2. | INTERMEDIATE ACCOUNTING 1 BCM 2104

3. | Introduction to I.A. 1 1.Conceptual framework for financial reporting. 2.Accounting for Cash and receivables [IAS 7: Statement of cash flows]. 3.Accounting for Inventories [IAS 2: Inventories]. 4.Accounting For Property, Plant and Equipment Assets [IAS 16: Property, Plant and Equipment]. 5.Accounting for Intangible Assets [IAS 38: Intangible assets]. 6.Impairment of assets [IAS 36: Impairment of Assets] 7.Accounting for Long term construction contracts [IAS 11: Construction Contracts]. 8.Accounting for Investments [IAS 40: Investment Property]. 9.Accounting for Agriculture [IAS 41: Agriculture]. 7/5/2016MIS Notes 2

4. | CONCEPTUAL FRAMEWORK AS PER 2013 DOCUMENT

5. | Learning objectives The objectives of this session are to enable the learner: –Understand the conceptual framework for financial reporting; –Apply the requirements of the Conceptual Framework for Financial Reporting in various accounting practices.

6. | Conceptual Framework Is a coherent system of interrelated objectives and fundamentals that can lead to consistent standards that prescribes the nature, function and limits of financial reporting and financial reporting statements 7/5/2016MIS Notes 5

7. | Credibility of the Conceptual Framework Rests upon its general recognition and acceptance by preparers, auditors and other users of financial statements. 7/5/2016MIS Notes 6

8. | Purpose and status of the CF The Framework sets out the concepts that underlie the presentation of financial statements for external users. The purpose of the Framework is to: –(a) assist the Board of IASC in the development of future International Accounting Standards and in its review of existing International Accounting Standards; –(b) assist national standard-setting bodies in developing national standards;

9. | Purpose and status –(c) assist the Board of IASC in promoting harmonisation of regulations, accounting standards and procedures relating to the presentation of financial statements –(d) assist preparers of financial statements in applying International Accounting Standards and in dealing with topics that have yet to form the subject of an International Accounting Standard; –(e) assist auditors in forming an opinion as to whether financial statements conform with International Accounting Standards;

10. | Purpose and status –(f) assist users of financial statements in interpreting the information contained in financial statements prepared in conformity with International Accounting Standards; and –(g) provide those who are interested in the work of IASC with information about its approach to the formulation of International Accounting Standards.

11. | Users and their information needs The users of financial statements include: present and potential investors, employees, lenders, suppliers and other trade creditors, customers, governments and their agencies and the public. They use financial statements in order to satisfy some of their different needs for information.

12. | SCOPE OF CONCEPTUAL FRAMEWORK Objective of presenting the financial statements Qualitative characteristics Definition, recognition and measurement Concept of capital and capital maintenance theory 7/5/2016MIS Notes 11

13. | The objective of presenting financial statements The objective of presenting financial statements is to provide information about the: –financial position, –financial performance and –changes in financial position of an entity that is useful to a wide range of users in making economic decisions.

14. | Objective of FSs cont’d… However, financial statements do not provide all the information that users may need to make economic decisions. Financial statements also show the results of the stewardship of management, or the accountability of management for the resources entrusted to it. –Ref. to the agency theory.

15. | Financial position The financial position of an entity is affected by: –the economic resources it controls, –its financial structure, –its liquidity and solvency, and –its capacity to adapt to changes in the environment in which it operates.

16. | Financial performance The performance of an entity, in particular its profitability, is required in order to assess potential changes in the economic resources that it is likely to control in the future. –How do we measure the profitability of an entity? Information about variability of performance is important in this respect for example: PW Limited Income statement for the year ended 31 March 2011 (Financial perf. for the last 4 years) 2008200920102011 Sh. 'million' Net profit before tax 5,800 5,985 8,452 9,632 Tax (1,740) (1,796) (2,536) (2,890) Net profit after tax 4,060 4,190 5,916 6,742

17. | Changes in financial performance Information concerning changes in the financial position of an entity is useful in order to assess its: –investing, –financing and –operating activities during the reporting period.

18. | Review Underlying assumptions, Qualitative characteristics of useful financial information, Constraints on relevant and reliable information, The elements of financial statements

19. | Review: contents Underlying assumptions, –Accrual basis and going concern. Qualitative characteristics of useful financial information, Fundamental qualitative characteristics Relevance and Faithful representation(complete, neutral and free from error). Enhancing the qualitative characteristics Comparability, Verifiability, Timeliness and Understandability. Constraints on relevant and reliable information, –Timeliness; Balance between benefit and cost; Balance between qualitative characteristics

20. | Definition, Recognition and Measurement The elements of financial statements: –Assets, –Liabilities, –Equity, –Income, –Expenses. 7/5/2016MIS Notes 19

21. | Asset An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity. 7/5/2016MIS Notes 20

22. | Liability A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits. 7/5/2016MIS Notes 21

23. | Equity Equity is the residual interest in the assets of the entity after deducting all its liabilities. 7/5/2016MIS Notes 22

24. | Income Income is increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants. 7/5/2016MIS Notes 23

25. | Expense Expenses are decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrence of liabilities that result in decreases in equity, other than those relating to distributions to equity participants. 7/5/2016MIS Notes 24

26. | Recognition a)It meets the definition of the element of the financial statements b)It is probable that any future economic benefits associated with the item will flow to or from the entity. c)The item has a cost or value that can be measured with reliability. 7/5/2016MIS Notes 25

27. | Measurement Present value Current cost Realizable (settlement) value Historical cost 7/5/2016MIS Notes 26

28. | Capital maintenance adjustments The revaluation or restatement of assets and liabilities gives rise to increases or decreases in equity. Concepts of capital maintenance:

29. | Financial capital maintenance Under this concept a profit is earned only if the financial (or money) amount of the net assets at the end of the period exceeds the financial (or money) amount of net assets at the beginning of the period. –i.e., Closing net assets - Opening net assets = Profit earned. –This is after excluding any distributions to, and contributions from, owners during the period.

30. | Physical capital maintenance Under this concept a profit is earned only if the physical productive capacity (or operating capability) of the entity (or the resources or funds needed to achieve that capacity) at the end of the period exceeds the physical productive capacity at the beginning of the period i.e., –Ending physical productivity – Beginning physical productivity = Profit earned –this is after excluding any distributions to, and contributions from, owners during the period.

31. | Presentation of Financial Statements Adjustments to the Trial Balance End-Year Financial Statement Adjustments Trial Balance Preparation (summary of balances) Posting (to the ledgers) Journalization (day books/journals, cash books) Recording Transactions (from source documents) Review: The accounting cycle

32. | Now close your exercise books, get a plain sheet of paper and attempt the following set of questions by indicating the correct choice from the options provided. Note: Each question is 1.5 minutes!

33. | Multiple Choice Questions 1. Which of the following is not an objective of financial statements as per the framework? –a) Measurement of financial position of an entity –b) Measurement of financial performance of an entity –c) Measurement of financial strength of an entity 2. One of the following is not a purpose of the framework: –a) Assist national standard-setting bodies in developing national standards –b) Assist local governments in the process of setting accounting standards. –c) Assist users of financial statements in interpreting financial statements

34. | Multiple Choice Questions 3. According to the framework, is the management specified as one of the users of financial statements? –a) No. –b) Yes, because the framework helps them in carrying out the planning, decision-making and control responsibilities –c) Yes, because financial statements help them in proving their ability to move capital markets. 4. Which one of the following qualitative characteristics does not enhance faithful representation? –a) Completeness, –b) Neutrality, –c) Materiality.

35. | Multiple Choice Questions 5. Which of the following is the correct version of the accounting equation? –a) Assets + Liabilities = Capital –b) Assets – Liabilities = Capital –c) Assets + Capital = Liabilities 6. The accounting concept which holds that assets and incomes should not be overstated is: –a) Accruals –b) Conservatism/Prudence –c) Realization

36. | Multiple Choice Questions 7. Which of the following is an accounting assumption? –a) Accruals –b) Prudence –c) Materiality 8. Which of the following statements correctly describes what substance over form is? –a) Recognition of transactions immediately they occur. –b) Recording only the items with a substantial amount and ignoring small valued items –c) Accounting for the economic reality of transactions and not their legal form.

37. | Multiple Choice Questions 9. Which of the following items is a liability? –a) Deferred income –b) Deferred tax –c) Deferred expenses 10. Which of the following elements represents an economic resource? –a) Asset –b) Liability –c) Owners’ capital

38. | Multiple Choice Questions 11. Which of the following represents a residual claim? –a) Asset –b) Liability –c) Owners’ capital 12. Which of the following is a qualitative characteristic of useful information in financial statements? –a) Accuracy –b) Cost effective –c) Comparability

39. | Multiple Choice Questions 13. Assuming a discount rate of 10% per annum, the present value of Sh. 10,000 received 5 years from now is closest to: –a) Sh. 9,090 –b) Sh. 6,209 –c)Sh. 16,105 14. Which of the following measurement bases is closest to ‘fair value’? –a) Current value –b) Present value –c) Realisable value

40. | Multiple Choice Questions 15. Decreases in liabilities are best classified as: –a) Income, because it is a reduction in obligation, –b) Income, because it is a reduction in expenses, –c) Expense

41. | Answers 123456789101112131415 CBBCBBACAACCBAA

42. | Ole Sangale Road, Madaraka Estate. PO Box 59857-00200, Nairobi, Kenya Tel +254 (0)20 606155, 606268, 606380 Fax +254 (0)20 607498 Mobile +254 (0)722 25 428, (0)733 618 135 Email info@strathmore.edu www.strathmore.edu