文本案例讲稿msc fa1lecture

1、1 Lecture 9 Accounting for UncertaintyIAS 8 Accounting Policies IAS 37 - ProvisionsIAS 10 Events after the Reporting Period2IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors3OBJECTIVE & SCOPETo prescribe the criteria for selecting and changing accounting policies, together with t

2、he accounting treatment and disclosure of changes in accounting policies, changes in accounting estimates and correction of errors4KEY DEFINITIONSAccounting PolicesThe specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting Financial Statements (

3、FS)Prior Period ErrorsOmissions from, and misstatements in, the entitys FS for one or more prior periods arising from a failure to use, or misuse of, reliable information that:was available when FS for those periods were authorised for issue; andcould reasonably be expected to have been obtained and

4、 taken into account in the preparation and presentation of those FS.Such errors include the effects of mathematical mistakes, mistakes in applying accounting policies, oversights or misinterpretations of facts, and fraud.5ACCOUNTING POLICIESSelection, Application and Change in Accounting Policy (AP)

5、 Accounting Policies normally kept the same to ensure comparability of FS over time.Retrospective changes in accounting policiesAdjust the opening balance of each effected component and any other relevant comparative amounts as if the new accounting policy had always been applied. This means that th

6、ere will be a prior period adjustment (PPA) to the balance of retained earnings brought forward in the statement of changes in equity.Comparative information be restated unless impracticableWhen a change in AP has a material effect on the current period or any prior period, or may have a material ef

7、fect in subsequent periods, the following disclosures should be made:Reasons for change;Amount of adjustment recognised in the current period;Amount of adjustment included in each period prior to those included in the FS.Share Other Reval RetainedTotal capital comp reserve earnings of equity00000000

8、0000000Balance at 1 April 20X0XXX XX XX XXXXXXChanges in accounting policy- - - (X) (X)Restated balanceXXX XX XX XXX XXChanges in equity Issue of share capitalXXX - - -XXXDividends - - - (XX) (XX) Total comprehensive e for the period - - XX XXXXXXBal at 31/03/X1XXX XX XX XXXXXXStatement of changes i

9、n equity7ACCOUNTING ESTIMATESEstimates may be required for:bad debts;Useful lives of depreciable assets;warranty obligations; Changes in Accounting EstimatesChanges do not constitute prior year adjustments i.e. if changes occur in the circumstances on which the estimate was based, or as a result of

10、new information, this does not relate to prior periods and is not the correction of an error.The effect of a change in estimate should be recognised prospectively in the SCI in the period of the change and/or future periods (e.g. bad debts, remaining useful economic life of PPE).If the effect of the

11、 change is material, its nature and amount must be disclosed.8SummaryChange in accounting policyCorrection of material errorsChange in accounting estimatePrior Period Adjustment Current Period Adjustment 9Student ActivityAngel plc has retained earnings (RE) of 30m for the year to 30th June 20X4 and

12、the revenue reserve was 700m on 1st July 20X3. It has been discovered, whilst producing the 20X4 accounts, that the closing inventory figure as at 30th June 20X3 was understated by 15m.RequiredShow how this error would be shown in the statement of changes in equity10AnswerThe 20X3 comparative invent

13、ory figure would be restated and the error corrected as it is likely to be material. As the error has been identified, the 20X4 profit is already correct.Angel plc Statement of Changes in Equity mBalance at 30th June 20X3 As previously reported700Prior period adjustment (note x) 15Restated 715Retain

14、ed profit for year 30Balance at 30th June 20X474511IAS 37 Provisions, Contingent Liabilities and Contingent Assets12IAS 37 Provisions, Contingent Liabilities and Contingent Assets ObjectiveScopeDefinitionsProvisionsContingent LiabilitiesContingent AssetsDisclosure13PROVISIONSA provision should be re

15、cognised when: An entity has a present obligation (legal or constructive) as a result of a past event; It is probable that a transfer of economic benefits will be required to settle the obligation; and A reliable estimate can be made of the amount of the obligation. If these conditions are not met,

16、no provision should be recognised (but might have to disclose a contingent liability see later) 14PRESENT OBLIGATIONA present obligation arises if, taking account of all the available evidence, it is more likely than not (50% chance) that an obligation exists at the reporting date 15PAST EVENTAn eve

17、nt that creates a legal or constructive obligation that results in an entity having no realistic alternative to settling that obligation ObligationsA Legal Obligation derives from: A contract (through explicit or implicit terms) Legislation & other operation of lawA constructive obligation derives f

18、rom an entitys actions where:By established pattern of past practice, published policies or a sufficiently specific current statement, the entity has indicated to other parties that it will accept certain responsibilities; andAs a result, the entity has created a valid expectation on and a the part

19、of those other parties that it will discharge those responsibilities. 17PROBABLE TRANSFER OF ECONOMIC BENEFITS Regarded as probable if the event is more likely than not to occuri.e. the probability that the event will occur is greater than that the probability that it will not (50% chance)18RELIABLE

20、 ESTIMATE OF THE OBLIGATION An estimate of the obligation, based upon a range of possible es that is acceptable Where no reliable estimate can be made, the liability cannot be recognised and should be disclosed as a contingent liability 19Measurement of ProvisionsManagement are required to estimate

21、the expenditure required to settle the present obligation at the reporting date Estimates of e and the financial effect are determined by the judgement of management, supplemented by experience of similar transactionsProvisions for large populations of events (e.g. warranties, customer refunds) are

22、measured at a probability-weighted expected value. Where the effect of the time value of money is material, the amount of a provision should be the present value of the expenditures expected to be required to be settle the obligation. APPLICATION FUTURE OPERATING LOSSESProvisions should not be recog

23、nised for future operating losses Future operating losses do not meet the general definition of a liability and the general recognition criteria for provisions APPLICATION ONEROUS CONTRACTSThis is a contract in which the unavoidable costs of meeting the applications under it exceed the economic bene

24、fits expected to be received from it The present obligation under onerous contracts should be recognised and measured as a provision Student ActivityNorwind plc is a major UK retailer. On 1st January 20X8 Norwind plc signed a five-year lease on a new shop in a new shopping mall. Annual lease payment

25、s were 1m, payable on 31st December each year.Changes in Norwinds key markets meant that the shop was not opened as expected and in late 20X8 it became clear that Norwind had no possible use for the shop premises. The company has failed to sub-let the premises as most of the shopping mall is empty.

26、It now seems probable that Norwind will never use the premises or that it will ever be sub-let. The company has a cost of capital of 10%.RequirementDiscuss how these the lease should be accounted for and disclosed in the 20X8 financial statements22AnswerThis is an onerous contract the unavoidable co

27、sts of meeting the contract outweigh the economic benefits. A provision should be made.The provision could be discounted at the companys cost of capital.DR Rent 1m + 3.169m = 4.169m.CR Bank 1m,CR Liability 3.169mIn 20X9 there will be an unwinding of the discount DR Rent 0.317m CR liability 0.317m an

28、d bank payments will continue DR liability 1m, CR Bank 1m. Liability at the end of 20X9 will be a liability of 909 +826 +751 =2.486m23 YearCash Flow mDiscount FactorPresent Value 00020X910.90990920Y010.82682620Y110.75175120Y210.6836833,169RESTRUCTURINGRules cover:Sale or termination of a line of bus

29、iness Closure of business in a country or region Relocation of business activities from one country or region to another Changes in the management structure Fundamental reorganisations that have a material effect on the nature and focus of operations RESTRUCTURINGA constructive obligation to restruc

30、ture arises only when an entity has: A detailed formal plan for the restructuring Raised a valid expectation in those affected that it will carry out the restructuring by starting to implement that plan or announcing its main features to all those affected by it RESTRUCTURINGThe formal plan should i

31、dentify at least:The business or part of the business concerned The principal locations affected The allocation, function, and approximate number of employees who will be terminated The expenditures that would be undertaken When the plan will be implemented RESTRUCTURINGNo obligation arises for the

32、sale of an operation until the entity is committed to its sale e.g. there is a binding sale agreement RESTRUCTURINGA restructuring provision should include only the correct expenditures arising from the restructuring i.e. those that are both: Necessarily entailed by the restructuring; and Not associ

33、ated with the ongoing activities of the entity.DISCLOSURE - PROVISIONSFor each class of provision: Carrying amount at beginning and end of period Additional provisions made in the periodAmounts used during the periodUnused amounts reversed during the period Increase during the period in the discount

34、ed amount arising from the passage of time and the effect of any change in the discount rateComparative information is not requiredDISCLOSURE - PROVISIONSFor each class of provision, disclose: A brief description of the nature of the obligation, and the expected timing of any resulting transfers of

35、economic benefits An indication of the uncertainties about the amount or timing of those transfers of economic benefits The amount of any expected reimbursement 31CONTINGENT LIABILITIESNormally of this type:A possible obligation that arises from past events and whose existence will be confirmed only

36、 by the occurrence of one or more uncertain future events not wholly within the entitys controlRarely contingent liabilities can also include:A provision where the amount of the obligation cannot be measured with sufficient reliability 32TREATMENT OF CONTINGENT LIABILITIES Contingent liabilities sho

37、uld not be recognised in the accounts but should be disclosed in the notes, unless the possibility of a transfer of economic benefits is remote DISCLOSURE CONTINGENT LIABILITIESFor each class of contingent liability: A brief description of the nature of the contingent liability and, where practicabl

38、e: An estimate of its financial effect An indication of the uncertainties relating to the amount or timing of any outflow The possibility of the any reimbursement StartPresent obligationas a result of anobligating event?Probableoutflow?Reliableestimate?ProvidePossibleobligation?Remote?Disclosecontin

39、gent liabilityDo nothingYesYesYesNoNoNo (rare)YesNoNoYes35CONTINGENT ASSETSAs contingent assets usually arise from events that may give rise to an inflow of economic benefits, they are not recognised in the accounts Where an inflow of benefits is probable, a disclosure should be made in the notes No

40、te asymmetric treatment or gains and losses!Student ActivityX plc manufactures parts for the motor trade. Its year end is 31st December 20X8. It gives warranties at the time of sale to purchasers of its product. Under the terms of the contract for sale the manufacturer undertakes to make good, by re

41、pair or replacement, manufacturing defects that e apparent within three years from the date of sale. Sales in 20X8 were 100m. On past experience, there is a 75% chance of no claims, a 15% chance of claims totaling 10m and a 10% chance of claims totaling 20m.On 12th December 20X8 the board of an enti

42、ty decided to close down a division. Before the reporting date (31st December 20X8) the decision was not communicated to any of those affected and no other steps were taken to implement the decision.A supplier is suing X plc for 100m for breach of contract. Lawyers have advised that the action is un

43、likely to be successful.RequirementDiscuss how these three items are to be accounted for and disclosed in the 20X8 financial statements3637Answer 1. WarrantyPresent obligation as a result of a past obligating event - The obligating event is the sale of the product with a warranty, which gives rise t

44、o a legal obligation.An outflow of resources embodying economic benefits in settlement - Probable for the warranties as a whole . Most likely payout is 15%*10m + 10%*20m = 3.5m, DR e CR Liability. This could be discounted.Conclusion - A provision is recognised for the best estimate of the costs of m

45、aking good under the warranty products sold before the reporting date .2. Closure of DivisionThere has been no obligating event and so there is no obligation.3. ClaimPossible disclose as a contingent liability 38Closure of a Division that would be provided forOn 12th December 20X8, the board of an e

46、ntity decided to close down a division making a particular product. On 20th December 20X8 a detailed plan for closing down the division was agreed by the board; letters were sent to customers warning them to seek an alternative source of supply and redundancy notices were sent to the staff of the di

47、vision.Present obligation as a result of a past obligating event - The obligating event is the communication of the decision to the customers and employees, which gives rise to a constructive obligation from that date because it creates a valid expectation that the division will be closed.An outflow

48、 of resources embodying economic benefits in settlement - Probable.Conclusion - A provision is recognised at 31st December 20X8 for the best estimate of the costs of closing the division .39IAS 10 Events After The Reporting Period40IAS 10 Events After The Reporting PeriodObjective to specify when an

49、 enterprise should adjust its financial statements for events occurring after the end of the reporting periodthe disclosures that should be made about date of authorisation of financial statements for issue and about events occurring after the end of the reporting period41EVENTS AFTER THE REPORTING

50、PERIODAre those events, both favourable and non-favourable, which occur between the end of the reporting period and the date on which the financial statements are authorised for issue42TYPES OF EVENTAdjusting eventsProvide evidence of conditions that existed at the end of the reporting periodNon-adj

51、usting eventsIndicative of conditions that arose after the end of the reporting periodDate of authorisation43ADJUSTING EVENTSSome examples (conditions exist at year end) -Significant fall in value of investment Renegotiation of amounts owing by account receivables or insolvency of an account receiva

52、ble (debtor).Bankruptcy of a debtor after end of reporting period that confirms that a loss existed at the end of the reporting period on trade receivables.Discovery of errors or frauds which show the FS were incorrect.Eventual resolution of industrial actions/HR issues44NON-ADJUSTING EVENTSSome exa

53、mples (conditions not exist at year end) -Fire after the end of the reporting period which results in the destruction of a major production plant.New business opportunities/prospects & future success/failure of products under trialFinancial obligation (possible disclosure as contingent liab)Fall of

54、raw modity market prices Closing a significant part of the trading activities if not anticipated at the end of the reporting period.Acquisition/disposal of subsidiary & other assets after end of reporting period.45NON-ADJUSTING EVENTSMore examples (conditions did not exist at year end) Decline in th

55、e value of property and investments, if it can be demonstrated that the decline occurred after the end of the reporting period.Decline in market value of investments between the end of the reporting period and the date when the FS are authorised for issue.Announcing a plan to discontinue an operatio

56、n.Commencing major litigation arising solely out of events that occurred after the end of the reporting period.46NON-ADJUSTING EVENTSDo not result in changes in the amounts in the FS. They may, however, be of such materiality that their disclosure is required by way of a note to ensure that the financial statements are not misleading. 47NON-ADJUSTING EVENTSFor material non-adjusting events after the end of the reporting period the following disclosure is required:Nature of the event