Summary — What This Chapter Covers
- Nine standards are on the syllabus: IAS 1, 2, 7, 8, 10, 16, 36, 37 and 38. Name each by number and title.
- IAS 1 sets the components and principles of financial statements; IAS 8 governs policies, estimates and errors.
- IAS 2: inventory at the lower of cost and net realisable value. IAS 16: property, plant and equipment at cost or revalued amount, depreciated. IAS 36: write assets down to recoverable amount.
- IAS 7: statement of cash flows. IAS 10: adjusting and non-adjusting events after the reporting period. IAS 37: provisions are recognised; contingent liabilities and assets are disclosed or ignored. IAS 38: intangible assets, including development costs.
- The five fundamental ethical principles: integrity, objectivity, professional competence and due care, confidentiality, professional behaviour.
- The external auditor reports to shareholders on whether the statements give a true and fair view; the report is unqualified or qualified.
- Directors act as stewards of the shareholders’ resources and are responsible for preparing the financial statements.
1. IAS 1 and IAS 8: Presentation, Policies, Estimates and Errors
Syllabus 3.2.1 · A Level · Paper 3
The framework for every set of statements
IAS 1 Presentation of financial statements lists the components of a complete set: a statement of financial position, a statement of profit or loss (and other comprehensive income), a statement of changes in equity, a statement of cash flows, and notes including the accounting policies. Comparative figures for the previous year are shown. Its general principles are:
- fair presentation and compliance with the standards;
- going concern: statements assume the business will continue unless management intends or is forced to close it;
- accruals basis (except the statement of cash flows);
- materiality and aggregation: material items shown separately, immaterial ones grouped;
- no offsetting of assets and liabilities or income and expenses unless a standard allows it;
- consistency of presentation from year to year.
IAS 8 Accounting policies, changes in accounting estimates and errors sets three different treatments.
| Example | Treatment |
|---|
| Change in accounting policy | Moving from the cost model to the revaluation model; changing the inventory cost formula | Only if required by a standard or it gives more reliable and relevant information. Applied retrospectively: comparatives are restated as if the new policy had always applied. |
| Change in accounting estimate | Revising the useful life or residual value of a machine; changing the allowance for irrecoverable debts | Applied prospectively: the current and future years only. Past figures are not changed. |
| Prior-period error | A material mistake or omission in an earlier year’s statements | Corrected retrospectively by restating the comparatives. |
2. IAS 2, IAS 16 and IAS 36: Measuring Assets
Memorise