International Accounting Standards (IAS) Overview
The State of Flow
The state of flow is the basic financial statement showing the effect generated and used in operating, investing, and financing activities.
Purpose of the State of Flow:
- Provide appropriate information to management so that it can measure its accounting policies and make decisions.
- Provide information to administrators, allowing them to improve their operating and financing policies.
- Project where the cash on hand has been spent.
Accrual Principle
The accrual principle requires the determination of operating results and financial position to take into consideration all assets and liabilities of the period, whether or not collected or paid.
Accounting Reports:
- Balance Sheet
- Income Statement
- Cash Flow Statement
Current Assets:
- Cash
- Bank
Withholding account is a liability account.
Part of the Property:
- Capital
- Net Income
The income statement is complementary to the balance sheet and explains the details of the profit.
IAS 1: Presentation of Financial Statements
The objective of IAS 1 is to establish the basis for the presentation of financial statements for general information purposes, to ensure that they are comparable, both with the financial statements of the same entity for previous periods and with other entities.
IAS 2: Inventories
The objective of IAS 2 is to prescribe the accounting treatment of inventories. A primary issue in accounting for inventories is the amount of cost to be recognized as an asset to be deferred until the revenue is recognized.
IAS 2 Applies to All Inventories, Except:
- Work in progress arising under construction contracts.
- Financial instruments.
- Biological assets.
Inventories are Assets:
- Held for sale in the normal course of operations.
- In production for such sale.
- In the form of materials or supplies to be consumed in the production process or in providing services.
Definitions:
Net realizable value is the estimated selling price of an asset in the normal course of business less the estimated costs of completion and to carry out the sale.
Fair value is the amount for which an asset could be exchanged or a liability settled between knowledgeable, willing parties who perform a transaction at arm’s length.
The acquisition cost of inventories comprises the purchase price, import duties and other taxes, transport, storage, and other costs directly attributable to the acquisition of goods, materials, or services.
IAS 16: Property, Plant and Equipment
The objective of IAS 16 is to prescribe the accounting treatment for property, plant, and equipment so that users of financial statements can discern information about the investment that the institution has in its property, plant, and equipment, and changes that have occurred in such investment.
Definitions:
Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life.
Cost is the amount of cash or cash equivalents paid or the fair value of the consideration given to acquire an asset at the time of acquisition or construction.
Depreciable amount is the cost of an asset or other amount substituted for cost, less its residual value.
Carrying amount is the amount for which an asset is recognized, net of accumulated depreciation and accumulated impairment losses.
Recoverable amount is the higher of the net selling price of an asset and its value in use.
Plant and equipment are tangible assets:
- Held for use in the production or supply of goods and services, for rental to others, or for administrative purposes, and
- Expected to be used for more than one year.
An impairment loss is the amount by which the carrying amount of an asset exceeds its recoverable amount.
Entity-specific value is the present value of cash flows the entity expects to receive by the continued use of an asset and the sale or other disposal thereof at the end of its useful life. In the case of a liability, it is the present value of cash flows expected to be incurred to cancel it.
Fair value is the amount for which an asset could be exchanged or a liability settled between knowledgeable, willing parties in a transaction at arm’s length.
The residual value of an asset is the estimated amount that an entity would currently obtain from the sale or other disposal of the asset, after deducting the estimated costs of such sale or disposal if the asset were already of the age and in the condition expected at the end of its useful life.
Useful life is:
- The period during which an entity expects to use a fixed asset, or
- The number of production or similar units expected to be obtained from the asset by the entity.
IAS 14: Segment Reporting (Summary)
The objective of IAS 14 is to establish policies for segment reporting, including information on various types of products and services the company produces and the different geographical areas in which it operates, to help users of financial statements:
- Better understand the company’s performance in the past.
- Better assess the risks and returns of the company, and
- Make more informed judgments about the company as a whole.
Definitions:
Operating activities are the activities that constitute the main source of revenue for the company as well as other activities that cannot be classified as investing or financing.
Accounting policies are the specific principles, bases, conventions, rules, and procedures adopted by the entity in preparing and presenting financial statements.
Revenue is the gross inflow of economic benefits during the period arising in the course of ordinary activities of an enterprise when those inflows result in increases in equity, other than contributions from the owners.
A business segment is a distinguishable component of the company, charged with providing a single product or service, or combinations of them that are related and are characterized by being subject to risks and returns that are different from those corresponding to other business segments within the same company. Factors to be taken into account in determining whether the goods or services are related include:
- The nature of these products or services.
- The nature of their production processes.
- The type or class of customer for the goods or services.
- The methods used to distribute the products or services, and
- If applicable, the nature of the regulatory environment in which they operate (e.g., banking, insurance, and utilities).
A geographical segment is a distinguishable component of the company responsible for supplying goods or services within a particular economic environment and is characterized by being subject to risks and returns that are different from those corresponding to other operating components that are active in different environments. Factors that should be considered in identifying geographical segments include:
- Similarity of economic and political conditions.
- Relationships between operations in different geographical areas.
- The proximity of operations.
- Special risks associated with operations in specific areas.
- Exchange control regulations, and
- The underlying currency risks.
IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors
The objective of IAS 8 is to prescribe the criteria for selecting and changing accounting policies, as well as the accounting treatment and disclosures about changes in accounting policies, changes in accounting estimates, and the correction of errors.
Definitions:
Prospective application of a change in accounting policy and the recognition of the effect of a change in accounting estimate, respectively, are:
- Implementing the new accounting policy for transactions, other events, and conditions occurring after the date on which the policy is changed, and
- Recognition of the effect of the change in the accounting estimate for the current and future periods affected by this change.
Retroactive application is applying a new accounting policy to transactions, other events, and conditions as if it had always applied.
A change in accounting estimate is an adjustment in the carrying amount of an asset or a liability, or the amount of the periodic consumption of an asset, that results from the assessment of the current status of the item, as well as expected future benefits and obligations associated with the assets and liabilities.
Prior period errors are omissions and misstatements in the financial statements of an entity for one or more prior periods arising from a failure to employ or use reliable information that:
- Was available when financial statements for those periods were made, and
- Could reasonably be expected to have been obtained and taken into account in the preparation and presentation of those financial statements.
Such errors include the effects of mathematical mistakes, mistakes in applying accounting policies, oversights or misinterpretations of facts, and fraud.
Impracticable application occurs when an entity cannot apply a requirement after making all reasonable efforts to do so. For a particular prior period, it will be impracticable to apply a change in accounting policy retrospectively or to make a retrospective restatement to correct an error.
Materiality (or relative importance). Omissions or misstatements of items are material if they could, individually or collectively, influence the economic decisions taken by users based on the financial statements. Materiality depends on the magnitude and nature of the omission or misstatement judged in the particular circumstances in which they were produced. The size or nature of the item, or a combination of both, could be the determining factor.
Accounting policies are the specific principles, bases, conventions, rules, and procedures adopted by the entity in preparing and presenting financial statements.
Restatement is correcting the recognition, measurement, and disclosure of the amounts of the elements of financial statements as if the error made in previous years had never been committed.
IAS 10: Events After the Balance Sheet Date
The objective of IAS 10 is to prescribe:
- When an entity shall adjust its financial statements for events after the balance sheet date, and
- The disclosures that an entity should give about the date on which the financial statements have been made or authorized for disclosure and about events after the balance sheet date.
The standard also requires that an entity should not prepare its financial statements on the going concern assumption if events after the balance sheet date indicate that this assumption is not appropriate.
The entity shall adjust the amounts recognized in its financial statements to reflect the occurrence of events after the balance sheet date involving adjustments.
IAS 39: Financial Instruments: Recognition and Measurement
The objective of IAS 39 is to establish principles for recognizing and measuring financial assets and financial liabilities and some contracts to buy or sell non-financial items.
IAS 32: Financial Instruments: Presentation and Disclosure
Definitions:
Financial instrument. It is a contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.
Financial asset. Is any asset that is:
- Cash.
- An equity instrument of another entity.
- A contractual right to receive cash or another financial asset from another entity or to exchange financial assets or financial liabilities on potentially favorable terms.
- A contract that will be or will be settled with equity instruments.
Financial liabilities. Any person subject to:
- A contractual obligation to deliver cash or another financial asset to another entity, to exchange financial assets or financial liabilities on potentially unfavorable terms.
- A contract that can or will be settled with equity instruments.
Equity instrument. Is any contract that evidences a residual interest in the assets of the entity after deducting all its liabilities.
Amortized cost. The amount for which a financial instrument will be valued at the time of initial recognition, less principal repayments, plus or minus the cumulative amortization using the effective interest rate for the difference between the initial amount and the repayment value at maturity, less any impairment value.
Effective interest rate. The interest rate that equates the estimated future stream of cash receipts or payments during the expected life of the instrument with the value of the asset or financial liability. The effective interest rate includes commissions that are an integral part of it, premiums and discounts, as well as transaction costs.
Fair value. Is the amount by which a financial asset could be exchanged, or a financial liability settled, between unrelated parties, sufficiently informed and acting on their own behalf.