college enrolled in Bachelor of Science in Industrial Engineering. I thought 'Why not take this course? Almost everyone in our clan finished this degree.' I took an enrollment form for Industrial Engineering and completed the enrollment process. Still, something inside me is telling me not to proceed with this course. I remembered on of the guidance counselors told me "Don't ever bother enrolling in Engineering or Medical Course because your intelligence in those fields has a rating of just 1 out of 10" Her voice is echoing in my mind. I slept that night and woke up the next morning with a firm decision-not to proceed in an Engineering Course. I further decided to take an Accountancy course instead. I hurriedly went to the Registrar's office and got a course withdrawal form. Then, I finally decided to go to the Commerce Department and talked to the College of Commerce Dean. He assessed my grades and accepted me to enroll in Accountancy department.

That's it! It started my accounting learning process. During my four years as an Accountancy student, I studied well but never deprived myself from having recreation. I always keep things in balance. Through my effort and with God's help, I have finished the course with flying colors.

Having graduated the course as an honor student is not just a prestige but a challenge as well. Then, I took the review class. But I was slipping away from my goal and so the first time I took the board exam was a tragedy--I failed.

Then, I got a job in the city and worked there for six months as a Bookkeeper/Disbursement officer/collection officer. I saved money from that tedious multi-task job and so I decided to leave the job and made use of my money the better way. I took a review class and decided to stay very focused. Well, I don't have the heart to be a CPA but I thought to myself that an accountancy graduate will have much worth by passing the CPA licensure exam.

I enrolled in one famous review class in our city. The review instructors are equally good. They taught the subject in a detailed manner--such a good refresher course. After six months, I attend another review class in another university. Well the review class was truly awesome because the instructors were doing it in a fast-pace manner. After another six months, I finished the review and was about to take the exam. I paid for the exam fee and then after a month that was May 7,8,14,15 year 2006, were the scheduled exam dates. I was very relaxed in taking the exam and made sure about my answers. It was May 16 and I thought there was a release on CPA Board exam passers but there was nothing about it. Waiting for the exam result was scarier than taking the exam itself. I felt as if floating mid-air wherever I go. On May 17, I shiver more. I went out because I just can't calm down. When I went home, my sister told me that my friends called up and announced that I passed the board exam. Then my close friend Jane called up and congratulated me. I just can't believe that finally I succeeded. Then, everything else is history.