Lucubrate Magazine, Issue 36, August 10th, 2018

What do all these statements have in common and for that matter what do all financial accounting standards have in common. They all make the presumption that the information contained therein is accurate, transparent, faithfully representational and directly comparable against other entities. But why is that important? Financial statements provide the information necessary for all stakeholders and potential investors to make crucial financial decisions, do I invest or do I sell.


  • Accounting Series – article No: 17
  • Accounting Theory – Advanced Part 7

By Peter Welch, Georgia, CEO GlobalCfo.LLC.


An Adjustment that has the Effect of Increasing Management’s Compensation

Materiality continued:

 

 

v)      a transaction or adjustment that masks a change in earnings or other trends;

vi)      a transaction or adjustment that concerns a segment, or other portion, of the undertaking’s business that has been identified as playing a significant role in the undertaking’s operations or profitability;

vii)       a transaction or adjustment that affects an undertaking’s compliance with loan covenants  or other contractual requirements;

viii)      a transaction or adjustment that has the effect of increasing management’s compensation, for example by satisfying requirements for the award of bonuses;

ix)      changes in laws and regulations;

x)       non-compliance with laws and regulations;

xi)       fines against the undertaking;

xii)       legal cases;

xiii)      deterioration in relationships with individual or groups of key suppliers, clients or employees; and

xiv)      dependency on a particular supplier, client or employee.

IFRS Workbook 2017 IAS 8

To wrap up IAS 8, we have a situation where at times it is ambiguous and open to management discretion between selecting whether they are dealing with changing estimates i.e. depreciation,

IASB A change in accounting estimate is an adjustment of the carrying amount of an asset or a liability

or the correction of an error, or changes to the policies and procedures manual. As referenced above any changes to policies and procedures fall within a very narrow range of acceptability.

Transparency and Faithful Representation

Accounting policies are designed to ensure that financial statements, fully comply with, and reflect the transparency and faithful representation of all IFRSs.

per IASB definitions (para 5):

The following terms are used in this Standard with the meanings specified:

Accounting policies are the specific principles, bases, conventions, rules, and practices applied by an entity in preparing and presenting financial statements. 

Photo: Tim Gouw

You may recall last week:

A change in accounting policy can be established by the following tests. The accounting policies chosen by an entity should reflect transactions and events through:

  • recognition e.g. capitalising or writing off certain types of expenditure);
  • measurement (e.g. measuring non-current assets at cost or valuation); and
  • presentation e.g. classification of costs as cost of sales or administrative expenses).

If at least one of these criteria is changed, then there is a change in accounting policy. IAS 8 requires a change in an accounting policy to be accounted for retrospectively whereas a change in an accounting estimate is normally recognized in the current period (and there is no requirement for retrospective application).

Illustration: Emile Woolf International Ltd, Essential IFRS 2017

 

‘Thus, depending on the outcome, we are directed to:

Errors:                                     apply retrospectively (material errors)

Consider this above example (viii). Remember, Financial Shenanigans previously discussed.

a transaction or adjustment that has the effect of increasing management’s compensation, for example by satisfying requirements for the award of bonuses

IFRS Workbook 2017 IAS 8

 

Estimates:                            apply prospectively

Accounting Policies:         apply retroactively

 

 

Let’s now consider “IAS 10 Events after the Reporting Period”

We are also going to introduce the concept of a going concern. Up until now, all these articles have stressed the importance of the Framework along with faithful representation, transparency, and comparability. We have discussed the balance sheet, primarily assets, in great detail addressing the issue that all assets have to possess” future economic value”. If in any way that is impaired, something we have discussed, then the asset needs to be written down with the incremental value being charged to the income statement. Or in other words, both assets and liabilities and equity are reduced.

 

Photo: Tim Gouw

Adjusting Events and Non-adjusting Events

We have started addressing IASs, such as IAS 1 on financial statement presentation, IAS 2 on inventories, and IAS 7 on cash flow statements. And of course just recently IAS 8. What do all these statements have in common and for that matter what do all financial accounting standards have in common. They all make the presumption that the information contained therein is accurate, transparent, faithfully representational and directly comparable against other entities. But why is that important? Financial statements provide the information necessary for all stakeholders and potential investors to make crucial financial decisions, do I invest or do I sell. Such implicit informational content is absolutely critical in the mergers and acquisitions field, particularly across borders. The going concern concept simply states that an investor can rely on financial statement information to make decisions. Such decisions are based on the presumption that all things being equal the next fiscal year and the following will be fairly comparable to the current fiscal year. Obviously, things do change but it is reasonable to rely on continued net income that going forward will not be widely divergent from current results. So what does all this have to do with IAS 10 or Events after the Reporting Period?  Let’s consider how the IASB addresses such events.

Relative to the IASB para 3:

3.  The following terms are used in this Standard with the meanings specified:

Events after the reporting period are those events, favorable and unfavorable, that occur between the end of the reporting period and the date when the financial statements are authorized for issue. Two types of events can be identified:

a  those that provide evidence of conditions that existed at the end of the reporting period (adjusting events after the reporting period)] and

b  those that are indicative of conditions that arose after the reporting period (non-adjusting events after the reporting period)

 

Ordinarily, the reporting period runs from January 1 through December 31, however, there are many entities that have 12 monthly periods ending March 31, June 30 and September 30.

If such an event occurred that questioned the going concern concept and existed at the end of the reporting period then certainly the financial statements would be bound to reflect this information. If on the other hand there was no knowledge of such an event the balance sheet and financial statements would be developed on a normal ongoing basis.

 

Illustration: IABFM International Academy of Business and Financial Management 

 

 

Illustration: IABFM International Academy of Business and Financial Management 

 

Photo: Tim Gouw

 

Do you have a comment or do you want to give your feedback on this article? Do you want to write letters to the editor? Please use the link https://lucu.nkb.no/feedback/

 


Acknowledgments:
  • IFRS Workbook 2017 IAS 8. The set of books provides a book for every standard. Our acknowledgment to Mr. Prof. Robin Joyce.
  • Thanks also to IFRSbox and Silvia for her valuable contribution as a reference source. Ms. Silvia Mahútová runs the website  ifrsbox.com dedicated to helping people understand and learn IFRS in an easy way.  In 2018, her website has over 130 000 visits per month and from more than 130 countries in the world.
  • PricewaterhouseCoopers: This publication (VALUE IFRS Plc.) presents annual financial reports of a fictional listed company, and illustrates a model of IFRS financial reporting requirements. All tables/financial statements/notes used are shown without any modification.
  • Emile Woolf International Ltd, Essential IFRS 2017. Emile Woolf International is an international global training and publishing provider. Over 100,000 people have studied with us and over 80,000 people have used our textbooks to help them pass Professional examinations.

(Illustration on top: Tim Gouw)


 

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Peter Welch
Peter Welch

GlobalCfo.LLC is an expert at developing entrepreneurs and building 3-5 year business plans and cash flow projections as a prerequisite for accessing financing sources. GlobalCfo.LLC targets accounting standards compliance and theory, sound infrastructure /process mapping and COSO 2013-17/solid internal controls, ERM, and last but not least documentation /Policy and Procedures and other manuals. Additionally, interim CFO services (or Rent-a-CFO by the hour/day) are offered locally or remotely as well as training at all levels and all functions, not just accounting; e.g., management and leadership skills. Pre/Post-M&A is also offered.

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