International Accounting Standards (Cambridge (CIE) A Level Accounting): Revision Note

International Accounting Standards

What are the International Accounting Standards?

• The International Accounting Standards (IAS) are a set of rules for financial reporting

• You need to know about the following ones:

  • IAS 1 Presentation of financial statements

  • IAS 2 Inventories

  • IAS 7 Statement of cash flows

  • IAS 8 Accounting policies, changes in accounting estimates and errors

  • IAS 10 Events after the reporting period

  • IAS 16 Property, plant and equipment

  • IAS 36 Impairment of assets

  • IAS 37 Provisions, contingent liabilities and contingent assets

  • IAS 38 Intangible assets

IAS 1 Presentation of financial statements

• This describes the basis for presenting financial statements

• This ensures comparability between periods and between different businesses

• The required components of a complete set of financial statements for a limited company are:

  • statement of profit or loss and other comprehensive income

  • statement of changes in equity

  • statement of financial position

  • statement of cash flows

  • notes to financial statements

    • including the schedule of non-current assets

• The key principles of IAS 1 are:

IAS 2 Inventories

• This rule states that inventories must be stated at the lower of cost and net realisable value (NRV)

  • Cost is the purchase price plus any costs incurred in bringing the inventories to their present condition and location

  • Net realisable value is the estimated selling price minus the estimated selling costs such as repairs

• This rule adheres to the prudence concept to ensure that assets and profits are not overstated

• FIFO (First In First Out) and AVCO (Weighted Average Cost) are acceptable methods of inventory valuation under IAS 2

  • LIFO (Last In First Out) is not permitted under IAS 2

• The provision for unrealised profit removes the factory profit element of the cost of inventory for manufacturing businesses

  • This ensures that it is stated at cost

IAS 7 Statement of cash flows

• This provides information about changes in cash and cash equivalents during a financial period

• It shows how the business generates and uses cash

• The statement of cash flows is split into three sections

  • Operating activities

  • Investing activities

  • Financing activities

IAS 8 Accounting policies, changes in accounting estimates and errors

• There are three areas to this standard

IAS 10 Events after the reporting period

• There is a gap between the financial statements being prepared and them being authorised

• Once they are authorised, the statements cannot be changed

• There are two types of events that can arise during the gap after the reporting period

  • Adjusting events

    • These are events that existed at the end of the year

    • The financial statements can be adjusted to account for these events

  • Non-adjusting events

    • These are events that arose after the end of the year

    • The financial statements should not be adjusted

• Examples include:

IAS 16 Property, plant and equipment

• Non-current assets are initially measured at the cost value

  • The cost is the purchase price plus any directly attributable costs to bring the asset to intended use

    • Such as delivery costs and other capital expenditure

• There are two models that can be used to calculate the carrying value of the non-current asset

  • Cost model

    • The carrying value is equal to the cost minus the accumulated depreciation and accumulated impairment losses

  • Revaluation model

    • The carrying value is the fair value at the revaluation date minus the subsequent depreciation and impairment losses

• The standard details how to deal with depreciation

  • Must be allocated over the asset's useful life

  • The residual value and useful life is reviewed at least annually

  • Land is not depreciated

  • Depreciation begins when the asset is available for use

• The standard details how to deal with disposals

  • The carrying value at the date of disposal is compared to the proceeds

  • The difference is the profit or loss on disposal

    • This is charged to the statement of profit or loss

IAS 36 Impairment of assets

• You need to know the following definitions

  • The value in use of an asset is the present value of future cash flows expected from the asset

  • The recoverable amount of an asset is the higher of

    • its fair value minus the costs to sell it

    • its value in use

  • The impairment loss is the amount by which the carrying value exceeds the recoverable amount

• An impairment could be due to:

  • physical damage

  • obsolescence

  • decline in market value

• An impairment loss is an expense on the statement of profit or loss

• The carrying value of the asset is reduced by the impairment loss and stated on the statement of financial position

IAS 37 Provisions, contingent liabilities and contingent assets

• You need to be familiar with the following words which are used to describe the likelihood of events

  • Virtually certain means a very high chance

  • Probable means more than a 50% chance

  • Possible means less than a 50% chance

  • Remote means a very little chance

• A provision is an amount set aside to cover an expense which is probable to occur in the future

  • But the business is uncertain about the actual amount or timing of the expense

  • These are recognised as liabilities in the financial statements

• There are three conditions for recognising a provision:

  • The business has a present obligation because of a past event

  • It is probable (more than a 50% chance) that the obligation needs to be settled in the future

  • A reliable estimate can be made of the amount

• A contingent liability is a possible financial obligation that may arise depending on the outcome of an uncertain future event

  • Such as a lawsuit

  • The amounts are not included in the financial statements

    • These are disclosed as a note to the financial statements

• A contingent asset is a potential financial gain that may arise from past events but depends on uncertain future events

  • Such as the success of a lawsuit

  • The amounts are only included in the financial statements if they are virtually certain

  • They are disclosed as notes to the financial statements if they are probable

  • No disclosure is made if they are possible or remote

IAS 38 Intangible assets

• An intangible asset is an identifiable non-monetary asset without physical substance

  • The main types are:

    • Goodwill

    • Research and development

    • Patents, trademarks and copyright

• An intangible asset is recognised only when:

  • It is identifiable

    • It is separable from the business or arises from contractual/legal rights

  • The business has control over the resource

  • Future economic benefits are expected to flow to the business

• Intangible assets are either purchased or internally generated

  • They only appear on the financial statements if they are purchased

• Intangible assets are amortised only if they have a finite life

  • An intangible asset with an indefinite life has an annual impairment review to check its value

• Research costs are usually treated as revenue expenditure and charged to the statement of profit or loss when they are incurred

• Development costs can be treated as capital expenditure and entered as an intangible asset