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Financial reports are statements prepared for the purpose of presenting a periodical review or report of the progress made by a concern. It shows the status of investment in the business and the results achieved during the accounting period. The accounting process involves classification and recording of transactions. According to John N. Myer "The financial statement provides a summary of the accounts of a business enterprise, the Balance Sheet reflecting the assets and liabilities and the income statement showing the result of operations during a certain period."
The financial statement refers to statements which the accountant prepares at the end of a given period. It may include the following:
The need for financial reporting is to provide information about the enterprise to external users who require the information provided by the Board of Directors, who also will be interested in that information, to assist them in decision-making. According to the Federal Accounting Standards Board (FASB), the objective of publishing a financial statement is to provide information about the financial position, performance and changes in the financial position of an enterprise that would be useful to a wide range of users with regard to making decisions. The following clarify the usefulness of a financial statement:
To achieve the objectives of financial reporting, certain qualitative characteristics should be maintained. Some of these characteristics are as follows:
This indicates that the information contained in the financial reporting can be treated with confidence and with great trust, that it is true and not misleading in any of the details, and in terms of the origins of the financial information. As a qualitative characteristic it helps to distinguish more useful information from the financial statements.
This aspect considers the ability to allocate similarities and differences in terms of information that the financial report is providing, in order to help the user to make decisions.
This refers to the fact that everything we do can be demonstrated to be true or false, and the information contained in the financial statement must represent the situation faithfully. We apply this not only to the data itself, but also to the way in which we record it - the methods and values we use to describe the attributes of transaction in the statement. This means that the users observing the same data would make the same observation every time.
The financial reporting should be able to be used by all kind of user, professionals as well as non professionals. Therefore the relevant information in the statements must be presented clearly. It must not be complicated or difficult for some users to understand.
There are other additional qualitative characteristics that were considered by the IASB:
'Credibility' (involving verifiability); and 'high quality' (this is to support the objective and qualitative characteristics of financial reporting generally).
International Accounting Standard 16, 36 (IAS 16), (IAS 36)
The aim of this standard is to prescribe the accounting treatment for property, plant and equipment. The principal issues in this regard are the timing recognition of the assets, the determination of their carrying amounts, the depreciation charges and the determination and accounting treatment of the impairments of the carrying amounts.
The financial statements should make the following disclosures for each class of asset:
The measurement basis used for determining the gross carrying amount. When more than one basis has been used, disclosure of the following should be made:
The method of deprecation used
The useful life of the depreciation rates used
The gross carrying amount and the accumulated depreciation at the beginning and at the end of the period.
Acquisitions through business combinations
Reduction in the carrying amount in accordance with the standard
Net exchange differences arising from the translation of the financial statements of a foreign entity
Whether, in determining the recoverable amount of any such item, expected future cash flows have been discounted to their present value.
The existence and amounts of restrictions on title and any charge created on any such asset through pledging.
The counting policy for restoration costs relating to any such asset
The amount of expenditure of any such asset in course of construction.
The amount of commitment for the acquisition of any such asset
When revaluation of any such asset has been done, it is necessary to disclose the following:
The basis for revaluation
The effective date of revaluation
Whether an independent velour was involved
The nature of any indices uses
The carrying amount of each class of such assets that would have been included in the financial statements had the assets been carried at cost less depreciation.
The revaluation surplus, indicating the movement for the period and any restriction on the distribution of the balance to the shareholders.
International Accounting Standard 17 (IAS 17) Lease
This standard requires the presentation of assets taken on a finance lease basis in the Balance Sheet of the lessee. Also it requires the segregation of the lease rent received by the lessor into recovery of capital and revenue income.
The following disclosures are to be made in the financial statement of lessees:-
Net carrying amount of each class of assets at the Balance Sheet date
Reconciliation between the total of minimum lease payments at the Balance Sheet date and their present value. In addition it should disclose the total of the minimum value for each of the following periods:
Not later than one year;
Later than one year and not later than five years
Later than five years
Contingencies rents recognized in income for the period
A general description of the lessee's significant leasing arrangements
Lease payment as an expense in the income statement on a straight line basis over the lease term. The financial statement should disclose the total future minimum lease payments under non-cancelable operating leases of the following periods:
Not later than one year
Later than five years
The following disclosure is to be made in the financial statement of the lessor:
Reconciliation between the total gross investments in the lease payments receivable at the Balance Sheet date. In addition, an enterprise should disclose the total gross investment in the lease and the present value of minimum lease payment receivable at the Balance Sheet date for each of the following periods:
Not later than one year
Later than five years
Accumulated allowance for uncollectable minimum lease payment receivable
Unearned finance income
Unguaranteed residual values accruing to the benefit of the lessor
Contingent rent recognized in income
General description of the lessor's significant leasing arrangements
The information on the above lines should also be disclosed for an operating lease.
International Accounting Standard 23 (IAS 23) (Borrowing Costs)
Borrowing cost is interest and other costs related to the borrowing of funds on the part of the enterprise.
Borrowing costs should be recognized as an expense in the period in which they are incurred, except as to the extent that they are capitalized according to this Standard.
Capitalization of borrowing cost should cease when the asset is ready for its intended use or sale.
In case of investments, capitalization should cease when the investee has commenced its planned commercial principal operations. Capitalization should be suspended during extended periods in which active development has been interrupted.
When the construction of the asset is completed in parts and each part is capable of being used, while construction continuous on other parts, the capitalization of the borrowing costs should cease on each part as it is completed.
International Accounting Standard 37 (IAS 37)(Provisions, Contingent Liabilities and Contingent Assets)
The purpose of this IAS 37, except in specified cases, should be applied to all non-financial liabilities that are not within the scope of other Standards.
IAS 37 defines a provision as a liability of uncertain timing or amount. The draft does not use 'provision' as a defined term, and instead proposes to use the term 'non-financial liability', which includes items previously described as provisions as well as other liabilities.
IAS 37 defines a contingent liability as a possible obligation or a present obligation that is not recognized. A contingent liability that is a present obligation is not recognized, either because it is not probable that an outflow of resources will be required to settle the obligation, or because the amount of the obligation cannot be measured with sufficient reliability. The Standard does not permit contingent liabilities to be recognized, but requires them to be disclosed, unless the possibility of any outflow of economic resources in settlement of the contingent liability is remote.
Proposes eliminating the term 'contingent liability'.
Uses the term 'contingency' to refer to uncertainty about the amount that will be required to settle a liability, rather than uncertainty about whether a liability exists.
Specifies that a liability for which the settlement amount is contingent on one or more uncertain future events is recognized independently of the probability that the uncertain future event(s) will occur (or fail to occur).
The purpose of these amendments is:
To clarify that only present obligations (rather than possible obligations) of an enterprise give rise to liabilities and that liabilities arise from unconditional obligations.
To require that uncertainty about future events that affects the amount that will be required to settle a liability, be reflected in the measurement of that liability.
IAS 37 defines a contingent asset as a possible asset. It does not permit contingent assets to be recognized, but requires them to be disclosed if an inflow of economic benefits is probable.
Proposes eliminating the term 'contingent asset'.
Uses the term 'contingency' to refer to uncertainty about the amount of the future economic benefits embodied in an asset, rather than uncertainty about whether such an asset exists.
Specifies that items previously described as contingent assets, but satisfying the definition of an asset in the Framework, are within the scope of IAS 38 rather than IAS 37 (except for rights to reimbursements, which remain within the scope of IAS 37).
The purpose is to clarify that only resources currently controlled by the entity as a result of a past transaction or event (rather than possible assets) give rise to assets and that assets arise from unconditional rights.
IAS 37 defines a constructive obligation as an obligation that derives from an entity's actions when the entity has (a) indicated to other parties that it will accept particular responsibilities and (b) as a result has created a valid expectation on the part of those other parties that it will discharge those responsibilities.
To amend the definition of a constructive obligation to clarify that the actions of an entity must result in other parties having a valid expectation that they can reasonably rely on the entity to discharge its responsibilities.
To provide additional guidance on determining whether an entity has incurred a constructive obligation.
Probability recognition criterion
IAS 37 states that provisions should be recognized if it is probable that an outflow of resources embodying economic benefits will be required to settle the provision. In some cases, the examples accompanying the Standard apply this probability recognition criterion to what the
Exposure Draft now analyses as conditional obligations. For example, in the case of a product warranty, the Standard explains that the entity considers the likelihood of claims arising under the warranty. In effect, this means that the entity considers whether it is probable that the conditional obligation will result in an outflow of resources embodying economic benefits. Consistently with the revised analysis of contingent liabilities, the Basis for Conclusions explains that the probable outflow criterion should always be applied to the liability (i.e.an unconditional obligation). Therefore, if an entity has a non-financial liability arising from an unconditional obligation that is accompanied by a conditional obligation, the probability recognition criterion is applied to the unconditional obligation rather than to the conditional obligation.
For example, in the case of a product warranty, the criterion should be applied to the unconditional obligation to stand ready to honour warranty claims (i.e. to provide warranty coverage). As a result, the Basis for Conclusions highlights that the probability recognition criterion is always satisfied. The Exposure Draft therefore proposes omitting the criterion from the Standard.
IAS 37 states that provisions should be measured at the best estimate of the expenditure required to settle the present obligation at the Balance Sheet date. The best estimate is described as the amount that an entity would rationally pay to settle the obligation at the Balance Sheet date or to transfer it to a third party at that time.
Although expected value is described as the basis for measuring a provision involving a large population of items, the Standard states that the best estimate of single obligations may be the individual most likely outcome.
It is proposed that a non-financial liability should be measured at the amount that an entity would rationally pay to settle the present obligation or to transfer it to a third party on the Balance Sheet date.
It emphasizes that an expected cash flow approach can be used as the basis for measuring a non-financial liability for both a class of similar obligations and a single obligation.
It explains that measuring a non-financial liability for a single obligation at its most likely outcome, would not necessarily be consistent with the Standard's measurement objective.
IAS 37 states that when expenditure required to settle a provision is expected to be reimbursed by another party, the reimbursement should be recognized when it is virtually certain that the reimbursement will be received. Consistently with the revised analysis of a contingent asset, the Exposure Draft proposes that if an entity has an unconditional right to receive reimbursement, such a right should be recognized as an asset if it can be measured reliably.
IAS 37 defines an onerous contract as one in which the unavoidable costs of meeting its obligations exceed the economic benefits expected. The entity recognizes, as a provision, the present obligation under the contract. The Standard provides no further guidance about when the provision should be recognized.
Additional recognition guidance is provided to specify that if a contract will become onerous as a result of an entity's own action; the liability should not be recognised until the entity has taken that action.
It specifies that in the case of an onerous operating lease, the unavoidable costs of meeting the obligation should be based on the unavoidable lease commitment, less any sublease rentals that the entity could reasonably obtain for the property, regardless of whether the entity intends to sublease the property.
IAS 37 states that an entity that (a) has a detailed formal plan for restructuring and (b) has raised a valid expectation in those affected that it will carry out the restructuring, has a constructive obligation. Therefore, it recognizes a provision for the direct expenditures arising from the restructuring. The Exposure Draft proposes:
Revising the application guidance for restructuring provisions to specify that a non-financial liability for a cost associated with a restructuring is recognized only when the definition of a liability has been satisfied for that cost. Accordingly, a cost associated with a restructuring is recognized as a liability on the same basis as if that cost had arisen independently of a restructuring.
Specific guidance for accounting for costs that are often associated with a restructuring as follows:
The cost of employee termination benefits is recognized in accordance with IAS 19 Employee Benefits.
a liability for costs that will continue to be incurred under a contract for its remaining term without equivalent economic benefit to the entity is recognized when the entity ceases using the right conveyed by the contract (in addition to any liability recognized if the contract was previously determined to be onerous).
The cost of terminating a contract before the end of its term is recognized when the entity terminates the contract in accordance with the contract terms.