International Accounting Standards (IAS) Guidance · However, the Statement of Financial Position will be laid out similarly to Hill Traders, in the Statement of Financial Position

International Accounting Standards (IAS) Guidance:Terminology and Presentation

[email protected]+44 (0) 2476 518951 www.lcci.org.uk

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International Accounting Standards (IAS) Guidance: Terminology and Presentation

Introduction 3

1 First Level 4

1.1 Terminology 4

1.2Format of the Income Statement and Statement of Financial Position

4

1.3 Treatment of discount 5

1.4 Summary 5

2 Second Level

2.1 Preface 6

2.2 Partnerships 6

2.3 Limited liability companies 8

2.4 Manufacturing Accounts 10

2.5 Non-trading organisations 11

2.6 Statement of Comprehensive Income 11

2.7 Summary 11

3 Third Level

3.1 Preface 12

3.2 Terminology 12

3.3 Accounting treatment of goodwill 12

3.4

Format of Consolidated Income Statement and Consolidated Statement of Financial Position

13

3.5 Cash flows 14

3.6 IAS standards 15

3.7 Summary 15

4 Fourth Level

4.1 Preface 16

4.2 Components of financial statements 16

4.3 Format of the Statement of Financial Position

16

4.4 Statement of Comprehensive Income

17

4.5 Statement of Changes in Equity

17

4.6 Financial statements 18

4.7 IAS Standards 20

Contents


3

Introduction

The International Accounting Standards (IAS) and the International Financial Reporting Standards (FRS) are widely used throughout the world. Since 2001, almost 120 countries have required or permitted the use of IFRS. All remaining major economies have established time lines to converge with or adopt IFRS in the near future.

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1. First Level

1.1 Terminology

UK IAS

Fixed Assets Non-current Assets

Stock Inventory

Trade Debtors Trade Receivables

Prepayments Other Receivables

Trade Creditors Trade Payables

Accruals Other Payables

Trading Profit and Loss Account Income Statement

Sales Revenue

Balance Sheet Statement Of Financial Position

Provision for Doubtful Debts Allowance For Doubtful Debts

Net Book Value Carrying Amount

Creditors’ amounts falling due within 1 year Current Liabilities

Creditors’ amounts falling due after more than 1 year Non-current Liabilities

Long term Debenture Loan Note

1.2 Format of the Income Statement and the Statement of Financial PositionWhilst there are no compulsory requirements for the presentation of the accounts of sole traders, it is recommended that candidates become familiar with preparing accounts in the IAS format.


5

1.2.1 Format of Financial Statements for a sole trader

1.4 SummaryThe impact of international accounting standards at this level is mainly presentational. Candidates preparing accounts under recognisable formats will not be penalised as IAS does not apply to sole traders. However, candidates wishing to progress to higher levels would be encouraged to use these formats.

1.3 Treatment of DiscountDiscount allowed should be deducted from revenue,

Discount received should be deducted from purchases.

Peter PiperIncome Statement for the year ended

31 March 20x0

$ $

Revenue 18,300

Cost of goods sold

Opening inventory 2,200

Add Purchases 13,100

15,300

Less Closing inventory (2,100 13,200

Gross profit 5,100

Less Expenses:

Motor expenses 1,000

Rent and rates 1,500

Light and heat 1,300

Loan interest 50

Sundry expenses 200 (4,050

Profit for the year 1,050

Peter PiperStatement of Financial Position at

31 March 20x0$ $

Non-cuurent Assets

Plant and equipment 4,560

Motor vehicles 2,500

7,060

Current Assets

Inventories 2,100

Trade receivables 4,200

Other receivables 150

Cash 70 6,520

Total Assets 13,580

Capital

Opening balance 4,150

Add Profit for the year 1,050

5,200

Less Drawings ( 400

4,800

Non-current Liabilities

Bank loan 5,000

Current Liabilities

Trade payables 2,400

Other payables 400

Bank overdraft 980 3,780

Total equity and liabilities 13,580

)

)

)

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2. Second Level

2.1 PrefacePractices and principles raised at the First Level will be relevant at the Second Level, reflecting the cumulative requirements of the LCCI syllabuses.

2.2 Partnerships 2.2.1 Terminology

UK IAS

Trading, Profit and Loss and Appropriation Account Income Statement and Appropriation Account

Balance Sheet Statement of Financial Position


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2.2.2 Format of Financial Statements for a partnership

Peter and PopeStatement of Financial Position at

31 March 20x0

$ $

Non-cuurent Assets



7,060

Current Assets

Inventories 2,100



Cash 70 6,520

Total Assets 13,580

Capital Accounts

Peter 1,550

Pope 1,550 3,100

Current Accounts

Peter 1,000

Pope 700 1,700

4,800


Bank loan 5,000

Current Liabilities


Other payables 400

Bank overdraft 980 3,780


Peter and PopeIncome Statement and Appropriation

Account for the year ended 31 March 20x0

$ $

Revenue 18,300

Cost of goods sold



15,300


Gross profit 5,100

Less Expenses:




Loan interest 50

Sundry expenses 200 (4,050


Interest on Drawing

Peter 100

Pope 50 150

1,200

Salary-Pope ( 500

Interest on capital

Peter 100

Pope 100 ( 200

500

Share of Profits

Peter (1/2 x 500) 250

Pope (1/2 x 500) 250 ( 500

)

)

)

)

)

8


2.3 Limited liability companiesThe accounts of limited liability companies are affected much more substantially, and candidates preparing for examinations under IAS will be expected to comply with the basic layouts to be given in sections 2.3.2 and 2.6.

2.3.1 Terminology

2.3.2 Treatment of prefered share capital

UK GAAP IAS equivalent

Limited Company (Ltd) Private Company

Public Limited Company Public Company

Preference share Capital Preferred share capital

Ordinary shares Equity shares

Profit & loss/Accumulated profits Retained earnings

UK GAAP IAS equivalent

Redeemable preferred share capital Shown in Non Current liability

Irredeemable preferred share capital Shown in Shareholder’s equity


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2.3.2 Format of Financial Statements for companies

Hill TradersStatement of Financial Position at

31 March 20x0$ $

Non-current Assets



20,100

Current Assets

Inventories 2,100



Cash 70 6,520

Total Assets 26,620

Equity and Liabilities $ $

Capital and reserves

Ordinary share capital 10,000

Share premium 5,000

Retained earnings 4,000

Equity 19,000


Bank loan 3,000

Current Liabilities


Other payables 400

Bank overdraft 1,820 4,620


Hill TradersIncome Statement for the year ended

31 March 20x0

$ $

Revenue 18,300

Cost of goods sold



15,300


Gross profit 5,100

Less Expenses:




Loan interest 50

Less: Sundry expenses 200 (4,050


)

)

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2.4 Manufacturing accountsThe layout of manufacturing accounts will be unchanged, however, although the terminology will be consistent with IAS, and for example ‘stock’ will be referred to as ‘inventory’.

2.3.5 Format of the Statement of Changes in Equity of companies

2.3.3 Presentation of Dividends

Dividends paid by limited companies are no longer reported in the Income Statement. They are included in the Statement of Changes in Equity, as shown in 2.5. Only dividends paid before the yearend are included.

2.3.4 Statement of Changes in Equity

The Statement of Changes in Equity reports information about the increase/decrease in net assets or wealth of equity shareholders. The items that are likely to appear in the Statement of Changes in Equity at this level are:

� Profit for the year

� Additional shares issued during the year

� Dividends paid during the year

� Transfers between reserves (for example , transfer from retained earnings to general reserve)

Trotters Statement of Changes in Equity

For the year ended 31 March 20x0

Share capital

Share Premium

Retained earning

General reserve

Total equity

$000 $000 $000 $000 $000

Balance at 1 April 1,000 200 500 100 1,800

Changes in Equity for 20x0

Issue of share capital 200 200

Transfers (200) 200

Profit for the period 600 600

Dividends (300) (300)Balance at 31 March

1,200 200 600 300 2,300


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2.5 Non-trading organisations The layout of the accounts of non-trading organisations will remain unchanged, although the terminology will be consistent with IAS.

However, the Statement of Financial Position will be laid out similarly to Hill Traders, in the Statement of Financial Position shown in 2.3.2. The Accumulated Fund will be shown above Non Current Liabilities.

2.6 Statement of Comprehensive Income The Statement of Comprehensive Income will be examined at Level 4.

2.7 Summary Changes at this level are mainly presentational and specific formats only apply to company accounts.

However, once again, candidates wishing to progress to higher levels would be encouraged to become used to the formats.

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3. Third Level

3.1 PrefacePractices and principles raised at the First and Second Levels will be relevant at the Third Level, reflecting the cumulative requirements of the LCCI syllabi.

3.3 Accounting treatment of goodwillThere are two methods of calculating goodwill, the partial and full methods. The partial method is the method that is currently examined in the syllabus and is therefore currently the only method that is examined.

3.2 Terminology

UK IAS

Minority interest Non-controlling interest

3.3.1 Accounting treatment of positive goodwill

Goodwill arising from the acquisition of a subsidiary is not amortised. After the initial measurement and recognition, the group is expected to measure the goodwill at cost less any accumulated impairment losses since acquisition. The goodwill impairment loss should be charged to the Income Statement.

3.3.2 Accounting treatment of negative goodwill

Negative goodwill should be credited to the Income Statement. It does not appear in the Consolidated Statement of Financial Position.


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3.4 Format of the Consolidated Income Statement and Consolidated Statement of Financial Position

Peter Pope GroupConsolidated Statement of Financial Position

at 31 March 20x0$ $

Non-cuurent Assets

Goodwill 5,000



25,100

Current Assets

Inventories 2,100



Cash 70 6,520

Total Assets 31,620

Equity and Liabilities

Capital and reserves $ $

Ordinary share capital 10,000

Share premium 5,000

Retained earnings 2,000

17,000

Non-controlling Interest 1,000

Equity 18,000


Redeemable preferred share capital 5,100

Bank loan 5,000 10,100

Current Liabilities


Other payables 400

Bank overdraft 1,720 3,520


Peter Pope GroupConsolidated Income Statement

for the year ended 31 March 20x0

$ $

Revenue 18,300

Cost of sales 13,200

Gross profit 5,100

Less: Distibution costs 1,200

Less: Administrative expense 1,000 (2,200

2,900

Other operating income 1,100

Profit from operations 4,000

Interest payable 500


Profit attributable to: $

Owners of the Parent 3,200

Non-controlling interest 300

3,500

)

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3.5 Cash Flows (IAS 7) 3.5.1 Format of the Statement of Cash Flow

IAS 7 requires reporting of cash flows to be shown under three headings. These are Operating activities; investing activities and Financing activities.

The example is designed to show the possibilities likely in an LCCI examination and contains more figures than a typical question. However, as in previous sittings, examiners may ask for separate calculations of the cash flow from operating activities, cash flow from investing activities and cash flow from financing activities.

WhellarsStatement of Cash flows for the year ended 31 March 20x1

$ $

Cash flows from operating activities


Adjustments for:

Depreciation of non-current assets 120

Interest expense 10

Investment income ( 12

Operating profit before working capital changes 7,718

Decrease in trade receivables 4,210

Increase in inventories ( 1,100

Decrease in trade payables ( 1,800 1,310

cash generated from operations 9,028

Interest paid ( 80

Net cash flow from operating activities 8,948

Cash flows form investing activities

Cash paid for non-current assets (4,000

Cash received from the sale of non-current assets 1,400

Interest received 300

Dividends received 200

Net cash used in investing activities (2,100

Cash flows from financing activities

Proceeds from issue of shares 100

Proceeds from long term borrowing 200

Dividends paid ( 400

Net cash used in financing activities ( 100

Net increase in cash and cash equivalents 6,748

Cash and cash equivalents at 1 April 20x0 1,200

Cash and cash equivalents at 31 March 20x1 7,948

)

)

)

))

)

)

)


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3.6 Relevant international accounting standards 3.6.1 IAS 2 (Inventories)

Inventories are valued at the lower of cost and net realisable value. Costs include purchase cost, conversion costs and other costs incurred in bringing the inventory to its present location and condition. No different from the UK standards.

3.6.2 IAS 7 (Statement of Cash Flows)

Cash flows are reported under three main headings: operating activities, investing activities and financing activities

3.6.3 IAS 16 (Non-current Assets)

Tangible non-current assets are assets that have a physical substance and are held for use in the production or supply of goods or services, for rental to others or for administrative purposes and are expected to be utilised in more than one reporting year. A tangible non-current asset should be depreciated over its useful economic life. No different from the UK standards.

3.6.4 IAS 27 (Consolidated Financial Statements)

Consolidated financial statements are financial statements of a group (parent and subsidiary) presented as those of a single entity. Non-controlling interests are reported in equity in the Consolidated Statement of Financial Position. This standard will be superseded by IFRS 10 from 2013.

3.6.5 IFRS 3 (Business Combinations)

Goodwill arising from consolidation is measured as the difference between the cost (fair value of the purchase consideration) of an acquired entity and the aggregate of the fair values of the entity’s identifiable assets and liabilities. No different to the UK standards.

3.7 Summary Changes at this level are once again mainly presentational, most notably with regards to the Statement of Cash Flow.

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4. Fourth Level

4.1 PrefaceThe issues raised in the First, Second and Third Levels will be relevant at the Fourth Level, reflecting as such, the cumulative requirements of LCCI syllabi.

4.3 Format of the Statement of Financial PositionIAS 1 does not prescribe a format of the statement of financial position. However, it stipulates the minimum information that has to be disclosed on the face of the statement of financial position.

4.2 Components of financial statementsIAS 1, states that a complete set of financial statements should include the following:

� A Statement of Financial Position at the end of the reporting period.

� A Statement of Comprehensive Income for the period.

� A Statement of Changes in Equity for the period

� A Statement of Cash Flows for the period.

� Notes to the accounts, which include accounting policies and relevant explanatory notes.

This information is:

Cash and cash equivalents

Intangible assets

Inventories

Issued capital and reserves attributable to the owners of the firm

Non-controlling interest (minority interest) presented within equity

Payables (trade and other)

Provisions

Property, plant and equipment

Receivables (trade and other)


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4.4 Statement of Comprehensive IncomeComprehensive Income for a period includes profit or loss for that period and Other Comprehensive Income recognised during the period. The only item reported under Other Comprehensive Income that is examinable at this level is a gain/loss on the revaluation of a non-current asset during the reporting period.

4.5 Statement of Changes in equityThe Statement of Changes in Equity reflects information about the increase or decrease in net assets or wealth of equity shareholders. The minimum information on the face of the statement of changes in equity includes:

� Profit or loss for the period

� Each item of other comprehensive income

� Additional shares issued during the period

� Dividends paid during the year

� Purchase of shares during the period

� Effects of changes in accounting policy

� Effects of correction of errors

4.4.1 Minimum Information required on the Statement of Comprehensive Income

The minimum information on the face of the statement of comprehensive Income required by IAS 1 includes:

� Revenue

� Finance costs

� Profit or loss for the period

� Each component of other comprehensive income classified by nature

� Total comprehensive income

� Profit or loss attributable to non-controlling

� Profit or loss attributable to equity holders of the parent company

� Total comprehensive income attributable to non-controlling interests

� Total comprehensive income attributable to the parent company

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4.6 Financial statements

4.6.1 Statement of Comprehensive Income classifying expenses by function

4.6.2 Statement of Comprehensive Income classifying expenses by nature

Hayes MetalsStatement of Comprehensive Income


$ $

Revenue 18,300


Gross Profit 5,100

Less: Distribution costs 1,200


2,900



Finance costs ( 200


Other comprehensive income

Gains on revaluation of property 1,000

Total comprehensive income 4,700

Hayes MetalsStatement of Comprehensive Income


$ $

Revenue 18,300

Change in inventories of finished goods and WIP 1,000

Own work capitalised 1,500

Other operating income 1,000 3,500

21,800

Raw materials and consumables 3,000

Staff costs 5,000

Depreciation and amortisation 6,900

Other operating expenses 3,000 (17,900


Finance costs ( 200



Gains on revaluation of property 1,000


)

)

)

)


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4.6.3 Consolidated Statement of Comprehensive Income

Questions at this level would not combine group accounts with the presentation of accounts in accordance with IAS 1, although candidates would be expected to prepare their answers in a clear and well-presented way.

Hayes MetalsConsolidated Statement of

Comprehensive Incomefor the year ended 31 March 20x0

$ $

Revenue 18,300


Gross Profit 5,100

Less: Distribution costs 1,200


2,900



Interest payable ( 600



Gains on revaluation of property 200


Profit attributale to:



3,400

Total comprehensive income attributable to:



3,600

)

)

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4.7 Relevant international accounting standards 4.8.1 IAS 8 - Accounting policies

Accounting policies

Accounting policies are specific principles, bases, conventions and practices used by an entity in preparing and presenting its financial statements. They explain the way a firm treats items within its financial statements.

Changes in accounting policies

Accounting policies should only be changed where a new accounting standard requires such a change or where the new policy will result in more relevant and reliable information being presented.

Changes in accounting estimates

An example of a change in accounting estimate is a change in the percentage used to estimate allowance for doubtful debts. The effect of the change is recognised in the income statement for the year in which the change takes place. Another example of a change in accounting estimate is a change in the useful economic life of an asset.

Prior period errors

A prior period error is where an error has occurred even though reliable information was available when those financial statements were authorised for issue. Examples are mathematical errors, mistakes in applying accounting policies, misinterpretation of facts and fraud.

4.7.2 IAS 10 - Events after the reporting period

IAS 10 with events that occur between the year-end date and the date the financial statements are authorised for issue by the directors. The events that occur are either adjusting events or non-adjusting events. Adjusting events are those that provide evidence about conditions that existed at the end of the reporting date. Non-adjusting events are those that are indicative of conditions that arose after the reporting date.

4.7.3 IAS 11 –Construction contracts

There are minor differences between IAS 11 and SSAP 9, but they will not affect examination questions set at this level.

4.7.5 IAS 20 - Government grants

Grants must not be recognised until conditions have been complied with and there is reasonable certainty that the grant will be received (prudence). Government grants received must be matched with expenditure for which the grant is intended (accruals). This standard is not materially different from the equivalent UK standard.

4.7.4 IAS 16 – Accounting for property, plant and equipment

IAS 16 deals with the recognition of non-current assets, initial measurement, subsequent measurement and depreciation. There are no major differences between IAS 16 and FRS 15, the equivalent UK standard.


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4.7.6 IAS 37 - Provisions, contingent liabilities and assets

A liability is an obligation of an entity to transfer economic benefits as a result of past transactions or events. A provision is a liability of uncertain timing or amount. A provision should be recognised when:

� A firm has a present obligation as a result of a past event. The obligation may be legal or constructive

� It is probable that an outflow of resources will be required to settle the obligation

� A reliable estimate can be made of the amount

� If a firm through its future actions can avoid an obligation, a provision cannot be set up

Contingent liability

If one or more of the conditions required for a provision is not met a contingent liability may exist. A contingent liability should be disclosed unless the possible outflow to meet the obligation is remote. If outflow of resources is remote do not disclose in the accounts.

Contingent assets

A contingent asset is a possible asset that arises from past events and whose existence will be confirmed only by the occurrence of one or more uncertain future events not wholly within the entity’s control. A contingent asset should be disclosed when the expected inflow of economic resources is probable.

4.7.7 IAS 38 – Intangible assets

Intangible non-current assets are identifiable non-monetary assets that do not have a physical substance. IAS 38 deals with all intangible non-current assets, including development expenditure. Under SSAP 13 development expenditure may be capitalised after certain conditions have been satisfied. However, under IAS 38, development expenditure must be capitalised after certain conditions have been satisfied.

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International Accounting Standards (IAS) Guidance · However, the Statement of Financial Position will be laid out similarly to Hill Traders, in the Statement of Financial Position