Advanced Financial Reporting

Module outline
1. Introduction to the module & conceptual framework
2. Accounting for tangible asset
3. The international accounting framework
4. Accounting for lease
5. Accounting form intangible asset
6. Accounting for share capital and valuation
7. Accounting for foreign operations
8. Accounting for pensions(employee benefit)
9. Accounting for financial instruments
10.Accounting for liabilities
11.Financial measurement

Part 1 International Conceptual Framework

 Definition of elements
1. Asset: An asset is a resource controlled by the entity as a result of past events and
from which future economic benefits are expected to flow to the entity. Relate them to
typical items in the balance sheet. Eg a piece of machinery qualifies as an asset
because it was bought by the company in the past, and will be used in producing
goods for sale in the future.

2. Liability: A liability is 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. relate them to typical items in the balance sheet

3. Equity: Equity is the residual interest in the assets of the entity after deducting all its
liabilities. Equity is not defined independently of assets and liabilities.

4. Income: Income is 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.

5. Expense: Expenses are 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.
Part6 Accounting for Foreign Operation
1. Currencies:
1) Local currency: the currency in which the foreign operation measure and records its
transactions.
2) Functional currency: the currency of the primary economic environment in which the
entity operates.
3) Presentation currency: the currency in which the financial statement are presented.

2. Identifying the functional currency for individual company

1) The currency of the primary economic environment in which the entity operates
2) To consider what is the currency: a) mainly influence sales prices of goods and services;
b) mainly influence labor, material and other costs of providing goods and services; c) funds
from financing activities are generated; d) receipts from operating activities are usually
retained. 主要考虑，我付别人什么钱，别人付我什么钱，我用什么钱融资

3. The functional currency for branch or subsidiary

1) Are the activities of the foreign operation carried out as an extension of the reporting
entity, rather than being carried out with a significant degree of autonomy? 子公司拥有多大程度自治权？
2) Are transactions with the reporting entity a high or low proportion of the foreign
operation’s activities?
3) Do cash flows from the activities of the foreign operation directly affect the cash flows of
the reporting entity and are they readily available for remittance to it? 最终制报表的那个会不会受到这个影响？
4) Are cash flows from the activities of the foreign operation sufficient to service existing and
normally expected debt obligations without funds from the operating entity? 是否足够还债，是否需要
报表那个还债

4. Translation
1) Monetary items (accounts receivable, accounts payable, loan): closing rate at end of year
date.
2) Non-monetary items:
1) PPE, inventories: Historical cost, rate at date of transaction
2) Revalued items (land, buildings, investments): rate at date of revaluation
3) Translation of assets and liabilities

4) Translation of capital and reserves

5) Translation of income and expenses

6) Translation difference
这一部分要看书上的例题，考的可能性极大。Pp 660-664

5. IAS 29
IAS 29 requires the restatement of primary financial statement information for operations
located in hyperinflationary environments. All items must be expressed in constant
purchasing power as of the balance date.
Part 7 Employee benefits---IAS 19
1. Types of employee benefits
1) Short-term benefits eg: wages, salaries
2) Post-employment benefits: defined contribution schemes, defined benefits schemes

2. Treatment of short term employee benefit

1) Definition of short-term employee benefits: employee benefits (other than termination
benefits) that are expected to be settled wholly before 12 months after the end of the annual
reporting period in which the employees render the related services.
2) Treated as an expense in the income statement; treated as a liability in the balance sheet.
Liability is not discounted to present value.

3. Defined contribution plans

1) Each year the company pays into a fund, say x% of salary, for employee A.

The size of the fund depends on the accumulated contributions and fund earnings. When
A retires, the funs is used to pay a pension- based on the size of the fund. 企业的投入固定，但员工的收益不
固定，风险主要在员工.
Benefit is uncertain, costs are pre-determined. Treat as an expense in income statement,
treated as a liability in the balance sheet if company has not paid amount due for period.
Case for Journal entry: a company use defined contribution plans, contributing 5% of
empolyees’ gross salaries. Gross salaries for the year totaled 2.7m. Contributions 10,000 were
paid into the plans in each month.

4. Defined benefits plans

1) The company agrees to pay a certain amount pension to B, based on level of pay and
length of service.
The size of fund needed for these commitments determines the amount of contribution.
Employee receives the defined pension on retirement.
Pension based on length of service and final salary. Benefit can be reasonably predictable.
Cost to the employer is uncertain. Need to ensure sufficient funds to meet peosion
commitment
投入是不固定的，但给员工的 benefit 是固定的，风险在企业

5. Accounting for defined benefit plans (IAS 19)

1) Common format for it
PV of defined benefit obligation at beginning of year
+ Net interest cost
+ Current service cost
+ Past service cost
- Contributions paid
+ Remeasurement (actual loss/gain)
= PV of defined benefit obligation at end of year.
2) The starting point for IAS19 is the value of net defined benefit liability (asset). In simple
terms, this is the estimated obligation (liability) – any funds (plan assets) set aside to meet the
obligation.
3) Net interest cost: net interest is the net amount of two elements: interest cost (discounting
the defined benefit obligation to reflect that as passes, PV increase); interest income (return on
plan asset)

4) Current service cost: current service cost is the increase in the present value of the defined
benefit obligation resulting from employee service in the current period. It measures the extra
liability resulting from this years’ service by current employees.

5) Past service cost: increase in the present value of the defined benefit obligation for
employee service in prior period resulting from a plan amendment.
6) Contribution paid: Amount paid by the employer. When the plan is funded, the employer
will pay contribution into a fund. The contribution paid will be reflected within the employer’s
cash balance and in the valuation of the plan assets in the statement of financial position.

Part8 Accounting for Liabilities

1. Liabilities
1) Conceptual framework: a liability is 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.
2) ED Conceptual framework 2015: a liability is a present obligation of the entity to transfer
an economic resources as a result of past events.

2. Provisions
1) A provision is a subset of liability. IAS 37 define provision as a liability of uncertain timing
or amount.
2) A present obligation exists only where the entity has no reasonable alternative but to settle
the obligation.
3) Recognition of a provision:
Provisions should be recognized when:
---Present obligation: more than 50% change of occurring
---Result of a past event: obligating event; no realistic alternative of avoiding
--- Probable transfer of economic benefit: More than 50%
--- Reliable estimate of obligation
4) Distinguishing Provisions from other liabilities
a) Key distinguishing factors is the uncertainty relating to wither the timing or the amount.
b) Typical provisions: Warranty, restructuring, onerous contracts.
3. Contingent Liabilities 或有负债
1) A possible (present) obligation whose existence will be confirmed only by the occurrence
or non-occurrence of one or more uncertain future events not wholly in control of the entity.
Eg: a guarantee on a loan for another entity
2) OR A present obligation that fails the recognition criteria because:
--it is not probable an outflow of resources will be require to settle the obligation or
-- The amount cannot be measured reliably.
过去的交易或事项形成的潜在义务，其存在须通过未来不确定事项的发生或不发生予以证实；或过去的交易或事项形成的现时义务，履行该义务不
是很可能导致经济利益流出企业或该义务的金额不能可靠地计量。或有负债是指其最终结果如何目前尚难确定，须视某种事项是否发生而定的债务。
它是由于过去的某种约定、承诺或某些情况而引起的，其结果尚难确定，可能是要企业负责偿还的真正债务，也可能不构成企业的债务。因此，或
有负债只是一种潜在的债务，并不是企业目前真正的负债。
3) Difference between contingent liability and provisions
Contingent liability is
a) lack of reliable estimate; b) transfer of resources not probable; c) Awaiting confirmation
that obligation exists; d) disclose by note.

4. IAS37, liabilities, provisions and contingent liabilities

Contingent liabilities are those items where the probability is less than 50%. When the
liability is probable, that is p> 50%, the items is classified as a provision.

2) Decision tree
Part9 Accounting for financial instruments
1. Financial Instruments
1) Definitions: contracts that gives rise to a financial asset of one entity and a financial liability
or equity instrument of another entity. 合约
2) In simple term, a financial instrument is a piece of paper that results in one entity providing
finance to another.
3) The definition of financial instrument contains the definition of asset, liability and equity.
a) Financial asset: cash, contractual right to receive cash, an equity instrument
b) Financial liability: contractual obligation to deliver cash
c) Equity instrument: residual interest in the assets of an entity after deducting all of its
liability
d) Compound instrument: a financial instrument may have features of both equity and debt.
2. IAS 32 Preference Share
1) In substance, preference shares could be liabilities but legally are equity.
2) Treated as liability when,
a) Annual dividends are compulsory; b) Mandatory redemption by the issuers for fixed
amount at fixed date. 对发行者而言强制性的赎回。c) Holder has option to redeem, highly likely future
event. 拥有者可以赎回
3) If preference share treated as debt, then
a) Preference share appear in the balance sheet as debt; b) The dividends are treated as fiancé
cost in the income statement; c) any gain/loss on redemption goes through income statement.

Part10 Measurement issues in financial reporting

 the role and objective of income measurement
 accountant’s view of income, capital and value
 Critically comment on the accountant’s measure

1. Statement of financial position as prime financial statement

1) If financed mainly by bank loan
a) main focus is on the ability to repay loans
b) Statement of financial position is important
2) If financed mainly by shareholders
a) main focus is on to investor protection
b) Investor decision-making
c) Income statement and profit is important
3) pay attention to corporate scandals: liquidity problems, off balance sheet liabilities

2. Role and objective of income measurement

Two objectives
1) Provides a means of control in the micro sense by
a) Assessing stewardship performance through the use of financial ratio
b) Comparing actual performance with predicted performance, eg, budgeting
2) Provides a means of control in the macro sense by
 a) Government bodies regulation price charged by public utilities, eg, Electricity Company
Please read PPT, there is nothing important.