KC-01 Corporate Financial Reporting

8/17/2019 KC-01 Corporate Financial Reporting

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C A S R I L A N K A C U R R I C U L U M 2 0 1 5

S T U D Y T E X T


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ii

First edition 2015

ISBN 9781 4727 1050 5

British Library Cataloguing-in-Publication Data

A catalogue record for this book is available from the

British Library

Published by

BPP Learning Media Ltd

BPP House, Aldine Place

142–144 Uxbridge Road

London W12 8AA

www.bpp.com/learningmedia

The copyright in this publication is owned by

BPP Learning Media Ltd.

All rights reserved. No part of this publication may be

reproduced, stored in a retrieval system or transmitted in

any form or by any means, electronic, mechanical,

photocopying, recording or otherwise, without the priorwritten permission of the copyright holder.

The contents of this book are intended as a guide and not

professional advice and every effort has been made to

ensure that the contents of this book are correct at the time

of going to press by CA Sri Lanka, BPP Learning Media, the

Editor and the Author.

Every effort has been made to contact the copyright holders

of any material reproduced within this publication. If any

have been inadvertently overlooked, CA Sri Lanka and BPP

Learning Media will be pleased to make the appropriate

credits in any subsequent reprints or editions.

We are grateful to CA Sri Lanka for permission to reproducethe Learning Outcomes and past examination questions, the

copyright of which is owned by CA Sri Lanka, and to the

Association of Chartered Certified Accountants and

Chartered Institute of Management Accountants for use of

past examination questions in which they hold the

copyright.

©

BPP Learning Media Ltd

2015


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Introduction iii

Contents

Page

Introduction iv

Chapter features vi

Learning outcomes vii

Action verbs checklist xiii

KC1 Corporate Financial Reporting

1 The Regulatory and Conceptual Framework 1

2 Non-financial reporting 39

3 Presentation of financial statements 71

4 Non-current assets 101

5 Intangible assets 135

6 Impairment of assets 155

7 Leases 181

8 Other standards related to assets 209

9 Provisions and Events after the reporting period 241

10 Revenue 267

11 Income taxes 297

12 Financial Instruments 33113 Employee Benefits 389

14 Disclosure Standards 1 439

15 Disclosure Standards 2 467

16 Principles of consolidation 497

17 Step acquisitions and disposals 557

18 Complex groups and group reorganisations 593

19 Statements of cash flows 627

20 Foreign exchange issues 667

21 Small company reporting and first –time adoption 701

22 Financial statement analysis 727

Index 757


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KC1 Corporate Financial Reportingiv

Introduction

KC1 Corporate Financial Reporting

At the Corporate Level a student should have achieved comprehensive knowledge on accounting andfinancial reporting, and built on the analytical skills acquired at the Business Level. One should also

have developed advisory capacity on financial reporting, impact of accounting standards, various

accounting options and their implications to management. One should be able to critically analyse

different types of reports produced by an organisation in communicating its results to the stakeholders

and deal with ethical issues arising from financial reporting. The ability to integrate with other

functions of the business is a rounding off skill that is also expected at this level.

Syllabus structure

Main syllabus areas Weightings

1. Interpretation & Application of Sri Lanka Accounting Standards

(SLFRS/LKAS/IFRIC/SIC) 35%

2. Preparation & Presentation of Consolidated Financial Statements 30%

3. Analysis, Interpretations & Communication of Financial Results 25%

4. Corporate Governance & Recent Developments in Financial Reporting 5%

5. Ethical Issues in Financial Reporting and the Regulatory Framework 5%

One of the key elements in examination success is practice. It is important that not only you fully

understand the topics by reading carefully the information contained in this Study Text, but it is also

vital that you practise the techniques and apply the principles that you have learned.

In order to do this, you should:

Work through all the examples provided within the chapters and review the solutions, ensuring

that you understand them;

Complete the progress test for each chapter.

In addition, you should use the Practice & Revision Kit. These questions will provide you with excellent

examination practice when you are in the revision phase of your studies.


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Introduction v

Pillar structure

The Curriculum 2015 is structured around three pillars, namely, Knowledge, Skills and Personal.

The Pillars are subdivided into specific subject areas or sub pillars and content is delivered to meet the

requirements of three progressively ascending levels of competency, namely, Executive, Business and

Corporate.

The Corporate Level aims to produce a CA professional fully equipped with the required knowledge,skills and personality to be a corporate leader.

The Knowledge Pillar focuses on imparting sound technical knowledge required of a competent CA,

and comprises five sub pillars that focus on the following subject areas:

Sub pillar 1: Financial Accounting and Reporting (FA&R)

Sub pillar 2: Management Accounting and Finance (MA&F)

Sub pillar 3: Taxation and Law (T&L)

Sub pillar 4: Assurance and Ethics (A&E)

Sub pillar 5: Management and Contemporary Issues (M&C)


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KC1 Corporate Financial Reportingvi

Chapter features

Each chapter contains a number of helpful features to guide you through each topic.

Topic list This tells you what you will be studying in the chapter. The topic items form

the numbered headings within the chapter.

Chapter

introduction

The introduction puts the chapter topic into perspective and explains why it is

important, both within your studies and within your practical working life.

Learning

Outcomes

The learning outcomes issued for the module by CA Sri Lanka are listed at the

beginning of the chapter, with reference to the chapter section within which

coverage will be found.

Key terms These are definitions of important concepts that you really need to know and

understand before the exam.

Examples These are illustrations of particular techniques or concepts with a worked

solution or explanation provided immediately afterwards.

Case study Often based on real world scenarios and contemporary issues, these examples

or illustrations are designed to enrich your understanding of a topic and add

practical emphasis.

Questions These are questions that enable you to practise a technique or test your

understanding. You will find the answer underneath the question.

Formula to

learn

These are the formula that you are required to learn for the exam.

Section

introduction

This summarises the key points to remember from each section.

Chapter

roundup

This provides a recap of the key areas covered in the chapter.

Progress

Test

Progress tests at the end of each chapter are designed to test your memory.

Bold text Throughout the Study Text you will see that some of the text is in bold type.

This is to add emphasis and to help you to grasp the key elements within a

sentence or paragraph.


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L e a r n i n g o u t c o m e s

v i i


C A S r

i L a n k a ’ s L e a r n i n g o u t c o m e s f o r t h e M o d u l e a r e s e t o u t o n t h e f o l l o w i n g p a g e s . T h e y a r e c r o s s - r e f e r e n c e d

t o t h e c h a p t e r i n t h e S t u d y T e x t w

h e r e t h e y a r e

c o v e r

e d .

1 . I n

t e r p r e t a t i o n a n d A p p l i c a t i o n o f S r i L a n k a A c c o u n t i n g S t a n d a r d s ( S L F R S / L K A S / I F R I C / S I C )

( S

y l l a b u s W e i g h t i n g 3 5 % )

K n o w l e d g e C o m p o n e n t

K n o w l e d g e

D i m e n s i o n

K n o w l e d g e

P r o c e s s

L e a r n i n g O u t c o m e

C h a p t e r

1 . 1

L e v e l A

T h o r o u g h k n o w l e d g e a n d c o m p r e h

e n s i o n o f

t h e s t a n d a r d t o i d e n t i f y s i g n i f i c a n t

c o m p l i c a t e d i s s u e s a n d a n y p o t e n t i

a l

i m p l i c a t i o n s t o t h e f i n a n c i a l s t a t e m

e n t s , a n d

t o e x e r c i s e p r o f e s s i o n a l j u d g m e n t i n t h e

e v a l u a t i o n a n d a p p l i c a t i o n o f s t a n d

a r d s i n

r e s o l v i n g a c o m p l i c a t e d m a t t e r r e l a

t e d t o

f i n a n c i a l r e p o r t i n g .

W h e r e :

A “ c o m p l i c a t e d m a t t e r ” i n c l u d e s

t r a n s a c t i o n s a n d / o r e v e n t s w h

i c h

r e q u i r e t h o r o u g h a n a l y s i s o f t h e m a t t e r

a n d e v a l u a t i o n o f s t a n d a r d s .

I t m a y r e q u i r e t h e a n a l y s i s , a p

p l i c a t i o n

a n d e v a l u a t i o n o f r e l e v a n t s t a n d a r d / s .

( R e f e r A p p e n d i x 3 )

M e t a c o g n i t i v e

E

v a l u a t i o n /

S y n t h e s i s

1 . 1 . 1

A d v i s e o n t h

e a p p l i c a t i o n o f S r i L a n k a A c c o u n t i n g

S t a n d a r d s i n s o l v i n g c o m p l i c a t e d m a t t e r s .

1 . 1 . 2

R e c o m m e n d t h e a p p r o p r i a t e a c c o u n t i n g

t r e a t m e n t t o b e u s e d i n c o m p l i c a t e d

c i r c u m s t a n c e s i n a c c o r d a n c e w i t h S r i L a n k a

A c c o u n t i n g

S t a n d a r d s .

1 . 1 . 3

E v a l u a t e t h e o u t c o m e s o f t h e a p p l i c a t i o n o f

d i f f e r e n t a c c o u n t i n g t r e a t m e n t s .

1 . 1 . 4

P r o p o s e a p p r o p r i a t e a c c o u n t i n g p o l i c i e s t o b e

s e l e c t e d i n d i f f e r e n t c i r c u m s t a n c e s .

1 . 1 . 5

E v a l u a t e t h e i m p a c t o f t h e u s e o f d i f f e r e n t e x p e

r t

i n p u t s t o f i n

a n c i a l r e p o r t i n g .

1 . 1 . 6

A d v i s e a p p r

o p r i a t e a p p l i c a t i o n a n d s e l e c t i o n o f

a c c o u n t i n g /

r e p o r t i n g o p t i o n s g i v e n u n d e r

s t a n d a r d s .

1 . 1 . 7

D e s i g n t h e a

p p r o p r i a t e d i s c l o s u r e s t o b e m a d e

i n

t h e f i n a n c i a l s t a t e m e n t s .

1 , 3 , 4 , 5 ,

6 , 7 , 8 , 9 , 1

0 ,

1 1 , 1

2 , 1

3 ,

1 4 , 1

5 , 1

6 ,

1 7 , 1

8 , 1

9 ,

2 0 , 2

1


8/776

K C 1 C

o r p o r a t e F i n a n c i a l R e p o r t i n g

v i i i

1 . I n


( S



K n o w l e d g e

D i m e n s i o n

K n o w l e d g e

P r o c e s s


C h a p t e r

1 . 2

L e v e l B

G o o d k n o w l e d g e a n d c o m p r e h e n s i o n o f t h e

s t a n d a r d t o i d e n t i f y m o d e r a t e l y c o m p l i c a t e d

i s s u e s a n d a n y p o t e n t i a l i m p l i c a t i o n s t o t h e

f i n a n c i a l s t a t e m e n t s , a n d t o e x e r c i s

e

p r o f e s s i o n a l j u d g m e n t i n t h e a n a l y s i s a n d

a p p l i c a t i o n o f s t a n d a r d s i n r e s o l v i n

g a

m o d e r a t e l y c o m p l i c a t e d m a t t e r r e l a t e d t o


W h e r e :

A “ m o d e r a t e l y c o m p l i c a t e d m a t t e r ”

i n c l u d e s

t r a n s a c t i o n s a n d / o r e v e n t s w h i c h r

e q u i r e a n

a n a l y s i s o f a m a t t e r a n d e v a l u a t i o n

o f s u c h

m a t t e r w i t h t h e r e l a t e d s t a n d a r d / s .


C o n c e p t u a l /

P r o c e d u r a l

A

p p l i c a t i o n /

A n a l y s i s /

E v a l u a t e

1 . 2 . 1

A p p l y S r i L a

n k a A c c o u n t i n g S t a n d a r d s i n s o l v i n

g

m o d e r a t e l y

c o m p l i c a t e d m a t t e r s .

1 . 2 . 2

R e c o m m e n d t h e a p p r o p r i a t e a c c o u n t i n g

t r e a t m e n t t o b e u s e d i n c o m p l i c a t e d

c i r c u m s t a n c e s i n a c c o r d a n c e w i t h S r i L a n k a

A c c o u n t i n g

S t a n d a r d s .

1 . 2 . 3

D e m o n s t r a t

e a t h o r o u g h k n o w l e d g e o f S r i L a n k

a

A c c o u n t i n g

s t a n d a r d s i n t h e s e l e c t i o n a n d

a p p l i c a t i o n o f a c c o u n t i n g p o l i c i e s .

1 . 2 . 4

D e m o n s t r a t

e t h e a p p r o p r i a t e a p p l i c a t i o n a n d

s e l e c t i o n o f

a c c o u n t i n g / r e p o r t i n g o p t i o n s g i v e n

u n d e r s t a n d

a r d s .

1 . 2 . 5

O u t l i n e t h e d i s c l o s u r e s t o b e m a d e i n t h e f i n a n c i a l

s t a t e m e n t s .

9 , 1

2 , 1

3 ,

2 0


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i x

1 . I n


( S



K n o w l e d g e

D i m e n s i o n

K n o w l e d g e

P r o c e s s


C h a p t e r

1 . 3

L e v e l C

C o n c e p t u a l k n o w l e d g e a n d u n d e r s t a n d i n g o f

t h e s t a n d a r d t o i d e n t i f y s i m p l e i s s u

e s , t o

e x e r c i s e r e a s o n a b l e p r o f e s s i o n a l j u

d g m e n t i n

t h e a p p l i c a t i o n o f s t a n d a r d s i n r e s o

l v i n g a

s i m p l e ( s t r a i g h t f o r w a r d ) m a t t e r r e l a t e d t o


W h e r e :

A “ s i m p l e t r a n s a c t i o n o r e v e n t ” i n c l u d e s

t r a n s a c t i o n s o r e v e n t s w h i c h r e q u i r e d i r e c t

a n d c o n c e p t u a l a p p l i c a t i o n o f s t a n d

a r d s .


C o n c e p t u a l

R

e m e m b e r /

C o m

p r e h e n s i o n /

A

p p l i c a t i o n

1 . 3 . 1

E x p l a i n t h e

c o n c e p t s / p r i n c i p a l s o f S r i L a n k a

A c c o u n t i n g

S t a n d a r d s .

1 . 3 . 2

A p p l y t h e c o

n c e p t s / p r i n c i p a l s o f t h e s t a n d a r d s

t o

r e s o l v e a s i m

p l e / s t r a i g h t f o r w a r d m a t t e r .

1 . 3 . 3

L i s t t h e d i s c

l o s u r e s t o b e m a d e i n t h e f i n a n c i a l

s t a t e m e n t s .

8 , 1

1 , 1

2 ,

2 0


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K C 1 C


x

2 . P

r e p a r a t i o n a n d P r e s e n t a t i o

n o f C o n s o l i d a t e d F i n a n c i a l

S t a t e m e n t s

( S



K n o w l e d g e

D i m e n s i o n

K n o w l e d g e

P r o c e s s


C h a p t e r

2 . 1

C o n s o l i d a t e d f i n a n c i a l s t a t e m e n t s


S y n t h e s i s

2 . 1 . 1

C o m p i l e c o n

s o l i d a t e d f i n a n c i a l s t a t e m e n t s f o r a

g r o u p w i t h m o r e t h a n t w o s u b s i d i a r i e s , s u b -

s u b s i d i a r i e s

o r f o r e i g n s u b s i d i a r i e s .

2 . 1 . 2

R e c o m p i l e a

c o n s o l i d a t e d s e t o f f i n a n c i a l

s t a t e m e n t s ,

p o s t a c q u i s i t i o n , m e r g e r o r

d i v e s t m e n t .

1 6 , 1

7 , 1

8

2 . 2

J o i n t v e n t u r e s


E v a l u a t e /

S y n t h e s i s

2 . 2 . 1

E v a l u a t e t h e i n f o r m a t i o n p r o v i d e d a n d i d e n t i f y

t h e e x i s t e n c

e o f j o i n t v e n t u r e s .

2 . 2 . 2

C o m p i l e f i n a n c i a l s t a t e m e n t s f o r j o i n t v e n t u r e s

.

1 6

2 . 3

I n v e s t m e n t s i n a s s o c i a t e s

P r o c e d u r a l /


E v a l u a t e /

S y n t h e s i s

2 . 3 . 1

A d v i s e a p p r

o p r i a t e a c c o u n t i n g t r e a t m e n t t o b e

u s e d w h e n t h e r e i s a n i n v e s t m e n t i n a n a s s o c i a

t e .

2 . 3 . 2

C o m p i l e f i n a n c i a l s t a t e m e n t s w h e n t h e r e i s a n

i n v e s t m e n t

i n a n a s s o c i a t e .

1 6


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x i

3 . A

n a l y s i s

, I n t e r p r e t a t i o n s a n d

C o m m u n i c a t i o n o f F i n a n c i a l R e s u l t s

( S



K n o w l e d g e

D i m e n s i o n

K n o w l e d g e

P r o c e s s


C h a p t e r

3 . 1

I n

t e r n a l f i n a n c i a l s t a t e m e n t a n a l y s i s

P r o c e d u r a l

E v a l u a t e

3 . 1 . 1

E v a l u a t e t h e r e a s o n a b l e n e s s o f f i n a n c i a l

s t a t e m e n t s r e l a t i v e t o t h e a c t u a l f i n a n c i a l s t a t u s

o f a n e n t i t y .

2 2

3 . 2

E x t e r n a l f i n a n c i a l s t a t e m e n t s a n a l y

s i s

C o m m o n s i z e a n a l y s i s

T r e n d a n a l y s i s

P r o c e d u r a l

E v a l u a t e

3 . 2 . 1

E v a l u a t e e

x t e r n a l f i n a n c i a l s t a t e m e n t s .

3 . 2 . 2

C r i t i c i s e e x t e r n a l f i n a n c i a l s t a t e m e n t s , o n t h e

b a s i s o f r e

l e v a n t a n d r a t i o n a l c o n c l u s i o n s d r a

w n

f r o m t h e f i n a n c i a l s t a t e m e n t s a n a l y s i s .

2 2

4 . C

o r p o r a t e G o v e r n a n c e a n d R

e c e n t D e v e l o p m e n t s i n F i n a n c i a l R e p o r t i n g

( S

y l l a b u s W e i g h t i n g 5 % )


K n o w l e d g e

D i m e n s i o n

K n o w l e d g e

P r o c e s s


C h a p t e r

4 . 1

C o r p o r a t e g o v e r n a n c e a n d s u s t a i n a

b i l i t y

r e p o r t s i n c l u d i n g i n t e g r a t e d r e p o r t

i n g


E v a l u a t e /

S y n t h e s i s

4 . 1 . 1

C r i t i c i s e a n a n n u a l r e p o r t o f a c o m p a n y i n a

g i v e n s c e n

a r i o , o n t h e b a s i s o f a d e q u a c y o f

d i s c l o s u r e

s .

4 . 1 . 2

C o m p i l e a n i n t e g r a t e d r e p o r t a l o n g w i t h a

s u s t a i n a b i l i t y r e p o r t f o r a g i v e n e n t i t y .

4 . 1 . 3

E v a l u a t e i n t e g r a t e d / s u s t a i n a b i l i t y r e p o r t s i n

a c c o r d a n c

e w i t h t h e “ t r i p l e b o t t o m l i n e

p r i n c i p l e ”

a n d G R I g u i d e l i n e s .

2 2 2


12/776

K C 1 C


x i i

4 . C

o r p o r a t e G o v e r n a n c e a n d R

e c e n t D e v e l o p m e n t s i n F i n a n c i a l R e p o r t i n g

( S



K n o w l e d g e

D i m e n s i o n

K n o w l e d g e

P r o c e s s


C h a p t e r

4 . 2

N e w e x p o s u r e d r a f t s

P r o c e d u r a l

E v a l u a t e

4 . 2 . 1

E v a l u a t e t h e p o s s i b l e i m p a c t o f n e w e x p o s u r e

d r a f t s o n f

i n a n c i a l s t a t e m e n t s .

1

5 . E

t h i c a l I s s u e s i n F i n a n c i a l R e

p o r t i n g a n d t h e R e g u l a t o r y

F r a m e w o r k

( S



K n o w l e d g e

D i m e n s i o n

K n o w l e d g e

P r o c e s s


C h a p t e r

5 . 1

R e c e n t e t h i c a l i s s u e s


E v a l u a t e

5 . 1 . 1

A d v i s e o n a c c u r a t e p r e s e n t a t i o n o f f i n a n c i a l

s t a t e m e n t s f o r a g i v e n s e t o f c i r c u m s t a n c e s , w i t h

r e f e r e n c e t o

g l o b a l e x a m p l e s .

1


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Action verbs checklist xiii

Action verbs checklist

Knowledge Process Verb List Verb DefinitionsDefine Describe exactly the nature, scope or meaning

Draw Produce (a picture or diagram)

Identify Recognise, establish or select after

consideration

List Write the connected items one below the other

Relate To establish logical or causal connections

Tier – 1 Remember

Recall important information

State Express something definitely or clearly

Calculate/

Compute

Make a mathematical computation

Discuss Examine in detail by argument showing

different aspects, for the purpose of arriving at

a conclusion

Explain Make a clear description in detail revealing

relevant facts

Interpret Present in understandable terms or to translate

Recognise To show validity or otherwise, using knowledge

or contextual experience

Record Enter relevant entries in detail

Tier – 2 Comprehension

Explain important

information

Summarise Give a brief statement of the main points (in

facts or figures)


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KC1 Corporate Financial Reportingxiv

Knowledge Process Verb List Verb Definitions

Apply Put to practical use

Assess Determine the value, nature, ability or quality

Demonstrate Prove, especially with examples

Graph Represent by means of a graph

Prepare Make ready for a particular purpose

Prioritise Arrange or do in order of importance

Reconcile Make consistent with another

Tier – 3 Application

Use knowledge in a setting

other than the one in which it

was learned/solve close-

ended problems

Solve To find a solution through calculations and/or

explanations

Analyse Examine in detail in order to determine the

solution or outcome

Compare Examine for the purpose of discovering

similarities

Contrast Examine in order to show unlikeness or

differences

Differentiate Constitute a difference that distinguishes

something

Tier – 4 Analysis

Draw relations among ideasand to compare and

contrast/solve open-ended

problems

Outline Make a summary of significant features


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Action verbs checklist xv

Knowledge Process Verb List Verb Definitions

Advise Offer suggestions about the best course of

action in a manner suited to the recipient

Convince To persuade others to believe something using

evidence and/or argument

Criticise Form and express a judgment

Evaluate To determine the significance by careful

appraisal

Recommend A suggestion or proposal as to the best course

of action

Resolve Settle or find a solution to a problem or

contentious matter

Tier – 5 Evaluate

Formation of judgments and

decisions about the value of

methods, ideas, people or

products

Validate Check or prove the accuracy

Compile Produce by assembling information collected

from various sources

Design Devise the form or structure according to a plan

Develop To disclose, discover, perfect or unfold a plan or

idea

Tier – 6 Synthesis

Solve unfamiliar problems by

combining different aspects

to form a unique or novel

solution

Propose To form or declare a plan or intention for

consideration or adoption


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KC1 Corporate Financial Reportingxvi


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1

Knowledge Component

1 Interpretation and Application of Sri Lanka Accounting Standards (SLFRS /

LKAS / IFRIC / SIC)

1.1 Level A 1.1.1 Advise on the application of Sri Lanka Accounting Standards in solving

complicated matters.

1.1.2 Recommend the appropriate accounting treatment to be used in complicated

circumstances in accordance with Sri Lanka Accounting Standards.

1.1.3 Evaluate the outcomes of the application of different accounting treatments.

1.1.4 Propose appropriate accounting policies to be selected in different

circumstances.

1.1.5 Evaluate the impact of the use of different expert inputs to financial reporting.

1.1.6 Advise appropriate application and selection of accounting/reporting options

given under standards.

1.1.7 Design the appropriate disclosures to be made in the financial statements.

4 Corporate Governance and Recent Developments in Financial Reporting

4.2 New exposure

drafts

4.2.1 Evaluate the possible impact of new exposure drafts on financial statements

5 Ethical Issues in Financial Reporting and the Regulatory Framework

5.1 Recent ethical

issues

5.1.1 Advise on accurate presentation of financial statements for a given set of

circumstances, with reference to global examples.

C H A P T E

R

INTRODUCTION

This chapter revises the regulatory and conceptual frameworks studied at KB1 together with SLFRS

13 Fair Value Measurement . The chapter also considers current developments in financial reporting.


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KC1 | Chapter 1: The Regulatory and Conceptual Framework

2 CA Sri Lanka

CHAPTER CONTENTS

1 The regulatory framework

2 Ethics

3 The Conceptual Framework

4 SLFRS 13 Fair Value Measurement

SLFRS 13 Learning objectives

• Advise on the fair value measurement in relation to non-financial assets,

liabilities, entity’s own equity instruments, financial assets and financial

liabilities.

• Discuss valuation techniques, input to valuation techniques and fair value

hierarchy.

• Advise on accounting treatment to be used at fair value measurement at initial

recognition.

• Evaluate the impact of fair value adjustments on financial statements.

• Apply the requirements in preparation of disclosures.

1 The Regulatory Framework

The regulatory framework of financial reporting refers to the many sources of

regulation, including accounting standards, company law and stock exchange

rules.

1.1 Sri Lankan GAAP

Sri Lankan GAAP (Generally Accepted Accounting Practice) includes the following

mandatory sources:

1. The Companies Act

2. SEC Regulations and rulings (applicable only for listed companies)

3. Accounting standards as issued by the Institute of Chartered Accountants of

Sri Lanka (CA Sri Lanka).


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1.1.1 The Companies Act

Companies Act No 07 of 2007 regulates the affairs of limited liability companies.

The relevant sections are as follows:

Section 56 When a company makes any distribution to any shareholder, it is

required to maintain a solvent position and a certificate of

solvency should be provided by the auditors.

Section 69 Shares must be redeemed on the specified date where a

company has an obligation to do so. Otherwise shareholders are

ranked as unsecured creditors.

Section 148 Every company should keep accounting records that correctly

record and explain the company’s transactions.

Section 171 A company must have a reporting date in each calendar year; an

exception is after incorporation when the first reporting date

must be within 15 months of incorporation. No accounting

period can exceed 15 months.

Section 192 Directors' interests in transactions must be entered in the

interest register and disclosed to other Board members.

For further details of the content of these sections, refer to your KB1 study text.

1.1.2 SEC Regulations

SEC Rules govern the listing of Securities on the Exchange and continuing listing

requirements in order to ensure the creation and maintenance of a market in

which Securities can be issued and traded in an orderly and fair manner and

which secures efficiency and confidence of all stakeholders in the operation and

conduct of the market. The rules are summarised below:

Initial listing A company applying to list must comply with the Rules and

enter into a listing undertaking (a binding contract) with the

Exchange.

Listing of

shares and

debentures

An offer for subscription or offer for sale of shares or debt is

issued for cash only. In the case of a listing by introduction,

shares or debt must have been allotted at least 6 months

previously. In order to be listed, debt securities must be fully

paid and freely transferable.


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Prospectus

and

introductory

documents

The Rules set out the basic requirements for the contents of a

prospectus. The Exchange is within its rights to require

additional information to be disclosed.

Further issue

of securities of

a listed entity

Further shares of the same class as shares already listed may

not be issued until approved by the Exchange.

In the case of an application to issue another class of shares, the

total value of all the other classes of shares issued at any given

time (as set out in the latest statement of financial position of

the Entity), must not exceed fifteen percent of the entity’s

shareholders funds (ie stated capital and reserves).

A rights issue or issue through public subscription is for cash

only.

Articles of

association/

other

corresponding

documents

Must contain the following provisions:

– Shares must be freely transferable and registration not

subject to restriction

– Notices must be published in Sinhala, Tamil and English

newspapers

– More than 3 persons may not be registered as joint holders of

shares other than in relation to a deceased member

– The company must comply with the Rules.

Continuing

listing

requirements

It is the duty of the board of directors of every listed entity to

ensure that all the Rules of the Exchange are met on a

continuing basis as long as the entity remains listed.

Corporate

disclosure

A listed entity must make immediate disclosure of price

sensitive information to the Exchange in order to ensure the

maintenance of a fair and orderly securities market.

Related party

transactions

The Rules provide certain measures to prevent directors, chief

executive officers or substantial shareholders taking advantage

of their positions.

Enforcement Non-compliance with the Rules or failure to pay interest on

listed debt securities will result in the transfer of listed

securities to the Default Board.

For further details of the content of the rules, refer to your KB1 study text.


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1.1.3 Accounting standards

The Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka) issues

accounting standards in Sri Lanka. In 2011 it decided to converge fully with all

pronouncements made by the International Accounting Standards Board (IASB)

and thereafter to adopt all new pronouncements of the IASB.

The IASB issues IFRS, which are adopted by CA Sri Lanka as SLFRS. Previously

issued IASs have been adopted in Sri Lanka as LKAS. The following SLFRS and

LKAS are examinable at KC1:

Title

LKAS 1 Presentation of financial statements

LKAS 2 Inventories

LKAS 7 Statement of cash flows

LKAS 8 Accounting policies, changes in accounting estimates and errors

LKAS 10 Events after the reporting period

LKAS 11 Construction Contracts

LKAS 12 Income taxes

LKAS 16 Property, plant and equipment

LKAS 17 Leases

LKAS 18 Revenue

LKAS 19 Employee benefits

LKAS 20 Accounting for government grants and disclosure of government

assistance

LKAS 21 The effects of changes in foreign exchange rates

LKAS 23 Borrowing costs

LKAS 24 Related party disclosures

LKAS 26 Accounting and Reporting by Retirement Benefit Plans

LKAS 27 Separate financial statements

LKAS 28 Investments in associates and joint ventures

LKAS 29 Financial Reporting in Hyperinflationary Economies

LKAS 32 Financial Instruments: presentation

LKAS 33 Earnings per share


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Title

LKAS 34 Interim financial reporting

LKAS 36 Impairment of assets

LKAS 37 Provisions, contingent liabilities and contingent assets

LKAS 38 Intangible assets

LKAS 39 Financial Instruments: recognition and measurement

LKAS 40 Investment property

LKAS 41 Agriculture

SLFRS 1 First time adoption of SLFRS

SLFRS 2 Share-based paymentSLFRS 3 Business combinations

SLFRS 4 Insurance Contracts

SLFRS 5 Non-current assets held for sale and discontinued operations

SLFRS 6 Exploration for and Evaluation of Mineral Resources

SLFRS 7 Financial instruments: disclosures

SLFRS 8 Operating segments

SLFRS 9* Financial instruments

SLFRS 10 Consolidated financial statements

SLFRS 11 Joint arrangements

SLFRS 12 Disclosure of interests in other entities

SLFRS 13 Fair value measurement

SLFRS 15* Revenue from contracts with customers

SLFRS For Small and Medium-sized Entities

*SLFRS 9 and SLFRS 15 are not yet effective; therefore they are examinable as

current developments rather than in full detail.

The Sri Lanka Accounting and Auditing Standards Act No 15 of 1995 requires all

special business enterprises to comply with accounting standards established by

CA Sri Lanka. Therefore full SLFRS must be applied by:

• All companies with debt or equity securities traded in a public market in Sri

Lanka (in both separate and consolidated financial statements), and


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CA Sri Lanka 7

• Specified Business Enterprises (SBEs), including banks, insurance companies

and other financial institutions.

Other companies may apply either full SLFRS or the SLFRS for SMEs.

1.1.4 Interpretations

Interpretations, referred to as IFRICs (or previously SICs) are issued by the IFRS

Interpretations Committee as necessary to:

• Interpret the application of IFRS

• Provide timely guidance on financial reporting issues not specifically addressed

in IFRS

They are therefore of limited scope in nature, dealing with specific issues only. The

Interpretations that are examinable at KC 1 are:

Title

IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar

Liabilities

IFRIC 2 Members’ Share in Cooperative Entities and Similar Instruments

IFRIC 4 Determining whether an Arrangement contains a Lease

IFRIC 5 Rights to Interests arising from Decommissioning, Restorationand Environmental Rehabilitation Funds

IFRIC 6 Liabilities arising from Participating in a Specific Market – Waste

Electrical and Electronic Equipment

IFRIC 7 Applying the Restatement Approach under IAS 29 Financial

Reporting in Hyperinflationary Economies

IFRIC 9 Reassessment of Embedded Derivatives

IFRIC 10 Interim Reporting and Impairment

IFRIC 12 Service Concession Arrangements

IFRIC 13 Customer Loyalty Programmes

IFRIC 14 IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding

Requirements and their Interaction

IFRIC 15 Agreements for the Construction of Real Estate

IFRIC 16 Hedge of a Net Investment in a Foreign Operation

IFRIC 17 Distributions of Non-cash Assets to Owners


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Title

IFRIC 18 Transfers of Assets from Customers

IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments

IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine

SIC 15 Operating Leases – Incentives

SIC 25 Income Taxes – Change in the Tax Status of an Entity or its

Shareholder

SIC 27 Evaluating the Substance of Transactions in the Legal Form of a

Lease

SIC 29 Disclosure – Service Concession Arrangements

SIC 31 Revenue – Barter Transactions Involving Advertising Services

SIC 32 Intangible Assets – Website Costs

Interpretations form part of full SLFRS and are therefore applicable by those

companies that apply full SLFRS.

1.2 The development of accounting standards

1.2.1 Development of new and revised accounting standards by the IASB

The IASB has a six-step due process to develop new standards or revise existing

standards. The steps are as follows:

1. Setting the agenda involves identifying an item and adding it to the IASB’s

work agenda.

2. Planning the project involves the IASB deciding whether to conduct a project

alone or jointly with a national standard-setter.

3. Developing and publishing the discussion paper (a non-mandatory step). A

discussion paper includes an overview of the issue being addressed and

possible approaches to addressing it. It is published and interested parties

are invited to comment.

4. Developing and publishing the exposure draft (a mandatory step). An

exposure draft (ED) is a proposed standard, and is the IASB’s main vehicle

for consulting the public about proposals.

5. Developing and publishing the standard. A standard is published after

comments received on the ED are considered. In the light of these a topic

may be re-exposed (ie a second ED is published) prior to the finalisation of

the standard.


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CA Sri Lanka 9

6. After the standard is issued the IASB monitors its use and application in order

to identify whether further amendments are required. A post-implementation

review, being a formal review, normally takes place in respect of major new

standards and amendments, usually after they have been applied for two

years (which is normally 30-36 months after their effective date).

CA Sri Lanka has input into step 4 as follows:

1. IASB exposure drafts and draft interpretations are exposed for public

comment by CA Sri Lanka.

2. At the same time CA Sri Lanka conducts round table discussions to identify

the impact of the proposed standard in Sri Lanka.

3. Sri Lanka forwards its views to the IASB.

1.2.2 Adoption of new and revised standards by CA Sri Lanka

The process by which CA Sri Lanka adopts finalised IFRS as SLFRS is as follows:

1. CA Sri Lanka reviews the IFRS and related technical materials. This may

result in modification of the standard for use in Sri Lanka, or deferral of a

standard’s adoption.

2. The standard is translated into Sinhala and Tamil and published in the Extra

Ordinary Gazette as required by the Accounting and Auditing Standards Act

No: 15 of 1995 in Sri Lanka.

Once gazetted, the standard becomes legally authoritative.

1.3 Current developments

The IASB has a detailed work plan with a number of projects on-going at any given

time. In this section we consider a number of these projects. The status of the

projects is as at 20 December 2014.

1.3.1 Early stage projects

There are a number of projects that have been added to the IASB’s work agenda,

but as yet no discussion paper or exposure draft has been issued. Most of these

projects are narrow-scope, however there is one major early stage project, dealing

with the principles of disclosure. The objective of this project is to identify and

develop a set of principles for disclosure in IFRS.


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1.3.2 Discussion papers in issue

Discussion papers on the following topics are currently in issue:

A Portfolio Revaluation approach to Macro Hedging – a project related to

financial instruments that aims to develop an approach to better reflect thedynamic risk management activities of entities in their financial statements.

Rate Regulated Activities – rate-regulated activities are those activities that an

entity provides but subject to government regulation in respect of supply and

pricing eg gas, electricity and water. The discussion paper explores possible

approaches to reporting the financial effects of this type of regulation. This

project aims to provide a long-term solution to the issue of accounting for rate-

regulated activities; in the meantime an interim standard (IFRS 14) was issued

in 2012 to provide short-term guidance (see section 1.4).

1.3.3 Exposure drafts in issue

Exposure drafts in issue relate to major projects and narrow-scope amendments.

Major projects

Leases – A project to replace IAS 17 Leases has been on the IASB’s work plan for

a number of years. An exposure draft was issued in 2010 and a revised

exposure draft in 2013. The proposed amendments are considered in more

detail in Chapter 7 Leases.

Insurance Contracts – This major project to undertake a comprehensive review

of accounting for insurance contracts was added to the IASB’s agenda in 2001.

A first ED was issued in 2010 and a second in 2013. The proposed amendments

are considered in more detail in Chapter 12 Financial Instruments.

Narrow-scope amendments

Measuring quoted investments in subsidiaries, joint ventures and associates at

fair value (proposed amendments to IFRS 10, IFRS 12, IFRS 13, IAS 27, IAS 28

and IAS 36). The proposed amendments clarify that the fair value of an

investment in the financial instruments of a subsidiary, joint venture or

associate quoted in an active market is calculated based on the quoted price

without adjustment for the level of shareholding.

Recognition of Deferred Tax Assets for Unrealised Losses (proposed

amendments to IAS 12) clarifies how to account for deferred tax assets related

to debt instruments measured at fair value. For further detail see Chapter 11

Income Taxes.

Disclosure initiative (proposed amendments to IAS 7). The proposed

amendments are to improve the information provided in financial statements


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CA Sri Lanka 11

about an entity’s financing activities and provide disclosures that help users to

understand the liquidity of an entity. Further detail is provided in Chapter 19

Statements of Cash Flows.

Classification and measurement of Share-based payment transactions

(proposed amendment to IFRS 2). The proposed amendments clarify

accounting where there is a performance vesting condition or a modification

and classification where there is a net settlement feature. The proposed

amendments are considered in more detail in Chapter 13 Employee benefits.

1.3.4 Recently issued standards

Two major standards were issued in 2014 but are not examinable within this

edition of the KC1 study text. They are:

IFRS 9 Financial Instruments (effective 1 January 2018), and

IFRS 15 Revenue from Contracts with Customers (effective 1 January 2017).

The full detail of the impact of these standards is discussed in the relevant

chapters (Chapter 12 Financial Instruments and Chapter 10 Revenue).

IFRS 14 Regulatory Deferral Accounts was also issued in 2014. This standard is an

interim standard applicable whilst the IASB works on its rate-regulated activities

project. The new standard permits an entity adopting IFRS for the first time to

continue to account for regulatory deferral account balances in accordance withits previous GAAP.

Amended standards

In addition to the new standards detailed above, the following amended standards

have been issued by the IASB.

Clarification of acceptable methods of

depreciation and amortisation

amendments to IAS 16 and IAS 38

(effective 1 January 2016)

The amendment clarifies that a revenue-

based depreciation/amortisation method

is not appropriate because it reflects a

pattern of economic benefits being

generated from the asset rather than the

expected pattern of consumption of future

economic benefits embodied in the asset.

Accounting for acquisitions of

interests in joint operations

amendments to IFRS 11 (effective 1

January 2016)

The amendments require that where an

entity acquires an interest in a joint

operation that constitutes a business, IFRS

3 principles should be applied and

therefore goodwill may be recognised.


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Agriculture: Bearer plants

amendments to IAS 16 and IAS 41


A bearer plant (a plant held solely to grow

produce over its productive life) is

brought within the scope of IAS 16 rather

than IAS 41.

Equity method in Separate Financial

Statements amendments to IAS 27


The amendments allow an entity to apply

the equity method when accounting for

investments in subsidiaries, joint ventures

and associates in its separate financial

statements.

Sale or contribution of assets

between an investor and its associate

or joint venture – amendments to

IFRS 10 and IAS 28 (effective 1

January 2016)

The amendments clarify that in a

transaction involving an associate or joint

venture, the extent of gain or loss

recognition depends on whether the

assets sold or contributed constitute a

business

Disclosure initiative – amendments

to IAS 1 (effective 1 January 2016)

Narrow focus amendments to IAS 1 in

order to alleviate problems with over

disclosure and

aggregation/disaggregation

Investment Entities – applying the

Consolidation Exception –

amendments to IFRS 10, IFRS 12 and

IAS 28 (effective 1 January 2016)

The amendments clarify certain issues in

accounting for investment entities.

1.3.5 Post-implementation reviews

The following post-implementation reviews are currently underway:

(1) IFRS for SMEs

When the IFRS for SMEs was first issued, the IASB committed to undertake

an initial comprehensive review of it after the first two full years of

application in order to assess whether amendments were necessary.

This review process began in 2012 and an exposure draft of proposed

amendments was issued in 2013. The majority of the proposed changes

concern clarifications to the current text and will not result in a change in the

way that entities account for certain transactions and events. The one

exception to this is a change to the section on income taxes in order to align

its requirements with those of IAS 12.


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(2) IFRS 3 Business Combinations

IFRS 3 was revised in 2008, with the new requirements taking effect on

1 July 2009. A post-implementation review therefore began in January 2014

with a request for information on experience with, and the effects of,

implementing the standard.

1.4 Annual Improvements

The annual improvements programme is a vehicle through which the IASB makes

non-urgent, but necessary amendments to IFRS. The amendments made through

this process are clarifications of guidance and wording or corrections of minor

unintended consequences, conflicts or oversights.

Each annual improvements cycle lasts for two years from the identification ofissues to the final amendments; an omnibus exposure draft is issued midway

through the process, which contains proposed amendments to all standards under

consideration.

Annual improvements from the 2012-2014 cycle were issued in September 2014,

and the IASB is now working on the 2014-2016 cycle, having discontinued the

2013-2015 cycle in July 2014 in the light of there only being one proposed

amendment.

2 Ethics

Accountants must behave ethically and abide by ethical codes in order to apply

accounting standards correctly and achieve a fair presentation of financial

statements.

As we have seen, a regulatory framework of financial reporting exists, which

includes company law and accounting standards. Such a regulatory framework is

necessary in order to ensure that a company’s financial position and performance

is fairly presented in its financial statements. This is turn is important because the

financial statements are relied on by investors, lenders and other users in order to

make economic decisions.

A regulatory framework can, however, only go so far in achieving an

outcome of fair presentation. In addition, the individuals who prepare the

financial statements must ensure that they adhere to the regulatory

framework. This raises the issue of professional ethics and ethical

behaviour.


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14 CA Sri Lanka

2.1 Professional ethics

Professional ethics are the principles and standards that underlie the

responsibilities and conduct of a person in performing their function in a

particular field of expertise.

Chartered accountants of Sri Lanka are bound by the Code of Ethics for

Professional Accountants issued by CA Sri Lanka. This is based on the Code of

Ethics for Professional Accountants published by the International Federation of

Accountants. The fundamental principles contained within this Code are:

Integrity. Members should be straightforward and honest in all professional

and business relationships.

Objectivity. Members should not allow bias, conflict of interest or undue

influence of others to override professional or business judgements.

Professional Competence and Due Care. Members have a continuing duty to

maintain professional knowledge and skill at a level required to ensure that a

client or employer receives the advantage of competent professional service

based on current developments in practice, legislation and techniques.

Members should

Documents

KC-01 Corporate Financial Reporting