Solutions Manual - Livne, Janice Loftus, Leo van der Tas Prepared ...

Solutions Manual For Applying IFRS ®

Standards 4e Ruth Picker, Kerry Clark, John Dunn, David Kolitz, Gilad Livne, Janice Loftus, Leo van der Tas Prepared by Nila Latimer and revised for this edition by John Dunn 1 / 4

Applying IFRS Standards 4e Solutions Manual 1.2 Chapter 1 The IASB and its Conceptual Framework Discussion Questions

• Describe the standard-setting process of the IASB.

The standard setting process of the IASB for issuing IFRSs has six stages. The six stages

are:

• Setting the agenda.

The IASB considers the relevance and reliability of the information that could be provided, the existing guidance (if any), the potential for enhanced convergence of accounting practice and the quality of the standard to be developed and any resource constraints.

• Planning the project.

The IASB decides whether it should undertake the project by itself or jointly with another standard setter such as the Financial Accounting Standards Board (FASB).

• Developing and publishing the discussion paper.

The IASB may issue a discussion paper; however, this is not mandatory.

• Developing and publishing the exposure draft (ED).

The IASB must issue an ED. This is a mandatory step.

• Developing and publishing the standard.

The IASB may re-expose an ED, particularly where there are major changes since the ED was first released in stage 4.

• Procedures involving consultation and evaluation after an IFRS has been issued.

The IASB may hold regular meetings with interested parties, including other standard- setting bodies, to help understand unanticipated issues related to the practical implementation and potential impact of the IFRS. They also carry out post-implementation reviews of each new IFRS.The IASB has full discretion over its technical agenda and over the assignment of projects, potentially to national standard setters. In preparing the IFRSs, the IASB has complete responsibility for all technical matters including the preparation and issuance of standards and exposure drafts, including any dissenting opinions on these, as well as final approval of interpretations developed by the IFRS Interpretations Committee.IASB meetings are normally held every month and last between three and five days. The meetings are open to the public. Interested parties can attend the meetings in person, or may listen and view the meeting via the IASB webcast. Subsequent to each meeting, the decisions are summarised in the form of a publication called IASB Update which is available on the IASB website.

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Chapter 1: The IASB and its Conceptual Framework

1.3

• Identify the potential benefits of a globally accepted set of accounting

standards.

Potential benefits of a globally accepted set of accounting standards include:

Using a principles based approach which allows more scope for the use of professional judgement when the principles are applied to specific situations.Greater comparability between financial reports of different entities and countries if they are prepared using an internationally recognized and accepted basis of accounting.Reduction in the cost of financial statement preparation if restatement of financial statements for other jurisdictions is no longer required Greater mobility of staff as staff trained in IFRS will be more readily able to move between foreign subsidiaries without the need for retraining in financial statement preparation.

• Outline the fundamental qualitative characteristics of financial reporting

information to be considered when preparing general-purpose financial statements.This requires a discussion of the qualitative characteristics mentioned in figure 1.2 in learning objective 4, namely relevance, reliability, comparability and understandability.

• Discuss the importance of the going concern assumption to the practice of

accounting.The going concern assumption is important in that all measures of performance and financial position, and all classifications in a statement of financial position (current and non-current) implicitly assume that the entity is going to continue. Furthermore, valuation of assets on the basis of cost is sometimes justified on the grounds of the going concern assumption.The accrual basis assumption is made in the preparation of general-purpose financial reports. Under this assumption, the effects of all transactions and other events are recognised in the accounting records when they occur, rather than when cash or its equivalent is received or paid. Financial reports prepared on the accrual basis inform readers not only of past transactions involving the receipt and payment of cash but also of obligations to pay cash in the future and of amounts owing to the entity in the form of receivables. It is argued that the accrual basis therefore provides better information for users in their decision-making processes.

• Discuss the essential characteristics of an asset as described in the

Conceptual Framework.

Discussion of essential characteristics of asset:

•resource must contain future economic benefits •control, requiring a capacity to benefit from the asset in the pursuit of the entity’s objectives, and an ability to deny or regulate the access of others to those benefits.•past event, giving rise to the entity’s control over future economic benefits

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Applying IFRS Standards 4e Solutions Manual 1.4

Non-essential characteristics:

• purchased at a cost • tangibility • exchangeability

With the proposed definition of an asset, namely “An asset of an entity is a present economic resource to which, through an enforceable right or other means, the entity has access or can limit the access of others,” there will be less focus on “future economic benefits” and more on “present resource”; and less on “control”, with more on the existence of enforceable rights to limit access of others.

• Discuss the essential characteristics of a liability as contained in the

Conceptual Framework.

A liability is defined in the current Framework as ‘a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits’. Important aspects of this

definition:

• A legal debt constitutes a liability, but a liability is not restricted to being a legal debt. Its essential characteristic is the existence of a present obligation, being a duty or responsibility of the entity to act or perform in a certain way. A present obligation may arise as a legal obligation and also as an obligation imposed by custom or normal business practices (referred to as a ‘constructive’ obligation).For example, an entity may decide as a matter of normal business policy to rectify faults in its products even after the warranty period has expired. Hence, the amounts that are expected to be spent in respect of goods already sold are liabilities.• A present obligation needs to be distinguished from a future commitment. A decision by management to buy an asset in the future does not give rise to a present obligation.• A liability must result in the giving up of resources embodying economic benefits which requires settlement in the future. The entity has little, if any, discretion in avoiding this sacrifice. This settlement in the future may be required on demand, at a specified date, or on the occurrence of a specified event.• A liability is that it must have resulted from a past event. For example, wages to be paid to staff for work they will do in the future is not a liability as there is no past event and no present obligation.

The IASB and FASB have proposed to change the definition of a liability by focusing on a liability as an enforceable “economic obligation” rather than an expected future sacrifice of economic benefits. Furthermore, the reference to past events is to be replaced by a focus on the present. The essential attributes of an enforceable obligation include the involvement of a separate party and the existence of a mechanism that is capable of forcing an entity to take a specified course of action.

• Discuss the difference, if any, between income, revenue and gains.

The Framework defines income as “increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants.”

This definition of income is linked to the definitions of assets and liabilities. The definition .

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