Acca f3 Financial Accounting (int) Study Text
Yüklə 3,78 Mb. Pdf görüntüsü
|
32 3: Accounting conventions Part B The qualitative characteristics of financial information and the fundamental bases of accounting In assessing whether or not an item is material, it is not only the value of the item which needs to be considered. The context is also important. (a)
If a statement of financial position shows non-current assets of $2 million and inventories of $30,000, an error of $20,000 in the depreciation calculations might not be regarded as material. Whereas an error of $20,000 in the inventory valuation is material. In other words, the total of which the error forms part must be considered. (b) If a business has a bank loan of $50,000 and a $55,000 balance on bank deposit account, it will be a material misstatement if these two amounts are displayed on the statement of financial position as 'cash at bank $5,000'. In other words, incorrect presentation may amount to material misstatement even if there is no monetary error. Question
Materiality Would you treat the following items as assets in the accounts of a company? (a) A box file (b) A computer (c) A small plastic display stand Answer (a)
No. You would write it off to the income statement as an expense. (b)
Yes. You would capitalise the computer and charge depreciation on it. (c)
Your answer depends on the size of the company and whether writing off the item has a material effect on its profits. A larger organisation might well write this item off under the heading of advertising expenses, while a small one might capitalise it and depreciate it over time. This is because the item is material to the small company, but not to the large company. 2.11 Offsetting IAS 1 does not allow assets and liabilities to be offset against each other unless such a treatment is required or permitted by another IFRS. Income and expenses can be offset only when one of the following applies. (a)
An IFRS requires/permits it. (b)
Gains, losses and related expenses arising from the same/similar transactions are not material. 2.12 Comparative information IAS 1 requires comparative information to be disclosed for the previous period for all
narrative information where helpful. Comparatives should be
statements is amended. 2.13 Prudence
estimates required under conditions of uncertainty, such that assets or income are not overstated and liabilities or expenses are not understated. Key term Part B The qualitative characteristics of financial information and the fundamental bases of accounting 3: Accounting conventions 33 Prudence must be exercised when preparing financial statements because of the uncertainty surrounding many transactions. It is not permitted, however, to create secret or hidden reserves using prudence as a justification. There are three important issues to bear in mind. (a) Where
which gives the most cautious result. For example, you may have wondered why the three washing machines in Question Going Concern were stated in the statement of financial position at their cost ($100 each) rather than their selling price ($150 each). This is simply an aspect of prudence: to value the machines at $150 would be to anticipate making a profit before the profit had been realised. (b) Where a
the exact amount of the loss is not known, an estimate of the loss should be made, based on the best information available. If a business purchases inventory for $1,200 but, because of a sudden slump in the market, only $900 is likely to be realised when the inventory is sold; the prudence concept dictates that the inventory is valued at $900. It is not enough to wait until the inventory is sold, and then recognise the $300 loss; it must be recognised as soon as it is foreseen. (c)
Profits should only be recognised when realised in the form of cash or another asset with a reasonably certain cash value. 2.14 Examples: Prudence Some examples might help to explain the application of prudence. (a) A company begins trading on 1 January 20X5 and sells goods worth $100,000 during the year to 31 December. At 31 December there are accounts receivable outstanding of $15,000. Of these, the company is now doubtful whether $6,000 will ever be paid.
The company should make an allowance for receivables of $6,000. Sales for 20X5 are shown in the income statement at their full value of $100,000, but the allowance for receivables is a charge of $6,000. Since there is some uncertainty that the sales will be realised in the form of cash, prudence dictates that the $6,000 should not be included in the profit for the year. (b)
Samson Feeble trades as a carpenter. He undertakes to make a range of kitchen furniture for a customer at an agreed price of $1,000. At the end of Samson's accounting year the job is unfinished (being two thirds complete) and the following data has been assembled. $ Costs incurred in making the furniture to date 800 Further estimated costs to completion of the job 400 Total cost 1,200
The incomplete job represents work in progress at the end of the year which is an asset, like inventory. Its cost to date is $800, but by the time the job is completed Samson will make a loss of $200.
The full $200 loss should be charged against profits of the current year. The value of work in progress at the year end is its net realisable value, which is lower than its cost. The net realisable value can be calculated in either of two ways. (i) (ii) $ $ Eventual sales value 1,000
Work in progress at cost 800
Less further costs to completion
In order to make the sale 400
Less loss foreseen 200
Net realisable value 600
600 Yüklə 3,78 Mb. Dostları ilə paylaş:
|