09-15-2004, 11:03 PM
FUNDAMENTAL ACCOUNTING CONCEPTS
Qualitative Characteristics of Financial Statements
24. Qualitative characteristics are the attributes that make the information provided in financial statement; useful to users. The four principal qualitative characteristics arc understandability, relevance, reliability and comparability.
Understandability
25. An essential quality of the information provided in financial statements is that it is readily understandable by users. For this purpose, users arc assumed to have a reasonable knowledge of. business and economic activities and accounting and a willingness to study the information with reasonable diligence. However, information about complex matters that should be included in me financial statements because of its relevance to the economic decision-making needs of users should not be excluded merely on the grounds that it may be too difficult for certain users to understand.
Relevance
26. To be useful, information must be relevant to me decision-making needs of users. Information has the quality of relevance when it influences the economic decisions of users by helping them evaluate past, present or future events confirming, or correcting, their past evaluations.
Reliability
31. To be useful, information must also be reliable. Information has the quality of reliability when it is free from material error bias.
32. Information may be relevant but so unreliable in nature or representation that its recognition may be potentially misleading. For example, if the validity and amount of a claim for damages under a legal action are disputed, it may be inappropriate for the enterprise to recognise the fall amount of the claim in the balance sheet, although it may be appropriate to disclose the amount and circumstances of the claim.
Comparability
39. Users must be able to compare the financial statements of' an enterprise .through time in order to identify trends in its financial position and performance. Users must also be able to compare the financial statements of different enterprises in order to evaluate their relative financial position, performance and changes in financial position. Hence, the measurement and display of the financial effect of like transactions and other events must be carried out in a consistent way throughout .an enterprise and over time for that enterprise and in a consistent way for different enterprises.
Faithful Representation
33. To be reliable, information must represent faithfully die .transactions and other events it either purports to represent or could reasonably be expected to represent. Thus, for example, a balance sheet should represent faithfully the transactions and other events that result in assets & liabilities expects to be represented.
Substance Over Form
If information is to represent faithfully the transactions and other events that it purports to represent, it is necessary that they are accounted for and presented in accordance with their substance and economic reality and not merely their legal form. the substance of transactions or other events is not always consistent with that which is apparent from their legal or contrived form. for example, an enterprise may dispose of an asset to another party in such a way that the documentation purports to pass legal ownership to that party; nevertheless, agreements may exist that ensure that the enterprise continues to enjoy the future economic benefits embodied in the asset. In such circumstances, the reporting of a sale would not represent faithfully the transaction entered into (if indeed there was a transaction).
Neutrality
To be reliable, the information contained in financial statements must be neutral, that is, free from bias. Financial statements are not neutral if, by the selection or presentation, they influence the making of a decision or judgment in order to achieve a predetermined result or outcome.
Prudence
The preparers of financial statements do, however, have to contend with the uncertainties that inevitably surround many events and circumstances, such as the collect ability of doubtful receivables, the probable useful life of plant and equipment and the number of warranty claims that may occur. Such uncertainties are recognized by the disclosure of their nature and extent and by the exercise of prudence in the preparation of the financial statements. Prudence is the inclusion of a degree of caution in the exercise of judgments needed in making the estimates required under conditions of uncertainty, such that assets or income are not overstated and liabilities or expenses are not understated. However, the exercise of prudence does not allow, for example, the creation of hidden reserves or excessive provisions, the deliberate understatement of assets or income, or the deliberate overstatement of liabilities or expenses,, because the financial statements would not be neutral and, therefore, not have the quality of reliability.
Completeness.
38. To be reliable, the information in financial statement must be complete within the bounds of materiality and cost. An omission can cause information to be false or misleading and thus unreliable and deficient in terms of its relevance.
Constraints on Relevant and Reliable Information
Timeliness
43. If there is undue delay in the reporting of information it may lose its relevance. Management may need to balance the relative merits of timely reporting and the provision of reliable information. To provide information on a timely basis it may often be necessary to report before all aspects of a transaction or other .event are known, thus impairing reliability. Conversely, if reporting is delayed until all aspects. are known, the information may be highly reliable but of little use to users who have had to make decisions in me interim. In achieving a balance between relevance and reliability, the overriding consideration is how best to satisfy the economic decision-making needs of users.
Balance between Benefit and Cost
44. The balance between benefit and cost is a pervasive constraint rather than a qualitative characteristic. The benefits derived from information should exceed the cost of providing it. The evaluation of benefits and costs is, however, substantially a judgmental process. Furthermore, the costs do not necessarily fall or those users who enjoy the benefits. Benefits may also be enjoyed by users other than those for whom the information is prepared; for example, the provision of further information to lenders may reduce the borrowing costs of an enterprise. For these treasons, it is difficult to apply a cost-benefit test in any ' particular case. Nevertheless, standard-setters in particular, as well as the preparers and users of financial statements, should be aware of this constraint.
Balance between Qualitative Characteristics
45. In practice a balancing, or trade-off, between qualitative characteristics is often necessary. Generally the aim is to achieve an appropriate balance among the characteristics in order to meet the objective of financial statements. The relative importance of the characteristics in different cases is a matter of professional judgment.
True and Fair View/Fair Presentation
46. Financial statements are frequently described as showing a true and fair view of, or as presenting fairly, the financial position, performance and changes in financial position of an enterprise. Although this Framework docs not deal directly with such concepts, the application of the principal qualitative characteristics and of appropriate accounting standards normally results in financial statements that convey what is generally understood as a true and fair view of, or as presenting fairly such information.
Going Concern
When preparing financial statements, management should make an assessment of an enterprise's ability to continue as a going concern. Financial statements should be prepared on a going concern basis unless management either intends to liquidate the enterprise or to cease trading, or has no realistic alternative but to do no. When management is aware, in making its assessment, of Material uncertainties related to events or conditions which may cast significant doubt upon the enterprise's ability to continue as a going concern, those uncertainties should be disclosed. When the financial statements are not prepared on. a going concern basis, that fact should be disclosed, together with the basis on which the financial statements are prepared and the reason why the enterprise it not considered to be a going concerns.
Going Concern
23. The financial statements are normally prepared on the assumption that an enterprise is a going concern and will continue in operation for the foreseeable future. Hence, it is assumed that the enterprise has neither the intention nor the need to liquidate or curtail materially the scale of its operations; if such an intention or need exists, the financial statements may have to be prepared on a different basis and, if so, the basis used is disclosed.
Underlying Assumptions
Accrual l Basis à except Cash Flow
22. In order to meet their objectives, financial statements ate prepared on the accrual basis of accounting. Under this basis, the effects of transactions and other events are recognized when they occur (and not as cash or its equivalent is received or paid) and they are recorded to the accounting records and reported in the financial statements of the periods which they relate. Financial statements prepared on the accrual basis inform users not only of past transactions involving the payment and receipt of cash but also of obligations to pay cash in me future and of resources that represent cash to be received in the future. Hence, they provide the type of information about past transactions and other events that is most useful to users in making economic decisions.
Consistency of Presentation (Accounting Assumption)
27. The presentation and classification of Items in the financial statements should be retained from one period to the next unless
(a) a significant change in the nature of the operations of the enterprise or a review of the financial statement presentation demonstrates that the change will result in a more appropriate presentation of events or transactions; or
(b) a change in presentation is required by an International Accounting Standard or an Interpretation of the Standing Interpretations Committee.
Materiality and Aggregation
29. Each material item should be presented separately, in the financial statements. Immaterial amounts mould be aggregated with amounts of a similar nature or function and need not be presented separately.
Offsetting
33. Assets and liabilities should not be offset except when offsetting is required or permitted by another International Accounting Standard.
34. Items of income and expense should be offset when, and only when
(a) an International Accounting Standard requires or permits it; or
(b) Gain & loss of disposal of Asset, gains, losses and related expenses arising from the same or similar transactions and events are net material. Such amounts should be aggregated in accordance with paragraph 29.
Purpose of Financial Statements
5. Financial statements are a structured financial representation of the financial position of and the transactions undertaken by an enterprise. The objective of general purpose financial statements is to .provide information about the financial position, performance and cash flow of an enterprise that is useful to a wide Range of users in making economic decisions. Financial statements also show the results of management's stewardship (how it is running) of the resources entrusted to it. To meet this objective, financial statements provide information about an enterprise's
(a) assets;
(b) liabilities
(c) equity;
(d) income and expenses, including gains and losses; and
(e) cash flows.
Components of Financial Statements
7. A complete set of financial statements includes the following components
(a) balance sheet;
(b) income statement;
(c) a statement showing either
(i) all changes in equity; or
(ii) changes in equity other than those arising from capital transactions with owner and
distributions to owners;
(d) cash flow statement; and
(e) accounting policies and explanatory notes.
Responsibility for Financial Statements
6. The Management of an enterprise is responsible for the preparation of its financial statements.
Users and Their Information Needs
9. The users of financial statements include present and potential investors, employers, lenders, suppliers and other trade creditors, customers, governments and their agencies and the public. They use financial statements in order to satisfy some of their different needs for information. These needs include the following
(a) Investors. The providers of risk capital and their advisers are concerned with the risk inherent in, and return provided by, their investments. They need information to help them determine whether they should buy, hold or sell. Shareholders are also interested in information which enables them to assess the ability of the enterprise to pay dividends.
(b) Employees. Employees and their representative groups are interested in information about the stability and profitability of their employers. They are also interested in information which enables them to assess the ability of the enterprise to provide remuneration, retirement benefits and employment opportunities.
(c) Lenders. Lenders are interested in information that enables them to determine whether their loans, and the interest attaching to them, will be paid when due.
(d) Suppliers and other trade creditors. Suppliers and other creditors are interested in information that enables them to determine whether amounts owing to them will be paid when due. Trade creditors are likely to be interested in an enterprise over a shorter period than lenders unless they are dependent upon the continuation of the enterprise as a major customer.
(e) Customers. Customers have an interest in information about the continuance of an enterprise, especially when they have a long-term involvement with, or are dependent on, the enterprise.
(f) Governments and their agencies. Governments and their agencies are interested in the allocation of resources and, therefore, the activities of enterprises. They also require information in order to regulate the activities of enterprises, determine taxation policies and as the basis for national income and similar statistics.
(g) Public. Enterprise affect members of the public in a variety of ways. For example, enterprises may a substantial contribution to the local economy fin many ways including the number of people they employ and their patronage of local suppliers. Financial statement may assist the public by providing information about the trends and recent developments in the prosperity of the enterprise and the range of its activities.
(a) Historical Cost.. Assets arc recorded at the amount of each or cash equivalents paid or tin; lair value of the consideration given to acquire them at the time of their acquisition. Liabilities are recorded at the amount of proceeds received in exchange for the obligation, or in some circumstances (for example, income taxes), at the amounts of cash or cash equivalents expected to be paid to satisfy the liability in the normal course of business.
Asset Valuation Alternates
(c) Realisable (settlement) value. Assets are carried at the amount of cash or cash equivalents that could currently be obtained by selling the asset in an orderly disposal. Liabilities are carried at their settlement values; that is, the undiscounted amounts of cash or cash equivalents expected to be paid Hi satisfy the liabilities in the normal course of business.
(b) Currant cost. Assets are carried at the amount of cash or cash equivalents that would have to be paid if the same or an equivalent asset was acquired currently, Liabilities are carried at the undiscounted amount of cash or cash equivalents that would be required to settle the obligation currently.
Sale, turnover, gross receipt, Revenue is the gross inflow of economic benefits during the period arising in the course of the ordinary activities of an enterprise when those inflows result in increases in equity, other than increases relating to contributions from equity participants.
Measurement of Revenue
9. Revenue should be measured at the fair value of the. consideration received or receivable.
10. The amount of revenue arising on a transaction is usually determined by agreement between the enterprise and the buyer or user of the asset. It is measured at the fair value of the consideration received or receivable taking into account the amount of any trade discounts and volume rebates allowed by the enterprise.
11. In most cases, the consideration is in the form of cash or cash equivalents and the amount of revenue is the amount of cash or cash equivalents received or receivable. However, where the inflow of cash or cash
Recognition of Revenue
Policy 1) When goods are dispatched.
When sale invoice is made.
Accrual Basis of Accounting
25. An enterprise should prepare its financial statements, except for cash flow information, under the accrual basis of accounting.
26. Under the accrual basis of accounting, transactions and events are recognized when they occur (and not as cash or its equivalent is received or paid) and they are recorded in the accounting records and reported in the financial statements of the periods to which they relate. Expenses arc recognized in the income statement on the basis of a direct association between the costs incurred and th; earning of specific items of income (matching). However the application of the matching concept does not allow the- recognition of items in the balance sheet winch do not meet the definition of assets or liabilities.
Comparative Information
38. Unless an International Accounting Standard permits or requires otherwise, comparative information should he disclosed in respect of the previous period for all numerical information in the financial statements. Comparative information should be included in narrative and descriptive information when it is relevant to an understanding of the current periodâs financial statements.
Materiality
29. The relevance of information is affected by its nature and materiality. In some cases, the nature of information alone is sufficient to determine its relevance. For example, the reporting of a new segment may affect the assessment of the risks and opportunities facing the enterprise irrespective of the materiality of the results achieved by the new segment in the reporting period. In other cases, both the nature and materiality are important, for example, the amounts of inventories^ held in each of the main categories that are appropriate to me business.
30. Information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements. Materiality depends on the size of the item or error judged in the particular circumstances of its omission or misstatement. Thus, materiality provides a threshold or cut-off point rather than being a primary qualitative characteristic which information must have if it is to be useful.
The Objective of Financial Statements
12. The objective of financial statements to provide information about the financial positron, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions.
Sale of Goods
14. Revenue from the sale of goods should be recognised when all the following conditions haw been satisfied
(a) the enterprise has transferred to the buyer the significant risks and rewards of ownership of the goods.
(b) the enterprise retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold.
(c) the amount of revenue can he measured reliably;
(d) it is probable that the economic benefits associated with the transaction will flow to the enterprise; and
(e) the costs incurred or to be incurred it respect of the transaction can be measured reliably.
Rendering of Services
20. When the outcome of a transaction involving the rendering of services can be estimated reliably, revenue associated with the transaction should be recognized by reference to the stage of completion of the transaction at the balance sheet date. The outcome of a transaction can be estimated reliably when all the following conditions are satisfied
(a) the amount of revenue can be measured reliably;
(b) it is probable that the economic benefits associated with the transaction will flow to the enterprise;
(c) the stage of completion of the transaction at the balance sheet date can be measured reliably; and
(d) the costs incurred for the transaction and the costs to complete the transaction can be measured reliably.
Interest, Royalties and Dividends
29. Revenue arising the use by others of enterprise assets yielding interest, royalties and dividends should be recognized on the bases set out in paragraph 30 when
(a) it is probable that the economic benefits associated with the transaction will flow to the enterprise; and
(b) the amount of the revenue can be measured realibly.
30. Revenue should be recognized on the fallowing bases
(a) interest should be recognised on a time proportion basis, that takes into account the effective yield on the asset;
(b) royalties should be recognised on an accrual basis in accordance with the substance of the relevant agreement; and
(c) dividends should be recognised when the shareholderâs right to receive payment is established.
Disclosure
35. An enterprise should disclose
(a) the accounting policies adapted for the recognition of revenue including the methods adopted to determine the stage of completion of transactions involving the tendering of services.
(b) the amount of each significant category of revenue recognised during the period including revenue arising from
(i) the sale of goody;
(ii) the rendering of services;
(iii) interest;
(iv) royalties;
(v) dividends; and
(vi) the amount of revenue arising from exchanges of goods or services included in each
significant category of revenue.
26. When the outcome of the transaction involving the rendering of services cannot be estimated reliably, revenue should be recognized only to the extent of the expenses recognized are recoverable.
Never seek advice from a Chartered Accountant. They are trained to find problems not solutions.
Qualitative Characteristics of Financial Statements
24. Qualitative characteristics are the attributes that make the information provided in financial statement; useful to users. The four principal qualitative characteristics arc understandability, relevance, reliability and comparability.
Understandability
25. An essential quality of the information provided in financial statements is that it is readily understandable by users. For this purpose, users arc assumed to have a reasonable knowledge of. business and economic activities and accounting and a willingness to study the information with reasonable diligence. However, information about complex matters that should be included in me financial statements because of its relevance to the economic decision-making needs of users should not be excluded merely on the grounds that it may be too difficult for certain users to understand.
Relevance
26. To be useful, information must be relevant to me decision-making needs of users. Information has the quality of relevance when it influences the economic decisions of users by helping them evaluate past, present or future events confirming, or correcting, their past evaluations.
Reliability
31. To be useful, information must also be reliable. Information has the quality of reliability when it is free from material error bias.
32. Information may be relevant but so unreliable in nature or representation that its recognition may be potentially misleading. For example, if the validity and amount of a claim for damages under a legal action are disputed, it may be inappropriate for the enterprise to recognise the fall amount of the claim in the balance sheet, although it may be appropriate to disclose the amount and circumstances of the claim.
Comparability
39. Users must be able to compare the financial statements of' an enterprise .through time in order to identify trends in its financial position and performance. Users must also be able to compare the financial statements of different enterprises in order to evaluate their relative financial position, performance and changes in financial position. Hence, the measurement and display of the financial effect of like transactions and other events must be carried out in a consistent way throughout .an enterprise and over time for that enterprise and in a consistent way for different enterprises.
Faithful Representation
33. To be reliable, information must represent faithfully die .transactions and other events it either purports to represent or could reasonably be expected to represent. Thus, for example, a balance sheet should represent faithfully the transactions and other events that result in assets & liabilities expects to be represented.
Substance Over Form
If information is to represent faithfully the transactions and other events that it purports to represent, it is necessary that they are accounted for and presented in accordance with their substance and economic reality and not merely their legal form. the substance of transactions or other events is not always consistent with that which is apparent from their legal or contrived form. for example, an enterprise may dispose of an asset to another party in such a way that the documentation purports to pass legal ownership to that party; nevertheless, agreements may exist that ensure that the enterprise continues to enjoy the future economic benefits embodied in the asset. In such circumstances, the reporting of a sale would not represent faithfully the transaction entered into (if indeed there was a transaction).
Neutrality
To be reliable, the information contained in financial statements must be neutral, that is, free from bias. Financial statements are not neutral if, by the selection or presentation, they influence the making of a decision or judgment in order to achieve a predetermined result or outcome.
Prudence
The preparers of financial statements do, however, have to contend with the uncertainties that inevitably surround many events and circumstances, such as the collect ability of doubtful receivables, the probable useful life of plant and equipment and the number of warranty claims that may occur. Such uncertainties are recognized by the disclosure of their nature and extent and by the exercise of prudence in the preparation of the financial statements. Prudence is the inclusion of a degree of caution in the exercise of judgments needed in making the estimates required under conditions of uncertainty, such that assets or income are not overstated and liabilities or expenses are not understated. However, the exercise of prudence does not allow, for example, the creation of hidden reserves or excessive provisions, the deliberate understatement of assets or income, or the deliberate overstatement of liabilities or expenses,, because the financial statements would not be neutral and, therefore, not have the quality of reliability.
Completeness.
38. To be reliable, the information in financial statement must be complete within the bounds of materiality and cost. An omission can cause information to be false or misleading and thus unreliable and deficient in terms of its relevance.
Constraints on Relevant and Reliable Information
Timeliness
43. If there is undue delay in the reporting of information it may lose its relevance. Management may need to balance the relative merits of timely reporting and the provision of reliable information. To provide information on a timely basis it may often be necessary to report before all aspects of a transaction or other .event are known, thus impairing reliability. Conversely, if reporting is delayed until all aspects. are known, the information may be highly reliable but of little use to users who have had to make decisions in me interim. In achieving a balance between relevance and reliability, the overriding consideration is how best to satisfy the economic decision-making needs of users.
Balance between Benefit and Cost
44. The balance between benefit and cost is a pervasive constraint rather than a qualitative characteristic. The benefits derived from information should exceed the cost of providing it. The evaluation of benefits and costs is, however, substantially a judgmental process. Furthermore, the costs do not necessarily fall or those users who enjoy the benefits. Benefits may also be enjoyed by users other than those for whom the information is prepared; for example, the provision of further information to lenders may reduce the borrowing costs of an enterprise. For these treasons, it is difficult to apply a cost-benefit test in any ' particular case. Nevertheless, standard-setters in particular, as well as the preparers and users of financial statements, should be aware of this constraint.
Balance between Qualitative Characteristics
45. In practice a balancing, or trade-off, between qualitative characteristics is often necessary. Generally the aim is to achieve an appropriate balance among the characteristics in order to meet the objective of financial statements. The relative importance of the characteristics in different cases is a matter of professional judgment.
True and Fair View/Fair Presentation
46. Financial statements are frequently described as showing a true and fair view of, or as presenting fairly, the financial position, performance and changes in financial position of an enterprise. Although this Framework docs not deal directly with such concepts, the application of the principal qualitative characteristics and of appropriate accounting standards normally results in financial statements that convey what is generally understood as a true and fair view of, or as presenting fairly such information.
Going Concern
When preparing financial statements, management should make an assessment of an enterprise's ability to continue as a going concern. Financial statements should be prepared on a going concern basis unless management either intends to liquidate the enterprise or to cease trading, or has no realistic alternative but to do no. When management is aware, in making its assessment, of Material uncertainties related to events or conditions which may cast significant doubt upon the enterprise's ability to continue as a going concern, those uncertainties should be disclosed. When the financial statements are not prepared on. a going concern basis, that fact should be disclosed, together with the basis on which the financial statements are prepared and the reason why the enterprise it not considered to be a going concerns.
Going Concern
23. The financial statements are normally prepared on the assumption that an enterprise is a going concern and will continue in operation for the foreseeable future. Hence, it is assumed that the enterprise has neither the intention nor the need to liquidate or curtail materially the scale of its operations; if such an intention or need exists, the financial statements may have to be prepared on a different basis and, if so, the basis used is disclosed.
Underlying Assumptions
Accrual l Basis à except Cash Flow
22. In order to meet their objectives, financial statements ate prepared on the accrual basis of accounting. Under this basis, the effects of transactions and other events are recognized when they occur (and not as cash or its equivalent is received or paid) and they are recorded to the accounting records and reported in the financial statements of the periods which they relate. Financial statements prepared on the accrual basis inform users not only of past transactions involving the payment and receipt of cash but also of obligations to pay cash in me future and of resources that represent cash to be received in the future. Hence, they provide the type of information about past transactions and other events that is most useful to users in making economic decisions.
Consistency of Presentation (Accounting Assumption)
27. The presentation and classification of Items in the financial statements should be retained from one period to the next unless
(a) a significant change in the nature of the operations of the enterprise or a review of the financial statement presentation demonstrates that the change will result in a more appropriate presentation of events or transactions; or
(b) a change in presentation is required by an International Accounting Standard or an Interpretation of the Standing Interpretations Committee.
Materiality and Aggregation
29. Each material item should be presented separately, in the financial statements. Immaterial amounts mould be aggregated with amounts of a similar nature or function and need not be presented separately.
Offsetting
33. Assets and liabilities should not be offset except when offsetting is required or permitted by another International Accounting Standard.
34. Items of income and expense should be offset when, and only when
(a) an International Accounting Standard requires or permits it; or
(b) Gain & loss of disposal of Asset, gains, losses and related expenses arising from the same or similar transactions and events are net material. Such amounts should be aggregated in accordance with paragraph 29.
Purpose of Financial Statements
5. Financial statements are a structured financial representation of the financial position of and the transactions undertaken by an enterprise. The objective of general purpose financial statements is to .provide information about the financial position, performance and cash flow of an enterprise that is useful to a wide Range of users in making economic decisions. Financial statements also show the results of management's stewardship (how it is running) of the resources entrusted to it. To meet this objective, financial statements provide information about an enterprise's
(a) assets;
(b) liabilities
(c) equity;
(d) income and expenses, including gains and losses; and
(e) cash flows.
Components of Financial Statements
7. A complete set of financial statements includes the following components
(a) balance sheet;
(b) income statement;
(c) a statement showing either
(i) all changes in equity; or
(ii) changes in equity other than those arising from capital transactions with owner and
distributions to owners;
(d) cash flow statement; and
(e) accounting policies and explanatory notes.
Responsibility for Financial Statements
6. The Management of an enterprise is responsible for the preparation of its financial statements.
Users and Their Information Needs
9. The users of financial statements include present and potential investors, employers, lenders, suppliers and other trade creditors, customers, governments and their agencies and the public. They use financial statements in order to satisfy some of their different needs for information. These needs include the following
(a) Investors. The providers of risk capital and their advisers are concerned with the risk inherent in, and return provided by, their investments. They need information to help them determine whether they should buy, hold or sell. Shareholders are also interested in information which enables them to assess the ability of the enterprise to pay dividends.
(b) Employees. Employees and their representative groups are interested in information about the stability and profitability of their employers. They are also interested in information which enables them to assess the ability of the enterprise to provide remuneration, retirement benefits and employment opportunities.
(c) Lenders. Lenders are interested in information that enables them to determine whether their loans, and the interest attaching to them, will be paid when due.
(d) Suppliers and other trade creditors. Suppliers and other creditors are interested in information that enables them to determine whether amounts owing to them will be paid when due. Trade creditors are likely to be interested in an enterprise over a shorter period than lenders unless they are dependent upon the continuation of the enterprise as a major customer.
(e) Customers. Customers have an interest in information about the continuance of an enterprise, especially when they have a long-term involvement with, or are dependent on, the enterprise.
(f) Governments and their agencies. Governments and their agencies are interested in the allocation of resources and, therefore, the activities of enterprises. They also require information in order to regulate the activities of enterprises, determine taxation policies and as the basis for national income and similar statistics.
(g) Public. Enterprise affect members of the public in a variety of ways. For example, enterprises may a substantial contribution to the local economy fin many ways including the number of people they employ and their patronage of local suppliers. Financial statement may assist the public by providing information about the trends and recent developments in the prosperity of the enterprise and the range of its activities.
(a) Historical Cost.. Assets arc recorded at the amount of each or cash equivalents paid or tin; lair value of the consideration given to acquire them at the time of their acquisition. Liabilities are recorded at the amount of proceeds received in exchange for the obligation, or in some circumstances (for example, income taxes), at the amounts of cash or cash equivalents expected to be paid to satisfy the liability in the normal course of business.
Asset Valuation Alternates
(c) Realisable (settlement) value. Assets are carried at the amount of cash or cash equivalents that could currently be obtained by selling the asset in an orderly disposal. Liabilities are carried at their settlement values; that is, the undiscounted amounts of cash or cash equivalents expected to be paid Hi satisfy the liabilities in the normal course of business.
(b) Currant cost. Assets are carried at the amount of cash or cash equivalents that would have to be paid if the same or an equivalent asset was acquired currently, Liabilities are carried at the undiscounted amount of cash or cash equivalents that would be required to settle the obligation currently.
Sale, turnover, gross receipt, Revenue is the gross inflow of economic benefits during the period arising in the course of the ordinary activities of an enterprise when those inflows result in increases in equity, other than increases relating to contributions from equity participants.
Measurement of Revenue
9. Revenue should be measured at the fair value of the. consideration received or receivable.
10. The amount of revenue arising on a transaction is usually determined by agreement between the enterprise and the buyer or user of the asset. It is measured at the fair value of the consideration received or receivable taking into account the amount of any trade discounts and volume rebates allowed by the enterprise.
11. In most cases, the consideration is in the form of cash or cash equivalents and the amount of revenue is the amount of cash or cash equivalents received or receivable. However, where the inflow of cash or cash
Recognition of Revenue
Policy 1) When goods are dispatched.
When sale invoice is made.
Accrual Basis of Accounting
25. An enterprise should prepare its financial statements, except for cash flow information, under the accrual basis of accounting.
26. Under the accrual basis of accounting, transactions and events are recognized when they occur (and not as cash or its equivalent is received or paid) and they are recorded in the accounting records and reported in the financial statements of the periods to which they relate. Expenses arc recognized in the income statement on the basis of a direct association between the costs incurred and th; earning of specific items of income (matching). However the application of the matching concept does not allow the- recognition of items in the balance sheet winch do not meet the definition of assets or liabilities.
Comparative Information
38. Unless an International Accounting Standard permits or requires otherwise, comparative information should he disclosed in respect of the previous period for all numerical information in the financial statements. Comparative information should be included in narrative and descriptive information when it is relevant to an understanding of the current periodâs financial statements.
Materiality
29. The relevance of information is affected by its nature and materiality. In some cases, the nature of information alone is sufficient to determine its relevance. For example, the reporting of a new segment may affect the assessment of the risks and opportunities facing the enterprise irrespective of the materiality of the results achieved by the new segment in the reporting period. In other cases, both the nature and materiality are important, for example, the amounts of inventories^ held in each of the main categories that are appropriate to me business.
30. Information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements. Materiality depends on the size of the item or error judged in the particular circumstances of its omission or misstatement. Thus, materiality provides a threshold or cut-off point rather than being a primary qualitative characteristic which information must have if it is to be useful.
The Objective of Financial Statements
12. The objective of financial statements to provide information about the financial positron, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions.
Sale of Goods
14. Revenue from the sale of goods should be recognised when all the following conditions haw been satisfied
(a) the enterprise has transferred to the buyer the significant risks and rewards of ownership of the goods.
(b) the enterprise retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold.
(c) the amount of revenue can he measured reliably;
(d) it is probable that the economic benefits associated with the transaction will flow to the enterprise; and
(e) the costs incurred or to be incurred it respect of the transaction can be measured reliably.
Rendering of Services
20. When the outcome of a transaction involving the rendering of services can be estimated reliably, revenue associated with the transaction should be recognized by reference to the stage of completion of the transaction at the balance sheet date. The outcome of a transaction can be estimated reliably when all the following conditions are satisfied
(a) the amount of revenue can be measured reliably;
(b) it is probable that the economic benefits associated with the transaction will flow to the enterprise;
(c) the stage of completion of the transaction at the balance sheet date can be measured reliably; and
(d) the costs incurred for the transaction and the costs to complete the transaction can be measured reliably.
Interest, Royalties and Dividends
29. Revenue arising the use by others of enterprise assets yielding interest, royalties and dividends should be recognized on the bases set out in paragraph 30 when
(a) it is probable that the economic benefits associated with the transaction will flow to the enterprise; and
(b) the amount of the revenue can be measured realibly.
30. Revenue should be recognized on the fallowing bases
(a) interest should be recognised on a time proportion basis, that takes into account the effective yield on the asset;
(b) royalties should be recognised on an accrual basis in accordance with the substance of the relevant agreement; and
(c) dividends should be recognised when the shareholderâs right to receive payment is established.
Disclosure
35. An enterprise should disclose
(a) the accounting policies adapted for the recognition of revenue including the methods adopted to determine the stage of completion of transactions involving the tendering of services.
(b) the amount of each significant category of revenue recognised during the period including revenue arising from
(i) the sale of goody;
(ii) the rendering of services;
(iii) interest;
(iv) royalties;
(v) dividends; and
(vi) the amount of revenue arising from exchanges of goods or services included in each
significant category of revenue.
26. When the outcome of the transaction involving the rendering of services cannot be estimated reliably, revenue should be recognized only to the extent of the expenses recognized are recoverable.
Never seek advice from a Chartered Accountant. They are trained to find problems not solutions.
