Accounting Standards applicable to Examinations of the Association of Accounting Technicians of Sri Lanka commencing from January 2012

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1 Accounting Standards applicable to Examinations of the Association of Accounting Technicians of Sri Lanka commencing from January 2012 Revision of Accounting Standards This note explains the impact of Revised Accounting Standards which takes effect from 01 st January 2012 on the syllabus of the Association of Accounting Technicians of Sri Lanka which too has to be inline with the revised Sri Lanka Accounting Standards. Accounting Standards are revised from time to time in keeping with the changes taking place in the business sphere. The possibility of acceptance of the Accounting Standards in one country would be higher, when such standards are commonly and globally recognized, with a view to reaching a globally accepted consensus on Accounting Standards. The Institute of Chartered Accountants of Sri Lanka has taken steps to comply with International Accounting Standards, effective from 01 st January 2012 by revising the Sri Lanka Accounting Standards, effective from 01 st January These Standards which take effect from 01st January 2012 has been named Sri Lanka Financial Reporting Standards (SLFRS). As for back as 1987, the International Accounting Standards Committee (International Accounting Standards Board as it is called presently) arrived at a decision to transform into International Financial Reporting Standards and accordingly adoption of then prevailing Accounting Standards to the circumstances then prevailing in place of the Standards in force at that time. By 2008, 100 countries have either made it mandatory to comply with or have granted the option of complying with the International Financial Reporting Standards. The objective of the Sri Lanka Accounting Standards, becoming operational as from 1 st January 2012, would be presentation of a fairer picture based on Fair Value Accounting through Financial Statements of an enterprise. We know that presently, Accounting is done based on historical values and the real status of an enterprise cannot be determined by accounts prepared based on historical values existed as on the year end, the reason being the assets and liabilities representing their historical values. By implementation of the New Standards, assets and liabilities will represent their fair values. The new Sri Lanka Accounting Standards are becoming operational as from 01 st January The first Financial Standard prepared by enterprises preparing Accounts for period ending on 31 st March, would cover the year 2012/2013 or the year commencing on 01 st April 2012 and ending on 31 st March If an enterprise prepared Financial Statements for the year commencing on 01 st January and ending on 31 st December such enterprises first financial statements proposed under the new Sri Lanka Accounting Standards would cover the year 2012 or year commencing on 01 st January 2012 and ending 31 st December While there are 37 Sri Lanka Accounting Standards operational, as from 01 st January 2012 of them 08 are called as Sri Lanka Financial Reporting Standards (SLFRS) as they are based on International Financial Reporting Standards (IFRS) and 29 of them are called Lanka Accounting Standards (LKAS), as they are based on International Accounting Standards. They are called by two different names to give the reader an idea of its origin, both the IFRS and LKAS are identified as Sri Lanka Accounting Standards. Please study the following note on Sri Lanka Accounting Standards, which would come into force as from 01 st January Sri Lanka Accounting Standards Applicable from 01 st January 2012 SLFRS 08 LKAS 29 Sri Lanka Financial Reporting Standards Sri Lanka Accounting Standards Based on International Financial (Reporting) Standards (IFRS) Based on International Accounting Standards (IAS) Given below are Sri Lanka Accounting Standards becoming effective from 01 st January 2012

2 1) SLFRS 1 FIRST TIME ADOPTION OF SRI LANKA ACCOUNTING STANDARDS (SLFRS) 2) SLFRS 2 SHARE BASED PAYMENT 3) SLFRS 3 BUSINESS COMBINATIONS 4) SLFRS 4 INSURANCE CONTRACTS 5) SLFRS 5 NON-CURRENT ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS. 6) SLFRS 6 EXPLORATION FOR AND VALUATION OF MINERAL RESOURCES. 7) SLFRS 7 FINANCIAL INSTRUMENTS : DISCLOSURE 8) SLFRS 8 OPERATING SEGMENTS 9) LKAS 1 PRESENTATION OF FINANCIAL STATEMENTS 10) LKAS 2 INVENTORIES 11) LKAS 7 STATEMENT OF CASH FLOWS 12) LKAS 8 ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES AND ERRORS 13) LKAS 10 EVENTS AFTER REPORTING PERIOD 14) LKAS 11 CONSTRUCTION CONTRACTS 15) LKAS 12 INCOME TAXES 16) LKAS 16 PROPERTY, PLANT & EQUIPMENT 17) LKAS 17 LEASES 18) LKAS 18 REVENUE 19) LKAS 19 EMPLOYEE BENEFITS 20) LKAS 20 ACCOUNTING FOR GOVERNMENT GRANTS AND DISCLOSURE OF GOVERNMENT ASSISTANCE 21) LKAS 21 EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES 22) LKAS 23 BORROWING COSTS 23) LKAS 24 RELATED PARTY DISCLOSURES 24) LKAS 26 ACCOUNTING AND REPORTING BY RETIREMENT BENEFIT PLANS 25) LKAS 27 CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS 26) LKAS 28 INVESTMENTS IN ASSOCIATES 27) LKAS 29 FINANCIAL REPORTING IN HYPERINFLATIONARY ECONOMIES 28) LKAS 31 INTERESTS IN JOINT VENTURES 29) LKAS 32 FINANCIAL INSTRUMENTS : PRESENTATION 30) LKAS 33 EARNING PER SHARE 31) LKAS 34 INTERIM FINANCIAL REPORTING 32) LKAS 36 IMPAREMENT OF ASSETS 33) LKAS 37 PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS 34) LKAS 38 INTANGIBLE ASSETS 35) LKAS 39 FINANCIAL INSTRUMENTS : RECOGNITION AND MEASUREMENT 36) LKAS 40 INVESTMENT PROPERTY 37) LKAS 41 AGRICULTURE Apart from Accounting Standards, the framework for preparation and presentation of Financial Statements provide a base for Accounting Standards and play an important role in accounting. Foundation Examination What is applicable for Foundation Examination of the Association of Accounting Technicians of Sri Lanka would be only the qualitative matters dealt with in the framework for preparation and presentation of Financial Statements. As there are no changes to this framework consequent to implementation of the New Accounting Standards, there would not be any impact on the syllabus of the Foundation Examination, arising out of implementation of the New Standards. However, it would be useful to understand that the Sri Lanka Accounting Standards have been revised as from 01 st January 2012 in line with the International Financial Reporting Standards.

3 Intermediate Examination As the framework for preparation and presentation of Financial Statement is already included in the syllabus of the Intermediate Examination and as there are no changes in this framework there would be no change in the current status. However, the manner in which the Accounting Standards are identified after the new revision would be as follows ; Name of the relevant Accounting Standard as per the existing Examination Syllabus Name of the relevant Standard after 01 st January 2012 Sri Lanka Accounting Standards 05 (SLAS 05) - Inventories Sri Lanka Accounting Standards 02 (LKAS 02) - Inventories Sri Lanka Accounting Standards 18 (SLAS 18) - Property, Plant & Equipment Sri Lanka Accounting Standards 16 (LKAS 16) - Property, Plant & Equipment Basically, what is dealt with in currently applicable SLAS 05 and LKAS 02 coming into force on 01 st January 2012 are the same. Accordingly the knowledge acquired from SLAS 05 would be sufficient for compliance with the new LKAS 02. There are no material differences between currently applicable SLAS 18 and the LKAS 16 under the revised Standards. Any differences between the above two standards will be dealt with in the AAT Study Texts to be compiled in future and till then you will be tested in Examinations only on matters corresponding with currently applicable SLAS 18. Final Examination As the framework for preparation and presentation of Financial Statement is already included in the syllabus and as there is no revision in this framework, there would be no changes in the current applicable Standards. Method of identification of applicable Accounting Standard for this examination in accordance with new revisions is explained hereunder. Name of the relevant Accounting Standard as per the existing Examination Syllabus SLAS 03 Presentation of Financial Statements SLAS 09 Cash Flow Statements SLAS 10 Accounting Policies, Changes in Accounting estimates and errors SLAS 12 Events after Balance Sheet Date SLAS 13 Construction Contracts SLAS 14 Income Taxes SLAS 19 Leases SLAS 20 Borrowing Costs SLAS 25 Business Combination SLAS 26 Consolidated and Separate Financial Statements Name of the relevant Standard after 01 st January 2012 LKAS 01 Presentation of Financial Statements LKAS 07 Cash Flow Statements LKAS 08 Accounting Policies, Changes in Accounting estimates and errors LKAS 10 Events after reporting period LKAS 11 Construction Contracts LKAS 12 Income Taxes LKAS 17 Leases LKAS 23 Borrowing Costs SLFRS 03 Business Combination LKAS 27 Consolidated and Separate Financial Statements

4 SLAS 29 Income SLAS 36 Provisions, Contingent Liabilities, Contingent Assets SLAS 37 Intangible Assets Accounting Standards for Small Enterprises LKAS 18 Income LKAS 37 Provisions, Contingent Liabilities, Contingent Assets LKAS 38 Intangible Assets Accounting Standards for Small Enterprises There are many differences between the SLAS 03, which is currently applicable and the LKAS 01 which is to be implemented from 01 st January 2012, although both of them are titled Presentation of Financial Statements. Further there are wide differences between SLAS 25 and SLFRS 03 which replaces the Business Combination standard and SLAS 20 existed and LKAS 23 coming into force on 01 st January 2012 which replaces the Standard on Borrowing Costs. Apart from the Standards having wide differences dealt with above, there are no conceivable differences between other Standards coming into force and those which are presently being used. While in compiling new AAT Self Study Texts in future the differences between the old Standards and the new Standards will be dealt with in detail, till then you will in tested at examination only on Standards corresponding with the currently used Standards. LKAS 01 (Presentation of Financial Statements) given below are important differences in the Standard for the preparation and presentation of Financial Statements. 01 Sri Lanka Accounting Standards shall be defined as follows ; Sri Lanka Accounting Standards are those Accounting Standards determined by the Council of the Institute of Chartered Accountants of Sri Lanka. That will consist of the following; A. Sri Lanka Financial Reporting Standards (SLFRS) B. Sri Lanka Accounting Standards (LKAS) C. Interpretations adopted by the Council of the Institute of Chartered Accountants of Sri Lanka. (IFRIC & SIC) 02 Given below are the components of a set of Financial Statements to be prepared for a business after 01 st January 2012 ; A. A statement of the Financial position as at the end of the period. B. A statement of the comprehensive Income for the period. C. A statement of changes in equity for the period. D. A statement of Cash Flows for the period. E. Notes comprising a summary of significant accounting policies and other explanatory information. F. A Statement of the Financial position as at the beginning of the earliest comparative period, when an entity applies an accounting policy. Retrospectively or makes a retrospective restatement of items in its financial statements or when it re-classifies items in its Financial Statements. 03. The heading of the Financial Statements too should change in compliance with the Sri Lanka Financial Reporting Standards. Terminology presently been used Income Statement Balance Sheet New terminology to be used Comprehensive Income Statement Statement of Financial Position

5 Accordingly, if the new Sri Lanka Accounting Standards are applicable as from 01 st January 2012 on Income Statement prepared for an enterprises should be called a Comprehensive Income Statement and a Balance Sheet to be called a Statement of Financial Position. Other constituent parts of a Financial Statements such as Cash Flow Statement, Statement of Changes in Equity and notes on the Financial Statement can be called by the same names. 04. LKAS 01 (Presentation of Financial Statements) indicates that a Comprehensive Income Statement shall be prepared in place of the Income Statement, to comply with new Sri Lanka Accounting Standards taking effect from 01 st January The Accounting Standards do not stipulate a specific format for Financial Statements. It is the Income Statement which is subjected to changes by the new Sri Lanka Accounting Standards in preparation of Financial Statements. Although Balance Sheet is renamed as Statement of Financial Position there is no need to effect any substantial changes in its format. This article has dealt only with the Comprehensive Financial Statement. 05. The Comprehensive income Statement can be prepared in 2 different ways as per LKAS 01 (Presentation of Financial Statements) ; 01. Preparation of Single Statement of Comprehensive Income. 02. Preparation of Income Statement in two components, one displaying components of profit or loss (Separate Income Statement) and the other statement beginning with profit or loss and displaying components of the Comprehensive Income (Statement of Comprehensive Income) i. Preparation of an Independent Comprehensive Income Statement. XYZ Company Comprehensive Income Statement for the year ended 31 st March 2013 (Expenditures have been classified by the functions) Rs. Revenue Cost of Sales Gross Profit () Other Income Distribution Cost Administration Expenses Other Expenses Finance Cost () () () () Share of Profit from Associates Profit before Tax Tax expense ()

6 Net profit for the year Other Comprehensive Income Excess on re-valuation of Property, Plant & Equipment Profit or loss on conversion of Financial Statements of overseas units to Foreign Currencies Profit or loss on conversion to Fair Value of Financial Assets held resale Profit or loss on actuarial revaluation of defined pension benefits Total Comprehensive Income ii. Preparation of a Income Statement indicating Profit or Loss and as its second part of a Comprehensive Income Statement, showing Comprehensive Income XYZ Company Income Statement for the year ended 31 st March 2013 (Expenditures have been classified by the functions of its activities). Rs. Revenue Cost of Sales Gross Profit Other Income Distribution Cost Administration Expenses Other Expenses Financing Cost Share of Profit from Associates Profit before Taxes Income Tax Costs Net Profit for the year

7 XYZ Company Comprehensive Income Statement for the year ended 31 st March 2013 Rs. Net Profit for the year Other Comprehensive Income Excess on Revaluation Profit or loss on conversion to Foreign Currency of Financial Statements Profit or Loss on restatement of value of financial assets held for resale at fair value Profit or Loss on actuarial value of pension benefit Total Comprehensive Income X SLFRS 03 (Business Combination) Given below are important differences applicable at accounting for Business Combination. Definitions - Given below are few important definitions (i) (ii) Acquiree The business or businesses that the acquirer obtains control of in a business combination. Acquirer The entity that obtains control of the acquiree. (iii) (iv) (v) (vi) (vii) (viii) Acquisitions date The date on which the acquirer obtains control of the acquiree. Business An integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs or other economic benefits directly to investors or other owners, members or participants. Business combination A transaction or other event in which an acquirer obtains control of one or more businesses. Transactions sometimes referred to as true mergers or mergers of equals are also business combinations as that term is used in this SLFRS. Control The power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. Non-controlling interest The equity in a subsidiary not attributable, directly or indirectly to a parent. Fair value The amount for which an asset could be exchanged,or a liability settled, between knowledgeable,willing parties in an arm s length transaction.

8 (ix) Goodwill An asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognised. Accounting for Acquisition An enterprise should account for a business combination under acquisition method or purchase method. Following will be relevant in using acquisition method (a) (b) (c) (d) (a) Identifying the acquirer Determining the acquisition date Recognizing and measuring the identifiable assets acquired, liabilities assumed and any noncontrolling interest in the acquiree. Recognizing and measuring goodwill or gain from bargain purchase. Identifying the acquirer For each business combination, one of the combining entities shall be identified as the acquirer. Given below are determinants of controlling power of another entity : i. Ability to control more than half the voting power, through ownership or through contractual relationships. ii. iii. iv. Gaining controlling power over the financing and operational decision making in the relevant entity through a constitution or through an agreement. Giving power to appoint and dismiss the majority of its Board of Directors or its equivalent controlling body. Gaining majority voting power at meetings of its Board of Directors or its equivalent other controlling body. v. Currently enforceable or convertible potential voting power. (b) Determining the Acquisition Date While the acquirer should determine the acquired date, generally the date of obtaining controlling power over the acquiree is considered as the acquisition date. Recognizing and measuring identifiable assets acquired, liabilities assumed and any non-controlling interest in the acquiree. (c) Recognition Principle As of the acquisition date, the acquirer shall recognize separately from goodwill the identifiable assets acquired, liabilities assumed and any non-controlling interest in the acquiree. The assets acquired and liabilities assumed must meet the definition of assets and liabilities in the framework for the preparation and presentation of Financial Statements and they must be part of what the acquirer and acquiree exchanged in the business combination transaction, rather than results of separate transactions. Among these there would be intangible assets such as brand names, patents or customer relationships, which were not recognized as assets in Financial Statements as they were developed internally and charged the related cost to expense. Apart from above, even the contingent assets may have to be assumed at the acquisition date, the acquirer shall suitably classify or designate the identifiable assets acquired and liabilities assumed.

9 The acquirer shall measure the identifiable assets acquired and the liabilities assumed at their acquisition date fair values. (d) Recognizing and measuring goodwill or a gain from a bargain purchase Goodwill The acquirer shall recognize goodwill as of the acquisition date measured as the excess of (a) over (b) below : a. Aggregate of : i. The consideration transferred measured in accordance with this standard. ii. The amount of any non-controlling interest in the acquiree measured in accordance with the standard. iii. In a business combination achieved in stages, the acquisition date fair values of the acquirer is previously held equity interest in the acquiree. b. The net of the acquisition date amounts of the identifiable assets acquired and the liabilities assured measured in accordance with this standard. Profit on Bargain Purchase If, on the acquisition date by the acquirer, the value of (b) below is higher than the value of (a), it is recognized as a gain on the bargain purchase. a. Aggregate of : i. The consideration transferred measured in accordance with this standard. ii. The amount of any non-controlling interest in the acquire measured in accordance with the standard. iii. In a business combination achieved in stages, the acquisition date fair values of the acquirers previously held equity interest in the acquiree. b. The net of the acquisition date amounts of the identifiable assets acquired and the liabilities assured measured in accordance with this standard. Accounting for Non-controlling Interest Non-controlling interest means the fraction of the interest in the equity of the acquiree company which is beyond the control of the controlling company. There are two methods to measure the non-controlling interest on an acquisition date. A. Fair Value Method. B. Pro rata share of the net assets of the acquire company After calculation of the non-controlling interest on the above bases, the value of non-controlling interest is determined subsequently from time to time on the basis of changes in equity. The following items, including that portion of the equities to the acquiree which do not come under the control of the acquirer entity are taken account of in evaluating the interest of the acquirer entity. (A) Ordinary Shares of the acquire entity. (B) Other equities, which do not carry a pro rata right over the net assets such as : (i) Equity components in convertible loans and other financial instruments

10 (ii) Preference Shares (iii) Share Warrants (iv) Preferences based on right to shares (v) Preferences based on share based payments Disclosures The acquirer shall disclose particulars of the nature and the consequences of all combinations that took place during the reporting period or thereafter but before the certification of issuance of Financial Statements, for the benefit of the parties who place reliance on them. Effective Date This standard is applicable for the periods commencing from 01 st January If a particular group prepare their accounts for periods ending on 31 st December, this standard become applicable for the first time, for the year ending on 31 st December If a certain group prepare their accounts on a year ending on 31 st March, for them this standard becomes applicable for the first for the year ending on 31 st March Borrowing Costs LKAS 23 Basic Principle Borrowing Costs directly attributable to acquisition, construction or production of a qualifying asset is considered as part of its cost. All other borrowing costs are considered as expenses. Definition Borrowing Costs are all expenses incurred in respect of raising funds including interest on borrowing and other costs incurred thereon. A qualifying asset is an asset which essentially takes a long period to bring it to the state of its intended use or to a saleable condition. Following assets may be qualifying assets depending on the circumstances : A. Inventories B. Production Machinery C. Power Generation Facilities D. Intangible Assets E. Investment Properties Financial assets and assets which take a short time only for its manufacture or its production are not considered as qualifying assets. The assets which were in a ready to use position in its intended purpose or in a ready to resale position the time it was acquired too, are not qualifying assets.