International Accounting Standards (Copy)

IAS 1 – Presentation of Financial Statements

• Objective: Ensure comparability of financial statements across entities and periods.
• Components of financial statements required:
  • Statement of Financial Position
  • Statement of Profit or Loss and Other Comprehensive Income
  • Statement of Changes in Equity
  • Statement of Cash Flows
  • Notes (accounting policies + explanatory notes)
• Under IAS 1, financial statements must present fairly the financial position, performance, and cash flows.
• Going concern assumption must be evaluated by management.
• Accrual basis is mandatory (except for cash flow).
• Materiality and aggregation principle: items must be presented separately if material.
• No offsetting unless permitted by another IAS/IFRS.
• Comparative information must be disclosed (at least 1 prior period).

Statement of Financial Position structure:

• Assets: Non-current (e.g. PPE, intangibles) and Current (inventory, receivables, cash).
• Liabilities: Non-current (loans, deferred tax) and Current (payables, short-term borrowings).
• Equity: Share capital, reserves, retained earnings.

Worked Example (Classification):
Inventory of $40,000, Loan repayable in 3 years $200,000, Retained earnings $120,000 → classify under current assets, non-current liabilities, equity respectively.

Mini extract:
Statement of Financial Position (extract)
Assets:

• Current assets: Inventory $40,000
  Liabilities:
• Non-current liabilities: Loan $200,000
  Equity:
• Retained earnings $120,000

IAS 2 – Inventories

• Inventories defined as assets:
  • Held for sale (finished goods)
  • In production (WIP)
  • To be consumed in production (raw materials)
• Measurement: Lower of Cost and Net Realisable Value (NRV).
• Cost includes:
  • Purchase price (net of trade discounts)
  • Conversion costs (direct labour + production overheads)
  • Other costs to bring inventory to present location/condition
• Cost formulas: FIFO or Weighted Average (LIFO not permitted).

Journal Entry Example (Purchase of inventory):
Dr Inventory $10,000
Cr Trade Payables $10,000

Valuation Example:
Cost per unit = $5
Units = 1000 → Total cost = $5,000
NRV = $4.50 × 1000 = $4,500
Inventory value reported = $4,500

IAS 7 – Statement of Cash Flows

• Objective: Provide information on cash inflows/outflows classified into:
  • Operating activities (main revenue-producing activities)
  • Investing activities (purchase/sale of non-current assets, investments)
  • Financing activities (equity, borrowings, dividends)
• Two methods for operating cash flows:
  • Direct method (cash receipts – cash payments)
  • Indirect method (Profit before tax → adjust for non-cash and working capital).

Journal Example (Depreciation adjustment – non-cash):
No cash entry, but add back depreciation in indirect method.

Worked Example (Indirect method extract):
Profit before tax = $50,000

• Depreciation = $5,000
  – Increase in receivables = ($3,000)
  Net cash from operations = $52,000

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

• Accounting policies: Principles, bases, conventions applied (e.g. depreciation method).
• Change in policy only if required by IFRS or results in reliable & relevant information.
• Changes in estimates (e.g. useful life of asset): applied prospectively.
• Errors (e.g. mathematical mistakes, fraud, misapplication of policies): must be corrected retrospectively.

Journal Example (Error correction – understatement of expense $2,000):
Dr Retained Earnings $2,000
Cr Payables $2,000

IAS 10 – Events after the Reporting Period

• Events after reporting date but before financial statements are authorised:
  • Adjusting events: Provide evidence of conditions at reporting date (e.g. customer bankruptcy after year-end confirms impairment). Adjust FS.
  • Non-adjusting events: Indicate conditions after reporting date (e.g. fire destroying factory). Disclose only.

Example:
31 Dec: Reporting date.
5 Jan: Customer owing $20,000 declared bankrupt.
→ Adjusting event. Receivables written off.

Journal Entry:
Dr Allowance for doubtful debts $20,000
Cr Trade Receivables $20,000

IAS 16 – Property, Plant and Equipment

• Tangible assets used for production/supply expected to last > 1 year.
• Recognition: if probable future benefits and cost can be reliably measured.
• Measurement:
  • Initial cost = Purchase price + directly attributable costs.
  • Subsequent = Cost model (cost – depreciation – impairment) OR Revaluation model.
• Depreciation methods: Straight-line, Reducing balance, Units of production.
• Component depreciation required.

Journal Entry (Purchase of machine):
Dr PPE $50,000
Cr Cash/Payables $50,000

Depreciation example:
Cost $50,000, life 5 years, residual value $5,000.
Depreciation = (50,000 – 5,000) ÷ 5 = $9,000/year.

Revaluation Example:
Revalued upwards by $10,000.
Dr PPE $10,000
Cr Revaluation Surplus (Equity) $10,000

IAS 36 – Impairment of Assets

• Ensure assets not carried above recoverable amount.
• Recoverable amount = Higher of:
  • Value in use (PV of future cash flows)
  • Fair value less costs to sell
• If carrying amount > recoverable amount → impairment loss.
• Impairment loss recognised in P&L (unless asset revalued → reduce revaluation surplus first).

Worked Example:
Carrying amount of asset = $100,000
Value in use = $80,000
Fair value less costs = $75,000
Recoverable amount = $80,000
Impairment = 100,000 – 80,000 = $20,000

Journal Entry:
Dr Impairment Loss (P&L) $20,000
Cr Asset $20,000

IAS 37 – Provisions, Contingent Liabilities and Contingent Assets

• Provision = Present obligation from past event, probable outflow, reliably estimated.
• Contingent liability = Possible obligation, or present obligation not probable or cannot be measured. Disclose only.
• Contingent asset = Possible asset, only disclosed if inflow probable.
• Provision measured at best estimate.

Journal Example (Provision for legal claim $15,000):
Dr Expense (P&L) $15,000
Cr Provision (Liability) $15,000

Table (Recognition rules):

IAS 38 – Intangible Assets

• Non-monetary, identifiable, no physical substance (e.g. patents, trademarks, software).
• Recognition: if probable future benefits and cost measurable.
• Purchased intangibles = measured at cost.
• Internally generated goodwill not recognised.
• Internally generated intangibles:
  • Research phase costs → expense
  • Development phase → capitalise if criteria met (technical feasibility, intention to use/sell, future benefits, resources available).
• Amortisation required for finite life intangibles.
• Indefinite life intangibles tested annually for impairment (not amortised).

Journal Example (Purchase of patent $30,000):
Dr Intangible Asset $30,000
Cr Cash $30,000

Amortisation Example:
Patent cost $30,000, useful life 10 years.
Amortisation = $3,000 per year.
Dr Amortisation Expense $3,000
Cr Accumulated Amortisation $3,000

Master Comparison Table of Key IAS