IAS 7 Statement of Cash Flows

http://www.iasplus.com/standard/ias07.htm

Objective of IAS 7

The objective of IAS 7 is to require the presentation of information about the historical changes in cash and cash equivalents of an entity by means of a statement of cash flows, which classifies cash flows during the period according to operating, investing, and financing activities.

Fundamental Principle in IAS 7

All entities that prepare financial statements in conformity with IFRSs are required to present a statement of cash flows. [IAS 7.1]

The statement of cash flows analyses changes in cash and cash equivalents during a period. Cash and cash equivalents comprise cash on hand and demand deposits, together with short-term, highly liquid investments that are readily convertible to a known amount of cash, and that are subject to an insignificant risk of changes in value. Guidance notes indicate that an investment normally meets the definition of a cash equivalent when it has a maturity of three months or less from the date of acquisition. Equity investments are normally excluded, unless they are in substance a cash equivalent (e.g. preferred shares acquired within three months of their specified redemption date). Bank overdrafts which are repayable on demand and which form an integral part of an entity's cash management are also included as a component of cash and cash equivalents. [IAS 7.7-8]

Presentation of the Statement of Cash Flows

Cash flows must be analysed between operating, investing and financing activities. [IAS 7.10]

Key principles specified by IAS 7 for the preparation of a statement of cash flows are as follows:

• operating activities are the main revenue-producing activities of the entity that are not investing or financing activities, so operating cash flows include cash received from customers and cash paid to suppliers and employees [IAS 7.14]
• investing activities are the acquisition and disposal of long-term assets and other investments that are not considered to be cash equivalents [IAS 7.6]
• financing activities are activities that alter the equity capital and borrowing structure of the entity [IAS 7.6]
• interest and dividends received and paid may be classified as operating, investing, or financing cash flows, provided that they are classified consistently from period to period [IAS 7.31]
• cash flows arising from taxes on income are normally classified as operating, unless they can be specifically identified with financing or investing activities [IAS 7.35]
• for operating cash flows, the direct method of presentation is encouraged, but the indirect method is acceptable [IAS 7.18] The direct method shows each major class of gross cash receipts and gross cash payments. The operating cash flows section of the statement of cash flows under the direct method would appear something like this:
  
  

  Cash receipts from customers	xx,xxx
  Cash paid to suppliers	xx,xxx
  Cash paid to employees	xx,xxx
  Cash paid for other operating expenses	xx,xxx
  Interest paid	xx,xxx
  Income taxes paid	xx,xxx
  Net cash from operating activities	xx,xxx

  The indirect method adjusts accrual basis net profit or loss for the effects of non-cash transactions. The operating cash flows section of the statement of cash flows under the indirect method would appear something like this:
  
  

  Profit before interest and income taxes		xx,xxx
  Add back depreciation		xx,xxx
  Add back amortisation of goodwill		xx,xxx
  Increase in receivables		xx,xxx
  Decrease in inventories		xx,xxx
  Increase in trade payables		xx,xxx
  Interest expense	xx,xxx
  Less Interest accrued but not yet paid	xx,xxx
  Interest paid		xx,xxx
  Income taxes paid		xx,xxx
  Net cash from operating activities		xx,xxx

  
  
• the exchange rate used for translation of transactions denominated in a foreign currency should be the rate in effect at the date of the cash flows [IAS 7.25]
• cash flows of foreign subsidiaries should be translated at the exchange rates prevailing when the cash flows took place [IAS 7.26]
• as regards the cash flows of associates and joint ventures, where the equity method is used, the statementof cash flows should report only cash flows between the investor and the investee; where proportionate consolidation is used, the cash flow statement should include the venturer's share of the cash flows of the investee [IAS 7.37-38]
• aggregate cash flows relating to acquisitions and disposals of subsidiaries and other business units should be presented separately and classified as investing activities, with specified additional disclosures. [IAS 7.39] The aggregate cash paid or received as consideration should be reported net of cash and cash equivalents acquired or disposed of [IAS 7.42]
• cash flows from investing and financing activities should be reported gross by major class of cash receipts and major class of cash payments except for the following cases, which may be reported on a net basis: [IAS 7.22-24]
  • cash receipts and payments on behalf of customers (for example, receipt and repayment of demand deposits by banks, and receipts collected on behalf of and paid over to the owner of a property)
  • cash receipts and payments for items in which the turnover is quick, the amounts are large, and the maturities are short, generally less than three months (for example, charges and collections from credit card customers, and purchase and sale of investments)
  • cash receipts and payments relating to deposits by financial institutions
  • cash advances and loans made to customers and repayments thereof
• investing and financing transactions which do not require the use of cash should be excluded from the statementof cash flows, but they should be separately disclosed elsewhere in the financial statements [IAS 7.43]
• the components of cash and cash equivalents should be disclosed, and a reconciliation presented to amounts reported in the statement of financial position [IAS 7.45]
• the amount of cash and cash equivalents held by the entity that is not available for use by the group should be disclosed, together with a commentary by management [IAS 7.48]

IAS 10 Events After the Reporting Period

Key Definitions
Event after the reporting period: An event, which could be favourable or unfavourable, that occurs between the end of the reporting period and the date that the financial statements are authorised for issue. [IAS 10.3]
Adjusting event: An event after the reporting period that provides further evidence of conditions that existed at the end of the reporting period, including an event that indicates that the going concern assumption in relation to the whole or part of the enterprise is not appropriate. [IAS 10.3]
Non-adjusting event: An event after the reporting period that is indicative of a condition that arose after the end of the reporting period. [IAS 10.3]
Accounting

• Adjust financial statements for adjusting events – events after the balance sheet date that provide further evidence of conditions that existed at the end of the reporting period, including events that indicate that the going concern assumption in relation to the whole or part of the enterprise is not appropriate. [IAS 10.8]
• Do not adjust for non-adjusting events – events or conditions that arose after the end of the reporting period. [IAS 10.10]
• If an entity declares dividends after the reporting period, the entity shall not recognise those dividends as a liability at the end of the reporting period. That is a non-adjusting event. [IAS 10.12]

Going Concern Issues Arising After End of the Reporting Period
An entity shall not prepare its financial statements on a going concern basis if management determines after the end of the reporting period either that it intends to liquidate the entity or to cease trading, or that it has no realistic alternative but to do so. [IAS 10.14]

Disclosure
Non-adjusting events should be disclosed if they are of such importance that non-disclosure would affect the ability of users to make proper evaluations and decisions. The required disclosure is (a) the nature of the event and (b) an estimate of its financial effect or a statement that a reasonable estimate of the effect cannot be made. [IAS 10.21]
A company should update disclosures that relate to conditions that existed at the end of the reporting period to reflect any new information that it receives after the reporting period about those conditions. [IAS 10.19]
Companies must disclose the date when the financial statements were authorised for issue and who gave that authorisation. If the enterprise's owners or others have the power to amend the financial statements after issuance, the enterprise must disclose that fact. [IAS 10.17]

IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors

http://www.iasplus.com/standard/ias08.htm

Key Definitions [IAS 8.5]

• Accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements.
• A change in accounting estimate is an adjustment of the carrying amount of an asset or liability, or related expense, resulting from reassessing the expected future benefits and obligations associated with that asset or liability.
• International Financial Reporting Standards are standards and interpretations adopted by the International Accounting Standards Board (IASB). They comprise:
  • International Financial Reporting Standards (IFRSs);
  • International Accounting Standards (IASs); and
  • Interpretations developed by the International Financial Reporting Interpretations Committee (IFRIC) or the former Standing Interpretations Committee (SIC) and approved by the IASB.
• Materiality. Omissions or misstatements of items are material if they could, by their size or nature, individually or collectively, influence the economic decisions of users taken on the basis of the financial statements.
• Prior period errors are omissions from, and misstatements in, an entity's financial statements for one or more prior periods arising from a failure to use, or misuse of, reliable information that was available and could reasonably be expected to have been obtained and taken into account in preparing those statements. Such errors result from mathematical mistakes, mistakes in applying accounting policies, oversights or misinterpretations of facts, and fraud.

Selection and Application of Accounting Policies

When a Standard or an Interpretation specifically applies to a transaction, other event or condition, the accounting policy or policies applied to that item must be determined by applying the Standard or Interpretation and considering any relevant Implementation Guidance issued by the IASB for the Standard or Interpretation. [IAS 8.7]

In the absence of a Standard or an Interpretation that specifically applies to a transaction, other event or condition, management must use its judgement in developing and applying an accounting policy that results in information that is relevant and reliable. [IAS 8.10]. In making that judgement, management must refer to, and consider the applicability of, the following sources in descending order:

• the requirements and guidance in IASB standards and interpretations dealing with similar and related issues; and
• the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses in the Framework. [IAS 8.11]

Management may also consider the most recent pronouncements of other standard-setting bodies that use a similar conceptual framework to develop accounting standards, other accounting literature and accepted industry practices, to the extent that these do not conflict with the sources in paragraph 11. [IAS 8.12]

Consistency of Accounting Policies

An entity shall select and apply its accounting policies consistently for similar transactions, other events and conditions, unless a Standard or an Interpretation specifically requires or permits categorisation of items for which different policies may be appropriate. If a Standard or an Interpretation requires or permits such categorisation, an appropriate accounting policy shall be selected and applied consistently to each category. [IAS 8.13]

Changes in Accounting Policies

An entity is permitted to change an accounting policy only if the change:

• is required by a standard or interpretation; or
• results in the financial statements providing reliable and more relevant information about the effects of transactions, other events or conditions on the entity's financial position, financial performance, or cash flows. [IAS 8.14]

Note that changes in accounting policies do not include applying an accounting policy to a kind of transaction or event that did not occur previously or were immaterial. [IAS 8.16]

If a change in accounting policy is required by a new IASB standard or interpretation, the change is accounted for as required by that new pronouncement or, if the new pronouncement does not include specific transition provisions, then the change in accounting policy is applied retrospectively. [IAS 8.19]

Retrospective application means adjusting the opening balance of each affected component of equity for the earliest prior period presented and the other comparative amounts disclosed for each prior period presented as if the new accounting policy had always been applied. [IAS 8.22]

• However, if it is impracticable to determine either the period-specific effects or the cumulative effect of the change for one or more prior periods presented, the entity shall apply the new accounting policy to the carrying amounts of assets and liabilities as at the beginning of the earliest period for which retrospective application is practicable, which may be the current period, and shall make a corresponding adjustment to the opening balance of each affected component of equity for that period. [IAS 8.24]
  
• Also, if it is impracticable to determine the cumulative effect, at the beginning of the current period, of applying a new accounting policy to all prior periods, the entity shall adjust the comparative information to apply the new accounting policy prospectively from the earliest date practicable. [IAS 8.25]

Disclosures Relating to Changes in Accounting Policies

Disclosures relating to changes in accounting policy caused by a new standard or interpretation include: [IAS 8.28]

• the title of the standard or interpretation causing the change
• the nature of the change in accounting policy
• a description of the transitional provisions, including those that might have an effect on future periods
• for the current period and each prior period presented, to the extent practicable, the amount of the adjustment:
  • for each financial statement line item affected, and
  • for basic and diluted earnings per share (only if the entity is applying IAS 33)
• the amount of the adjustment relating to periods before those presented, to the extent practicable
• if retrospective application is impracticable, an explanation and description of how the change in accounting policy was applied.

Financial statements of subsequent periods need not repeat these disclosures.

Disclosures relating to voluntary changes in accounting policy include: [IAS 8.29]

• the nature of the change in accounting policy
• the reasons why applying the new accounting policy provides reliable and more relevant information
• for the current period and each prior period presented, to the extent practicable, the amount of the adjustment:
  • for each financial statement line item affected, and
  • for basic and diluted earnings per share (only if the entity is applying IAS 33)
• the amount of the adjustment relating to periods before those presented, to the extent practicable
• if retrospective application is impracticable, an explanation and description of how the change in accounting policy was applied.

Financial statements of subsequent periods need not repeat these disclosures.

If an entity has not applied a new standard or interpretation that has been issued but is not yet effective, the entity must disclose that fact and any and known or reasonably estimable information relevant to assessing the possible impact that the new pronouncement will have in the year it is applied. [IAS 8.30]

Changes in Accounting Estimate

The effect of a change in an accounting estimate shall be recognised prospectively by including it in profit or loss in: [IAS 8.36]

• the period of the change, if the change affects that period only, or
• the period of the change and future periods, if the change affects both.

However, to the extent that a change in an accounting estimate gives rise to changes in assets and liabilities, or relates to an item of equity, it is recognised by adjusting the carrying amount of the related asset, liability, or equity item in the period of the change. [IAS 8.37]

Disclosures Relating to Changes in Accounting Estimate

Disclose:

• the nature and amount of a change in an accounting estimate that has an effect in the current period or is expected to have an effect in future periods
• if the amount of the effect in future periods is not disclosed because estimating it is impracticable, an entity shall disclose that fact. [IAS 8.39-40]

Errors

The general principle in IAS 8 is that an entity must correct all material prior period errors retrospectively in the first set of financial statements authorised for issue after their discovery by: [IAS 8.42]

• restating the comparative amounts for the prior period(s) presented in which the error occurred; or
• if the error occurred before the earliest prior period presented, restating the opening balances of assets, liabilities and equity for the earliest prior period presented.

However, if it is impracticable to determine the period-specific effects of an error on comparative information for one or more prior periods presented, the entity must restate the opening balances of assets, liabilities, and equity for the earliest period for which retrospective restatement is practicable (which may be the current period). [IAS 8.44]

Further, if it is impracticable to determine the cumulative effect, at the beginning of the current period, of an error on all prior periods, the entity must restate the comparative information to correct the error prospectively from the earliest date practicable. [IAS 8.45]

Disclosures Relating to Prior Period Errors

Disclosures relating to prior period errors include: [IAS 8.49]

• the nature of the prior period error
• for each prior period presented, to the extent practicable, the amount of the correction:
  • for each financial statement line item affected, and
  • for basic and diluted earnings per share (only if the entity is applying IAS 33)
• the amount of the correction at the beginning of the earliest prior period presented
• if retrospective restatement is impracticable, an explanation and description of how the error has been corrected.

Financial statements of subsequent periods need not repeat these disclosures.

IAS 2 Inventories

http://www.iasplus.com/standard/ias02.htm

Objective of IAS 2

The objective of IAS 2 is to prescribe the accounting treatment for inventories. It provides guidance for determining the cost of inventories and for subsequently recognising an expense, including any write-down to net realisable value. It also provides guidance on the cost formulas that are used to assign costs to inventories.

Scope

Inventories include assets held for sale in the ordinary course of business (finished goods), assets in the production process for sale in the ordinary course of business (work in process), and materials and supplies that are consumed in production (raw materials). [IAS 2.6]

However, IAS 2 excludes certain inventories from its scope: [IAS 2.2]

• work in process arising under construction contracts (see IAS 11 Construction Contracts
• financial instruments (see IAS 39 Financial Instruments: Recognition and Measurement)
• biological assets related to agricultural activity and agricultural produce at the point of harvest (see IAS 41 Agriculture).

Also, while the following are within the scope of the standard, IAS 2 does not apply to the measurement of inventories held by: [IAS 2.3]

• producers of agricultural and forest products, agricultural produce after harvest, and minerals and mineral products, to the extent that they are measured at net realisable value (above or below cost) in accordance with well-established practices in those industries. When such inventories are measured at net realisable value, changes in that value are recognised in profit or loss in the period of the change.
• commodity brokers and dealers who measure their inventories at fair value less costs to sell. When such inventories are measured at fair value less costs to sell, changes in fair value less costs to sell are recognised in profit or loss in the period of the change.

Fundamental Principle of IAS 2

Inventories are required to be stated at the lower of cost and net realisable value (NRV). [IAS 2.9]

Measurement of Inventories

Cost should include all: [IAS 2.10]

• costs of purchase (including taxes, transport, and handling) net of trade discounts received
• costs of conversion (including fixed and variable manufacturing overheads) and
• other costs incurred in bringing the inventories to their present location and condition

IAS 23 Borrowing Costs identifies some limited circumstances where borrowing costs (interest) can be included in cost of inventories that meet the definition of a qualifying asset. [IAS 2.17 and IAS 23.4]

Inventory cost should not include: [IAS 2.16 and 2.18]

• abnormal waste
• storage costs
• administrative overheads unrelated to production
• selling costs
• foreign exchange differences arising directly on the recent acquisition of inventories invoiced in a foreign currency
• interest cost when inventories are purchased with deferred settlement terms.

The standard cost and retail methods may be used for the measurement of cost, provided that the results approximate actual cost. [IAS 2.21-22]

For inventory items that are not interchangeable, specific costs are attributed to the specific individual items of inventory. [IAS 2.23]

For items that are interchangeable, IAS 2 allows the FIFO or weighted average cost formulas. [IAS 2.25] The LIFO formula, which had been allowed prior to the 2003 revision of IAS 2, is no longer allowed.

The same cost formula should be used for all inventories with similar characteristics as to their nature and use to the entity. For groups of inventories that have different characteristics, different cost formulas may be justified. [IAS 2.25]

Write-Down to Net Realisable Value

NRV is the estimated selling price in the ordinary course of business, less the estimated cost of completion and the estimated costs necessary to make the sale. [IAS 2.6] Any write-down to NRV should be recognised as an expense in the period in which the write-down occurs. Any reversal should be recognised in the income statement in the period in which the reversal occurs. [IAS 2.34]

Expense Recognition

IAS 18 Revenue, addresses revenue recognition for the sale of goods. When inventories are sold and revenue is recognised, the carrying amount of those inventories is recognised as an expense (often called cost-of-goods-sold). Any write-down to NRV and any inventory losses are also recognised as an expense when they occur. [IAS 2.34]

Disclosure

Required disclosures: [IAS 2.36]

• accounting policy for inventories
• carrying amount, generally classified as merchandise, supplies, materials, work in progress, and finished goods. The classifications depend on what is appropriate for the entity
• carrying amount of any inventories carried at fair value less costs to sell
• amount of any write-down of inventories recognised as an expense in the period
• amount of any reversal of a writedown to NRV and the circumstances that led to such reversal
• carrying amount of inventories pledged as security for liabilities
• cost of inventories recognised as expense (cost of goods sold). IAS 2 acknowledges that some enterprises classify income statement expenses by nature (materials, labour, and so on) rather than by function (cost of goods sold, selling expense, and so on). Accordingly, as an alternative to disclosing cost of goods sold expense, IAS 2 allows an entity to disclose operating costs recognised during the period by nature of the cost (raw materials and consumables, labour costs, other operating costs) and the amount of the net change in inventories for the period). [IAS 2.39] This is consistent with IAS 1 Presentation of Financial Statements, which allows presentation of expenses by function or nature.

IAS 1 Presentation of Financial Statements

http://www.iasplus.com/standard/ias01.htm

Objective of IAS 1

The objective of IAS 1 (2007) is to prescribe the basis for presentation of general purpose financial statements, to ensure comparability both with the entity's financial statements of previous periods and with the financial statements of other entities. IAS 1 sets out the overall requirements for the presentation of financial statements, guidelines for their structure and minimum requirements for their content. [IAS 1.1] Standards for recognising, measuring, and disclosing specific transactions are addressed in other Standards and Interpretations. [IAS 1.3]

Scope

Applies to all general purpose financial statements based on International Financial Reporting Standards. [IAS 1.2]

General purpose financial statements are those intended to serve users who are not in a position to require financial reports tailored to their particular information needs. [IAS 1.7]

Objective of Financial Statements

The objective of general purpose financial statements is to provide information about the financial position, financial performance, and cash flows of an entity that is useful to a wide range of users in making economic decisions. To meet that objective, financial statements provide information about an entity's: [IAS 1.9]

• assets
• liabilities
• equity
• income and expenses, including gains and losses
• contributions by and distributions to owners
• cash flows

That information, along with other information in the notes, assists users of financial statements in predicting the entity's future cash flows and, in particular, their timing and certainty.

Components of Financial Statements

A complete set of financial statements should include: [IAS 1.10]

• a statement of financial position (balance sheet) at the end of the period
• a statement of comprehensive income for the period (or an income statement and a statement of comprehensive income)
• a statement of changes in equity for the period
• a statement of cash flows for the period
• notes, comprising a summary of accounting policies and other explanatory notes

When an entity applies an accounting policy retrospectively or makes a retrospective restatement of items in its financial statements, or when it reclassifies items in its financial statements, it must also present a statement of financial position (balance sheet) as at the beginning of the earliest comparative period.

An entity may use titles for the statements other than those stated above.

Reports that are presented outside of the financial statements – including financial reviews by management, environmental reports, and value added statements – are outside the scope of IFRSs. [IAS 1.4]

Fair Presentation and Compliance with IFRSs

The financial statements must "present fairly" the financial position, financial performance and cash flows of an entity. Fair presentation requires the faithful representation of the effects of transactions, other events, and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the Framework. The application of IFRSs, with additional disclosure when necessary, is presumed to result in financial statements that achieve a fair presentation. [IAS 1.15]

IAS 1 requires that an entity whose financial statements comply with IFRSs make an explicit and unreserved statement of such compliance in the notes. Financial statements shall not be described as complying with IFRSs unless they comply with all the requirements of IFRSs (including Interpretations). [IAS 1.16]

Inappropriate accounting policies are not rectified either by disclosure of the accounting policies used or by notes or explanatory material. [IAS 1.16]

IAS 1 acknowledges that, in extremely rare circumstances, management may conclude that compliance with an IFRS requirement would be so misleading that it would conflict with the objective of financial statements set out in the Framework. In such a case, the entity is required to depart from the IFRS requirement, with detailed disclosure of the nature, reasons, and impact of the departure. [IAS 1.19-20]

Going Concern

An entity preparing IFRS financial statements is presumed to be a going concern. If management has significant concerns about the entity's ability to continue as a going concern, the uncertainties must be disclosed. If management concludes that the entity is not a going concern, the financial statements should not be prepared on a going concern basis, in which case IAS 1 requires a series of disclosures. [IAS 1.25]

Accrual Basis of Accounting

IAS 1 requires that an entity prepare its financial statements, except for cash flow information, using the accrual basis of accounting. [IAS 1.27]

Consistency of Presentation

The presentation and classification of items in the financial statements shall be retained from one period to the next unless a change is justified either by a change in circumstances or a requirement of a new IFRS. [IAS 1.45]

Materiality and Aggregation

Each material class of similar items must be presented separately in the financial statements. Dissimilar items may be aggregated only if the are individually immaterial. [IAS 1.29]

Offsetting> Assets and liabilities, and income and expenses, may not be offset unless required or permitted by an IFRS. [IAS 1.32]

Comparative Information

IAS 1 requires that comparative information shall be disclosed in respect of the previous period for all amounts reported in the financial statements, both face of financial statements and notes, unless another Standard requires otherwise. [IAS 1.38]

If comparative amounts are changed or reclassified, various disclosures are required. [IAS 1.41]

Structure and Content of Financial Statements in General

Clearly identify: [IAS 1.50]

• the financial statements
• the reporting enterprise
• whether the statements are for the enterprise or for a group
• the date or period covered
• the presentation currency
• the level of precision (thousands, millions, etc.)

Reporting Period

There is a presumption that financial statements will be prepared at least annually. If the annual reporting period changes and financial statements are prepared for a different period, the entity must disclose the reason for the change and a warning about problems of comparability. [IAS 1.36]

Statement of Financial Position (Balance Sheet)

An entity must normally present a classified statement of financial position, separating current and noncurrent assets and liabilities. Only if a presentation based on liquidity provides information that is reliable and more relevant may the current/noncurrent split be omitted. [IAS 1.60] In either case, if an asset (liability) category combines amounts that will be received (settled) after 12 months with assets (liabilities) that will be received (settled) within 12 months, note disclosure is required that separates the longer-term amounts from the 12-month amounts. [IAS 1.61]

Current assets are cash; cash equivalent; assets held for collection, sale, or consumption within the entity's normal operating cycle; or assets held for trading within the next 12 months. All other assets are noncurrent. [IAS 1.66]

Current liabilities are those to be settled within the entity's normal operating cycle or due within 12 months, or those held for trading, or those for which the entity does not have an unconditional right to defer payment beyond 12 months. Other liabilities are noncurrent. [IAS 1.69]

When a long-term debt is expected to be refinanced under an existing loan facility and the entity has the discretion the debt is classified as non-current, even if due within 12 months. [IAS 1.73]

If a liability has become payable on demand because an entity has breached an undertaking under a long-term loan agreement on or before the reporting date, the liability is current, even if the lender has agreed, after the reporting date and before the authorisation of the financial statements for issue, not to demand payment as a consequence of the breach. [IAS 1.74] However, the liability is classified as non-current if the lender agreed by the reporting date to provide a period of grace ending at least 12 months after the end of the reporting period, within which the entity can rectify the breach and during which the lender cannot demand immediate repayment. [IAS 1.75]

Minimum items on the face of the statement of financial position [IAS 1.54]

• (a) property, plant and equipment
• (b) investment property
• (c) intangible assets
• (d) financial assets (excluding amounts shown under (e), (h), and (i))
• (e) investments accounted for using the equity method
• (f) biological assets
• (g) inventories
• (h) trade and other receivables
• (i) cash and cash equivalents
• (j) assets held for sale
• (k) trade and other payables
• (l) provisions
• (m) financial liabilities (excluding amounts shown under (k) and (l))
• (n) liabilities and assets for current tax, as defined in IAS 12
• (o) deferred tax liabilities and deferred tax assets, as defined in IAS 12
• (p) liabilities included in disposal groups
• (q) non-controlling interests , presented within equity and
• (r) issued capital and reserves attributable to owners of the parent

Additional line items may be needed to fairly present the entity's financial position. [IAS 1.54]

IAS 1 does not prescribe the format of the balance sheet. Assets can be presented current then noncurrent, or vice versa, and liabilities and equity can be presented current then noncurrent then equity, or vice versa. A net asset presentation (assets minus liabilities) is allowed. The long-term financing approach used in UK and elsewhere – fixed assets + current assets - short term payables = long-term debt plus equity – is also acceptable.

Regarding issued share capital and reserves, the following disclosures are required: [IAS 1.79]

• numbers of shares authorised, issued and fully paid, and issued but not fully paid
• par value
• reconciliation of shares outstanding at the beginning and the end of the period
• description of rights, preferences, and restrictions
• treasury shares, including shares held by subsidiaries and associates
• shares reserved for issuance under options and contracts
• a description of the nature and purpose of each reserve within equity

Statement of Comprehensive Income

Comprehensive income for a period includes profit or loss for that period plus other comprehensive income recognised in that period. As a result of the 2003 revision to IAS 1, the Standard is now using 'profit or loss' rather than 'net profit or loss' as the descriptive term for the bottom line of the income statement.

All items of income and expense recognised in a period must be included in profit or loss unless a Standard or an Interpretation requires otherwise. [IAS 1.88] Some IFRSs require or permit that some components to be excluded from profit or loss and instead to be included in other comprehensive income. [IAS 1.89]

The components of other comprehensive income include:

• changes in revaluation surplus (IAS 16 and IAS 38)
• actuarial gains and losses on defined benefit plans recognised in accordance with IAS 19
• gains and losses arising from translating the financial statements of a foreign operation (IAS 21)
• gains and losses on remeasuring available-for-sale financial assets (IAS 39)
• the effective portion of gains and losses on hedging instruments in a cash flow hedge (IAS 39).

An entity has a choice of presenting:

• a single statement of comprehensive income or
• two statements:
  • an income statement displaying components of profit or loss and
  • a statement of comprehensive income that begins with profit or loss (bottom line of the income statement) and displays components of other comprehensive income [IAS 1.81]

Minimum items on the face of the statement of comprehensive income should include: [IAS 1.82]

• revenue
• finance costs
• share of the profit or loss of associates and joint ventures accounted for using the equity method
• tax expense
• a single amount comprising the total of (i) the post-tax profit or loss of discontinued operations and (ii) the post-tax gain or loss recognised on the disposal of the assets or disposal group(s) constituting the discontinued operation
• profit or loss
• each component of other comprehensive income classified by nature
• share of the other comprehensive income of associates and joint ventures accounted for using the equity method
• total comprehensive income

The following items must also be disclosed in the statement of comprehensive income as allocations for the period: [IAS 1.83]

• profit or loss for the period attributable to non-controlling interests and owners of the parent
• total comprehensive income attributable to non-controlling interests and owners of the parent

Additional line items may be needed to fairly present the entity's results of operations. [IAS 1.85]

No items may be presented in the statement of comprehensive income (or in the income statement, if separately presented) or in the notes as 'extraordinary items'. [IAS 1.87]

Certain items must be disclosed separately either in the statement of comprehensive income or in the notes, if material, including: [IAS 1.98]

• write-downs of inventories to net realisable value or of property, plant and equipment to recoverable amount, as well as reversals of such write-downs
• restructurings of the activities of an entity and reversals of any provisions for the costs of restructuring
• disposals of items of property, plant and equipment
• disposals of investments
• discontinuing operations
• litigation settlements
• other reversals of provisions

Expenses recognised in profit or loss should be analysed either by nature (raw materials, staffing costs, depreciation, etc.) or by function (cost of sales, selling, administrative, etc). [IAS 1.99] If an entity categorises by function, then additional information on the nature of expenses – at a minimum depreciation, amortisation and employee benefits expense – must be disclosed. [IAS 1.104]

Statement of Cash Flows

Rather than setting out separate standards for presenting the cash flow statement, IAS 1.111 refers to IAS 7 Statement of Cash Flows

Statement of Changes in Equity

IAS 1 requires an entity to present a statement of changes in equity as a separate component of the financial statements. The statement must show: [IAS 1.106]

• total comprehensive income for the period, showing separately amounts attributable to owners of the parent and to non-controlling interests
• the effects of retrospective application, when applicable, for each component
• reconciliations between the carrying amounts at the beginning and the end of the period for each component of equity, separately disclosing:
  • profit or loss
  • each item of other comprehensive income
  • transactions with owners, showing separately contributions by and distributions to owners and changes in ownership interests in subsidiaries that do not result in a loss of control

The following amounts may also be presented on the face of the statement of changes in equity, or they may be presented in the notes: [IAS 1.107]

• amount of dividends recognised as distributions, and
• the related amount per share

Notes to the Financial Statements

The notes must: [IAS 1.112]

• present information about the basis of preparation of the financial statements and the specific accounting policies used
• disclose any information required by IFRSs that is not presented elsewhere in the financial statements and
• provide additional information that is not presented elsewhere in the financial statements but is relevant to an understanding of any of them

Notes should be cross-referenced from the face of the financial statements to the relevant note. [IAS 1.113]

IAS 1.114 suggests that the notes should normally be presented in the following order:

• a statement of compliance with IFRSs
• a summary of significant accounting policies applied, including: [IAS 1.117]
  • the measurement basis (or bases) used in preparing the financial statements
  • the other accounting policies used that are relevant to an understanding of the financial statements
• supporting information for items presented on the face of the statement of financial position (balance sheet), statement of comprehensive income (and income statement, if presented), statement of changes in equity and statement of cash flows, in the order in which each statement and each line item is presented
• other disclosures, including:
  • contingent liabilities (see IAS 37) and unrecognised contractual commitments
  • non-financial disclosures, such as the entity's financial risk management objectives and policies (see IFRS 7)

Disclosure of judgements. New in the 2003 revision to IAS 1, an entity must disclose, in the summary of significant accounting policies or other notes, the judgements, apart from those involving estimations, that management has made in the process of applying the entity's accounting policies that have the most significant effect on the amounts recognised in the financial statements. [IAS 1.122]

Examples cited in IAS 1.123 include management's judgements in determining:

• whether financial assets are held-to-maturity investments
• when substantially all the significant risks and rewards of ownership of financial assets and lease assets are transferred to other entities
• whether, in substance, particular sales of goods are financing arrangements and therefore do not give rise to revenue; and
• whether the substance of the relationship between the entity and a special purpose entity indicates control

Disclosure of key sources of estimation uncertainty. Also new in the 2003 revision to IAS 1, an entity must disclose, in the notes, information about the key assumptions concerning the future, and other key sources of estimation uncertainty at the end of the reporting period, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year. [IAS 1.125] These disclosures do not involve disclosing budgets or forecasts. [IAS 1.130]

The following other note disclosures are required by IAS 1.126 if not disclosed elsewhere in information published with the financial statements:

• domicile and legal form of the entity
• country of incorporation
• address of registered office or principal place of business
• description of the entity's operations and principal activities
• if it is part of a group, the name of its parent and the ultimate parent of the group
• if it is a limited life entity, information regarding the length of the life

Other Disclosures

Disclosures about Dividends

In addition to the distributions information in the statement of changes in equity (see above), the following must be disclosed in the notes: [IAS 1.137] " the amount of dividends proposed or declared before the financial statements were authorised for issue but not recognised as a distribution to owners during the period, and the related amount per share and " the amount of any cumulative preference dividends not recognised.

Capital Disclosures

An entity should disclose information about its objectives, policies and processes for managing capital. [IASA 1.134] To comply with this, the disclosures include: [IAS1.135]

• qualitative information about the entity's objectives, policies and processes for managing capital, including
  • description of capital it manages
  • nature of external capital requirements, if any
  • how it is meeting its objectives
• quantitative data about what the entity regards as capital
• changes from one period to another
• whether the entity has complied with any external capital requirements and
• if it has not complied, the consequences of such non-compliance.

Disclosures about Puttable Financial Instruments

IAS 1.136A requires the following additional disclosures if an entity has a puttable instrument that is classified as an equity instrument:

• summary quantitative data about the amount classified as equity
• the entity's objectives, policies and processes for managing its obligation to repurchase or redeem the instruments when required to do so by the instrument holders, including any changes from the previous period
• the expected cash outflow on redemption or repurchase of that class of financial instruments and
• information about how the expected cash outflow on redemption or repurchase was determined.

Terminology

The 2007 comprehensive revision to IAS 1 introduced some new terminology. Consequential amendments were made at that time to all of the other existing IFRSs, and the new terminology has been used in subsequent IFRSs including amendments. IAS 1.8 states: "Although this Standard uses the terms 'other comprehensive income', 'profit or loss' and 'total comprehensive income', an entity may use other terms to describe the totals as long as the meaning is clear. For example, an entity may use the term 'net income' to describe profit or loss." Also, IAS 1.57(b) states: "The descriptions used and the ordering of items or aggregation of similar items may be amended according to the nature of the entity and its transactions, to provide information that is relevant to an understanding of the entity's financial position."

Term before 2007 revision of IAS 1	Term as amended by IAS 1 (2007)
balance sheet	statement of financial position
cash flow statement	statement of cash flows
income statement	statement of comprehensive income (income statement is retained in case of a two-statement approach)
recognised in the income statement	recognised in profit or loss
recognised [directly] in equity (only for OCI components)	recognised in other comprehensive income
recognised [directly] in equity (for recognition both in OCI and equity)	recognised outside profit or loss (either in OCI or equity)
removed from equity and recognised in profit or loss ('recycling')	reclassified from equity to profit or loss as a reclassification adjustment
Standard or/and Interpretation	IFRS
on the face of	in
equity holders	owners (exception for 'ordinary equity holders')
balance sheet date	end of the reporting period
reporting date	end of the reporting period
after the balance sheet date	after the reporting period

Financial Accountancy

source: http://en.wikipedia.org/wiki/Financial_accountancy

Financial accountancy (or financial accounting) is the field of accountancy concerned with the preparation of financial statements for decision makers, such as stockholders, suppliers, banks, employees, government agencies, owners, and other stakeholders. The fundamental need for financial accounting is to reduce principal-agent problem by measuring and monitoring agents' performance and reporting the results to interested users.

Financial accountancy is used to prepare accounting information for people outside the organization or not involved in the day to day running of the company. Managerial accounting provides accounting information to help managers make decisions to manage the business.

In short, Financial Accounting is the process of summarizing financial data taken from an organization's accounting records and publishing in the form of annual (or more frequent) reports for the benefit of people outside the organization.

Financial accountancy is governed by both local and international accounting standards.

Basic accounting concepts

Financial accountants produce financial statements based on Generally Accepted Accounting Principles of a respective country.

Financial accounting serves following purposes:

• producing general purpose financial statements
• provision of information used by management of a business entity for decision making, planning and performance evaluation
• for meeting regulatory requirements

Graphic definition

The accounting equation (Assets = Liabilities + Owners' Equity) and financial statements are the main topics of financial accounting.

The trial balance which is usually prepared using the Double-entry accounting system forms the basis for preparing the financial statements. All the figures in the trial balance are rearranged to prepare a profit & loss statement and balance sheet. There are certain accounting standards that determine the format for these accounts (SSAP, FRS, IFS). The financial statements will display the income and expenditure for the company and a summary of the assets, liabilities, and shareholders or owners’ equity of the company on the date the accounts were prepared to.

Assets, Expenses, and Withdrawals have normal debit balances (when you debit these types of accounts you add to them), remember the word AWED which represents the first letter of each type of account.

Liabilities, Revenues, and Capital have normal credit balances (when you credit these you add to them).

0 = Dr Assets                            Cr Owners' Equity                 Cr Liabilities  
          .       _____________________________/\____________________________       .
          .      /    Cr Retained Earnings (profit)         Cr Common Stock  \      .
          .    _________________/\_______________________________                      Cr Revenue                           .            .
      \________________________/  \______________________________________________________/
       increased by debits           increased by credits


          Crediting a credit                         
Thus -------------------------> account increases its absolute value (balance)
           Debiting a debit                             


          Debiting a credit                         
Thus -------------------------> account decreases its absolute value (balance)
          Crediting a debit

When you do the same thing to an account as its normal balance it increases; when you do the opposite, it will decrease. Much like signs in math: two positive numbers are added and two negative numbers are also added. It is only when you have one positive and one negative (opposites) that you will subtract.

Related qualification

• There are several related professional qualifications in the field of financial accountancy including:
  • Qualified Accountant qualifications (Chartered Certified Accountant (ACCA), Chartered Accountant (CA) and Certified Public Accountant (CPA))
  • CCA Chartered Cost Accountant (cost control) designation offered by the American Academy of Financial Management

ABOUT FINANCIAL INTERMEDIARIES: Basic Questions

Source:  http://www.answers.com/topic/financial-intermediary

Financial intermediary

Investment Dictionary: Financial Intermediary

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Home > Library > Business & Finance > Investment Dictionary

An institution that acts as the middleman between investors and firms raising funds. Often referred to as financial institutions.
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This can include chartered banks, insurance companies, investment dealers, mutual funds, and pension funds.
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Banking Dictionary: Financial Intermediary

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Financial institution, such as a commercial bank or savings and loan association, that accepts deposits from the public and makes loans to those needing credit. By acting as a middleman between cash surplus units in the economy (savers) and deficit spending units (borrowers), a financial intermediary makes it possible for borrowers to tap into the vast pool of wealth in federally insured deposits-accounting for more than half the financial assets held by all financial service companies-in banks and other depository financial institutions. The movement of capital from surplus units through financial institutions to deficit units seeking bank credit is an indirect form of financing known as intermediation-consumers are net suppliers of funds, whereas business and government are net borrowers. A bank gives its depositors a claim against itself, meaning that the depositor has recourse against the bank (and, if the bank fails, the deposit insurance fund protecting insured deposits), but has no claim against the borrower who takes out a bank loan. See also Disintermediation.

Real Estate Dictionary: Financial Intermediary

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A firm, such as a bank or savings and loan association, which performs the function of collecting deposits from individuals and investing them in loans and other securities. Also includes credit unions and mutual savings banks. See Disintermediation.
Example: First National Bank serves as a financial intermediary by taking in deposits and placing them in mortgage loans and various securities. In doing so, the bank links individual investors with demanders of credit and the financial markets.

Law Dictionary: Financial Intermediary

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An institution or organization such as a bank that brings together lenders (in the form of depositors) and borrowers. Other examples include savings and loan associations, credit unions, real estate investment trusts (reits), and various kinds of finance companies.

Wikipedia: Financial intermediary

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Financial market participants
Collective investment schemes Credit Unions Insurance companies Investment banks Pension funds Prime Brokers Trusts
Finance series Financial market Participants Corporate finance Personal finance Public finance Banks and Banking Financial regulation
v • d • e

Financial intermediation consists of “channeling funds between surplus and deficit agents”

A financial intermediary is an entity that connects surplus and deficit agents. The classic example of a financial intermediary is a bank that transforms bank deposits into bank loans.^[1]

Through the process of financial intermediation, certain assets or liabilities are transformed into different assets or liabilities.^[2]

As such, financial intermediaries channel funds from people who have extra money (savers) to those who do not have enough money to carry out a desired activity (borrowers).^[3]

In the U.S., a financial intermediary is typically an institution that facilitates the channeling of funds between lenders and borrowers indirectly. That is, savers (lenders) give funds to an intermediary institution (such as a bank), and that institution gives those funds to spenders (borrowers). This may be in the form of loans or mortgages. Alternatively, they may lend the money directly via the financial markets, which is known as financial disintermediation.

Contents [hide] 1 Forms of intermediation 2 Functions performed by financial intermediaries 3 Advantages of financial intermediaries 4 Types of financial intermediaries 5 Summary & conclusion 6 See also 7 References 8 Bibliography

Forms of intermediation

There are 2 forms of intermediation:

• Direct- lenders and borrowers make agreements and channel funds directly among them (fewer options)

• Indirect- funds are channeled by financial institutions (intermediaries)

Lenders and borrowers have conflicting needs

• Most lenders prefer lending short-term

• Most borrowers prefer borrowing long-term

That is why most intermediation is done indirectly, where intermediaries understand and reconcile the different needs of lenders and borrowers.

Functions performed by financial intermediaries

Financial intermediaries provide 3 major functions:

1. Maturity transformation

Converting short-term liabilities to long term assets (banks deal with large number of lenders and borrowers, and reconcile their conflicting needs)

2. Risk transformation

Converting risky investments into relatively risk-free ones. (lending to multiple borrowers to spread the risk)

3. Convenience denomination

Matching small deposits with large loans and large deposits with small loans

Advantages of financial intermediaries

There are 2 essential advantages from using financial intermediaries:

1. Cost advantage- over direct lending/borrowing

2. Market failure protection- the conflicting needs of lenders and borrowers are reconciled, preventing market failure

The cost advantages of using financial intermediaries include:

• Reconciling conflicting preferences of lenders and borrowers

• Risk aversion- intermediaries help spread out and decrease the risks

• Economies of scale- using financial intermediaries reduces the costs of lending and borrowing

• Economies of scope- intermediaries concentrate on the demands of the lenders and borrowers and are able to enhance their products and services (use same inputs to produce different outputs)

Types of financial intermediaries

Financial intermediaries include:

• Banks
• Building societies
• Credit unions
• Financial advisers or brokers
• Insurance companies
• Collective investment schemes
• Pension funds

Summary & conclusion

Financial institutions (intermediaries) perform the vital role of bringing together those economic agents with surplus funds who want to lend, with those with a shortage of funds who want to borrow.

In doing this they offer the major benefits of maturity and risk transformation. It is possible for this to be done by direct contact between the ultimate borrowers, but there are major cost disadvantages of direct finance.

Indeed, one explanation of the existence of specialist financial intermediaries is that they have a related (cost) advantage in offering financial services, which not only enables them to make profit, but also raises the overall efficiency of the economy. The other main explanation draws on the analysis of information problems associated with financial markets. ^[4]

See also

• Debt
• Financial economics
• Investment
• Saving
• Financial market efficiency

References

1. ^ Siklos, Pierre (2001). Money, Banking, and Financial Institutions: Canada in the Global Environment. Toronto: McGraw-Hill Ryerson. p. 35. ISBN 0-07-087158-2.
2. ^ Siklos, Pierre (2001). Money, Banking, and Financial Institutions: Canada in the Global Environment. Toronto: McGraw-Hill Ryerson. p. 35. ISBN 0-07-087158-2.
3. ^ Sullivan, Arthur; Steven M. Sheffrin (2003). Economics: Principles in action. Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. pp. 272. ISBN 0-13-063085-3. http://www.pearsonschool.com/index.cfm?locator=PSZ3R9&PMDbSiteId=2781&PMDbSolutionId=6724&PMDbCategoryId=&PMDbProgramId=12881&level=4.
4. ^ Gahir, Bruce (2009), Financial Intermediation, Prague, Czech Republic

Bibliography

• Pilbeam, Keith. Finance and Financial Markets. New York: PALGRAVE MACMILLAN, 2005.

• Valdez, Steven. An Introduction To Global Financial Markets. Macmillan Press, 2007.