Fiche de révision : Accounting Standards Framework and IAS

📋 Course Outline

1. International Accounting Standards Framework
2. Conceptual Framework Objectives
3. Financial Statement Presentation
4. Inventory Accounting
5. Cash Flow Statement
6. Accounting Policies and Errors
7. Events After Reporting Period
8. Construction Contracts
9. Lease Contracts
10. Foreign Exchange Changes
11. Separate Financial Statements

📖 1. International Accounting Standards Framework

🔑 Key Concepts & Definitions

• International Accounting Standards : Rules for measuring transactions and events affecting an entity’s financial position and performance and for disclosing information to users.

★ Must-know

• Accounting standards aim to reduce differences in expression and practice under similar circumstances and provide a framework for evaluating the quality and efficiency of professional work and the extent of professional responsibility.

Further detail

• The Saudi Organization for Certified Public Accountants, or SOCPA, regulates the accounting and auditing professions in Saudi Arabia, develops and approves accounting and professional standards, trains practitioners and administers professional examinations, and increases public confidence in the professions.

• The International Accounting Standards Board was established in 2001, renamed within the IFRS Foundation framework in 2010, and consists of sixteen members under the foundation’s constitution.

• The IASB approves International Financial Reporting Standards and related documents, including the Conceptual Framework, exposure drafts, and discussion documents.

📖 2. Conceptual Framework Objectives

🔑 Key Concepts & Definitions

• Conceptual Framework : For Financial Reporting establishes the concepts underlying the preparation and presentation of financial statements for external users.
• Relevance : Relevant financial information is capable of making a difference in users’ decisions because it has predictive value, confirmatory value, or both.
• Faithful Representation : Requires information to represent the phenomena it purports to represent completely, neutrally, and without error.
• Asset : A resource controlled by an entity as a result of past events from which future economic benefits are expected to flow to the entity.
• Liability : A present obligation of an entity arising from past events whose settlement is expected to result in an outflow of resources embodying economic benefits.
• Equity : The residual interest in an entity’s assets after deducting all its liabilities.
• Historical Cost : Under historical cost, assets are recorded at the cash or fair value of consideration given at acquisition, while liabilities are recorded at the amount received or the cash expected to be paid to settle them in the normal course of business.

★ Must-know

• The Conceptual Framework addresses the objective of financial statements, qualitative characteristics of useful financial information, the definition, recognition and measurement of financial statement elements, and capital and capital maintenance concepts.

📌 The financial concept of capital treats capital as net assets or equity, whereas the physical concept treats capital as the entity’s productive capacity, such as daily production units.

• Under financial capital maintenance, profit exists when end-of-period financial net assets exceed beginning financial net assets after excluding owner distributions and contributions; under physical capital maintenance, profit exists when end-of-period productive capacity exceeds beginning productive capacity after those exclusions.

Further detail

• The enhancing qualitative characteristics are comparability, understandability, verifiability, and timeliness.

• Income includes revenue from ordinary activities and gains from other events, while expenses include ordinary-activity expenses and losses; gains and losses are generally presented separately when recognized in profit or loss.

• Current cost measures assets at the cash amount required to acquire the same or an equivalent asset currently and liabilities at the undiscounted cash amount currently required for settlement.

• Net realizable or settlement value measures assets at the current selling amount and liabilities at their settlement value, while present value measures assets and liabilities using discounted future net cash flows.

💡 Memory Hook

Objective → qualities → elements → measurement → capital

📖 3. Financial Statement Presentation

★ Must-know

• IAS 1 aims to establish the basis for presenting general-purpose financial statements so that they are comparable with an entity’s financial statements for previous periods and with those of other entities.

• A complete set of financial statements comprises the statement of financial position, statement of profit or loss and other comprehensive income, statement of changes in equity, statement of cash flows, and notes including significant accounting policies and explanatory information.

📌 An entity must present current and non-current assets and current and non-current liabilities as separate classifications unless a liquidity-based presentation provides more relevant information, such as for some financial institutions.

📌 An asset is current when it is expected to be realized, sold, or consumed in the normal operating cycle, held mainly for trading, expected to be realized within twelve months after the reporting period, or is cash or a cash equivalent without a restriction lasting at least twelve months.

📌 A liability is current when it is expected to be settled in the normal operating cycle, held mainly for trading, due within twelve months after the reporting period, or when the entity lacks the right to defer settlement for at least twelve months.

Further detail

• General presentation considerations include fair presentation and IFRS compliance, going concern, accrual accounting, materiality and aggregation, offsetting, reporting frequency, comparative information, and consistency of presentation.

• The statement of profit or loss includes revenue, gains or losses on derecognition and reclassification of financial assets, finance costs, equity-accounted results of associates and joint ventures, tax expense, and total discontinued operations.

📌 Material income and expense items must be disclosed separately by nature and amount, expenses must be analyzed by nature or function, and no income or expense item may be presented as an extraordinary item.

📖 4. Inventory Accounting

🔑 Key Concepts & Definitions

• Net Realizable Value : The estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.

★ Must-know

• IAS 2 applies to inventories except work in progress arising from construction contracts, financial instruments, and biological assets related to agricultural activity.

• Inventories are measured at the lower of cost and net realizable value.

• Inventory cost includes costs of purchase, costs of conversion, and other costs incurred to bring inventories to their present location and condition.

📌 When inventory is sold, its carrying amount is recognized as an expense in the period in which the related revenue is recognized; write-downs and inventory losses are expensed when they occur, and reversals reduce inventory expense when they occur.

Further detail

• Costs of purchase include purchase price, import duties, non-recoverable taxes, transport, and other acquisition costs, while discounts and returns are deducted.

• Conversion costs include direct labor and fixed and variable production overheads such as depreciation, maintenance, factory management, indirect materials, and indirect labor.

• Inventory cost formulas include specific identification, first-in first-out, and weighted average; last-in first-out was no longer used under the 2005 amendments to international accounting standards.

📖 5. Cash Flow Statement

🔑 Key Concepts & Definitions

• Cash Equivalents : Short-term, highly liquid investments readily convertible to known amounts of cash and subject to an insignificant risk of changes in value.

★ Must-know

• IAS 7 requires a cash flow statement as a component of the financial statements for every period for which financial statements are presented.

• Operating activities are the entity’s principal revenue-producing activities and activities other than investing or financing, investing activities concern acquiring and disposing of long-term assets and other non-cash-equivalent investments, and financing activities change the size and composition of contributed equity and borrowings.

• Cash flows must be classified into operating, investing, and financing activities.

📌 Under the direct method, major classes of gross cash receipts and payments are disclosed, whereas under the indirect method, profit or loss is adjusted for non-cash items, working-capital changes, and investing or financing items.

Further detail

• Operating cash flows include cash receipts from sales, services, grants, fees, commissions, and other income, cash payments to suppliers and employees, insurance receipts and payments, income-tax payments unless specifically linked to investing or financing, and cash flows from trading contracts.

• Investing cash flows include payments for long-term assets and investments in other entities and receipts from their disposal or repayment, excluding instruments held as cash equivalents or for trading.

• Financing cash flows include proceeds from issuing shares, payments to owners for buying or redeeming shares, proceeds from issuing debt, and lessee payments reducing a finance-lease liability.

📖 6. Accounting Policies and Errors

🔑 Key Concepts & Definitions

• Accounting Policies : The specific principles, bases, conventions, rules, and practices applied by an entity in preparing and presenting financial statements.
• Change in Accounting Estimate : An adjustment to the carrying amount of an asset or liability, or to periodic consumption of an asset, resulting from new information or new developments rather than correction of an error.
• Prior-Period Error : An omission or misstatement in prior-period financial statements caused by failing to use, or misusing, reliable information that was available or could reasonably have been obtained when those statements were prepared.

📝 Essential Points

📌 An entity changes an accounting policy only when required by an IFRS or when the change provides reliable and more relevant information about the entity’s financial position, performance, or cash flows.

📌 A change in accounting policy is applied retrospectively by adjusting opening equity and comparative amounts as if the new policy had always been applied, unless determining the period-specific or cumulative effect is impracticable.

📌 A change in accounting estimate is recognized in profit or loss in the current period if it affects only that period and in the current and future periods if it affects both.

📌 Material prior-period errors must be corrected retrospectively in the first financial statements authorized for issue after discovery by restating the comparative information.

💡 Memory Hook

Policy change ≠ estimate change ≠ error

📖 7. Events After Reporting Period

🔑 Key Concepts & Definitions

• Events After Reporting Period : Events after the reporting period are events occurring between the end of the reporting period and the date when the financial statements are authorized for issue.

★ Must-know

📌 Adjusting events provide evidence of conditions that existed at the reporting date, whereas non-adjusting events indicate conditions that arose after the reporting date.

• An entity adjusts amounts recognized in its financial statements for adjusting events after the reporting period.

• An entity does not adjust recognized amounts for non-adjusting events after the reporting period, such as a decline in investment fair value, a major business combination, or an announced plan to discontinue operations after the reporting date.

• A customer’s bankruptcy after the reporting period can confirm that a trade receivable was impaired at the reporting date and therefore requires adjustment of the receivable’s carrying amount.

• An entity does not adjust recognized amounts for non-adjusting events after the reporting period, but it discloses material events by describing their nature and estimating their financial effect or stating that the effect cannot be estimated.

Further detail

• Examples of adjusting events include a post-reporting-period court judgment confirming a reporting-date obligation, a customer bankruptcy confirming a reporting-date receivable loss, a post-reporting-period sale providing evidence of inventory net realizable value, discovery of fraud or errors, and later determination of asset cost or legally required profit-sharing amounts relating to the reporting period.

• The authorization date is the date on which the financial statements are legally authorized for issue, normally the date when the board of directors approves them.

📌 Dividends proposed or declared after the reporting period are not recognized as a liability at the reporting date and are disclosed in the notes if declared before authorization of the financial statements.

📌 If management decides after the reporting period to liquidate the entity, cease trading, or has no realistic alternative, the financial statements must not be prepared on a going-concern basis.

📖 8. Construction Contracts

🔑 Key Concepts & Definitions

• Construction Contract : A specifically negotiated contract for constructing a single asset or a group of interrelated or interdependent assets in design, technology, function, purpose, or use.

★ Must-know

📌 A fixed-price contract provides for a fixed contract price or fixed price per unit of output, whereas a cost-plus contract reimburses allowable or otherwise defined costs plus a percentage or fixed fee.

• When contract results can be estimated reliably, contract revenue and costs are recognized by reference to the stage of completion at the reporting date, and an expected loss is recognized immediately as an expense.

• When contract results cannot be estimated reliably, revenue is recognized only to the extent of costs incurred that are probably recoverable, while contract costs are expensed as incurred.

Further detail

📌 Separate assets within one contract are treated as separate construction contracts when separate bids are submitted, each asset is separately negotiated and independently acceptable or rejectable, and each asset’s revenue and costs can be identified.

📌 A group of contracts is treated as one construction contract when it is negotiated as a single package, is so interrelated that it forms one project with an overall profit margin, and is performed concurrently or continuously.

• For a fixed-price contract, reliable estimation requires reliable measurement of total revenue, probable inflow of economic benefits, reliable measurement of remaining costs and stage of completion, and clearly identifiable and reliably measurable contract costs.

• Construction-contract disclosures include revenue recognized during the period, the methods used to determine revenue and stage of completion, cumulative costs and recognized profits less recognized losses, advances received, and retentions.

💡 Memory Hook

Contract → revenue and costs → percentage of completion → disclosure

📖 9. Lease Contracts

🔑 Key Concepts & Definitions

• Finance Lease : A lease that transfers substantially all the risks and rewards incidental to ownership of an asset, whether or not ownership is eventually transferred.
• Operating Lease : A lease that is not a finance lease and therefore does not transfer substantially all the risks and rewards incidental to ownership.
• Lease Contract : An agreement under which the lessor gives the lessee the right to use an asset for an agreed period in exchange for a payment or series of payments.

★ Must-know

• At commencement, a lessee recognizes a finance lease as an asset and liability at the lower of the asset’s fair value and the present value of the minimum lease payments, adding the lessee’s initial direct costs to the asset.

📌 Operating-lease payments are recognized as an expense on a straight-line basis over the lease term unless another systematic basis better represents the time pattern of the user’s benefit.

Further detail

• Finance-lease payments are divided between finance charges and reduction of the outstanding liability, with finance charges allocated to produce a constant periodic interest rate on the remaining liability.

📖 10. Foreign Exchange Changes

🔑 Key Concepts & Definitions

• Functional Currency : The currency of the primary economic environment in which an entity operates.
• Monetary Items : Money held and assets or liabilities to be received or paid in fixed or determinable amounts of money.

★ Must-know

• A foreign-currency transaction is initially recorded in the reporting currency by multiplying the foreign-currency amount by the exchange rate between the two currencies at the transaction date.

📌 At each reporting date, foreign-currency monetary items are translated using the closing rate, non-monetary items measured at historical cost use the transaction-date rate, and non-monetary items measured at fair value use the rate when fair value was measured.

• Exchange differences on settlement or remeasurement of monetary items are recognized in profit or loss in the period in which they arise.

Further detail

• For translating a foreign operation into a different presentation currency in a non-hyperinflationary economy, assets and liabilities use the closing rate, income and expenses use transaction-date rates, and resulting exchange differences are recognized in other comprehensive income.

• On disposal of a foreign operation, the cumulative exchange differences recognized in other comprehensive income and accumulated in a separate equity component are reclassified from equity to profit or loss.

💡 Memory Hook

Recognize → remeasure → translate → reclassify

📖 11. Separate Financial Statements

🔑 Key Concepts & Definitions

• Separate Financial Statements : Statements presented by a parent, an investor with joint control, or an investor with significant influence in which investments are accounted for at cost or under IFRS 9.

★ Must-know

📌 Consolidated financial statements present the assets, liabilities, equity, income, expenses, and cash flows of the parent and subsidiaries as those of a single economic entity, whereas separate financial statements account for investments held by the parent or investor.

• In separate financial statements, investments in subsidiaries, joint ventures, and associates are accounted for either at cost or in accordance with IFRS 9, using the same accounting treatment for each class of investment.

Further detail

📌 Dividends from a subsidiary, joint venture, or associate are recognized in profit or loss in separate financial statements when the investor’s right to receive them is established.

• If a parent presents separate rather than consolidated financial statements, it discloses that fact, its principal place of business and country of incorporation, where the consolidated statements can be obtained, significant investments and their ownership percentages, and the accounting method used.

📊 Synthesis Tables

Qualitative Characteristics

Cash Flow Classifications