Our Financial Relatives - IAS 24: Related Party Disclosures

Hi everyone!
We shall study IAS 24 today!

Let's consider these scenarios.
A) Steve buys raw materials at 0.50k/item from the producer

B) Rose buys the same raw materials at 0.25k/item because the producer is her mother.

After production, its obvious that Rose would have a reduced cost of sale and higher profit than Steve and it won't be fair to compare their results.

Rose's transaction is a related party transaction while that of Steve is an arms length transaction.

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Answers - Accounting Riddles

Hi everyone!
Hope we ddnt have a hard time answering the riddles?

Here are the answers to the riddles:

1. IAS 18 - Revenue Recognition
2. Impairment
3. Statement of Cash flow
4a. SAS 14 - Accounting in the petroleum industry - Downstream Activities
  B. SAS 17 - Accounting in the petroleum industry - Upstream Activities
  C. SAS 25 - Telecommunication
5. Familiarity threat
6. Income taxes
7. Consolidation
8. Professional Competence & Due care
9. Last In First Out (LIFO)
10. Biological Assets
11. Salaries & Wages
12. Changes in accounting estimates
13. IAS 40 - Investment property
14. Break even point
15. Current Ratio

Now score yourself!

Have a nice day!

Accounting Riddles!!

Morning guys!

How many of these riddles can you answer?

1. I am an accounting standard, I determine how to recognize and measure all you earn? What am I?

2. I occur when carrying amount exceeds recoverable value. What am I?

3. I am the only financial statement prepared on cash basis. What am I?

4. We are the 3 local standards which are not included in IFRS but still in use in Nigeria. What are we?

5. I am a threat that occurs due to a long or close relationship or being too sympathetic with clients. What am I?

6. I am an expense in the profit or loss account remitted to the government. What am I?

7. I am the process of marrying my own accounts with my parent's accounts. What am I?

8. I am the longest of the 5 fundamental principles in the code of ethics. What am I?

9. I am the stock valuation method prohibited by IAS 2 - Inventory . What am I?

10. I am a type of asset governed by IAS 41 - Agriculture. What am I?

11. I am the reward for labour expensed in the profit or loss account. What am I

12. I am the only item required to be treated prospectively by IAS 8. What am I?

13. I am the standard that prescribes the treatment for properties held for rental income and capital appreciation. What am I?

14. I am the point where no profit or loss is made. What am I?

15. I am the ratio that expresses the relationship between current assets and current liabilities. What am I?

Let's get learning! Comment below! Answers would be uploaded soon.

Note: You can now subscribe to the blog posts.

For any clarifications, please mail:
Nneomakristen@gmail.com

Have a wonderful day!

Do you borrow? - IAS 23: Borrowing Costs

Hi guys!
How are you doing?

We shall consider Borrowing Costs today.

We all know that businesses borrow money for different purposes like acquiring or constructing an asset or even for the simple reason of running the business.

When we borrow we have interest rates attached. For example, N1m at 10% interest rate, the 10% attached is the cost of borrowing. It also implies that, if the company does not borrow the N1m, the cost of N100,000 (10%) would not be incurred by it. In strategic financial management, we say its the duty of the financial manager to find cheaper borrowing sources i.e. sources with reduced borrowing costs for the business.

In simple terms, the standard defines borrowing costs as, interests or other costs incurred in connection with borrowing funds.

Answers to Quiz1

1a) ABC Company can give a statement of compliance with IFRS. IAS 1 allows for the departure of the requirements of a standard, if its considered misleading by the management. However, the departure must be disclosed in the notes as well as the reason(s) for the departure.

1b) ABC Company cannot give a statement of compliance with IFRS because IAS 1 does not allow for departure due to local or national governing laws.

Tip: To avoid the conflict of national standards with the IFRS's, local standard setters are advised to fashion their standards in line with the IAS's and IFRS's.

2) This question is simply testing the IAS 2 principle of measuring inventory at the lower of cost and Net Realizable Value.

Cost = N350,000
Net Realizable Value (NRV) = N300,000*

Hence,
Closing inventory = N300,000 (Lower of cost & NRV)

*Working:
Fair Value less cost to sell. Hence, N420,000 - N120,000 = N300,000

Then, this figure is used to prepare the statements of financial position and profit or loss. It is used as the closing inventory for the profit or loss statement and as a current asset in the statement of financial position.

Hope you got it right?

Regards.

Its Interim! - IAS 34: Interim Financial Reporting

Hi everyone, 

We shall study IAS 34 today!

Let's consider this: As a citizen, it is mandatory you pay your taxes but it is not mandatory you own a car. Hence, if you don't own a car, the rules that apply to motorists such as: obeying the traffic light does not apply to you.

In the same manner, this standard applies to companies that prepare interim financial reports. The standard doesn't specify that, companies must prepare interim financial reports. Any company which does not prepare interim reports does not compromise its compliance with IFRS.

This standard is a simple one that prescribes the minimum contents of an interim report. 

What then, is an interim financial report?

It is a complete or condensed set of financial statements for an interim period.

Also, an interim period is any period less than the financial reporting period.

The standard prescribes the preparation of interim reports for quoted companies at least at the end of half the financial year (usually 6months). It further specifies that the interim report should be available not later than 60days after the end of the interim period.

Contents of Interim Financial statement:

1. Condensed Statement of Financial Position

2. Condensed Statement of Profit or Loss and other comprehensive income.

3. Condensed Statement of Cash flow. 

4. Condensed Statement of Changes in Equity.

5. Selected Explanatory Notes.

Selected Explanatory Notes:

These notes are not necessarily the regular notes to the year end financial statement. Rather, they should explain the events or changes that have occurred since the last annual reporting period. They include:

• Accounting policies and any changes in accounting policies

• Changes in capital structure

• Interim dividend

• Seasonality & Cyclicality of activities

• Segmental Information

• Changes in estimates

• Exceptional or Unusual Items

• Significant events occurring after the end of the interim period.

• Business combinations etc.

Comparatives:

According to IAS 1, it is expected that we provide comparatives for the financial statement (most recent past information to aid comparism)

This also applies to interim reports in a slightly different way.

For statement of financial position (SOFP), the comparative is the last statement of financial position reported whilst the statements of profit or loss, cash flow and equity, the comparative is the last interim statement reported. 

For example, if a company prepared its accounts to 31st December 2014 and its interim to 30th June 2015. Its comparatives shall be as follows:

1) SOFP - 31st December 2014

2) SOP/L, SOCF & SOCE - 30th June 2014

(The last reported interim statement)

Notes to consider in the preparation of interim financial statements:

• Income Tax Expense: For interim reports, the income tax expense is based on the average annual effective income tax rate consistent with the tax assessment.

• Assets: the test for future economic benefits should apply as at the interim dates. 

• Liabilities: there should be a representation of an existing obligation at an interim period.

• Revenue & Expenses: the related inflow and outflow must have taken place for them to be recognized

• Consolidation: A consolidated interim report can be prepared if the recent annual financial statements were consolidated.

DAILY CHALLENGE: Summarize the standard in 5 lines.

For further clarifications, mail: nneomakristen@gmail.com

Regards.

QUIZ!

Let's test our understanding!

1. In the following cases, determine if ABC Company can give a statement of compliance with IFRS and the reason for your answer.

a) It has departed from certain requirements of IAS 19 as its management is of the view that, the requirement will be misleading and will be in conflict with the objective of financial statements

b) Governing laws applicable in ABC's country requires departure from the requirements of IAS 19.

2)* Using the following items below, prepare the statement of profit or loss and financial position as at 31st December 2014:

                                       N
Revenue 900,000
Share capital 400,000
Retained earnings 150,000
Non Current Asset 300,000
Receivables 180,000
Payables 120,000
Inventory (1/1/14) 200,000
Purchases 650,000
Operating expenses 200,000
Bank balance 410,000
Other income 370,000

Other Notes:
• Inventory amounted to N350,000 being the cost. It is estimated that, it can be sold for N420,000 after incurring a cost of N120,000.
• Income tax is estimated at N170,000
*(Q2 is culled from Teach yourself IFRS)

Make an attempt!

You can comment below, the answers would be given tomorrow.

Have a wonderful day!

Let's take stock - IAS 2: Inventory

Hi guys!
Hope you enjoyed the last post?

We shall continue with IAS 2 today.

Inventory (formerly known as stock) is defined by the standard as follows:
1. Assets held for sale in the ordinary course of business i.e. Finished Goods.
2. Assets in the process of production for sale i.e. Work in Progress
3. Assets in the form of materials or supplies to be consumed in the production process or in rendering services i.e. Raw Materials.

For example, a company that makes and sells furniture; Its inventory could include: tables and chairs for finished goods, uncompleted tables or chairs consist its work in progress and materials like wood and nails are the raw material.

Inventory is very important for 2 basic reasons:
1. It constitutes a current asset in the statement of financial position (closing stock)
2. It has a direct impact on profit and it can be used as a medium to manipulate profit.

COST
The following are included in the cost of inventory:
1. Cost of purchase (this includes import duties, handling duties, non-refundable taxes etc & excludes rebates and trade discounts)
2. Cost of conversion from raw materials to finished goods.
3. Costs that are directly involved in bringing the inventory to its current location

The following are not included in the cost of inventory, but are rather, expensed to Statement of Profit or Loss:
1. Selling costs
2. Amounts of wasted material, labour and other production costs
3. General administrative costs.
4. Storage Costs

For example, it costs me N200,000 to purchase raw material for my business, I also had to pay N20,000 for importation and N5,000 for transportation to my company. I also paid N50,000 as salary to my staff and then N10,000 for storage. What is the cost of the inventory?

Solution: The cost of inventory shall be N200000 + N20000 + N5000 = N225000
Whilst N50000 + N10000 = N60000 shall be expensed to Statement of Profit or Loss.

NET REALIZABLE VALUE:
In simple terms, its Fair Value less costs to sell. That is, the amount you can realize from the sale of an asset in its ordinary course of business less costs incurred to sell.
For example, a car costs you N3m, you sell it at N5m and it costs you N0.5m to deliver it to the buyer, which is part of the agreement. The Net Realizable Value will be N5m - N0.5m = N4.5m and this implies that N4.5m is what can be realized from the sale of the car.

MEASUREMENT OF INVENTORY
Inventory is to be measured at THE LOWER of:
        Cost and Net Realizable Value
Hence, in the case of the car above,
Costs = N3m
Net realizable value = N4.5m

Hence, inventory shall be recorded at N3m which is lower than N4.5m

METHODS OF INVENTORY VALUATION
This differs from measurement of inventory. Inventory valuation refers to the method by which inventory is valued or counted. They include: FIFO, LIFO, Weighted Average Method etc. The standard only allows 2 methods:

1. First In, First Out (FIFO): Here, inventory is consumed in the order in which it is purchased or manufactured. The first items purchased are the first items issued/sold.

2. Weighted Average Method: Here, inventory is issued at the current weighted average cost per unit. This implies that, once more items are purchased, a new weighted average cost is calculated.

It is important to note that, the standard doesnot permit the use of Last in First Out (LIFO) method.

Final Notes:
1. This standard does not apply to:
•Biological Assets in IAS 41
•Financial Instruments in IAS 32, IAS 39, IFRS 7 and IFRS 9
•Construction Contracts in IAS 11

2. The standard requires that, you disclose the following in the financial statements:
• The inventory valuation method
• The amount of inventory carried at Net Realizable Value
• The carrying amount of inventory per category i.e. Raw material, work in progress, finished goods
• The amount of inventory recognized as an expense during the period (Cost of sales)
• The amount of write down of inventory, its reversal and events that led to the write down
Note: A write down occurs when the cost of inventory is greater than its net realizable. Hence, it has to be "written down" to its net realizable value.

DAILY CHALLENGE: This standard involves the use of various judgements and estimates, which is often criticized. For example, the Net Realizable Values often used are estimates. Can you spot others?

For further clarifications, mail: nneomakristen@gmail.com

Have a wonderful day!

The Genesis: IAS 1 - Presentation of Financial Statements

Hi everyone,
Happy new month!

We shall be discussing IAS1 today!

Let's consider this: Most books contain a table of contents and preface, giving a brief introduction to the book and its contents.

Likewise, this standard basically prescribes the minimum information and content of financial statements, as it includes the standard formats of financial statements. IAS 1 has defined financial statements to include:
1. Statement of Financial Position (formerly Balance Sheet)
2. Statement of Profit or Loss and other Comprehensive Income (formerly Profit ot Loss account)
3. Statement of Cash flows
4. Statement of Changes in Equity
5. Statement of Accounting Policies and Explanatory Notes to the Account
6. Statement of Financial Position for the earliest comparative period; where there is a retrospective restatement [This means a last past statement of financial position, when there is a retrospective application. This would be fully discussed in IAS8]

When you buy a new machine like: a generator or washing machine, there are instructions for its use usually enclosed in it. In a similar manner, IAS1 has stated some "Concepts" to be followed in preparing financial statements. They are as follows:

1. Going Concern: Financial Statements shall be prepared on going concern basis i.e. prepared with the intentions that the business will last infinitely and nothing will threaten it.

2. Accrual Basis: Apart from the cashflow statement, other statements would be prepared on accrual basis i.e. Revenue is recorded when earned not received while Expenses are recorded when incurred not paid for.

3. Materiality & Aggregation: Record each material item of a similar class separately, dis-similar items should be recorded separately. For example, all revenue items should be recorded together, but don't mix up revenue and expenses, as they are dis-similar.

4. Frequency of Reporting: Companies need to present their financial statements (including comparatives) at least annually.

5. Consistency of Presentation: Companies are expected to maintain the same manner of presentation in preparing their financial statements except:
(A) There is a more appropriate manner of presentation that best reflects their activities. This change shall be done in respect to the provisions of IAS 8
(B) An IFRS requires the change.

6. Offsetting: In preparing financial statements, report separately assets and liabilities, income and expenses, don't offset against each other.

7. Comparative information: Companies are expected to disclose comparative information except when an IFRS prevents it. That is, provide past iinformation on the statements. If you are preparing a statement of financial position for 2015, you are expected to include that of 2014 as well.

Another important area this standard highlights is, Fair presentation and Compliance with IFRS. It is expected that financial statements should contain transparent and comparable information to help users make informed decisions. Hence:
1. It views fair presentation as compliance with IFRS. That is, Compliance with the IFRS = Fair presentation of financial statement.

2. You are expected to disclose that, you have complied with IFRS and this can only be done if you have followed the applicable IFRS's in preparing your financial statements.

3. The standard also states that, the use of a wrong accounting treatment is not justified by disclosing or giving explanatory notes. For example, you are expected to debit expenses, if you choose to credit it and disclose in the notes; it is not justified because it is a wrong accounting treatment.

4. There could be rare situations where compliance with a standard or its interpretation could be misleading and won't give a true and fair presentation. Companies are allowed to depart from the standard but have to disclose that they have departed from the standards and give reasons why.

DAILY CHALLENGE: List 5 main highlights of IAS1 in your own words. (This helps to demonstrate an understanding of the standard)

For further clarifications, mail: nneomakristen@gmail.com

Have a nice day!