Notesale: Turn your study into money

Document Preview

Extracts from the notes are below, to see the PDF you'll receive please use the links above

---

UGANDA CHRISTIAN UNIVERSITY, MBALE UNIVERSITY COLLEGE
DEPARTMENT OF BUSINESS AND ADMINISTRATION
ADVANCED ACCOUNTING LECT
...
It is not what it was ten
years ago and it will not be what it is now ten years from now
...

Preparation of budgets; expected operating results and financial positions of business entities
Financial statement preparation and presentation; to be used by interested groups in
determining the financial operations and results of a business entity
...

The present scope of accounting is, however, wider
...
In particular, public interest in protecting the natural environment
has grown significantly during the last ten years
...

 Different accountants may produce different statements from the same set of data
...


ADVANCED ACCOUNTING LECTURE NOTES BY OWINO S FOR BBA 3 WEEKEND UCU

Page 1

UGANDA CHRISTIAN UNIVERSITY, MBALE UNIVERSITY COLLEGE
DEPARTMENT OF BUSINESS AND ADMINISTRATION
ADVANCED ACCOUNTING LECT
...

The foreword to accounting standards defines accounting standards as authoritative statements
of how particular types of transaction and other events should be reflected in financial
statements
...
International Accounting Standards
(IASs) and International Financial Reporting Standards (IFRS) are meant to apply to most
organizations in the world
...

International Accounting Standards
(a) Historical Development
The International Standards Committee (IASC), established in 1973, was an independent private
sector body and had no formal authority
...
The IASC operated under the umbrella of the International Federation of
Accountants (IFAC), which is the worldwide organization of accountancy bodies and is
independent of any country's government
...
One of the problems facing the IASC was that it quite often had to issue standards that
accommodated two or more alternative acceptable accounting treatments
...

In 1995 the IASC entered into an agreement with the International Organisation of Securities
Commission (IOSCO) (the body representing stock exchanges throughout the world) to produce
a core set of accounting standards
...
This deal was to give IASC its much needed authority
...
NOTES FOR BBA 3, SEPT 2018 WEEKEND
backing the IASC had to agree to a restructuring which occurred in 2000
...

The European Union, besides issuing directives on company law (Fourth and Seventh
Directives), has also adopted the IASB standards for the preparation of financial statements
...
This is referred to as its conceptual
framework
...
The framework does not have the status of an
accounting standard
...
It assists,
 Preparers of financial statements in applying International Accounting Standards and in
dealing with topics that have yet to form the subject of an International Accounting Standard
...
The objective of financial statements;
2
...
Qualitative characteristics of financial information;
4
...
Recognition of the elements of financial statements;
6
...
Concepts of capital maintenance
...
NOTES FOR BBA 3, SEPT 2018 WEEKEND

Objectives of Financial Statements is to provide information about :
 The financial position ( Provided in the Balance sheet)
 Financial performance (provided in an Income Statement and the Statement of changes in
Equity
 and changes in financial position (This is the Cash flow of the enterprise
...

 There are two more assumptions of secondary importance, which should also be followed:
Materiality and offsetting
Elements of the Financial Statements
The framework identifies five elements:
 assets,
 liabilities,
 Equity interest,
 Income, and
 expenses
ASSET: Is a resource controlled by the enterprise as a result of past events and from which
future economic benefits are expected to flow to the enterprise
...
Ownership is usually synonymous with control
...
NOTES FOR BBA 3, SEPT 2018 WEEKEND
 Past Events: The event must be ‘past’ before an asset can arise
...
g equipment will only
become an asset when there is the right to demand delivery or access to the asset’s potential
...

 Entities would normally obtain assets by: purchasing them for cash; from credit or barter
transactions; by selling goods and services; or by entering into arrangements that provide
rights to future benefits
 Resource-type assets may also arise from discovery, although recognition will generally
occur on extraction of the resources
...

Agriculture]
...
e acquired free of charge , once it has the capacity to
generate future economic benefits then meets the definition of an asset [IAS 20]
 Future economic benefits: These are evidenced by the prospective receipt of cash
...

 Owner must carry the rewards and risks of ownership: Rewards – Increase in Value,
Income stream associated with the asset, right to use the asset
...

 Tangibility is not an essential Characteristic - Hence intangible assets are also recognised
 Legal right of ownership is not essential

LIABILITY
A liability is an entity's present obligation arising from a past event, the settlement of which will
result in an outflow of economic benefits from the entity
 Obligations: may be legal or not, e
...
e past)
event but in law this liability does not arise untill it is assed some time later
 Outflow of economic benefits – A liability exists when the entity has little or no discretion to
avoid an outflow of economic benefits
...

ADVANCED ACCOUNTING LECTURE NOTES BY OWINO S FOR BBA 3 WEEKEND UCU

Page 5

UGANDA CHRISTIAN UNIVERSITY, MBALE UNIVERSITY COLLEGE
DEPARTMENT OF BUSINESS AND ADMINISTRATION
ADVANCED ACCOUNTING LECT
...


Equity interest
The residual interest in the assets of the entity after deducting all liabilities
...


Decreases in equity result from
 Distributions to owners;
 The repurchase of an entity's shares;
 Net losses; and
 Fair value adjustments that have a negative impact on equity
...

Expenses: Decreases in economic benefits during the accounting period in the form of outflows
or depletions of assets or incurrences of liabilities that result in decreases in equity, other than
those relating to distributions to equity participants
...
NOTES FOR BBA 3, SEPT 2018 WEEKEND
 Realizable value - what could currently be obtained by selling the asset in an orderly
disposal
 Present Value – PV of future cashflows

Development of International Accounting Standards
 1967 – Accountants International study Group set up under Lord benson, then president of
ICAEW
...

 It expanded to include Canadian Institute of Chartered Accountants (CICA) and the
American Institute of Certified Public Accountants (AICPA)
...

 1983 – IASC membership expanded to include all professional accountancy bodies that are
members of the IFAC
...

 2001 – IASC adopted a new structure, IASC Foundation was set up with a board of trustees
(as a not for profit organisation based in USA) and the IASB – International Accounting
Standards Board, with the sole responsibility of setting accounting standards – now known
as ‘International Financial Reporting Standards’
...

 The IASB (has 14 Board members – current chairman is Sir David Tweedie) is appointed by
the IASC Foundation
...
NOTES FOR BBA 3, SEPT 2018 WEEKEND
FROM “IAS” TO “IFRS”
After taking office on 1st April 2001, the new IASB announced that the IASC Foundation
Trustees had agreed that the accounting standards issued by the IASB would be designated
‘International Financial Reporting Standards- IFRS‟ while existing standards would continue
to be designated „International Accounting Standards – IAS
...


Procedure for development of an IFRS
 IASB identifies a subject and appoints an advisory committee to advise on the issues
 The IASB publishes an exposure draft for public comment, being a draft version of the
intended standard
 Following the consideration of comments received on the draft, the IASB publishes the final
text of the standard
...
It is governed by
a group of 19 individual trustees, known as the IASC Foundation, with diverse geographical and
functional backgrounds
...
Volcker, the former chair of
the US Federal Reserve Board
...
NOTES FOR BBA 3, SEPT 2018 WEEKEND
public awareness of the IASB
...
Examples include:

IAS 1 Presentation of Financial Statements (FRS 3 UK similar, but not identical)
The standard sets out overall requirements for the presentation of financial statements, guidelines
for their structure and minimum requirements for their content
...
Inventories are assets;
 held for sale
 in the process of production for such sale
 in the form of materials or supplies to be consumed in the production process or the
rendering of services
...
These are dealt with under IAS 11
IAS 7 Cash Flow Statements (FRS 1 revised UK similar, but not identical)
The standard deals with the preparation of one of the primary financial statements as specified by
IAS 1
...

IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors (FRS 18 UK
similar, but not identical)
The objective of the standard is to prescribe the criteria for selecting and changing accounting
policies used in the preparation of financial statements
...

IAS 10 Events After the Balance Sheet Date (FRS 21 UK)
The standard deals with events that occur after the balance sheet date and whether these affect
the financial statements prepared and/or whether information on these events should be provided
in the notes to the accounts
...
NOTES FOR BBA 3, SEPT 2018 WEEKEND
IAS 11 Construction Contracts (SSAP 9 UK similar, but not identical)
The primary issue in dealing with construction contracts that cover more than one accounting
period is the allocation of contract revenue and contract costs to the appropriate accounting
period
...
The standard
deals with the accounting of both current taxes and deferred taxes
...

IAS 17 Leases (SSAP 21 UK similar, but not identical)
Businesses do not always purchase the fixed assets they require but, rather; quite often lease
them from another party
...
This is an example of accounting for substance over form
...
It further states that income
encompasses both revenues and gains
...

IAS 19 Employee Benefits (FRS 17 UK similar, but not identical)
Many businesses, in addition to wages/salaries, provide further benefits to their employees
...

This standard deals with the accounting for all employee benefits except those dealt with under a
specific standard
...

IAS 20 Accounting for Government Grants and Disclosure of Government Assistance
(SSAP 4 UK similar, but not identical)
ADVANCED ACCOUNTING LECTURE NOTES BY OWINO S FOR BBA 3 WEEKEND UCU

Page 10

UGANDA CHRISTIAN UNIVERSITY, MBALE UNIVERSITY COLLEGE
DEPARTMENT OF BUSINESS AND ADMINISTRATION
ADVANCED ACCOUNTING LECT
...
Capital grants relating to capital expenditure should be credited to revenue
over the expected useful economic life of the asset
...
The objective of this standard is to prescribe how to
deal with such activities in the financial statements
...
Normally the interest costs on
such assets should be expensed to the income statement in accordance with the matching
principle
...
This standard deals with
the accounting for borrowing costs and whether the alternative treatment can be permitted
...
This disclosure is necessary because quite often such
transactions would not be entered into with unrelated parties
...

IAS 27 Consolidated and Separate Financial Statements (FRS 2 UK similar, but not
identical)
This forms the basis of study units 11 and 12 where we deal with the preparation of financial
statements for holding and subsidiary businesses
...
Thus, the standard requires
restatement of financial statements of businesses operating in a hyperinflationary economy
...
NOTES FOR BBA 3, SEPT 2018 WEEKEND

IAS 33 Earnings per Share (FRS 22UK)
This statement specifies the determination and presentation of the earnings per share figure/s in
the financial statements
...
An asset is carried at more than
its recoverable amount if its carrying value exceeds the amount to be recovered through the use
or sale of the asset
...

IAS 37 Provisions, Contingent Liabilities and Contingent Assets (FRS 12 UK, similar but not
identical)
The standard deals with the appropriate recognition and measurement of provisions and
contingencies
...

IAS 38 Intangible Assets (FRS 10 UK similar, but not identical)
The standard only permits the recognition of intangible assets if certain criteria are met
...

IAS 39 Financial Instruments: Recognition and Measurement (FRS 26 UK)
IAS 40 Investment Property (SSAP 19 UK similar, but not identical)
An investment property is property held by a business to earn rentals or for capital appreciation
or both, rather than for use in the production or supply of goods or services
...

IAS 41 Agriculture

ADVANCED ACCOUNTING LECTURE NOTES BY OWINO S FOR BBA 3 WEEKEND UCU

Page 12

UGANDA CHRISTIAN UNIVERSITY, MBALE UNIVERSITY COLLEGE
DEPARTMENT OF BUSINESS AND ADMINISTRATION
ADVANCED ACCOUNTING LECT
...

A conceptual framework is a statement of generally accepted theoretical principles which
form the frame of reference for financial reporting
...

(b) What are the advantages of developing a conceptual framework?
 The situation is avoided whereby standards are developed on a patchwork basis, where a
particular accounting problem is recognised as having emerged, and resources were then
channelled into standardising accounting practice in that area, without regard to whether
that particular issue was necessarily the most important issue remaining at that time without
standardisation
...
Where there is a
conflict of interest between user groups on which policies to choose, policies deriving from a
conceptual framework will be less open to criticism that the standard-setter buckled to
external pressure
...

(c) What are the advantages to international harmonization of accounting standards?
The advantages of harmonisation will be based on the benefits to users and preparers of
accounts, as follows
...

(ii) Multinational companies would benefit from harmonisation for many reasons including the
following
...

 Management control would be improved, because harmonisation would aid internal
communication of financial information
...

 It would be easier to comply with the reporting requirements of overseas stock exchanges
...

 A reduction in audit costs might be achieved
...

(iii) Governments of developing countries would save time and money if they could adopt
international standards and, if these were used internally, governments of developing
...
It will be easier to calculate the tax liability of investors, including
multinationals who receive income from overseas sources
...
This
would be aided by common accounting practices within the region
...
NOTES FOR BBA 3, SEPT 2018 WEEKEND
(vi) Large international accounting firms would benefit as accounting and auditing would be
much easier if similar accounting practices existed throughout the world
...

(b) Given the diversity of user requirements, there may be a need for a variety of accounting
standards, each produced for a different purpose (and with different concepts as a basis)
...

Reasons why Accountants should observe International Accounting Standards:
a) Use of IASs adds credibility to the financial statements as they can be compared with others
globally
...

c) Adds value to the financial statements in case an entity is sourcing for foreign capital
...

Qualities of Useful Financial Information
The four principal qualities of useful financial information are understandability, relevance,
reliability and comparability
...
For these reason users are assumed to have a reasonable knowledge of
business and economic activities and accounting
...
The relevance of information is affected by its nature and materiality
...
To be reliable then the information should:
a) Be represented faithfully,
b) Be accounted for and presented in accordance with their substance and economic reality and
not merely their legal form,
c) Be neutral i
...
free from bias,
d) Include some degree of caution especially where uncertainties surround some events and
transactions (prudence),
e) Be complete i
...
must be within the bounds of materiality and cost
...


ADVANCED ACCOUNTING LECTURE NOTES BY OWINO S FOR BBA 3 WEEKEND UCU

Page 14

UGANDA CHRISTIAN UNIVERSITY, MBALE UNIVERSITY COLLEGE
DEPARTMENT OF BUSINESS AND ADMINISTRATION
ADVANCED ACCOUNTING LECT
...
Users must also be
able to compare the financial statements of different accounting policies, changes in the various
policies and the effect of these changes in the accounts
...

(a) Define a 'conceptual framework'
...

These theoretical principles provide the basis for the development of new accounting standards
and the evaluation of those already in existence
...

 As stated above, the development of certain standards (particularly national standards) have
been subject to considerable political interference from interested parties
...

 Some standards may concentrate on the income statement whereas some may concentrate
on the valuation of net assets (statement of financial position)
...

(i) Investors, both individual and corporate, would like to be able to compare the financial results
of different companies internationally as well as nationally in making investment decisions
...

 Better access would be gained to foreign investor funds
...

 Appraisal of foreign entities for take-overs and mergers would be more straightforward
...

ADVANCED ACCOUNTING LECTURE NOTES BY OWINO S FOR BBA 3 WEEKEND UCU

Page 15

UGANDA CHRISTIAN UNIVERSITY, MBALE UNIVERSITY COLLEGE
DEPARTMENT OF BUSINESS AND ADMINISTRATION
ADVANCED ACCOUNTING LECT
...

 A reduction in audit costs might be achieved
...

(iii) Governments of developing countries would save time and money if they could adopt
international standards and, if these were used internally, governments of developing
...
It will be easier to calculate the tax liability of investors, including
multinationals who receive income from overseas sources
...
This
would be aided by common accounting practices within the region
...

REGULATORY FRAMEWORK OF ACCOUNTING (ACCOUNTING RULES)
Accounting rules are imposed on accountants in order to make sure that their reporting
from bias
...

GAAP refers to accounting principles or practices that are regarded permissible by the
accounting profession
...
the key terms used in accounting regulatory framework include:
 Accounting principles/ concepts/conventions
 Accounting bases
 Accounting policies
 Accounting standards
Accounting principles
Also known as accounting concepts, conventions or postulates, are basic ground rules which
must be followed when financial accounts are being prepared and presented
...


Accounting bases
These are methods developed for applying fundamental concepts to financial transactions and
items for the purpose of final accounts and in particular:
 For determining the accounting periods in which revenue and costs should be recognised in
the profit and loss account
...
NOTES FOR BBA 3, SEPT 2018 WEEKEND
 For determining the amounts at which material items should be stated in the balance sheet
...


Accounting standards
These are guideline statements or rules issued by professional accounting governing
accounting practice, relating to how accounts should be prepared and presented
Accounting Concepts, Bases and Policies
Bases
Bases are the methods that have been developed for expressing or applying fundamental
accounting concepts to financial transactions and items
...
g
...

NB: The distinction between concepts, bases and policies is often unclear in some people minds
...

Concept
Prudence

Base
Provision against
bad debts

Going concern

Carrying forward
research
and
development
expenditure
Stock valuation or
Depreciation
...

Only
carried
forward
expenditure
relating
to
commercially viable projects
Using Straight-line or reducing
balance) LIFO or FIFO being
followed from one year to the
other
...
NOTES FOR BBA 3, SEPT 2018 WEEKEND

Concepts/conventions/principles
Accounting Concepts are broad basic assumptions that underlie the periodic financial accounts of
business enterprises
...
Financial statements should be prepared under the going concern basis
unless the entity is being (or is going to be) liquidated or if it has ceased (or is about to cease)
trading
...
The main significance of the going concern concept is
that the assets of the business should not be valued at their ‘break-up’ value, which is the amount
that they would sell for it they were sold off piecemeal and the business were thus broken up
...
However, the short
coming of the concept is that the business operates in an environment and sometimes it leaves an
organisation with no choice but to wind up as we have seen many organisations doing so e
...

Crane Bank, WBS TV
...
They must be matched with one another so far as their relationship can be
established or justifiably assumed, and dealt with in the profit and loss account of the period to
which they relate
...
e
...

iii) The Prudence Concept:
The prudence concept states that accountants should not only anticipate for profits alone, but
should also provide for losses as well
...
Therefore, revenue and profits are not anticipated but are
recognized by inclusion in the profit and loss account only when realized in the form of either
cash or of other assets the ultimate cash realization of which can be assessed with reasonable
certainty: provision is made for all liabilities (expenses and losses) whether the amount of these
is known with certainty or is best estimate in the light of the information available
...

The other aspect of the prudence concept is that where a loss is foreseen, it should be anticipated
and taken into account immediately
...
It is not enough to wait until the stock
ADVANCED ACCOUNTING LECTURE NOTES BY OWINO S FOR BBA 3 WEEKEND UCU

Page 18

UGANDA CHRISTIAN UNIVERSITY, MBALE UNIVERSITY COLLEGE
DEPARTMENT OF BUSINESS AND ADMINISTRATION
ADVANCED ACCOUNTING LECT
...
A profit
can be considered to be a realized profit when it is in the form of:
a) Cash
b) Another asset that has a reasonably certain cash value
...

A company begins trading on 1 January 20X2 and sells goods worth £100,000 during the year to
31 December
...
Of these, the company is
now doubtful whether £6,000 will ever be paid
...
Sales for 20x5 will be shown in the profit and loss account at their full
value of £100,000, but the provision for doubtful debts would be a charge of £6,000
...

iv) The consistency concept:
The consistency concept states that in preparing accounts consistency should be observed
in
two respects
...

b) The same treatment should be applied from one period to another in accounting for
similar items
...

v) The entity concept:
The concept is that accountants regard a business as a separate entity, distinct from its owners or
managers
...

vi)

The money measurement concept:
The money measurement concept states that accounts will only deal with those items to which a
monetary value can be attributed
...
g
...
g
...

The monetary measurement concept introduces limitations to the subject matter of accounts
...
These may be important enough to give it a clear superiority over an otherwise
identical business, but because they cannot be evaluated in monetary terms they do not appear
anywhere in the accounts
...
NOTES FOR BBA 3, SEPT 2018 WEEKEND
vii) The materiality concept:
An item is considered material if it’s omission or misstatement will affect the decision making
process of the users
...
Only items material
in amount or in their nature will affect the true and fair view given by a set of accounts
...
In preparing accounts it is important to assess what is material and what is not, so
that time and money are not wasted in the pursuit of excessive detail
...
There is no
absolute measure of materiality
...
But some items disclosed in accounts are regarded as particularly sensitive and even a
very small misstatement of such an item would be regarded as a material error
...

The assessment of an item as material or immaterial may affect its treatment in the accounts
...

Example:
a) If a balance sheet shows fixed assets of £2 million and stocks 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 stock valuation probably would be
...

b) If a business has a bank loan of £50,000 balance and a £55,000 balance on bank deposit
account, it might well be regarded as a material misstatement if these two amounts were
displayed on the balance sheet as ‘cash at bank £5,000’
...

viii) The historical cost convention:
This concept requires accountants to record assets and or liabilities at their original cost of
acquisition
...
e
...
An important advantage of this procedure is
that the objectivity of accounts is maximized: there is
usually objective, documentary
evidence to prove the amount paid to purchase an asset
or pay an expense
...

In general, accountants prefer to deal with costs, rather than with ‘values’
...

For
ADVANCED ACCOUNTING LECTURE NOTES BY OWINO S FOR BBA 3 WEEKEND UCU

Page 20

UGANDA CHRISTIAN UNIVERSITY, MBALE UNIVERSITY COLLEGE
DEPARTMENT OF BUSINESS AND ADMINISTRATION
ADVANCED ACCOUNTING LECT
...
The
machine has an expected useful life of four years
...
The
limitation of the concept is that it does not consider the effect of changes in value since some
assets appreciate e
...
land where as others depreciate
...
This means he should try to strip his
answers of any personal opinion or prejudice and should be as precise and as detailed as the
situation warrants
...
Objectivity means that accountants
must
be free from bias
...
In
practice objectivity is difficult
...
It was to combat
subjectivity that accounting standards were developed
...
The concept states that revenue and profits
are not anticipated but are recognized by inclusion in the income statement only when realized
in the form of either cash or of other assets the ultimate cash realization of which can be
assessed with reasonable certainty
...
Every transaction has twofold effect in the accounts and is the basis of double entry bookkeeping
...
g
...


ADVANCED ACCOUNTING LECTURE NOTES BY OWINO S FOR BBA 3 WEEKEND UCU

Page 21



---