After a long long pause, I’m finally back to this blog! 

Thanks a million for all your comments! It feels great to know that stuff I post here is so helpful and interesting for people.

Exam is approaching, so now each day is so important.

First of all I would like to attract your attention to important change in exam entry dates.  It’s crucially important, so
please see Day 2  for further information.  I have posted updates in red there.  (it might be not so important right now, as deadline has passed. But at the time when i was writing this post, it was quite up to date)

I have sent my application documents on 14th September, had to use DHL service for this. 100 usd is gone , but it was worth it as documents were delivered to Glasgow the same day. I had some fears that my application will not be
accepted, as in the letter from employer that I enclosed, I still lacked 2 more months of relevant working experience. But well, I was lucky!

By the end of SAME  day i got a reply from ACCA saying:

“We are pleased to inform you that your application has been successful and you are now a student of the Diploma for International Financial Reporting (DipIFR)”.

Yay!
It was a pleasant moment

I have to say that if you seriously decided to apply for DipIFR, you’ve got to prepare to pay and pay and pay.

If your documents are not originally in English, quite a nice sum of money will go for official translation and notarization of those (even if u can translate them yourself, you’ll still have to pay to public notary or any service in your country that will make that translation “official”), plus costs of delivery of your application (if u don’t send them couple of months before deadline, then better not to use public post services, as with those you can never be sure when your documents will be delivered. In some countries post service
functions brilliantly, but not all countries are that lucky, so most likely you‘ll have to use express mail) and above all that exam fee, not saying about money that you’ll spend on study materials and or/tuition.

I mentioned above that I had doubts regarding letter from employer, so to save you from the stress that i went through i decided to provide a sample of that letter, that i composed (that’s the format that i used for english version of this file, original document looked slightly different):
http://dipifr.net/wp-content/uploads/2011/10/letter-from-employer.bmp

Format of this document can very from country to country and company to company, so the sample provided above is just to show you that this document can be as simple as that. 

To make your application look nicely spend a while and compose a cover letter, that wil make it easier for ACCA to check your 
documents and will make your application pack look more official. Here is the sample of the document that I used:

http://dipifr.net/wp-content/uploads/2011/10/Sample-cover-letter.bmp

Ok, and now it’s time to move on to topic of today

 “the Framework for the Preparation and Presentation of Financial statements.”

Quite an important topic and to my opinion, simply FUNDAMENTAL!
It’s the base of all international financial reporting knowledge.  And I believe that knowledge of this one + IASB structure & standard
setting is a must for DipIFR exam. It will prepare you for further studies of standards and will provide you with fundamental principles, without which you might be lost in the ocean of technical words and rules.

The Framework was replaced by new Conceptual Framework, issued on 28^th September 2010.  And we should be thankful to IFRS Foundation that they issued it so close to our cut off date for examinable documents. As this makes new Framework not examinable, which is clearly explained in FAQ’s section  for DipIFR at accaglobal.

So now you happily go to IFRS.org to view the Framework and guess what you discover there. A new Conceptual
Framework : )  Thanks to DipIFR.info  we still have access to old text. You can view it here.

Best thing to do is to benefit from IAS Plus module for Framework
(http://www.deloitteifrslearning.com/). As if you start reading Framework straight away, you might fall asleep or get bored in no time. While in fact Framework is not boring, when it’s explained well.

IAS Plus module presents Framework as an ancient building, where separate parts of that building represent separate parts of Framework. Good idea, to my opinion, as it’s easy to remember theory by making associations to some pictures.

Other  publicly available sources to study this subject are the following ACCA articles:

 The IASB’s Conceptual Framework for Financial Reporting. 

The need for and an understanding of a conceptual framework.

Don’t beconfused about name “conceptual”. Currently in ACCA materials, conceptual framework means The Framework (old version), not the new “Conceptual Framework” document.

Reason for calling old one conceptual is for separating it from regulatory framework. The latter refers to bodies governing anything related to IFRS, it was covered in Day 4 of this blog. While the document of framework itself contains concepts on thebase of and in accordance with which Financial Statements should be prepared.

Plus you can easily access any F7 (Financial reporting ACCA paper) free materials for this topic:

1) Emile Wolf
- http://emilewoolfpublishing.com/product.asp?pid=244&cs=39.  For framework see page 13

I appreciate EW books a lot. Quite informative, with many practical examples. And all that for FREE! Highly recommended.

2) EXP 
- http://www.theexpgroup.com/expand/11-f7_financial_reporting_int.html

Very nice resource where you can find not only notes but also relevant videos, which make studies easier and enjoyable.

If you work out all of those materials, it will be more then enough for Framework, however if u got ATC or BPP
DipIFR materials, you’ll find them quite useful as well. Both are good for this topic with BPP Conceptual Framework chapter being a bit more detailed.

 Syllabus requires you to UNDERSTAND and INTERPRET the FinancialReporting Framework.

Just in case if those key words used by examiners still confuse you, I suggest you to check one ACCA article, written by F5 examiner: Approaching written articles(see end of article). If you never sat ACCA exams, I strongly recommend it,  because such key words like “understand, interpret, evaluate, discuss etc” might be quite straightforward, but in reality they cause  a real problem to candidates. A common mistake is to ignore those key words in hope that if you write everything you know about the subject, you will get your marks.  Wrong approach really ! you will waste your time writing those oceans of words and gain really just few marks. While if you provide in your answer only those bits that examiner is asking you about, you will avoid wasting time and will get your marks. Avoid those oceans of words as much as u can. Use spaces between paragraphs of your answer to make it easier to read, use bullet points style to make it easier for marker to see main ideas. If you were a marker and you were supposed to check , say, 10 scripts in one evening, what would u feel easier to read and mark : several pages of  text or an answer where ideas are clearly separated,  maybe even underlined?  I guess each time you would see those pages of plain text without or almost without any paragraphs, you would get bored immediately, not mentioning that those pages that poor markers have to mark are filled with handwriting which, let’s be honest to yourselves, doesn’t look lovely as a result of exam stress and rush. So have mercy for those markers!

Well, those ideas might be helpful generally, but  we should be clear that for DipIFR exam theory is important but not as important as ability to prepare and analyze Financial Statements quickly. So theoretical bits must be studied in smart way and in case if examined, you should provide relevant bits answering exactly what examiner wants from you.

To my opinion,   understand and interpret means that you should be familiar with all important bits of framework and be able not only to describe any of them but also to provide your opinion.

Now you might be asking yourself, should I even bother studying it? So you open topics allocation in past papers questions and see that it was directly examined just once in June’04, Question 5. It asked for strenghts and weaknesses of histocial cost system. And asked to justify why the use of current value measurement system for financial instruments is more appropriate then historical cost. 

If u go even deeper to past there were two other questions on framework , one in December 94, another in June 98. Both of them were examining the principle of substance over form.

So, needless to say that it’s rarely examined directly. However it is indirectly examined in almost any question and you ‘ll see it in further studies.

It should be understood that Framework is NOT an accounting standard. And cases of conflict between standards and the Framework, requirements of standards prevail.
Luckily, those cases are rare. 

Framework itself is a statement of generally accepted theoretical principles which form a frame for financial reporting.

When you think of Framework, i think it’s a good idea to study summary of it’s contents carefully. That will help you to understand what it actually includes, using those you’ll just need to learn some key terms and then it’s up to you to decide whether that basic knowledge is enough or you want to go to details.

As for me, i don’t see a better way to memorize Framework’s “building bricks” but to present those in simple scheme (I still suggest to check
IAS plus learning module and it’s “ancient building” for Framework).
See below.

Purpose of framework is shown clearly in the introduction part of this document:

It should be noted that Framework is concerned with general purpose financial statements.

Now what are those? Well, the main statements that you might hear about daily:

- Statement of financial position ;

- Statement of comprehensive income;

- Statement of changes in financial position (eg a statemement of cash flows)

- Notes, other statements and explanatory material

They are directed towards common needs of a wide range of users.
 That’s why they are said to be general purpose statements.

Apart from those there are special purpose financial reports, such as prospectuses and computations prepared for taxation purposes, reports of directors, statements of chairman, various documents prepared by management etc.

Now guess, under IFRS, who do you prepare financial statements for?

Directors? …right

well, in fact  financial statements are prepared for a large group of users. But your main goal are investors, those guys who you want to grab money from And as you will see later, this focus on investors influences the rules for preparation for statements alot.

However each group of users is important, plus each of them has it’s specific needs.

Here is a list of those:

1. Investors and their advisers + shareholders

They are providers of risk capital, so their main concern is risk inherent in and return provided by investments.  

Investors additionally need information to be able to decide whether to buy, hold or sell.  And shareholders need information to be able to access the ability of entity to pay dividends.

2. Employees

They simply  want to know whether they will be paid or not and whether their company is stable enough or they should check what’s new on monster.com

Thus they need information about the stability and profitability of their employer and its abillity to pay remunerations,  retirement and/or other employee benefits etc. 

3. Lenders

They  lend you something, say loans, so they are interested in whether you’ll ever return/repay it and as they are not charities, they expected to get a nice chunk of interest at amount and on conditions discussed beforehand.

4. Suppliers and other trade creditors

Those sell you some goods or services and guess what? They expect to be paid for that one day.  So they are interested in information that will allow them to determine whether amounts owed to them will be repaid when due. 

*Try to distinguish third  and forth group clearly , as it’s easily to mess those two.

5. Customers

Well those choose you among competitors as provider of anything. So they are interested whether their choice was right. Whether a company is a going concern, whether it’s stable enough, whether it’s worth dealing with!

6. Government and their agencies

Well, they want to know whether company is being “good”, whether it follows laws, pay taxes etc.  So they need information in order to regulate activities of entities, determine taxation policies etc

7. Public

Well, what public might be interested in, whether you have job positions opened, and what do you actually do.

So financial statements should reflect how envity contribute to local economy and contain information about its prosperity, recent developments and range of it’ s activities.

Here is a small diagram illustrating those users and their needs.

OBJECTIVES OF FINANCIAL STATEMENTS

Next “brick” is – objective of financial statements.

Well nothing much is required to know here. Main objective of FS is to provide information about the financial position, performance and changes in financial position of an entity that is useful to a wide range of users in making economic decisions.

 Information about financial position (which economic resources it controls, what is it’s financial structure, situation with it’s liquidity and solvency, and capacity to adapt to changes) is provided by statement of financial positon.

Information about financial performance (profitability, potential changes in economic resources that it is likely to control in the future, variability of perfomance, capacity to generate cash flows from existing resources  base) is provided by statement of comprehensive income.

Information about changes in financial position (investing, financing and operating acitivities, ability to genearal cash and cash equivalents and the needs to utilise those) is provided by statement of cash flows.

UNDERLYING ASSUMPTIONS

Now a very important “brick” – Underlying assumptions.

There are just two of those  : accruals basis and going concern.

1) Accruals basis means that you need to recognize / record transactions in the same period that they occur (you don’t need to wait till the payment is received or made).

If you are asked, what’s the use of accruals basis?

well it shows future obligtaions and cash to be received in the future. At the same time it allows users to see infromation about past transactions quicker which allows them to make economic decisions well beforehand.

Accruals often mean same thing as  matching!

Matching principle means that expenses are matched against revenues.

That means expenses are recognised when obligations incured (goods transfered or services orffered) and offset against recognised revenues which were generated from those expenses, no matter when cash is paid out!

It is opposed to cash accounting, under which expenses are recognised when cash is paid in or out no matter when obligations incurred. 

2) Going concern means that entity will continue in operation for the foreseeable future. It is assumed that the entity has neither the intention nor the need to liquidate or curtail materially the scale of its operations.

However if entity’s situation is not that nice, it might need to use another basis for preparation of financial statements, e.g. liquividation basis .

What makes this brick important, well those principles pop up all the time, and you’ll have to apply them in any question.

QUALITATIVE CHARACTERISTICS

Another nice brick.  And here for your good sake don’t try just to memorize those. Rather try to understand them.

Another nice way to make mnemonics for those, as those have way higher chance to stay in your poor overloaded brain then text.

There are 4 characteristics :

-  Understandability;

-  Relevance;

-  Reliability;

-  Comparability.

To my opinion, URRC seems to be a nice mnemonic for those.

Understandability

Financial information provided by financial statements should be readily understable for users.

However it doesn’t mean that you should sit and worry that words like “derivatives” will cause users of FS a mental shock and brain collapse.

Users of financial statements are assumed to have a reasonable knowledge of business and economic activities and a willingness to study the information with reasonable diligence.

Information cannot be excluded from financial statements solely on the basis that it might be too complex for  certain users.

Relevance

This one means that in order to be useful information provided in FS  should be relevant to decision making.

Well that literally means that each group of users should find anything in your statements that is meaningful for them.

Information is relevant when it influences the conomic decisions of users by helping them evaluate past, present or future events or confirming or correcting their past evaluations.  

Relevance of information is affected by it’s nature and materiality.

If, say, you are member of public and you are researching about trends in development of company , it’s activities etc, you are you are an employee and you heard that major customers refused to cooperate with company.

In this case nature of information alone is enough to be relevant to their decision making.

In other cases, both nature and materiality are important.

Information is material if it’s omission or misstatement could influence the economic decisions of users.

Say, some inventory was purchased for $25 mln.

To users who will be investigating this transaction both it’s nature (what was actually bought, who bought it, who sold it , any special conditions etc)  AND materiality (amount of transaction, % in total amount of similar transactions etc) will be important.

Reliability

To be useful information must be reliable.

Well, information is reliable , when it’s free from material misstatements and bias and when users can depend upon it.

To be reliable, information must satisfy the following concepts:

- Faithful representation  of transactions and events

 -Substance over form

Financial leasing is when you give an asset as lease but in fact all risks and rewards attached to that asset are transfered to lessee. And prior to IFRS 17, in this situation lessee would enjoy anything it can enjoy about this asset and as it’s leasing it, he didn’t need to reveal this information in SFP, as legal title belongs to owner, lessor. Well situation was changed by IFRS 17 and now such leased asset should be reported as an actual asset of lessee, and not in lessor’s.

So when you analyze this or that transaction you should examine it very carefully. In documents “on the surface” it might appear to be one thing, but in reality, it might be something completely different and thus requiring a different way of treating it.

Pay attention to sales. One entity might sell an asset to another, so legal title passes from one party to another,  but in reality those two might arrange it in such a way that a company that sold will be still enjoying the risks and rewards of ownership. Say it’s sold and leased back for remainder of life. It this case it’s not a sale!! It’s a certain financial arrangment ending by financial lease  and “selling” company can’t take away this assets from it’ s statements and what it earned from sales should be treated as a loan.

One more alarming indicator is when assets are sold above or or below fair value. Think logically about it. If entities are sellng an asset below fair value. Why would they do it?! No one will sell at loss unless he is forced to do it, or cirmustances don’t allow to sell otherwise, or they have a nice plan behind it. If we return to previous example when asset is sold and then leased back. If u sell it at lower price, then your future rental payments can be also reduced. And how about selling below fair value. Why would someone buy? aren’t there cheaper products proposed by competitors? This again should lead to some financial arrangment in course of which both parties will have their benefits.

Well, now it doesn’t mean that you should assume that there is something hidden in any transaction. No, just pay attention to indicators and facts given by examiner.

- Neutrality

This one means nothing more but that information in FS should be free from bias.If FSs are made in such a way that their reader will take certain decisions which are predermined by composer of FSs, then those FSs are not neutral.

- Prudence

As it was said above, unless you are a God, you can’t really predict future (let’s leave clairvoyants apart).  And if you are God, well …leave me a message ) 

Due to that prepares of FSs often face uncertanties that surround events and circumstances (collectivity of doubtrul receivables, probable useful life of plant and equipmentl, number of claims that may arise against you etc).  You can’t predict them, however you can esitmate possible negative effects and prepare for them. And by preparing for them you act on the grounds of prudence. If you know that at certain place there might be a hole in ground , you will surely be watching where you are going!

So, prudence is the inclusion of a degree of caution in the exercise of the jugdgements needed in making the estimates required under conditions of uncertainty.
This is required to ensure that income or assets are not overstated and liabilites or expenses are not understated.

Say someone raised a claim on you. You don’t know the result yet, but you know that you know that most likely you will loose this case, so what you should do is to include a provision for the amount of claim in your SFP.

And now you might say, wow!  This gives you so much freedom in making FSs. Well, unfortunately no, different cases and potential problems and misuse were analyze and IAS 37 was born. Which disallows the creation of hidden reserves or excessive provisions, deliberate understatement of assets or income or overstatement of liabilities and expenses. Plus neutrality issue arise, as financial statements that are rather made up with certain purpose in mind  then prepared on the basis of rules are not neutral and thus not reliable.

- Completeness

A good friend of mine invented a nice mnemonic for those SCNPF (Sue Can Never Play Football).
What I like about this mnenomic is that you just can’t forget it

 I must stress it here, that those concepts are very very important in International Financial Reporting. They influence rules of standards alot and you’ll find reflection of those concepts in many standards.
Most frequently examined are PRUDENCE and SUBSTANCE OVER FORM.

 Comparability

One of the best outcomes of having a single set of principles for preparation of FSs for different entities in diferent coutnries is their comparability.
Though IFRS do not provide any samples of documents and any strict rules about how statements should be prepared, how they should look like, they do provide guidances and principles . And the result is that all entities that adapt IFRS follow the same principles and thus statements that they prepare statements can be relatively easily compared , which helps users to make their decisions.

Users of financial statements need to be able to compare financial statements :
- of one entity trhough time (to see how it develops, analyze financial position and performance better);
- of different entities (to compare efficiency of different companies).

Comparabiliy implies that effects of like transactions and events are initially and susequently measured and presented in consistent way.

However comparability should not be confused with uniformity. And it is not appropriate for an entity to ontinue accounting in he same manner for a transaction or other event if the policy adopted is not in keeping with the qualitative characteristics of relevance and reliability.

In other words, say you choosed certain accounting policy, you issued it and you keep applying it from year to year . However it can be amended if needed, but users should be informed of any changes in those policies and effects of these changes.

 So those are qualititive characteristics and everything could be perfect, if not the fact that nothing is ever perfect.
As you might have guessed while studying them,  innevitably various conflicts between those charactericts may arise. Biggest conficts arise between relevance and reliability:

 - timeliness :  When financial statements are prepared, sometimes it’s hard to gether all the required information on time and when you finally manage to gether all the necessary information it might be already too late. So financial statements that you prepare which contain all the facts about transactions and events will surely be very reliable, but they most likely won’t be of much relevance, because there are strict deadlines for preparation of FS and users need them on time.

- cost vs benefit : this issue can be expresed in one phrase : “sometimes it just doesn’t worth it”.
The cost of getting/acquiring and providing certain infromation might be sometimes so high that it exceeds the benefit of providing it.
But our goal is to make it the other way round. Benefit should exceed cost, otherwise you’ll end up having losses.

So the big goal of prepares of financial statemetns is to find balance between those characteristics

 

THE ELEMENTS OF FINANCIAL STATEMENTS

There are 5 main elements.

3 of them relate to financial position (and shown in statement of financial position) :

• assets;
• liabilities;
• equity.

2 of them relate to
financial performance (and shown in statement of comprehensive income) :

• income;
• expenses.

From the first site it might seem classification of items to this or this element might seem obvious, but it fact it might bring lots of confusion.

Check Pilot paper , Q3  , and try to propose an appropriate treatment for those 3 transactions. I don’t know how about you, but for me it was complicated at first.  Common sense do helps sometimes, but often it just makes you stuck, so what you rather need is knowledge of rules and practice.

Assets

Those have 3 main characteristics:

1) It is a resource controlledby the entity

(not necessarily owned! e.g.  financial lease , remember substance over form principle. When you are entitled to all the risks and rewards associated with the asset, then you control it. There are resources that you can’t control, like your stuff, it might appear to be quite a valuable asset of a company, but any member of stuff might leave almost any time,  so you don’t really control it. Thus stuff, workforce is not an asset);  

2) as a result of past events

(e.g. when you bought an asset, you got an asset. When you only think or dream of buying it, you don’t have any asset, thus nothing to recognize so you don’t really control it. Thus stuff, workforce is notan asset););

3) from which future economic benefits are expected to flow to the enterprise.

(Future economic benefit of an asset is the potential to contribute directly or indireclty to the flow of cash and cash equivalents to the entity. It might also provide a capability to reduce cash outflows, e.g. alternative manufacturing process or material may lower the costs of production.) 

Many assets have physical form but it’s not a must for an asset (remember intangible ones like patents, licences, copywrites). What is important instead is the ability of those to bring future economic benefits.

Examples of assets are : property, plant and equipment, inventory, trade receivables, investments.

Liabilities

Again 3 main characteristics:

1)It is a present obligation

(it means existing one. If u only plan to buy an asset, it doesn’t mean that you already have an obligation).

2) arising from past events

(e.g. acquisition of goods and the use of services gives rise to trade payables (unless paid in advance or on delivery) or the receipt of a bank loan results in an obligation to repay the loan)

3)  the settlement of which is expected to result in an outflow of economic benefits from the entity

(e.g. payment of cash, transfer of other assets; provision of services, replacement of that obligation with another obligation or conversion to equity)

Certain liabilities when being measured require some degree of estimation. Those are provisions , e.g. provision made uner existing warranties, provision for existing claims , provision to cover pension obligations. To be recognised they should satisfy the defintion of liabilities.

Examples of liabilities are : loan notes, finance lease obligations, trade payables, deferred tax.

Equity

Well this element can be expressed as a simple formula  C = A – L

Equity is a residual interest in the assets of the enterprise after deducting all its liabiltiies.

And as it’s a residual interest, this element depends on your measurement of assets and liabilities, it is simply a balancing figure.

Examples of equity items are : shares, share premium, equity reserve etc

Income

1)increases in economic benefits during the accounting period

(see definition of economic benefits above. )

2)in the form of inflows or enhacements of assets or decreases of liablities

3) that result in increases in equity  (so your capital increases…)

4) other thent those relating to contributuions from equity participants.

(… but not by their contributions. It might be purchase of shares or
any other relevant transaction)

Both revenue and gains are included in the definition of income.

Difference between those is that revenue arises in the course of ordinary activities of the entity  (dividends, rents, interst, fees, sales etc) , while gains are other items that meet definition of income but may or may not arise in the course of ordinary activities of entity (e.g. revaluation of assets, gains on disposal of non current assets ). Unrealised gains are also parts of income (e.g. on revaluation of marketable securities). Unrealised gains occur wheneveran asset is revalued upwards, but is not disposed of (not realised!).

Expenses

1) decreases in economic benefits during the accounting period

2)in the form of outflows  (e.g. cash or finished goods inventory) or depletions (e.g. depreciation of non current assets) of assets or incurrences of liabilities

3) that result in decreases in equity

4) other than those relating to distributions to equity participants.

If you memorized definition of income, this one will be easy to remember as it’s just opposite.

As in income we have items that arise in the ordinary course of activities and not. Here the situation is the same.

There are expenses, that arise in the ordinary course of activities (e.g. cost of sales, wages, depreciation). And there are losses  which represent other items that meet the definition of expenses and may or may not arise in the ordinary course of the entity (e.g. results of force majeur, and on disposal of non current assets below net book value). Unrealised losses (e.g. decrease in the carryingamount of assets due to impairment) are also part of expenses.

 

RECOGNITION OF THE ELEMENTS OF FINANCIAL STATEMENTS

Well, once you decided whether an item is an asset or a libility, equity, income or expense, you’ll need to put it to statements, incorporate it there.

However, to be recognised in financial statements an item must not only meet the definition of element, but also the criteria for recognition.

This criteria consists of two parts :

- It is probable* that  any economic benefit associated with the item will flow to or from the entity;  AND

- the item has a cost or value that can be measured with reliability.

*Note the difference between possible and probable.

Probable means that something has at least 50% chance to occur,  and possible has less strengh then this, in %s u can express it as between 5 to 50%.  So possible means that you think that something might happen, but you are rather
unsure. And probable means that you rather sure that something will happen.

Also keep in mind the double entry effect of trasnactions. It means that an item that meets the definition and recognition criteria for a particular eement for example an assset, automatically requires the recognition of another element, for example, income or liability.

Cost or value must be estimated. When however a reasonable estimate can’t be made, the item is not recognised in balance sheet or incoem statement.  E.g. the expected proceeds from a lawsuit may meet the definitions of both an asset and income as well as the probability criterion, however, if it’s not possible for the claim to be measured reliably, it should be recognised as an asset or as income .

However in cases like above, when an item meets the definition of element but doesn’t meet recognition criteria, yes , it can’t be recognised  , but it should be dislosed in notes or other explanatory supplementary material.
 That satisfies the concept of prudence.

Meanwhile, items that meet definition of certain element and the recognition criteria, should (=”must” in this case) be recognised in the balance sheet or income statement. Failure to recognised those can’t be justified by the fact that they are recognised in notes or any other supplementary material.

An item that fails to meet the recognition criteria at a specific point in time may still qualify for recognition at later date as a result of subsequent (that that will happen later) circumstances or events.

 

MEASUREMENT OF THE ELEMENTS OF FINANCIAL STATEMENTS

Measurement is the process of determining the monetary amounts at which the elements of financial statements are to be recognised and carried in the statement of financial position and statement of comprehensive income.

It was mentioned in recognition part that item should be reliablymeasured.

But how to measure it? which bases to use?

There are 4 of such bases given in the framework :

 1) Historical cost

Assets are recorded at the amount of cash or cash equivalents paid or the fair value consideration given to acquire them at the time of their acquisition.  (So it’s simply how much u paid for this or that asset)Liabilities are recorded at the amount of proceeds receved in exchange for the obligation or in some circumstances (e.g. taxes) for the amounts of cash or cash equivalents expected to be paid to satisfy the liability in the normal course of business.

 2) Current 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.

 3) Realisable/ settlement value

Assets are carried at the amount of cash and  cash equivalents that could currently be obtained by selling the asset in an orderly disposal (realisable value).  (With exemption for land and buildings which price grow too quickly andso they are revaluated periodically to a current vlue, otherwise information in FS would be misleading. Such revaluations created unrealised profit).Liabilities are carried at their settlement values, that is, the undiscounted amounts of cash or cash equivalents expected to be paid to satisfy the liabilities in the normal course of business (settlement value).

 4) Present value

Assets are carried at the present discounted value of the future net cash inflows that teh item is expected to generate in the normal course of business.Liabilities are carried at the present discounted value of the future net cash outflows that are expected to be required to settle the liabilities in the normal course of business.

Discounted value is based on the loss of value of money over time. So discounted value brings that past value equal to same amount of present.

Basis of measurement  that is used most often is historical cost. Reason : often (but not always) easy , reliable and objective, it usually has documentary evidence to prove the amount paid  to purchase an asset or pay an expense. Plus initial recognition is most often  made using historical most data.

However it is always combined with other bases.  So some items are measured at historical cost, some at current and other at present value.

Nowadays another base is often used : fair value.

Recently to respond the needs of prepares of financial statements IASB even issued a new standard solely on fair value measurement – IFRS 13.

Fair valueis the amount for which an asset could be exchanged, a liability settled or an equity instrument granted could be exchanged between knowledgeable, willing parties , in a arm’s length transaction.

That means that those parties should be aware of what they are doing and not forced to makes a deal, and they should be independant from one another and not making a hidden financial arrangement.

 
CONCEPTS OF CAPITAL AND CAPITAL MAINTENANCE

Framework provides 2 concepts of capital :

- Financial concept

- Physical concept

Capital = productive capacity that the entity is based on (e.g. units of output per day)

Well, for exam purpose financial concept of capital is used.

The concepts of capital give give to the following concepts of capital maintenance.

- Financial capital maintenance

Under this concept profit is earned only if financial amount of net assets at the end ofperiod exceeds te financial amount of net assets at the beginning of the period, after excluding any distributions to, and contributions from owners during the period.

- Physical capital maintenance

Under this concept profit is earned only if the physical productive capacity of the entity at the end of the period exceeds the physical productive capacity at the beginning of the period, after excluding any distributions to, and  contributions from owners during the period.

 If physical concept is sed that the entity will need to adopt current cost as basis for measurement. Financial concept does not request for any specific basis for measurement

Well that’s it,

In my opinion those things mentioned above are more then enough for your theoretical knowledge of framework.

However, exam questions are not that easy, and to answer them you’ll need to apply not only the knowledge of framework to say, dedice which item is this or that element, but knowledge of standards as well.

I would suggest to focus your attention on the following theoretical bits of Framework :

- role of framework in developing standards;
- underlying assumptions (accruals basis and going concern);
- substance over form, explain importance (possible scenarios to illustrate how this principle works).
- different cost measurement systems;
- concept of prudence;
- qualitative characteristics and mainly comparability;
- elements of financial statements;
- needs of different groups of users of financial statements;
etc

BPP and ATC books and kits provide quite interesting exam format questions for some of these topics.

I will suggest same thing as i did before: no need to study it for one whole day and then leave it forever. Study what you can at one day, then go on with different topics, then return to framework, revise what u studied before and learn something new and so on.  Study those a bit heavy theoretical bits only when you feel that your brain can understand any word you read, and not when you hardly see what’s written on the page

Good luck!

Looks like this topic is quite popular and important. I believe that it always has a high chance to be examined.

You can immediately divide it to 3 sub-parts and study them in any order u want:

- Structure of IASB;

- IASB’s constitution;

- Standard –setting process.

Theory might become excessive and a bit boring, but I suggest that you note for yourself only certain key details (names of parts of structures, key terms, key functions, main steps, numerical data etc) and the most important – to get the logic, to UNDERSTAND what it’s all about. Make associations, draw tables of graphs , mind maps – anything that helps you to memorize more efficiently, and revise all this stuff regularly till u feel absolutely okay about it. I remarked that even a very small revision of the same thing EACH DAY makes real miracles. In brief, you can memorize absolutely anything in just a week.

After studying materials presented the site of IFRS Foundation I got inspired and decided to draw some simple diagrams, see below.

1. Constitution

Somehow I think that it’s more logic to start studying IASB from this topic, as constitution will guide you from general issues about IASB to it’s structure.

CONSTITUTION is open for public and can be easily downloaded here. That is the constitution of IFRS Foundation and IASB’s part is simply placed inside it.

It includes: preface, objectives of IFRS Foundation and an excessive description of Foundation’s governance and structure. It finishes by the annex describing criteria for IASB members.

And here all the attention should be placed on IASB, IASB and again IASB. In other words, I suggest to memorize everything related to IASB and simply to read all the rest. Somehow it looks like for exam purposes IFRS Foundation and IASB are considered almost like the same thing. But it’s nothing but my personal opinion.

• Preface describes how and when the Constitution of IFRS Foundation (former Internation Accounting Standards Committee – IASC) was set initially, then how it was revised due to change in the organisation (we don’t need to know more then the fact that the name was changed). It states that Constitution should be revised each five years by Trustees and describes how and when it was revised.
• Now an important part – objectives! Those are an absolute must to memorize. See page 2 of constitution. They are the same for IFRS Foundation and IASB and there are 4 of them.  You can see an altertive shorter version here. 
• Governance by Trustees and structure (see below). 
• Administration – held by administrative office located in location determined by Trustees.
• ANNEX

2. Structure

After analyzing the structural diagram presented on the site of IFRS Foundation and by adding some bits from Constitution, I composed my own diagram to avoid lengthy descriptions.

For every part of structure it’s important to memorize the name, yea, it will be the hardest : )) and it’s main responsibilities and functions. They all can be found in details in Constitution. Actually that’s what the Constitution is mainly about.

MONITORING BOARD is important because it approves and appoints Trustees and it serves as a link between those Trustees and public authorities.

Who are Trustees? Well those are smart and experienced guys who govern IFRS Foundation.

There goes IFRS Foundation itself which consists of : IASB, IFR Interpretations Committee and IFRS advisory Council. Foundation Trustees select, approve and appoint members of those sub-structures and monitor their work on regular basis. They should be no more 22 trustees from different parts of the world to maintain geographical balance. Current “head count” gave result of 20, though in fact they are 21. Former Chairman passed away last year, now they are in the process of selecting a new one.

Trustees are appointed for a renewable term of three years.

It should not be forgotten that Foundation is responsible for financing part: that is approval of budgets, and secure of funding. They determine rates of pay and in simple words, determine how much money should go to this or that activity.

Main objective of IFRS Foundation is to prepare a set of high quality standards and it performs via International Accounting standards Board (IASB).

Well that is our main sub-structure. That is the body that prepares and issues standards after the long and tough standard setting process. It consists of 16 members. Current chairman – Sir David Tweedy will leave this July and he will be replaced by Mr. Hans Hoogervorst. They are appointed by Trustees for an initial term of 3-5 years. Chairman automatically becomes a Chief executive of IFRS Foundation, responsible for establishment of senior staff management team of Foundation.

Main responsibilities are shown on the diagram and described in Constitution.

IFRS Interpretations Committee is appointed by Trustees and serves to interpret existing standards and to give guidance. They develop IFRICs and SECs which are later approved and issued by IASB.

IFRS Advisory Council is again appointed by Trustees and serves as a body that gives advice to both IFRS Foundation and IASB. Once there is a standard setting process or another major project, that’s when everyone needs to consult this body first , and hardly anything can be issued without it’s advice. Why? Well first of all because it’s part of Consitution to use it’s advice. Secondly, because it administers a forum where it collects views of interested parties. And those views are extremely important for issuing this or that standards for example.

Meanwhile IASB forms working groups that serve as minor advisory councils providing their advice and views on agenda projects.

And at the bottom of this tower lies all possible support operations that IFRS Foundation sets and keeps daily.

I think it’s also good to know at least little bit about the criteria for IASB members (last two pages of Constitution).

So how do u think, who can become an IASB member … maybe you or me? Yea , sure … : )

Of course a high level of education, experience, expertise and personal qualities is required from those. And in brief those guys should be ..bloody experienced : ) You can read about each of current members on the site to get the idea. Well, 8 main qualities are listed:

• Technical competence and knowledge of financial accounting and reporting (the second part makes me smile:) );
• Ability to analyze;
• Communication skills (yea, they need to be able to talk, as during their work they will mostly be talking, talking, talking, talking, talking..);
• Judicious decision making;
• Awareness of the financial reporting environment;
• Ability to work in a collegial atmosphere;
• Integrity, objectivity and discipline;
• Commitment to the IFRS Foundation’s mission and public interest.

3. Standard setting process

Standard setting process is described on the site of IFRS Foundation. But to my opinion this description is a bit confusing. However, you still can get the main idea.

I summarized main ideas in the diagram below.

6 main stages, which should be learnt by heart: 

1)    Setting the agenda.

Well before that various research are held, which reveal the necessity of setting a common rule in this or that area. And so , issues revealed and the whole work starts.

Firstly they meet meet meet and meet, discuss a lot, consult IFRS Advisory Council and after that issue the agenda .

2)  Project planning

Well they got agenda, so they have the idea in mind of what they are going to do. But now they need to decide: how, who will be responsible for this and that, set a budget etc.

And first of all they decide whether they will conduct project alone or with another standard –settler. And further steps will be similar but will still differ depending on this choice.

Then working group is formed, which consists of members of IFRS Foundation, but it might also include members of staff from other accounting standard – settlers if appropriate.

3) Development and publication of Discussion paper

Well this DP is something like an embryo of the future standard, though, it’s OPTIONAL to issue it. If the project is held by IASB alone then DP comes from agenda, if another standard settler is involved then it may result form research project of the latter. So if standard setter is involved, that is him, who publishes the draft of DP.

DP includes mostly ISSUES, related to IFRS, which by use of DP are reviewed and are published for PUBLIC COMMENTS.

Working groups and standard settlers are involved and surely suggestions of Advisory Council are taken into account.

All discussions are held in public sessions. Publication of DP requires a simple majority vote by the IASB. Constitutional requirement that no less then 60% or Board members are present at that meeting.

4) Development and publication of an Exposure Draft

So the baby IFRS starts to be recognizable. ED is a MANDATORY step in this whole due process, it’s publication is required by Constitution. And now it’s not a collection of issues, it is a first version of the future standard, it also includes additional provisions.

Before publishing issues on the basis of staff researches and recommendations are considered, comments received on DP are collected together with suggestions from our beloved Advisory Council , working groups and standard – settlers.

Once all the issues are collected and resolved, ED’s draft is published. Later on IASB ballots on it. Final publication of ED requires approval of 10 of the 16 IASB members. Once being published, this document is open for PUBLIC COMMENTS.

The period of this comment should be no less then 60 days, usually it lasts 90 – 120 days.

5) Development and publication of IFRS

Yay, standard is going to be born before you finish reading this sentence

Sigh …well, not really. Once comments on ED are received, how do u think what those guys do. 3 attempts. Indeed, they will meet and discuss , discuss , discuss.

Things don’t always go well, plus first ED might be not so ideal, so re-exposure of ED might be considered. This decision to publish second ED should be taken by IASB. And once IASB ensures that all ED issues are solved, they start to prepare a draft of IFRS.

They issue it, then vote. IFRIC reviews it. After that almost a final version is published on the site.

And at the end of the whole due process IFRS IS FINALLY ISSUED!    

6) After IFRS is issued

You might think that what we discussed above is so complicated, lengthy and effort consuming. But well, honestly, I believe that a much harder work starts once IFRS is published and put to practice.

Now IASB has to hold regular meetings with interested parties to figure out which issues are not covered by IFRS, which issues require reconsideration and improvement, which are too hard to put to practice etc. It also has to monitor changes in financial environment and regulatory requirements. IFRIC starts it’s work on interpretations and guidance, Advisory council monitors comments on forum etc. All this work may result in amendment of existing IFRS, or publication of another IFRS, that will either replace existing one or will be added to other standards.

So that should be enough about standard setting.

And I believe after Foundation’s objective, this is the second most important topic!

It gives the examiner so much freedom of which issue to examine: any stage of the process, brief description of the whole process, anything about DP and/or ED, discussion of differences between those two and draft of standard, how pre-ballot draft is issued and how the standard is finally issued, all the procedures after it is issued, how IASB cares about consistency in interpretation and / or application of IFRSs etc.

All possible questions should be analyzed and adequate answers should be prepared.

- Many national accounting systems are very tax driven.  Till the point that there exist simultaneously two systems of reporting :  accounting and tax.  So every change in accounting system poses a dilemma: what do to with tax one? Tax guys are often not happy with new rules. So introduction of IFRS will cause bigger and bigger differences between those two systems;

- Those who are engaged in the process of standard setting should understand them well.  In other words, how e.g. you can comment on standards and make proposals if u don’t even understand what it is about. We are humans, not robots, so it all takes time and efforts.

- Cost.  Nothing is free, well IASB members are not volunteers as well : ) And as usual financing is limited. So good budgeting system is required. But it all again takes time and slows down the whole process and poses some limits on activity.

- The process of developing a standard, discussing it and elaborating certain rules is sometimes and often quite tough. Everyone has his viewpoint, his background, experience and vision.  It’s hard to come to an agreement and to satisfy everyone. 

- As it’s been mentioned before, stakeholders are not always happy with new additional workload caused by IFRS. Implementation of new standards creates a lot of additional work for them.  IFRS departments have to be created, specialists need to be trained, accounting departments need to familiarize with IFRS, software should be choosen and adjusted, chart of account s, accounting policy and all the drafts of documents are to be created etc etc etc. Not saying about the situation when implementation of IFRS within the country causes changes in national standards.  So imagine a usual 45 + aged accountant who got used to work in one way now has to forget all the principles that he followed before and changed his mindset for something brand new and in fact doubtful for him.  In addition, not every company will be ready to disclose more information in it’s reports then it usually does.

- Sometimes standards might cause a real complexity. Not only they become complex themselves, but they also appear to be too complex to apply. 

  Well, that’s it in brief.  Looks like, it’s better to revise theory again and again. I remarked from past exams that sometimes it’s easy to remember some points but so hard to formulate those points clearly in exam.  Definitely better to read and reread and reread.