1. Accounting and Reporting on an Accrual Accounting Basis
Chapter 2
Accounting and Reporting on an Accrual Accounting Basis

2. Objectives By the end of this chapter, you should be able to:
explain the historical cost convention and accrual concept;
adjust cash receipts and payments in accordance with IAS 18 Revenue;
account for the amount of non-current assets used during the accounting period;
prepare a statement of income and a statement of financial position;
reconcile cash flow accounting and accrual accounting data.

3. 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
That is useful to a wide range of users in making economic decisions (IASB)

4. Common information needs for decision making
All the information needs of all users cannot be met
Some needs are common to all users, eg. interest in the financial position, performance and adaptability of the enterprise as a whole.
Which user is the primary target?
Investors are providers of risk capital, so financial statements that meet their needs would also meet the needs of other users.

5. Decision makers need to assess the ability to generate cash
Economic decisions require an evaluation of
A business’s ability to generate cash and
The timing and certainty of its generation
To make the evaluation, users need information that focuses on:
the financial position,
financial performance and
cash flow
of an enterprise.

6. Financial information to evaluate the ability to generate cash differs from financial information on actual cash flows . . .
Differs from the cash flow model used in Chapter 1, in that,
In addition to the cash flows and statement of financial position it includes within its definition of performance a reference to profit
This information is required to assess changes in the economic resources that the business is likely to control in the future – i.e
predicting the ability of the business to generate cash flows from its existing resource base.

7. A complete set of financial statements – IASB
A statement of financial position as at the end of the period - Balance Sheet
A statement of comprehensive income for the period - Income Statement
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.

8. HCA Accounting HCA = Historical cost accounting
HCA is useful for stewardship purposes
Transactions reported are the amount at the date transaction occurred
Amounts are objective and verifiable
Basis for determining outcome of agency agreements, for example loan covenants
However, may not be as useful as inflation adjusted data for decision making.

9. Accrual accounting
Includes transactions affecting the current accounting period that have not yet involved the movement of cash – i.e:
Adjusts the realised operating cash flows for transactions still not converted into cash at the end of the period – sales made on credit
Includes in the period’s income, invoices issued but cash still not received – credit sales
Includes in the period’s expenses, invoices received but cash still not paid out – goods bought on credit

10. Subjective judgements – the matching principle
Financial statements must include costs related to the achievement of the reported income
Payments made this period for expenses that relate to the next period are deducted from the cash paid to arrive at the expense for the period eg. rent
Payments to be made in the next period for expenses incurred in the current period are added to the cash paid to arrive at the expense for the period eg. electricity.

11. Illustration – income statement adjusted See Fig 1. 7, p. 11 (p
Illustration – income statement adjusted See Fig 1.7, p.11 (p.8) for source of these figures
Figure 2.3 Statement of income for the 6 months ended 30 June 20X1

12. Illustration – financial position adjusted
Cash flow
Cash flow
Figure 2.4 Statement of financial position adjusted to an accrual basis

13. Financial position applying IASB 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
Note that this definition is important and will be met throughout later chapters.

14. Financial position applying IASB definitions (Continued)
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.

15. Statement of financial position applying the IASB definitions cont
Statement of financial position applying the IASB definitions cont. next slide
Figure 2.5 Reframed statement as at 30 June - Equity

16. Statement of financial position applying the IASB definitions (Continued)
Figure 2.5 Reframed statement as at 30 June (Continued)

17. Treatment of non-current assets
The Matching Principle approach is to:
Estimate how much of initial cost of the asset has been consumed in the period – this is known as depreciation
Apply IAS 16 Depreciation – this IAS will be discussed in detail in the PPE chapter.

18. IAS 16 states
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 (value remaining at the end of the asset’s useful life)
The depreciation method used should follow the pattern in which the asset’s economic benefits are used, and assumes the business will continue in operational existence for foreseeable future – i.e. the going concern assumption is applied.

19. In the following illustrations, the lease is assumed to have a 10-year life and is losing its service potential in equal annual amounts of $8,000 – the amount of amortisation (depreciation) being charged as an expense each year.

20. Income statement adjusted
Figure 2.6 Statement of income for the 6 months ending 30 June

21. Statement of financial position
Figure 2.7 Statement of financial position as at 30 June

22. Statement of financial position (Continued)
Figure 2.7 Statement of financial position as at 30 June (Continued)

23. Reconcile the accrual accounting income figure with the net cash balance
Figure 2.8 Reconciliation of income figure with net cash balance

24. Reconcile the accrual accounting data in more detail
Figure 2.9 Statement of cash flow netting amounts that have not been converted to cash

25. Reconcile the accrual accounting data in more detail (Continued)
Figure 2.9 Statement of cash flow netting amounts that have not been converted to cash (Continued)

26. Reconciliation in accordance with accounting standards
Figure Cash flow statement in accordance with IAS 7 Statement of cash flows

27. Reconciliation in accordance with accounting standards (Continued)
Figure Cash flow statement in accordance with IAS 7 Statement of cash flows (Continued)