Università degli studi di Pavia Facoltà di Economia a.a. 2013-2014 Lesson 1 International Accounting Lelio Bigogno, Stefano Santucci 1
Introduction to the course Lecturers presentation and CVs News from 2013/2014: the seminars Structure of the course How to prepare the exam The contents of the exam How to find out the tools for the preparation Basic assumptions of the course 2
Topics International Accounting Course 2013/2014 Lecturers: Lelio Bigogno Stefano Santucci Seminars: Chiara Demartini Starting 04/10/2013 Ending 20/12/2013 Timetable Day Hour Room Tuesday 14-16 Vialli Friday 14-16 F Number Date Lecturer Argument Material 1 04/10/2013 Bigogno, Santucci, Demartini Introduction to the Lecturer, exam, tools, general overview of IFRS/IAS framework, vocabulary, accounting methodology. Slides 2 08/10/2013 Santucci IAS 1 - Statement of comprehensive income, other schemes and related disclosures Slides and examples 3 11/10/2013 Bigogno IAS 1 - Statement of Financial Position & disclosures Slides and examples 4 15/10/2013 Bigogno IAS 16 - Tangible Assets Slides 5 18/10/2013 Santucci IAS 7 - Cash Flow Statement Slides 6 22/10/2013 Santucci IAS 38 - Intangible Assets Slides 7 25/10/2013 Bigogno IAS 36 - Impairment Slides 8 29/10/2013 Santucci IAS 17 - Leasing Slides 9 05/11/2013 Santucci Exercise - Intangible Exercise prepared by Lecturers 10 08/11/2013 Bigogno Exercise - Leasing & Tangible Exercise prepared by Lecturers 11 12/11/2013 Santucci IFRS 8 - Operating Segment Slides 12 15/11/2013 Bigogno IFRS 3 - Business combination Slides 13 19/11/2013 Santucci IAS 37 - Provisions, contingent liabilities and contingent assets Slides 14 22/11/2013 Bigogno IAS 2 - Inventory Slides 15 26/11/2013 Santucci IAS 18 - Revenues Slides 16 29/11/2013 Bigogno FTA - First Time Adoption Slides 17 03/12/2013 Santucci Exercise - IAS 37 Exercise prepared by Lecturers 18 06/12/2013 Bigogno Exercise - Impairment Exercise prepared by Lecturers 19 10/12/2013 Santucci Exercise - Intangible & Revenues (review of arguments if necessary) Exercise prepared by Lecturers 20 13/12/2013 Bigogno Exercise - Business combination (review of arguments if necessary) Exercise prepared by Lecturers 21 17/12/2013 Santucci Exercise - Inventory & Cash Flow (review of arguments if necessary) Exercise prepared by Lecturers 22 20/12/2013 Bigogno Exercise - FTA, course closing Exercise prepared by Lecturers Seminars Consulting Hours 1 22/11/2013 Demartini/Trucco Voluntary disclosure, audit risk and audit fees Room A 4pm-6pm 2 29/11/2013 Demartini/Ruggiero (Brighton) The performative role of the accounting language. The intangible assets perspective Room A 4pm-6pm 3 To be defined Demartini/Swanson Cost analysis and control in a healthcare organization TO BE DEFINED Lecturer Day Time Note Bigogno Friday 1-2 pm Please arrange the meeting by mail before with the Lecturer Santucci Tuesday 1-2 pm Except for 1st October 2013 3
PART 1 IAS/IFRS: a General Overview 4
1. Some definitions A basic question: IAS? IAS/IFRS? IFRS The answer? 5
1. Some definitions International Accounting Standards (IASs) were issued by the IASC (International Accounting Standards Committee) from 1973 to 2000. The IASB (international Accounting Standards Board) replaced the IASC in 2001. 6
Since then, the IASB has amended some IASs and has proposed to amend others; has replaced some IASs with new International Financial Reporting Standards (IFRSs); has adopted or proposed certain new IFRSs on topics for which there was no previous IAS. 7
.IFRSs refers to the new numbered series of pronouncements that the IASB is issuing, as distinct from the International Accounting Standards (IASs) series issued by IASC. 8
.Broader definition IFRSs refers to the entire body of IASB pronouncements, including standards and interpretations approved by the IASB and IASs and SIC (Standing Interpretation Commission) interpretations approved by the predecessor International Accounting Standards Committee. 9
In fact, through committees, both the IASC and the IASB also have issued Interpretations of Standards 10
Interpretations of IASs and IFRSs are developed by the IFRS Interpretations Committee, whose name was changed from IFRIC (International Financial Reporting Interpretations Committee) in March 2010. 11
The IFRS Interpretations Committee replaced the former Standing Interpretations Committee (SIC) in March 2002 12
The Interpretations Committee's mission is "to interpret the application of International Accounting Standards (IASs) and International Financial Reporting Standards (IFRSs) and provide timely guidance on financial reporting issues not specifically addressed in IASs and IFRSs, in the context of the IASB Framework, and undertake other tasks at the request of the IASB". 13
2. The advantage of International Accounting GLOBALISATION INTERNATIONALISATION Common Accounting Rules Markets Efficiency 14
The goal of the IFRS Foundation and the IASB is to develop, in the public interest, a single set of highquality, understandable, enforceable and globally accepted financial reporting standards based upon clearly articulated principles. 15
IAS/IFRS adoption is considered as a quality improvement for financial information produced. YES BUT, WHERE IS THE REAL IMPROVEMENT COMPARED TO ITAGAAP? 16
IAS/IFRS adoption is considered as a quality improvement, BUT some discussions are still in place. Topics: 1) An extremely on-going world (updating needs, uncertain rules); 2) An assets side approach (fair value adoption problems); 3) A complex set of rules but at the end of the day often less strict than local GAAP. 17
3. IFRSs and European Community Standards issued by IASB must go through due process of endorsement before becoming law in EU. All the standards and interpretations are adopted in the form of Regulation. 18
Endorsement process: 1. IASB issues a standard 2. EFRAG (European Financial Reporting Advisory Group) holds consultations with interest groups 3. EFRAG delivers its advice to the European Commission whether the standard meets the criteria of endorsment. 19
4. SARG ( Standards Advice Review Group) issues its opinion whether EFRAG S endorsement advice is well -balanced and objective. 5. Based on the advice of EFRAG and the opinion of SARG, the Commission prepares a draft endorsement Regulation. 6. ARC (Accounting Regulatory Committee) votes on the Commission proposal. 20
7. The European Parliament and the Council of the European Union have 3 months to oppose the adoption of the draft Regulation by the Commission 8. In case of favorable opinion or the 3 months elapsed without opposition, the Commission adopts the draft Regulation. 9. The adopted Regulation is published in the Official Journal and enters into force on the day laid down in the Regulation itself. 21
4. International Accounting Standards around the world Country Argentina Australia Brazil Canada Status for listed companies Required for fiscal years beginning on or after 1 January 2011 Required for all private sector reporting entities and as the basis for public sector reporting since 2005 Required for consolidated financial statements of banks and listed companies from 31 December 2010 and for individual company accounts progressively since January 2008 Required from 1 January 2011 for all listed entities and permitted for private sector entities including not-for-profit organisations China Substantially converged national standards 22
European Union France Germany India Indonesia Italy Japan All member states of the EU are required to use IFRSs as adopted by the EU for listed companies since 2005 Required via EU adoption and implementation process since 2005 Required via EU adoption and implementation process since 2005 India is converging with IFRSs at a date to be confirmed. Convergence process ongoing; a decision about a target date for full compliance with IFRSs is expected to be made in 2012 Required via EU adoption and implementation process since 2005 Permitted from 2010 for a number of international companies; decision about mandatory adoption by 2016 expected around 2012 Mexico Required from 2012 23
Republic of Korea Required from 2011 Russia Saudi Arabia Required for banking institutions and some other securities issuers; permitted for other companies Not permitted for listed companies South Africa Required for listed entities since 2005 Turkey Required for listed entities since 2005 United Kingdom United States Required via EU adoption and implementation process since 2005 Allowed for foreign issuers in the US since 2007; target date for substantial convergence with IFRSs is 2011 and decision about possible adoption for US companies expected in 2011. 24
PART II Basic Accounting: Some technical vocabulary 1. Sources records and book of prime entry 2. Ledger accounts and double entry 3. Examples 25
1. Sources records and book of prime entry Sources Documents are the source of all information recorded by a business. Documents which are used to record the business transactions in the books of account include: quotation, sales order, purchase order, goods received note, goods despatched note, statement, credit note, debit note, remittance advice, receipt, invoices. 26
Invoices: relate to a sales order or a purchase order Credit note: relates to returned goods or refunds when a customer has been overcharged (regarded as a negative invoice) Other documents: debit notes: might be issued to adjust an invoice already issued goods received notes: record a receipt of goods (most commonly in a warehouse) 27
Books of prime entry The details of source documents need to be recorded; the records are recorded in books of prime entry,which are: Sales day book Purchase day book Sales returns day book Journal Cash book Petty cash book 28
Sales day book: for credit sales Purchase day book: for credit purchases Sales returns day book: for credit notes raised Purchase returns day book: for credit notes received from suppliers Journal: for transaction which are not recorded in any of the other books of prime entry 29
Cash book: for cash receipts and payments It records all transaction that go through the bank account. Reconciliation of bank statement and cash book Petty cash book: for small payments. A petty cash system is usually subject to strict controls Payments are made in respect of authorised claims All claims are supported by evidence 30
2. Ledger accounts and double entry Why do we need ledger account? Ledger accounts summarise all the individual transaction listed in the books of prime entry. Record of transaction, assets and liabilities: in chronological order built up in cumulative totals The method used to summarize records is ledger accounting and double entry 31
The nominal ledger Nominal ledger is an accounting record which summarises the financial affairs of a business The nominal ledger contains detail of: assets liabilities capital income and expenditure and profit and loss 32
The accounting equation The accounting equation emphasises the equality between assets and liabilities ( including capital as liability) Accounting equation is: ASSETS=CAPITAL + LIABILITIES 33
The accounting equation Liabilities are trade accounts payable; A payable is a person to whom a business owes money Trade account payable are debts arising from the purchase of material,components or goods for resale Assets are trade accounts receivable 34
The accounting equation Drawings are amount of money taken out of a business by its owner 35
The accounting equation Matching convention revenue earned is matched with the expenses incurred in earning it. 36
Double entry bookkeeping Double entry bookkeeping: each transaction has an equal but opposite effect. Every accounting event must be entered in ledger accounts both as a debit and as an equal but opposite credit. Weekly or monthly, totals are transferred books of prime entry into the nominal ledger. Every transaction has two effects (dual effect) from 37
Double entry bookkeeping A debt entry will increase an asset decrease a liability increase an expense A credit entry will decrease an asset increase a liability increase income 38
Double entry bookkeeping Every financial transaction gives rise to two accounting entries (a debit and a credit) Debit entries in the nominal ledger is therefore always equal at any time to the total value of credit entries. Every transaction is recorded twice every debit is balanced by a credit 39
Double entry bookkeeping A cash payment is a credit entry in the cash account The asset is decreasing. Cash may be paid out to pay an expense or to purchase an asset. The matching debit entry is therefore made in the appropriate expense or asset account 40
Double entry bookkeeping A cash receipt is a debit entry in a cash account. The asset is increasing. Cash might be received by a retailer who makes a cash sale. The credit entry would be made in the sales account 41
The rules of double entry bookeeping In terms of 'T' accounts: ASSET LIABILITY CAPITAL DEBIT $ CREDIT $ DEBIT $ CREDIT $ DEBIT $ CREDIT $ Increase Decrease Decrease Increase Decrease Increase For income and expenses, think about profit. Profit retained in the business increases capital. Income increases profit and expenses decrease profit. INCOME EXPENSE DEBIT $ CREDIT $ DEBIT $ CREDIT $ Decrease Increase Increase Decrease 42
Credit transaction Not all transaction are settled immediately in cash or by cheque. It s possible: purchase goods or non-current on credit terms so that the suppliers would be trade accounts payable until settlement was made in cash grant credit terms to its customers who would be trade accounts receivable of the business 43
Examples of accounts in the nominal ledger Examples of accounts in the nominal ledger include the following: (a) Plant and machinery at cost (b) Motor vehicles at cost (c) Plant and machinery, provision for depreciation (d) Motor vehicles, provision for depreciation (e) Proprietor's capital (f) Inventories raw materials (g) Inventories finished goods (h) Total trade accounts receivable (i) Total trade accounts payable 44
Examples of accounts in the nominal ledger (j) Wages and salaries (k) Rent and local taxes (l) Advertising expenses (m) Bank charges (n) Motor expenses (o) Telephone expenses (p) Sales (q) Total cash or bank overdraft 45
Examples: the accounting equation Mr XY starts a business. The business begins by owning the cash that he has put into it, $2,500. The business is a separate entity in accounting terms and so it owes the money to Mr XY as capital. When Mr XY sets up his business: Capital invested = $2,500 Cash = $2,500 Capital invested is a form of liability, because it is an amount owed by the business to its owner(s). Adapting this to the idea that assets and liabilities are always equal amounts, we can state the accounting equation as follows. As at 1 July 20X6: Assets = Capital + Liabilities $2,500 (cash) = $2,500 + $0 Mr XY purchases a market stall from Mr K, who is retiring from his fruit and vegetables business. The cost of the stall is $1,800. 46
Examples: the accounting equation He also purchases some flowers and potted plants from a trader in the wholesale market, at a cost of $650. This leaves $50 in cash, after paying for the stall and goods for resale, out of the original $2,500. The assets and liabilities of the business have now altered, and at 3 July before trading begins, the state of his business is as follows. Assets = Capital + Liabilities Stall 1,800 = $2,500 + $0 Flower and plants 650 Cash 50 2,500 The stall and the flowers and plants are physical items, but they must be given a money value. This money value is usually what they cost the business (called historical cost in accounting terms). 47
Examples: the accounting equation On 3 July Mr XY has a very successful day. He sells all of his flowers and plants for $900 cash. Since he has sold goods costing $650 to earn revenue of $900, we can say that he has earned a profit of $250 on the day's trading. Profits belong to the owners of a business. In this case, the $250 belongs to Mr XY. However, so long as the business retains the profits and does not pay anything out to its owners, the retained profits are accounted for as an addition to the proprietor's capital. Assets = Capital + Liabilities Stall 1,800 = Original investment $2,500 Flower and plants 0 Retained profit Cash (50 + 900) 950 (900-650) 250 2750 2750 + 0 48
Examples: the accounting equation At the beginning and end of 3 July 20X6, Mr XY s financial position was as follows. Net assets Capital (a) At the beginning of the day: $(2,500 0) = $2,500 = $2,500 (b) At the end of the day: $(2,750 0) = $2,750 = $2,750 There has been an increase of $250 in net assets, which is the amount of profits earned during the day. 49
Examples: the accounting equation The next market day is on 10 July and Mr XY purchases more flowers and plants for cash, at a cost of $740. He is not feeling well, because of a heavy cold, and so she decides to accept help for the day from his cousin Ethel. Ethel is to be paid a wage of $40 at the end of the day. Trading on 10 July was again very brisk, and Mr XY and Ethel sold all their goods for $1,100 cash. Mr XY paid Ethel her wage of $40 and drew out $200 for himself. Required (a) State the accounting equation before trading began on 10 July. (b) State the accounting equation at the end of 10 July, after paying Ethel: (i) but before drawings are made. (ii) after drawings have been made. 50
Examples: the accounting equation (a) After the purchase of the goods for $740. Assets = Capital + Liabilities Stall 1,800 Goods 740 Cash (770 740) 30 2,570 = $ 2,570 + $0 51
Examples: the accounting equation (b) On 10 July, all the goods are sold for $1,100 cash, and Ethel is paid $40. The profit for the day is $320. $ $ Sales 1,100 Less cost of goods sold 740 Ethel's wage 40 780 Profit 320 52
Examples: the accounting equation Assets = Capital + Liabilities Stall 1,800 At beginning of 10 July 2,570 Goods 0 Profits earned on 10 July 320 Cash (30+ 1,100 40) 1,090 2,890 2,890 + 0 53
Examples: the accounting equation After Mr XY has withdrawn $200 in cash, retained profits will be only $(320 200) = $120. Assets = Capital + Liabilities Stall 1,800 At beginning of 10 July 2,570 Goods 0 Profits earned on 10 July 120 Cash (1,090-200) 890 2,690 2,690 + 0 54
Examples: the rules of double entry bookeeping In terms of 'T' accounts: ASSET LIABILITY CAPITAL DEBIT $ CREDIT $ DEBIT $ CREDIT $ DEBIT $ CREDIT $ Increase Decrease Decrease Increase Decrease Increase For income and expenses, think about profit. Profit retained in the business increases capital. Income increases profit and expenses decrease profit. INCOME EXPENSE DEBIT $ CREDIT $ DEBIT $ CREDIT $ Decrease Increase Increase Decrease 55
Examples: double entry for cash transaction In the cash book of a business, the following transactions have been recorded. (a) A cash sale (ie a receipt) of $250 (b) Payment of a rent bill totalling $150 (c) Buying some goods for cash at $100 (d) Buying some shelves for cash at $200 How would these four transactions be posted to the ledger accounts and to which ledger accounts should they be posted? Don't forget that each transaction will be posted twice, in accordance with the rule of double entry. 56
Examples: double entry for cash transaction (a) The two sides of the transaction are: (i) Cash is received (debit entry in the cash at bank account). (ii) Sales increase by $250 (credit entry in the sales account). CASH AT BANK ACCOUNT SALES ACCOUNT Sales a/c 250 Cash a/c 250 (Note how the entry in the cash at bank account is cross-referenced to the sales account and vice-versa. This enables a person looking at one of the accounts to trace where the other half of the double entry can be found.) 57
Examples: double entry for cash transaction (b) The two sides of the transaction are: (i) Cash is paid (credit entry in the cash at bank account). (ii) Rent expense increases by $150 (debit entry in the rent account). CASH AT BANK ACCOUNT RENT ACCOUNT Rent a/c 150 Cash at bank a/c 150 58
Examples: double entry for cash transaction (c) The two sides of the transaction are: (i) Cash is paid (credit entry in the cash at bank account). (ii) Purchases increases by $100 (debit entry in the purchase account). CASH AT BANK ACCOUNT PURCHASES ACCOUNT Purchases100 Cash at bank a/c 100 59
Examples: double entry for cash transaction (d) The two sides of the transaction are: (i) Cash is paid (credit entry in the cash at bank account). (ii) Assets in this case, shelves increase by $200 (debit entry in shelves account). CASH AT BANK ACCOUNT SHELVES (ASSET) ACCOUNT Shelves a/c 200 Cash at bank a/c 200 60