Rules for preparation of Owners Equity Statements in accordance with IAS-1

Structure and content for Statement of changes in equity according to IAS-1:
Under paragraph 106:
An entity shall present a statement of changes in equity as required by paragraph 10.
The statement of changes in equity includes the following information:
(a) total comprehensive income for the period, showing separately the total amounts attributable to owners of the parent and to non-controlling interest;
(b) for each component of equity, the effects of retrospective application or retrospective restatement recognized in accordance with IAS 8; and
(c) [deleted]
(d) for each component of equity, a reconciliation between the carrying amount at the beginning and the end of the period, separately disclosing changes resulting from:
      (i) profit or loss;
      (ii) other comprehensive income; and
      (iii) transactions with owners in their capacity as 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.

106A For each component of equity an entity shall present, either in the statement of changes in equity or in the notes, an analysis of other comprehensive income by item .

Under paragraph 107:
An entity shall present, either in the statement of changes in equity or in the notes, the amounts of dividends recognized as distributions to owners during the period, and the related amount of dividends per share.

Under paragraph 108:
In paragraph 106, the components of equity include, for example, each class of contributed equity, the accumulated balance of each class of other comprehensive income and retained earnings.

Under paragraph 109:
Changes in an entity’s equity between the beginning and the end of the reporting period reflect the increase or decrease in its net assets during the period. Except for changes resulting from transactions with owners in their capacity as owners (such as equity contributions, reacquisition of the entity’s own equity instruments and dividends) and transaction costs directly related to such transactions, the overall change in equity during a period represents the total amount of income and expense, including gains and losses, generated by the entity’s activities during that period.

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IAS-16 (PPE)

Introduction

International Accounting Standards (IAS) introduces many internationally accepted accounting standards and principals. Among them a section of  IAS that is indicated as IAS-16 describes about Property, Plant & Equipment. We will discuss various principles and standards of IAS-16.
  
Objective
The goal of this standard is to prescribe the accounting treatment of tangible fixed assets, so that users of financial statements may know information about the investment that the institution has in its property and equipment as well as the changes that have occurred in that investment. The main problems in the accounting recognition of tangible fixed assets are the accounting for assets, the determination of its amount and charges for amortization and impairments to be recognized with respect to them.


Scope
This standard applies in the accounting for elements of tangible fixed assets, except when another International Accounting Standard requires or permits a different accounting treatment.  

This standard does not apply to-

• Property ,plant & equipment that is for sale
• Biological assets related to agricultural activity
• Mineral rights and mineral reserves
• Recognition and valuation of exploration and evaluation asset

Definitions

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

Depreciation is the systematic allocation of the depreciable amount of an asset
over its useful life.

Cost is the amount of cash or cash equivalents to cash paid or the fair value of the consideration given to buy an asset at the time of its acquisition, construction or, where applicable, the amount attributed to that asset when initially recognized in accordance with the specific requirements

Depreciable amount is the cost of an asset or the amount that has replaced it,less its residual value.

Amount is the amount at which an asset is recognized, less accumulated depreciation and impairment losses on the accumulated value.

Recoverable amount is the largest among the net sales price of an asset and its value in use.

Carrying amount is the amount at which an asset is recognized after deducting any  accumulated depreciation or losses.
    
        Formula of carrying amount:
        Carrying amount = Acquisition cost – Accumulated depreciation


Tangible assets are assets that:

(a) has an entity for use in the production or supply of goods and services, for lease to third parties or for administrative purposes, and

(b) are expected to use for more than a year.

The impairment loss is the amount that exceeds the amount of an asset to its recoverable amount.

Specific value for the entity is the present value of the cash flows that the entity expects to receive by the continued use of an asset and the sale or other disposition by the same route at the end of its useful life. In the case of a liability, is the present value of the cash flows that are expected to incur to cancel.

Fair value is the amount for which an asset could be exchanged, canceled or a liability, among stakeholders and duly informed in a transaction conducted at arm's length.

The residual value of an asset is the estimated amount that the entity could now get on disposal or disposition of assets by another means, after deducting the estimated costs of such sale or disposition, if the assets had already reached the age and other conditions expected at the end of its useful life.

Useful life is:

(a) the period during which it is expected to use the depreciable assets by the entity, or

(b) the number of production or similar units that are expected of it by the entity.
Recognition

An item of Property, Plant & Equipment that qualifies for recognition as an asset shall be measured at its cost.
Elements of Cost:

• Its purchase price and duties paid.
• Directly attributable costs.
• Initial estimate of the cost of dismantling and removing the item and restoring the site.
• Materials, labor and other inputs for self constructed assets.

The cost of Property, Plant & Equipment shall be recognized as an asset if, and only if:

• It is probable that future economic benefits associated with the item will flow to the entity; and
• The cost of the item can be measured reliably.

Cost Never be Capitalized

• Costs of opening new facility;
• Costs of introducing new product or service;
• Costs of conducting business in new location or with new class of  customer;
• Administration and other general overhead costs;
• Costs incurred in using or redeploying an item;
• Amounts related to certain incidental operations.

Subsequent Cost

Additional costs are incurred after the asset becomes operational is called subsequent costs.

Example of this cost includes-
Expense day-to-day servicing cost.
Capitalize replacement or renewal components and major  inspection costs.


Cost Model

Carrying amount is= Cost less Any accumulated Depreciation less Any accumulated impairment losses


Revaluation Model

Carrying amount is= Fair value less Subsequent accumulated depreciation less Subsequent accumulated impairment losses


Depreciation Method

There are four commonly used depreciation methods. They are-

1.Straight line method
2. Sum of the years digits method
3. Double declining balance method
4. Units of production method


Straight Line Method
Straight line method considers depreciation function of time rather than a function of usage.
                     

Sum of the Year Digit
Each fraction uses the sum of the years as a denominator (5 + 4 + 3 + 2 + 1 = 15).  The numerator is the number of years of estimated life remaining as of the beginning of the year.

Double declining method

• Double declining depreciation rate is a fixed percentage which is equal to double of the straight line rate.
•  If the straight line rate is 20% then twice of the straight line rate would be 40% that is double declining rat

Units of production method :

• Units of production method measures the amount of depreciation dividing the total estimated units by total estimated hours.
• Here the total estimated hours is identified by subtracting salvage value from cost multiplying specific working hours.

Impairments                     

An impairment is the amount by which the carrying amount of an asset exceeds its recoverable amount. Recoverable amount is the higher of an asset’s net selling price and its value in use.

When impairment occurs-

• Significant decrease in the market value of an asset
• Significant changes in the usage of an asset
• The significant adverse effects of climate change in the value of an asset

Asset exchange transactions:
Assets are exchanged for two reasons-
1.    Acquired asset will be measured at fair  value
2.    Given up asset will be measured at carrying amount

Acquired asset will be measured at fair value if:

• Exchange has commercial substance.
• Fair value of the asset acquired can be measured reliably

When no future benefits expected from use or disposal-

• Difference between carrying amount and net disposal proceeds recognised as gain/loss in profit or loss.
• Gains not classified as revenue
• Consideration receivable measured at fair value

De-recognition

When no future benefits expected from use or disposal-
   

• Difference between carrying amount and net disposal proceeds recognised as gain/loss in profit or loss.
• Gains not classified as revenue
• Consideration receivable measured at fair value

Presentation & Disclosure

Measurement basis-

• Depreciation methods
• Useful lives or depreciation rates
• Gross carrying amount and accumulated depreciation at beginning and end of period
• Reconciliation at beginning and end of period showing:
• Comparative information required

Disclosure basis
Disclosure of the nature & effectiveness of change in Accounting estimate with respect to-

• Residual values
• Estimated cost of removing or restoring items
• Useful lives
• Depreciation methods

At the revaluation of PPE, the followings must be disclosed:

•  Effective date of revaluation
•  Independent  valuator involvement 
•  Methods and significant assumptions applied
•  Carrying amount should be recognized under cost model
•  Revaluation surplus

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Conceptual Framework

Financial statements are prepared and presented for external users by many entities around the world. Although such financial statements may appear similar from country to country, there are differences which have probably been caused by a variety of social, economic and legal circumstances and by different countries having in mind the needs of different users of financial statements when setting national requirements.

These different circumstances have led to the use of a variety of definitions of the elements of financial statements: for example, assets, liabilities, equity, income and expenses. They have also resulted in the use of different criteria for the recognition of items in the financial statements and in a preference for different bases of measurement. The scopes of the financial statements and the disclosures made in them have also been affected.

The International Accounting Standards Board is committed to narrowing these differences by seeking to harmonize regulations, accounting standards and procedures relating to the preparation and presentation of financial statements. It believes that further harmonization can best be pursued by focusing on financial statements that are prepared for the purpose of providing information that is useful in making economic decisions.

The Board believes that financial statements prepared for this purpose meet the common needs of most users. This is because nearly all users are making economic decisions, for example:

(a) to decide when to buy, hold or sell an equity investment.
(b) to assess the stewardship or accountability of management.
(c) to assess the ability of the entity to pay and provide other benefits to its  employees.
(d) to assess the security for amounts lent to the entity.
(e) to determine taxation policies.
(f) to determine distributable profits and dividends.
(g) to prepare and use national income statistics.
(h) to regulate the activities of entities.

The Board recognizes, however, that governments, in particular, may specify different or additional requirements for their own purposes. These requirements should not, however, affect financial statements published for the benefit of other users unless they also meet the needs of those other users.

Financial statements are most commonly prepared in accordance with an accounting model based on recoverable historical cost and the nominal financial capital maintenance concept. Other models and concepts may be more appropriate in order to meet the objective of providing information that is useful for making economic decisions although there is at present no consensus for change. This Conceptual Framework has been developed so that it is applicable to a range of accounting models and concepts of capital and capital maintenance.


Purpose and status

This Conceptual Framework sets out the concepts that underlie the preparation and presentation of financial statements for external users. The purpose of the Conceptual Framework is:

(a) to assist the Board in the development of future IFRSs and in its review of existing IFRSs;

(b) to assist the Board in promoting harmonization of regulations, accounting
Standards and procedures relating to the presentation of financial statements by
providing a basis for reducing the number of alternative accounting treatments
permitted by IFRSs;

(c) to assist national standard-setting bodies in developing national standards;

(d) to assist preparers of financial statements in applying IFRSs and in dealing with topics that have yet to form the subject of an IFRS;

(e) to assist auditors in forming an opinion on whether financial statements comply with IFRSs;

(f) to assist users of financial statements in interpreting the information contained in financial statements prepared in compliance with IFRSs; and

(g) to provide those who are interested in the work of the IASB with information about its approach to the formulation of IFRSs.

This Conceptual Framework is not an IFRS and hence does not define standards for any particular measurement or disclosure issue. Nothing in this Conceptual Framework overrides any specific IFRS.

The Board recognizes that in a limited number of cases there may be a conflict between the Conceptual Framework and an IFRS. In those cases where there is a conflict, the requirements of the IFRS prevail over those of the Conceptual Framework. As, however, the Board will be guided by the Conceptual Framework in the development of future IFRSs and in its review of existing IFRSs, the number of cases of conflict between the Conceptual Framework and IFRSs will diminish through time. The Conceptual Framework will be revised from time to time on the basis of the Board’s experience of working with it.


Scope

The Conceptual Framework deals with:

(a) the objective of financial reporting;

(b) the qualitative characteristics of useful financial information;

(c) the definition, recognition and measurement of the elements from which financial statements are constructed; and

(d) concepts of capital and capital maintenance.

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IAS vs IFRS

Difference between IAS & IFRS :

1. All the accounting standards which were made between 1973 and 2001, are called IAS and all the accounting standards which were made after 2001, are called IFRS
2. IAS were made by International Accounting Standards Committee (IASC) and IFRS were made by International Accounting Standards Board (IASB).
3. Some new roles were made in IFRS which were not in IAS.  

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Assets

An asset of an entity is a present economic resource to which the entity has a right or other access that others do not have.

There are two types of assets:

1. Current assets

2. Non-current assets

Current assets are cash and other assets expected to be converted to cash or consumed either in a year or in the operating cycle (whichever is longer), without disturbing the normal operations of a business.

Examples:

• Cash and cash equivalents
• Short term investment
• Receivables
• Inventory
• Prepaid expenses

Non-current assets are those which cannot be converted into cash within a year or in the operating cycle (Whichever is longer).
Examples:

• Investment
• Goodwill
• Property, Plant & Equipment (PPE) 

 

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Liabilities

A liability is determined as an responsibility of an entity arising from previous dealings or activities, the settlement of which may result in the transfer or use of assets, provision of services or other yielding of financial advantages later on.

There are two kinds of liabilities-
1. Long-term liabilities
2. Current liabilities
Long-term liabilities contain potential upcoming forfeit of financial advantages coming up from present obligations that are not payable within a year or the operating cycle of the company, whichever is longer.
Examples:
►    Bonds payable
►    Long-term notes payable
►    Mortgages payable
►    Pension liabilities
►    Lease liabilities
Current liabilities are often recognized as all liabilities of the business that are to be resolved in cash within the fiscal year or the operating cycle of a given firm, whichever period is longer.
Examples:
►    Notes Payable
►    Accounts Payable
►    Unearned Revenue
►    Salaries Payable
►    Interest Payable
►    Taxes Payable

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Agency Relationship

An agent is one who represents another, known as the significant, in dealings with third people. Such expression is known as company. In an agency relationship, the significant affiliates to the agent the right to act on his or her aspect, and to perform out some stage of interest while so achieving.

Areas:
Agency Relationships are common in many professional areas.

• Employment.    
• Import-Export business
• Consignment businesses
• Real property dealings (real property broker agent, mortgage brokerage). In property broker agent, the customers or suppliers are the concepts themselves and the broker or his dealer who symbolizes each major is his broker.
• Pharmaceutical businesses
• Other production and service businesses
• Financial advice (insurance agency, stock broker agent, accountancy)
• Contract discussion and marketing (business management) such as for posting, fashion model, music, films, cinema, show company, and game.

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