Accounting and Reporting on an Accrual Accounting Basis By: Associate Professor Dr. GholamReza Zandi

Objective of Financial Statements To provide information about the financial position; the financial performance; capability of an enterprise to adapt and; changes in the amount due to equity owners. General purpose: useful to a wide range of users in making economic decisions (IASC).

Common Information Needs for Decision Making All the information needs of all users cannot be met, but – some needs are common to all users, e.g. some interest in the financial position, performance and adaptability of the enterprise as a whole. So, which user is the primary target? The IASC states that, as investors are providers of risk capital, financial statements that meet their needs would also meet the needs of other users.

Decision Makers Need to Assess The Ability to Generate Cash The IASC considers that economic decisions require an evaluation of –an enterprise’s ability to generate cash; and –the timing and certainty of its generation. It believes that users are better able to make the evaluation if they are provided with information that focuses on the financial position, performance and cash flow of an enterprise.

The Ability To Generate Cash VS Actual Cash Flows The IASC approach differs from the cash flow model, in that, –in addition to the cash flows and statement of financial position it includes within its definition of performance a reference to profit. It states that this information is required to assess changes in the economic resources that the enterprise is likely to control in the future. –This is useful in predicting the capacity of the enterprise to generate cash flows from its existing resource base.

A Complete Set of Financial Statements – IASB A statement of financial position as at the end of the period. A statement of comprehensive income for the period. A statement of changes in equity for the period. A statement of cash flows for the period. Notes, comprising a summary of significant accounting policies and other explanatory information.

HCA Accounting HCA is useful for stewardship purposes –Transactions reported at amount at date transaction occurred. –Amounts are objective and verifiable. –Basis for determining outcome of agency agreements, e.g. loan covenants. However, may not be as useful as inflation adjusted data for decision making.

Accrual Accounting Adjusts the realised operating cash flows for transactions still not converted into cash at the end of the period. Includes in period’s income, invoices issued but cash still not received. Includes in the period’s expenses invoices received but cash still not paid out. Was regarded by the IASC as more useful than cash accounting in making economic decisions.

Subjective Judgements – The Matching Principle Financial statements must include costs related to the achievement of the reported income. –Payments made relating to the next period are deducted from the cash paid to arrive at the expense for the period. –Payments to be made in the next period but incurred in the current period are added to the cash paid to arrive at the expense for the period.

Financial Position Applying IASC Definitions An asset is defined as a resource –controlled by the enterprise; –as a result of a past event; –from which future economic benefits are expected to flow.

Financial Position Applying IASC Definitions A liability is defined as a present obligation –arising from a past event; –whose settlement is expected to result in an outflow of resources. Note that this definition will also be met throughout the text.

Treatment Of Non-current Assets The matching principle approach is to –estimate as revenue expenditure how much of initial outlay has been consumed in the period – this is depreciation. IAS 16 is regarding depreciation.

IAS 16 Depreciation is the systematic allocation of the depreciable amount over useful economic life. Depreciable amount is the cost of an asset less its residual value. The depreciation method used should reflect the pattern in which the asset’s economic benefits are consumed.

Non-current Asset In Accrual Accounting The Going Concern Assumption Assumes business will continue in operational existence for foreseeable future. More relevant to use loss of service potential rather than change in net realisable value. Service potential means the number of products that can be produced over life of the asset. Necessary to assess financial capital maintenance.

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