Acc 201 (CBT Version)

What is IASB Conceptual Framework

• A theoretical document issued by IASB that sets out the principles, concepts and guidelines underlying IFRS

• It guides standards setters, preparers and auditors in developing and applying accounting standards

• It is not a standard itself and cannot override any IFRS but can help financial reporters make decisions in situations where IFRS does not cover

What is the objective of General Purpose Financial Statement

• To provide useful financial information about the reporting entity to existing and potential investors, lenders, and other creditors for decisions about providing resources.

• Focuses on assessing future cash flows and management stewardship.

What are the underlying assumptions of IASB

1. Accrual Basis: Records transactions when they occur, not when cash is received or paid. Improves relevance and faithful representation.

2. Going Concern Basis: Entity is expected to continue in operation for the foreseeable future, so assets/liabilities are not measured at liquidation values.

What are the qualitative qualities of financial information

1. Fundamental: Relevance, Faithful Representation

2. Enhancing: Comparability, Verifiability, Timeliness, Understandability

Explain the fundamental qualitative characteristics

1. Relevance: Information influences decisions. Includes predictive value, confirmatory value, and materiality (info whose omission/misstatement affects decisions).

2. Faithful Representation: Information must reflect economic reality. Requires completeness, neutrality, and freedom from error (estimates allowed if reasonable).

Explain the Enhancing Qualitative Characteristics

1. Comparability: Allows comparison over time and between entities. Includes consistency (same methods over time).

2. Verifiability: Different knowledgeable observers can reach the same conclusion using the same evidence.

3. Timeliness: Information must be available early enough to influence decisions.

4. Understandability: Clear presentation so users with reasonable knowledge can understand the info without being oversimplified.

Define Asset

A present economic resource controlled by the entity as a result of past events, from which future economic benefits are expected.

Define liability

A present obligation of the entity to transfer an economic resource as a result of past events.

Define Equity

Residual interest in the assets of the entity after deducting liabilities. Includes share capital, retained earnings, reserves.

Define Income

Increases in assets or decreases in liabilities that raise equity, excluding owner contributions. Includes revenue and gains.

Expense

Decreases in assets or increases in liabilities that reduce equity, excluding distributions to owners. Includes operating costs and losses.

What are measurement basis

The different methods used to assign monetary amounts to assets, liabilities, income and expenses

What are the 6 main measurement basis

1. Historical cost

2. Current cost

3. Fair value

4. Value in Use (for assets)

5. Fulfillment value (for liabilities)

6. Net Realizable Value (NRV)

Historical Cost

• Value based on the original amount paid to acquire the asset or received when the liability was incurred.

• Example: The same machine now costs ₦7,000,000 in today’s market.

Current cost

• Value based on the amount needed to acquire the same asset today.

• Example: The same machine now costs ₦7,000,000 in today’s market.

Fair value

• The price that would be received to sell an asset or paid to transfer a liability in an orderly market transaction at the measurement date.

• Example: What the machine could be sold for today if listed in an active market

Value in Use (for assets)

• Present value of the future cash flows expected from using the asset.

• Example: Expected cash inflows from a machine over its remaining life.

Fulfillment value (for liabilities)

Present value of the cash outflows expected to settle the liability.

Net Realizable Value (NRV)

• For inventory:

Selling price − costs of completion and selling.

• Example: Inventory that can be sold for ₦10,000 but requires ₦2,000 finishing costs → NRV = ₦8,000.

What are capital maintenance concepts

• It explains how a business determines whether it has made a profit after comparing it's capital at the beginning and end of the period

• There are two concepts: Financial Capital Maintenance and Physical capital Maintenance

What is Financial Capital Maintenance

Profit is earned only if the financial (money) amount of net assets increases during the period, after excluding owner contributions and withdrawals.

What is Physical Capital Maintenance

• Profit is earned only if the physical productive capacity (the ability to produce goods/services) increases over the period.

• Capital is maintained in terms of output capacity, not money.

• It focuses on things like:

Number of machines,

Ability to produce units,

Productive strength of the

business.

IAS 1

• Presentation of Financial Statements

• It tells you what must appear in financial statements and how they should be presented to ensure consistency, clarity and Comparability

List the components of a complete set of financial statements under IAS 1

1. Statement of Financial Position

2. Statement of Comprehensive Income or Statement of Profit and Loss and Other Comprehensive Income

3. Statement of Changes in Equity

4. Statement of Cash Flows

5. Statement of Accounting Policies and Explanatory Notes (i.e notes to the accounts)

General presentation principles of IAS 1

1. Fair Presentation: FS must faithfully represent transactions and comply with IFRS

2. Going Concern: Statements are prepared assuming the entity will continue operations into the foreseeable future.

3. Accrual Basis: Record transactions when they occur, not when cash is received or paid.

4. Materiality and Aggregation: Present material items separately, immaterial items can be aggregated.

5. No Offsetting: Do not offset assets with liabilities or income with expenses unless allowed by IFRS.

6. Consistency of presentation: Keep the same presentation method unless IFRS or better info requires change.

7. Comparative Information: Show prior period amounts for all figures unless an IFRS says otherwise.

What are the key presentation requirements for the Statement of Financial Position?

• Must distinguish current vs non-current assets and liabilities.

Current asset = expected to be realized within 12 months, held for trading, cash/cash equivalents, or operating cycle.

Same for current liabilities.

Equity = residual interest (Assets − Liabilities).

What is included in Statement of Profit or Loss and Other Comprehensive Income

1. Profit or Loss: Includes revenue, cost of sales, operating/admin expenses, finance costs, tax, and net profit or loss.

2. Other Comprehensive Income: Items not recognized in profit or loss (e.g., revaluation gains, FVOCI gains, exchange differences).

What does Statement of Changes in Equity Show

• Total comprehensive income

• Owner contributions/distributions

• Changes in reserves

• Opening and closing equity ba

lances

What must the Notes to Financial Statements include

• Basis of preparation

• Significant accounting policies

• Additional explanations of main statement items

• Required disclosures by IFRS

• Other information necessary for understanding

Key Disclosures required buy IAS 1

1. Management Judgement: Disclose judgments made in applying accounting policies.

2. Sources of Estimation Uncertainty: Disclose items where actual outcomes may differ from estimates.

3. Capital Management: Disclose objectives and processes for managing capital.

4. Going Concern Issues: Disclose uncertainties that may cast doubt on the entity’s ability to continue.

5. Dividends: Disclose dividends declared and paid during the period.

Minimum Line Items that must appear on Statement of Financial Position (Balance Sheet)

Assets:

• Property, Plant, and Equipment (PPE)

• Investment property

• Intangible assets

Inventories

• Trade and other receivables

• Cash and cash equivalents

Liabilities:

• Trade and other payables

• Provisions

• Borrowings

Equity:

• Share capital

• Retained earnings

Minimum Line Items that must appear on the Statement of Profit or Loss

• Revenue

• Finance costs (interest, borrowing costs)

• Tax expense

• Profit or loss for the period

• Other Comprehensive Income (OCI) items

When IAS 2 adopted

• In April 2001 by IASB

IAS 2 applies to all inventories except

1. financial instruments (see IAS 32 Financial Instruments: Presentation and IFRS 9 Financial Instruments); and

2. biological assets related to agricultural activity and agricultural produce at the point of harvest (see IAS 41 Agriculture).

Definition of Inventory

Inventories are assets:

(a) held for sale in the ordinary course of business (finished goods)

(b) in the process of production for such sale (Work in progress)

(c) in the form of materials or supplies to be consumed in the

production process or in the rendering of services (Raw Materials)

Which version of IAS 2 is currently in force, and what major update did it represent?

The IAS 2 revised in December 2003. It replaced the 1993 version and incorporated the guidance from SIC-1 (Consistency—Different Cost Formulas for Inventories).

According to its objective, what is the primary issue IAS 2 addresses in accounting for inventories?

Determining the amount of cost to be recognized as an asset (inventory) and carried forward until the related revenues are recognized.

What are the four key areas for which IAS 2 provides guidance, according to its objective?

1. Determination of cost

2. Subsequent recognition of that cost as an expense

3. Accounting for write-downs to net realisable value

4. Use of cost formulas (e.g., FIFO, Weighted Average) to assign costs.

Which two (or three) types of assets are completely excluded from the scope of IAS 2 Inventories?

1. Financial Instruments (covered by IAS 32 / IFRS 9).

2. Biological Assets related to agricultural activity and agricultural produce at the point of harvest (covered by IAS 41 Agriculture).

IAS 2's measurement rule ("lower of cost and NRV") does not apply to which two special cases? What valuation method do they use?

1. Producers of agricultural/forest/mineral products: Can measure at Net Realisable Value (NRV) per industry practice.

2. Commodity Broker-Traders: Measure at Fair Value Less Costs to Sell (FVLCS).

(For both, changes in value are recognized in profit or loss in the period of change.)

What is the business purpose that justifies allowing commodity broker-traders to measure inventories at Fair Value Less Costs to Sell, deviating from the normal IAS 2 rule?

Their primary business model is to generate profit from short-term price fluctuations or their trading margin. Fair value provides more relevant information about the current value of their trading position than historical cost.

What is IFRS 13

• Fair value measurement

• Fair Value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Define Net Realisable Value (NRV) and state its formula.

The net amount an entity expects to realize from the sale of inventory in the ordinary course of business.

Formula: Estimated Selling Price − (Estimated Costs of Completion + Estimated Costs to Sell)

What is the fundamental difference between Net Realisable Value and Fair Value?

NRV is an entity-specific value (what the company expects to net from the sale). Fair Value is a market-based value (the exit price between independent market participants). They are often not equal.

What is the core measurement principle for inventories per IAS 2?

Inventories must be measured at the LOWER OF COST AND NET REALISABLE VALUE (NRV).

The cost of inventories comprises what three broad categories of costs?

1. Costs of Purchase

2. Costs of Conversion

3. Other Costs incurred to bring inventories to their present location and condition.

What items are included in the "Costs of Purchase" for inventory? What is deducted?

Includes: Purchase price, import duties, non-recoverable taxes, and transport/handling costs directly attributable to acquisition.

Deducts: Trade discounts, rebates, and similar items.

What are Fixed Production Overheads and Variable Production Overheads?

• Fixed: Indirect costs that remain constant regardless of production volume (e.g., factory rent, depreciation, factory manager's salary).

• Variable: Indirect costs that vary directly with production volume (e.g., indirect materials, indirect labor, utilities for machines).

How are Fixed Production Overheads allocated to the cost of inventory?

• They are allocated based on the NORMAL CAPACITY of the production facilities.

• The amount allocated per unit is NOT increased due to low production/idle plant. Unallocated overhead is expensed immediately.

List costs that are excluded from inventory cost and are recognized as expenses when incurred.

1. Abnormal waste (materials, labor).

2. Storage costs (unless necessary for a further production stage).

3. Administrative overheads not related to production.

4. Selling costs.

How are immaterial by-products typically accounted for in allocating production costs?

They are measured at Net Realisable Value (NRV), and this NRV is deducted from the cost of the main product

What is the retail method of inventory costing, and what is its primary use case?

• It is an estimation technique where the cost of inventory is determined by taking its total sales (retail) value and reducing it by an appropriate average gross margin percentage.

• It is used primarily in the retail industry for large volumes of rapidly changing items with similar margins where specific identification or other costing methods are impracticable.

How does IAS 2 require you to account for inventory purchased on deferred settlement terms (e.g., buy now, pay much later)?

• The financing element (e.g., the difference between the deferred amount and the normal cash price) must be separated from the inventory cost.

• It is recognized as interest expense over the period of the financing.

• The inventory is recorded at its cash price equivalent (the present value of the future payment).

For which types of inventory is the Specific Identification cost formula required or appropriate?

For items that are not ordinarily interchangeable and for goods/services produced and segregated for specific projects. (It is inappropriate for large numbers of interchangeable items).

For inventories that are ordinarily interchangeable, which cost formulas are permitted by IAS 2? What is the rule about their application?

• First-In, First-Out (FIFO) or Weighted Average Cost.

• For inventories that are ordinarily interchangeable, which cost formulas are permitted by IAS 2? What is the rule about their application?The entity must use the same cost formula for all inventories having a similar nature and use.

• (Note: LIFO is prohibited under IFRS.)

Describe the First-In, First-Out (FIFO) cost flow assumption. What is the implication for the balance sheet value of ending inventory?

FIFO assumes the oldest items are sold first. Therefore, the ending inventory on the balance sheet consists of (and is valued at) the most recent costs incurred.

How is the cost of inventory determined under the Weighted Average Cost method?

• The cost of all items (from opening inventory and purchases/production in the period) is pooled, and a single weighted average cost per unit is calculated.

• This average cost is then applied to all units sold and remaining.

Last-In-First-Out

• Stock is valued under that assumption that stocks received last are issued first

• This implies that issues are priced at the price of the most recent batch until a new batch is received

What are the main advantages of using FIFO?

1. Intuitive & Logical: Matches the physical flow of goods for many businesses (especially perishables).

2. Current Inventory Valuation: Ending inventory on the balance sheet is valued at recent prices, providing a more current asset value.

3. Accepted under IFRS & ASPE/GAAP: It is a permissible method under major accounting standards.

4. Higher Reported Profits in Inflation: Results in a lower Cost of Goods Sold (COGS) and higher reported net income during periods of rising prices.

What are the main disadvantages of using FIFO?

1. Mismatch of Costs & Revenues: In inflation, older, lower costs are matched against current, higher sales revenues, which can overstate real economic profit.

2. Higher Tax Liability: Higher reported profits lead to higher taxable income (and thus higher taxes) in periods of inflation.

3. Can Obscure True Costs: May not reflect the current replacement cost of inventory sold in the income statement.

What are the main advantages of using Weighted Average Cost?

1. Smooths Out Price Fluctuations: Evens out the effects of significant price changes (inflation/deflation) on COGS and inventory values.

2. Simple & Objective: Easy to apply, especially with computerized systems, and is not subject to manipulation of which specific units are "sold."

3. Accepted under IFRS & ASPE/GAAP: A permissible method under major accounting standards.

4. Moderate Results: Produces COGS and ending inventory values that are between FIFO and LIFO extremes.

What are the main disadvantages of using Weighted Average Cost?

1. Not Current: Ending inventory value is a blend of old and new prices, so it may not represent the most recent cost or NRV.

2. Less Reflective of Physical Flow: Rarely matches the actual physical flow of inventory items.

3. Lags Price Changes: During rapid inflation or deflation, the average cost may lag significantly behind current market prices.

is LIFO permitted under IFRS?

LIFO is NOT permitted under IFRS (IAS 2). It is, however, allowed under US GAAP.

What is the primary financial/tax advantage of using LIFO

1. Tax Savings in Inflation: Matches current (higher) costs against current revenues, lowering reported net income and thus reducing current tax liability.

2. Better Matching (in inflation): Argued to provide a better match of current costs with current revenues on the income statement

What are the main disadvantages of using LIFO?

1. Not Allowed under IFRS: Makes financial statements non-compliant for international reporting.

2. Obsolete Inventory Valuation: Ending inventory on the balance sheet may be valued at very old, outdated costs, understating the value of current assets.

3. LIFO Liquidation Distortion: If old, low-cost inventory layers are sold, it can cause a sudden spike in reported profit and a large tax bill.

4. Less Reflective of Physical Flow: Rarely matches the actual physical flow of goods (except for some bulk items like coal or ore piles).

5. Lower Reported Earnings: Results in lower reported profits, which may be viewed negatively by investors.

What are the four specific conditions that may trigger a write-down of inventory to Net Realisable Value?

1. Inventories are damaged.

2. They have become obsolete (wholly or partially).

3. Their selling prices have declined.

4. Estimated costs of completion or estimated costs to sell have increased.

At what level should an inventory write-down to NRV be assessed and applied under IAS 2?

Primarily item-by-item. It can be applied to a group of similar/related items (same product line, purpose, geographical area) if they cannot be evaluated separately. It is NOT appropriate to write down by broad classifications like "all finished goods" or an entire operating segment.

Under what condition should raw materials be written down below their cost?

Only when a decline in the price of the materials indicates that the cost of the finished products they will be used in will exceed the net realisable value of those finished products.

Describe the rule regarding the reversal of a previous write-down of inventory to NRV.

Reversals are permitted if the circumstances that caused the write-down reverse (e.g., selling price increases). The reversal amount is limited so that the new carrying amount is the lower of the inventory's original cost and its revised NRV. The reversal is recognized as a reduction in cost of sales (a credit to P&L) in the period it occurs.

When and why is the carrying amount of inventory recognized as an expense?

• It is recognized as an expense (Cost of Goods Sold) in the same period that the related revenue from its sale is recognized.

• This applies the matching principle.

How are inventory write-downs and reversals of write-downs treated in the income statement?

· Write-downs/Losses: Recognized as an expense in the period they occur.

· Reversals: Recognized as a reduction of expense (e.g., a credit to Cost of Sales) in the period the reversal occurs.

How is the cost of inventory treated if it is used internally as a component to construct another asset (e.g., PPE)?

Its cost is transferred from inventories to the cost of the constructed asset. It is then expensed over the useful life of that new asset through depreciation, not as Cost of Goods Sold.

Regarding inventories, what must be disclosed about (1) accounting policies, and (2) their value on the balance sheet?

1. The accounting policies adopted for measuring inventories, including the cost formula used (e.g., FIFO, Weighted Average).

2. The total carrying amount of inventories and the carrying amount in classifications appropriate to the entity (e.g., raw materials, work in progress, finished goods

What disclosures are required specifically for inventory write-downs and reversals?

1. The amount of any write-down recognized as an expense.

2. The amount of any reversal of a write-down (recognized as a reduction in expense).

3. The circumstances or events that led to the reversal.

What must be disclosed about inventories measured at fair value less costs to sell and those pledged as security?

1. The carrying amount of inventories carried at fair value less costs to sell (e.g., for commodity broker-traders).

2. The carrying amount of inventories pledged as security for liabilities.

What costs are included in the disclosed "amount of inventories recognized as an expense" (typically Cost of Sales)?

1. The carrying amount of inventories that were sold.

2. Unallocated production overheads (e.g., fixed overhead of idle capacity).

3. Abnormal amounts of production costs (e.g., abnormal waste).

IAS 16

Property Plant and Equipment

IAS 20

Government Grant and Disclosure of Government Assistant

IAS 23

Borrowing Cost

IFRS 15

Revenue From Contract With Customers