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Презентация на тему Recognition and measurement of the elements of the financial statemets
Содержание
- 2. Primacy of definitionsIt must be established Based on either:assets and liabilities;or:expenses and income.
- 3. Primacy of decisionsto start with on assets,
- 4. Primacy of decisionswhich definitions have primacyis examined
- 5. Examples of such paymentsrepairs;decorating or redecorating;extensions;improvements;replacements of partsfuture inevitable payments for dismantling
- 6. 'applications' of resourcesThey are all recorded as
- 7. Method 1Expenses of 20X7 are the costs
- 8. Method 2Assets at the end of 20X7
- 9. Assets and expensesCostsAssetsExpenses
- 10. Definition of the assetThe Framework gives primacy
- 11. The FrameworkThis has the effect of reducing
- 12. LiabilityFramework, paragraph 49:A liability is a present
- 13. ObligationObligation is an unavoidable requirement to transfer
- 14. ProvisionsSome liabilities are of uncertain timing or
- 15. ProvisionsSome obligations are not based on precise
- 16. Other provisionsoutside of IFRS requirements, some companies
- 17. repair provision – exampleThe double entry for
- 18. Hierarchy of decisions
- 19. The first stageIs to apply three-stage hierarchy
- 20. RecognitionThe second stage is to ask whether
- 21. Recognition - The Framework (paragraph 83)gives recognition
- 22. Intangible assets (IAS 38)(a) Pre-operating expenses are
- 23. Intangible assets (IAS 38)(c) Development expenditure can
- 24. Views around the worldViews differ on these
- 25. EU Fourth DirectiveA more general European example
- 26. Balance sheet contents specified by the EU Fourth Directive
- 27. MeasurementIf an asset or liability should be
- 28. Cost of an assetIt is obvious, such
- 29. Cost of an assetThis will include (machinery,
- 30. Cost of an assetFor land and buildings
- 31. Capitalization of costsIf a company has used
- 32. If labour and material is capitalized certain
- 33. Cost of an assetAny payments that make
- 34. Expenses and improvementsIn general,repairs and maintenance are treated as current expenses,improvements are capitalized
- 35. Expenses and improvements –example a new engine
- 36. Materialitythe accountant needs to consider whether the
- 37. a list of six payments - exampleQ:
- 38. a list of six payments - exampleRepairs:
- 39. a list of six payments - exampleReplacement
- 40. Fair valueSome purchases are not made with
- 41. Fair value in IFRSthe amount at which
- 42. Problem After initial recognition, whether to take
- 43. Valuing an assetConventional accounting in most countriescontinues
- 44. Historical costis an easier and cheaper method
- 45. Reliability vs relevanceReliability is important (Framework)The Framework
- 46. Reliability vs relevance - the problem the
- 47. ExampleSuppose, a company buys an investment for
- 48. ExampleIt seems that the €800 cost is
- 49. The main asset valuation bases instead of
- 50. The main asset valuation bases instead of
- 51. Valuation methods
- 52. Choice of valuation methodsDepends on who requires
- 53. Choice of valuation methodsManagers may be prepared
- 54. conventional accountingfor most assets,the cheapness and reliability
- 55. assets with active marketssuch as some markets
- 56. ExampleA company owns two identical office blocks
- 57. conventional accounting - exampleIt sometimes takes account
- 58. Income recongition the recognition of income does
- 59. EU lawsis expressed in terms of 'realization':income
- 60. Defining ‘realized’One possibility is to define realized
- 61. Example12 January Buy raw materials; store them19
- 62. ExampleIt is clear that the eventual profit
- 63. At what point should the income be
- 64. Realization conventionprofits that have not been realized
- 65. Realization conventionincome recognition usually occurs a little
- 66. Definition of revenue(Framework, paragraph 70):Income is increases
- 67. Incomethe Framework contrasts the word 'income' (rather
- 68. Problems1) practical problems for the recognition of
- 69. Problem 1The IASB addresses it in IAS
- 70. Скачать презентацию
- 71. Похожие презентации
Primacy of definitionsIt must be established Based on either:assets and liabilities;or:expenses and income.
Слайд 3
Primacy of decisions
to start with on assets, there
is a hierarchy of decisions:
Is the item an asset?
If
yes, should the asset be recognized in the balance sheet?If yes, how should it be measured?
Слайд 4
Primacy of decisions
which definitions have primacy
is examined first
in the context of assets and expenses
In the case
of payments related to assets, decisions about:
whether such payments should be added to the asset
or should be treated as an expense
Слайд 5
Examples of such payments
repairs;
decorating or redecorating;
extensions;
improvements;
replacements of parts
future
inevitable payments for dismantling
Слайд 6
'applications' of resources
They are all recorded as 'debits'
in the double-entry system.
Those costs that do not
generate assets (and are not added to existing assets) are expenses
accounting can work on one of two bases:
Слайд 7
Method 1
Expenses of 20X7 are the costs of
any period that relate to 20X7;
And therefore .
. .Assets at the end of 20X7 are any remaining costs.
Слайд 8
Method 2
Assets at the end of 20X7
are
resources controlled by the entity
that are expected to
give benefits; and therefore . .
Expenses are any remaining costs.
Слайд 10
Definition of the asset
The Framework gives primacy to
the second way of defining the elements,
an asset defined
as follows (par. 49):a resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise
Слайд 11
The Framework
This has the effect of reducing the
importance of the 'matching' concept,
If an expense is postponed
in order to match it against a future revenue, it would have to be stored in the balance sheet as an asset.
this is not allowed unless the amount meets the definition of an asset
Слайд 12
Liability
Framework, paragraph 49:
A liability is a present obligation
of the enterprise arising from past events, the settlement
of which is expected to result in an outflow from the enterprise of resources
Слайд 13
Obligation
Obligation is an unavoidable requirement to transfer resources
to a third party
Many liabilities are clear legal obligations
of exact amounts, such as accounts payable or loans from the bank.
Слайд 14
Provisions
Some liabilities are of uncertain timing or amount
These
are called 'provisions'
Depending on the nature of legal contracts,
some of these provisions are also legally enforceable, such as provisions to pay pensions to retired employees or
to repair machinery sold to customers that breaks down soon after sale
Слайд 15
Provisions
Some obligations are not based on precise laws
or legal contracts
but would probably be enforced by
a court of law based on normal business practices
Слайд 16
Other provisions
outside of IFRS requirements,
some companies might
make provisions when there is no obligation.
the example
of provisions for repair expenses.The double entry for the creation of the liability is an expense.
Слайд 17
repair provision – example
The double entry for a
repair provision would be as follows, at the end
of 20X7Dr Repair expense of 20X7
Cr Provision for repair expense (to be carried out in 20X8)
Слайд 19
The first stage
Is to apply three-stage hierarchy of
decisions
The IASB Framework and most others, suggest that the
first stage is to ask: Is there an asset/liability?
not all asset and liabilities should be recognized!
Слайд 20
Recognition
The second stage is to ask
whether an
asset or liability should be recognized in the balance
sheetFor example, the value of some asset may be so difficult to measure
that they should be omitted from balance sheets
Слайд 21
Recognition - The Framework (paragraph 83)
gives recognition criteria
for an asset as follows:
(a) it is probable that
any future economic benefit... will flow . . . to the enterpriseand
(b) the item has a cost or value that can be measured with reliability
Слайд 22
Intangible assets (IAS 38)
(a) Pre-operating expenses are not
an asset,
because there is no resource with future
benefit (paragraph 69).(b) Research expenditure can give rise to an asset but (if it is spent inside the entity) it is too difficult to demonstrate
that the benefits are probable for the expenditure to be recognized in a balance sheet (paragraph 54)
Слайд 23
Intangible assets (IAS 38)
(c) Development expenditure can give
rise to an asset, which should be recognized
if,
and only if, certain criteria are met – such as there being a separately identifiable project that is technically feasible and commercially viable (paragraph 57)
(d) Publicity cannot be capitalized
for the same reason as research cannot be (paragraph 69)
Слайд 24
Views around the world
Views differ on these issues
For
example:
under the rules of the United States,
even
development expenditure cannot be recognized as an asset unless it relates to software
Слайд 25
EU Fourth Directive
A more general European example of
problems
concerning the recognition of assets
can be seen
in the
list of items shown under the heading 'Assets' in the EU Fourth Directive
Слайд 27
Measurement
If an asset or liability should be recognized,
it is necessary to measure its value
In most
systems of accountinginitial recognition takes place at cost
If this were not the case: this leads to recognition of a gain or loss
Слайд 28
Cost of an asset
It is obvious, such as
when a machine is bought for cash.
However, even
then, decisions have to be made about what to do with taxes on the purchase,
delivery charges, and so on.
The cost should include not only the invoice price of the asset
but also all costs involved in getting the asset
into a location and condition
where it can be productive
Слайд 29
Cost of an asset
This will include (machinery, equipment):
delivery
charges,
sales taxes and
installation charges
(in the case
of plant and machinery)
Слайд 30
Cost of an asset
For land and buildings cost
will include:
legal fees,
architect's fees
clearing the land and so
on, the builder's bill
the cost of the land
Слайд 31
Capitalization of costs
If a company has used its
own labour or materials to construct an asset,
these
should also increase the cost of the asset rather than being treated as current expenses (they are capitalized)
It is also possible to capitalize the interest cost on money borrowed to create fixed assets
Слайд 32
If labour and material is capitalized
certain formats
of the income statement show this (capitalized) item as
revenue.This is because
all the labour and materials used
have been charged elsewhere in the income statement.
Слайд 33
Cost of an asset
Any payments
that make the
asset better
than it was originally
are capitalized: added
to the asset!Any other payments are expenses.
Слайд 34
Expenses and improvements
In general,
repairs and maintenance
are treated
as current expenses,
improvements are capitalized
Слайд 35
Expenses and improvements –example
a new engine for
a company vehicle will usually be treated as an
expense,since it keeps the vehicle in running order rather than improving it,
unless the engine is recorded as a separate asset.
In contrast, the painting of advertising signs on the company's fleet of vans
may well be treated as capital item, if material in size.
Слайд 36
Materiality
the accountant needs to consider whether the amounts
relating to the improvements are material enough to capitalize
them.He or she tends to treat as much as possible as expense,
since this is the prudent and administratively more convenient method.
this will also speed up tax deductibility
Слайд 37
a list of six payments - example
Q: Which
of these should be added to the cost of
an asset,and which should be treated as an immediate expense?
repairs;
decorating or redecorating;
extensions;
improvements;
replacement of parts;
future inevitable payments for dismantling, decommissioning or cleaning up.
Слайд 38
a list of six payments - example
Repairs: expense,
they don’t improve the asset
Decorating costs might be capitalizable,
if it is material in sizeThe cost of building extensions
should normally be added to the asset being extended,
or could create a separately identified asset.
Improvements should probably be capitalized.
Слайд 39
a list of six payments - example
Replacement of
parts should be an expense
unless the part is
treated as a separate depreciable asset,so that replacement is treated as a disposal followed by a purchase.
Future costs of dismantling, etc. should be discounted and added to the cost of the asset
Слайд 40
Fair value
Some purchases are not made with cash
but in exchange for the future payment of cash
or for exchange with other assets. the current 'fair value' of the purchase consideration should be estimated as accurately as possible.
Слайд 41
Fair value in IFRS
the amount at which
an
asset could be exchanged,
or a liability settled,
between
knowledgeable, willing parties in an arm's length legal transaction.
(an arm's length transaction: where the parties are not related)
Слайд 42
Problem
After initial recognition,
whether to take account
of subsequent changes in the value of an asset.
For assets to be sold:when, to take account of changes in value,
the current value is recognized at the point of sale in the calculation of profit
Слайд 43
Valuing an asset
Conventional accounting in most countries
continues to
use cost
as the basis for valuing most assets
until the point of sale.
Because its cheapness and greater reliability.
Слайд 44
Historical cost
is an easier and cheaper method of
valuation
Because it uses information already recorded and does not
require expensive estimationsfor most assets the cost is more reliably determined than the fair value
Слайд 45
Reliability vs relevance
Reliability is important (Framework)
The Framework (paragraph
44) also suggests that regulators and preparers should be
aware of the cost of the accounting,to ensure that it does not exceed the benefits to the users
Слайд 46
Reliability vs relevance - the problem
the Framework's
other key characteristic is relevance for economic decisions.
It
is difficult to see that the historical cost is the most relevant information for making decisionswhich normally requires estimation of the future,
particularly the prediction of cash flows
Слайд 47
Example
Suppose, a company buys an investment for €800,
in 2007. Its market value is €1000 at year
end. It is sold for €850 in 2008.In order to give useful information, should the balance sheet show cost or market value at the end of 2007?
Слайд 48
Example
It seems that the €800 cost is not
a very useful predictor of cash flows at 31
December 20X7, particularly if the asset had been held for a longer period.Also, if only cost is recorded until sale, then a gain of €50 will be shown in 20X8 even though the asset has fallen in value in 20X8.
The result of management's decision not to sell asset early in 20X8 is not reflected in the 20X8 statements.
Слайд 49
The main asset valuation bases instead of cost
fair
value: assumes that the business is neither buying nor
selling;replacement cost: takes account of the transaction costs of replacement;
net realizable value: expected sales receipts less any costs to finish and to sell;
value in use (or economic value): is the present value (discounted value) of the expected net cash flows from the asset
Слайд 50
The main asset valuation bases instead of cost
these
values may be more relevant than past values,
they
involve much more subjectivity than historical cost valuations
Слайд 52
Choice of valuation methods
Depends on who requires it
Owners
want more realistic estimate (going concern)
Lenders may want a
much more conservative valuation, based on the lowest likely valuation of the individual assets
in the event that the business has to be closed down.
Слайд 53
Choice of valuation methods
Managers may be prepared to
put up with more estimated numbers,
because they can
trust themselves to estimate fairly.there is a need for reliability
and therefore
a difficult trade-off between relevance and reliability
Слайд 54
conventional accounting
for most assets,
the cheapness and reliability of
historical cost has ensured its dominance,
doubts about relevance.
Слайд 55
assets with active markets
such as some markets for
shares
fair values are reliable.
there seems a strong
argument for the use of fair values in financial reporting.
Слайд 56
Example
A company owns two identical office blocks next
door to each other in the centre of Stockholm.
They are used as the company's head office.
Office 1 was bought in 1980 for €1m and Office 2 was bought very recently for €4m.
Under conventional accounting practice,
Office 1 will be shown at less than €1m because it has worn out (depreciated) to some extent since 1980.
The identical Office 2 will be shown at €4m.
Is this a fair presentation?
Слайд 57
conventional accounting - example
It sometimes takes account of
market values before the sale of assets.
to be prudent,
inventories are usually valued at the lower of cost and net realizable value, fixed assets are written down below cost if their value is impaired
Слайд 58
Income recongition
the recognition of income does not
always need to await the receipt of cash;
that is,
the accruals convention is used.the determination of the exact moment when income should be recognized is a practical problem.
Слайд 59
EU laws
is expressed in terms of 'realization':
income should
be recognized in the income statement when it is
realized.In practice, this does not help much
because there is no clear way to define what is realized,
( if it does not mean 'received in cash'.)
Слайд 60
Defining ‘realized’
One possibility is to define realized as
having either received cash or
a contractual right to cash.
This allows income recognition before a customer pays a bill.
Слайд 61
Example
12 January Buy raw materials; store them
19 February
Begin work on processing the materials
3 April Finished goods
produced; store them10 May Receive order for goods; order accepted
17 May Goods delivered; customer invoiced
5 June Customer pays invoice for goods
Слайд 62
Example
It is clear that the eventual profit will
be
the difference between
the final sales receipts
and
the various costs involved.
Слайд 63
At what point should the income be recognized?
Is
the profit earned gradually over the manufacturing process,
or when
a contract of sale is agreed,or when the goods are delivered,
or when cash is finally paid?
Слайд 64
Realization convention
profits that have not been realized are
not recorded
income is not recognized until
a sale has
been agreed, and possibly even later.
Слайд 65
Realization convention
income recognition usually occurs a little later:
when control of the goods passes
and the invoice
is raised(17 May in our example).
Слайд 66
Definition of revenue
(Framework, paragraph 70):
Income is increases in
economic benefits during the accounting period
in the form of
inflows or enhancements of assets or decreases of liabilitiesthat result in increases in equity
Слайд 67
Income
the Framework contrasts the word 'income' (rather than
the word 'revenue') with the word 'expense'.
The Framework
uses the word 'revenue‘to mean income from customers
Слайд 68
Problems
1) practical problems for the recognition of revenue
from the sale of goods and rendering of services;
and2) major theoretical problems of when to recognize the gains on assets if they are revalued in the balance sheet.
Слайд 69
Problem 1
The IASB addresses it in IAS 18
Revenue:
revenue from the sale of goods
is to
be recognized when control and risks have passed to the customer.
