International Accounting Standards (Cambridge International A-Level Accounting)

Spec point — 3.2.1 · the main provisions of each of the following International Accounting Standards (IAS): – IAS 1 Presentation of financial statements – IAS 2 Inventories – IAS 7 Statement of cash flows – IAS 8 Accounting policies, changes in accounting estimates and errors – IAS 10 Events after the reporting period – IAS 16 Property, plant and equipment – IAS 36 Impairment of assets – IAS 37 Provisions, contingent liabilities and contingent assets – IAS 38 Intangible assets

International Accounting Standards

What are the International Accounting Standards?

• The International Accounting Standards (IAS) are a set of rules for financial reporting

• You need to know about the following ones:

  • IAS 1 Presentation of financial statements
  • IAS 2 Inventories
  • IAS 7 Statement of cash flows
  • IAS 8 Accounting policies, changes in accounting estimates and errors
  • IAS 10 Events after the reporting period
  • IAS 16 Property, plant and equipment
  • IAS 36 Impairment of assets
  • IAS 37 Provisions, contingent liabilities and contingent assets
  • IAS 38 Intangible assets

Exam Hint If asked to give reference to the relevant International Accounting Standard, you must name it. You will lose marks even if you explain it correctly.

IAS 1 Presentation of financial statements

• This describes the basis for presenting financial statements

• This ensures comparability between periods and between different businesses

• The required components of a complete set of financial statements for a limited company are:

  • statement of profit or loss and other comprehensive income

  • statement of changes in equity

  • statement of financial position

  • statement of cash flows

  • notes to financial statements

    • including the schedule of non-current assets

• The key principles of IAS 1 are:

IAS 2 Inventories

• This rule states that inventories must be stated at the lower of cost and net realisable value (NRV)

  • Cost is the purchase price plus any costs incurred in bringing the inventories to their present condition and location
  • Net realisable value is the estimated selling price minus the estimated selling costs such as repairs

• This rule adheres to the prudence concept to ensure that assets and profits are not overstated

• FIFO (First In First Out) and AVCO (Weighted Average Cost) are acceptable methods of inventory valuation under IAS 2

  • LIFO (Last In First Out) is not permitted under IAS 2

• The provision for unrealised profit removes the factory profit element of the cost of inventory for manufacturing businesses

  • This ensures that it is stated at cost

IAS 7 Statement of cash flows

• This provides information about changes in cash and cash equivalents during a financial period

• It shows how the business generates and uses cash

• The statement of cash flows is split into three sections

  • Operating activities
  • Investing activities
  • Financing activities

IAS 8 Accounting policies, changes in accounting estimates and errors

• There are three areas to this standard

IAS 10 Events after the reporting period

• There is a gap between the financial statements being prepared and them being authorised

• Once they are authorised, the statements cannot be changed

• There are two types of events that can arise during the gap after the reporting period

  • Adjusting events

    • These are events that existed at the end of the year
    • The financial statements can be adjusted to account for these events

  • Non-adjusting events

    • These are events that arose after the end of the year
    • The financial statements should not be adjusted

• Examples include:

Exam Hint A common trap is including dividends in financial statements which were declared after the reporting period. This is a non-adjusting event.

IAS 16 Property, plant and equipment

• Non-current assets are initially measured at the cost value

  • The cost is the purchase price plus any directly attributable costs to bring the asset to intended use

    • Such as delivery costs and other capital expenditure

• There are two models that can be used to calculate the carrying value of the non-current asset

  • Cost model

    • The carrying value is equal to the cost minus the accumulated depreciation and accumulated impairment losses

  • Revaluation model

    • The carrying value is the fair value at the revaluation date minus the subsequent depreciation and impairment losses

• The standard details how to deal with depreciation

  • Must be allocated over the asset's useful life
  • The residual value and useful life is reviewed at least annually
  • Land is not depreciated
  • Depreciation begins when the asset is available for use

• The standard details how to deal with disposals

  • The carrying value at the date of disposal is compared to the proceeds

  • The difference is the profit or loss on disposal

    • This is charged to the statement of profit or loss

IAS 36 Impairment of assets

• You need to know the following definitions

  • The value in use of an asset is the present value of future cash flows expected from the asset

  • The recoverable amount of an asset is the higher of

    • its fair value minus the costs to sell it
    • its value in use

  • The impairment loss is the amount by which the carrying value exceeds the recoverable amount

• An impairment could be due to:

  • physical damage
  • obsolescence
  • decline in market value

• An impairment loss is an expense on the statement of profit or loss

• The carrying value of the asset is reduced by the impairment loss and stated on the statement of financial position

IAS 37 Provisions, contingent liabilities and contingent assets

• You need to be familiar with the following words which are used to describe the likelihood of events

  • Virtually certain means a very high chance
  • Probable means more than a 50% chance
  • Possible means less than a 50% chance
  • Remote means a very little chance

• A provision is an amount set aside to cover an expense which is probable to occur in the future

  • But the business is uncertain about the actual amount or timing of the expense
  • These are recognised as liabilities in the financial statements

• There are three conditions for recognising a provision:

  • The business has a present obligation because of a past event
  • It is probable (more than a 50% chance) that the obligation needs to be settled in the future
  • A reliable estimate can be made of the amount

• A contingent liability is a possible financial obligation that may arise depending on the outcome of an uncertain future event

  • Such as a lawsuit

  • The amounts are not included in the financial statements

    • These are disclosed as a note to the financial statements

• A contingent asset is a potential financial gain that may arise from past events but depends on uncertain future events

  • Such as the success of a lawsuit
  • The amounts are only included in the financial statements if they are virtually certain
  • They are disclosed as notes to the financial statements if they are probable
  • No disclosure is made if they are possible or remote

IAS 38 Intangible assets

• An intangible asset is an identifiable non-monetary asset without physical substance

  • The main types are:

    • Goodwill
    • Research and development
    • Patents, trademarks and copyright

• An intangible asset is recognised only when:

  • It is identifiable

    • It is separable from the business or arises from contractual/legal rights

  • The business has control over the resource

  • Future economic benefits are expected to flow to the business

• Intangible assets are either purchased or internally generated

  • They only appear on the financial statements if they are purchased

• Intangible assets are amortised only if they have a finite life

  • An intangible asset with an indefinite life has an annual impairment review to check its value

• Research costs are usually treated as revenue expenditure and charged to the statement of profit or loss when they are incurred

• Development costs can be treated as capital expenditure and entered as an intangible asset