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Summary CPA Australia Financial Reporting (FR) INDEX
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DETAILED and COMPREHENSIVE Index for the CPA Australia Financial Reporting Program WORD-FOR-WORD from the CPA Australia textbook!
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Term Page Module Definitions/DescriptionAustralian Accounting Standards Board (AASB) Standards
- Accounting standards developed by the Australian Accounting Standards Board (AASB) for all
economy sectors in Australia
Specific numbering system
- Used to identify their connection to the international accounting standards
1-99: IFRS equivalent
101-999: IAS equivalent
1001 onwards: No international equivalent
Additional paragraphs included
AASB 5,7 1 - Where reporting requirements differ for specific entities
- Eg, Australian not-for-profit entities
- To highlight their limited applicability
For-profit private sector entities
- Subject to the Conceptual Framework
- Must prepare financial statements that comply with the Australian Accounting Standards either
by:
- Legislation
- Requires the entity to prepare financial statements in accordance with Australian accounting
standards or ‘accounting standards’
- Requirement by the entity’s constituting/other document
Constituting or Other Document
AASB - Partnership agreement
8 1
(Constituting or Other Document) - Trust deed
- Joint arrangement
Legislation
Disclosing entity
- An entity with enhanced disclosure securities on issue
- Similar to the notion of public accountability
Proprietary company
- Limited by shares
- No more than 50 shareholders
Large proprietary company
AASB
7 1 - Based on qualifying 2 out of 3 size thresholds for revenue, gross assets and number of
(Legislation)
employees
- Revenue: $50 million or more
- Gross assets: $25 million or more
- Employees: 100 or more
Public company
- A company other than a proprietary company
- Associations
- Follows the relevant state-based Incorporated Associations Act
AASB
(Two Tiers of General Purpose 8 1 Refer to "General purpose financial reporting (Two Tiers)"
Financial Reporting)
AASB 1054 Australian Additional Disclosures (pg 9)
AASB 1054 64 1 - An entity is required to disclose in its accounting policy note whether the financial statements are
general purpose or special purpose financial statements
AASB 1060
AASB 1060 8 1
- Both private (for - profit and not-for-profit) and public sectors
Accounting estimates
- Items measured at estimated monetary amounts
- An accounting policy may require finanical statement items to be measured with uncertainty
Examples:
- Allowance for expected credit losses (ie, provision for credit loss/impairment)
- Net realisable value of an item of inventory
Accounting Estimates 74 2
- Fair value of an asset/liability
- Depreciation expense for an item of property, plant and equipment
- Provision for warranty obligations (IAS 8, p32)
Nature of making an estimate
- An essential part of the preparation of financial statements
- As new information is received/new developments occur, the estimate may have to be revised
,Term Page Module Definitions/Description
Changes in accounting estimates
- Do not relate to a prior period (IAS 8, p34)
- Different from the correction of errors
- Cannot be recognised retrospectively
Recognised prospectively by including it in the profit or loss in:
- The period of change (current period) - if the change affects that period only; or
- The period of change and future periods - if the change affects both (IAS 8, p36)
Accounting Estimates IAS 8 requirements:
74 2
(Changes in) Income and expense adjustments
- As a result of the revision
- Must be recognised in either the current reporting period of the current and future reporting
periods (depending on which periods the change of estimate effects) (IAS 8, p36)
Assets, liabilities and equity adjustments
- Should be made in the reporting period of the change of estimate - where relevant (IAS 8, p37)
Nature and amount of the revision in the accounting estimate
- Specific disclosures must be made
- Where the change affects the current reporting period and, to the extent if it is practicable,
disclosure of the effect on future reporting periods (IAS 8, p39)
Material errors in a prior period
- Material error/mistake is made in a previous financial period that is not covered by the current
financial statements (ie, current year and previous year comparatives) but its only discovered in
the current reporting period
- Must be corrected if the financial statements are to comply with IFRS
- Eg, realising in the current period that the land sold in a previous financial year was not
accounted for correctly in the previous year;s accounts
Reasons for errors:
- Mathematical mistakes
- Mistakes in applying accounting policies
- Oversights
- Misinterpretations of facts/fraud (IAS 8, p5)
Retrospective correction of the error
- In the first set of financial statements issued after the error’s discovery
Ways to correct the error:
Accounting Estimates - Restating the comparative amounts for the prior period(s) presented in which the error
75 2
(Material errors in prior period) occurred; or
- Restating the opening balances of assets, liabilities, and equity for the earlier prior period
presented - if the error occurred before the earliest prior period presented (IAS 8, p42)
Catch - up adjustment
- Made starting from the date that the error was made
Adjustment to the opening balance of retained earnings
- If the error relates to the profit or loss of a period not covered by the financial statements
Impracticable to adjust comparative information for one prior period or more
- Adjustment is made at the beginning of the current financial reporting period (IAS 8, p47)
3 - column financial statement (IAS 1, p40A - 40C)
- To be presented where a material error in a prior period affects the statement of financial position
- Items to be presented in the statement of financial position as at the:
> End of the current period
> End of the previous period (which is the same as the beginning of the current period)
> Beginning of the earlier comparative period
Accounting for current tax
Accounting for current tax 163 4 - The amount of income tax payable for the period (determined form tax return) recognised in
profit or loss
,Term Page Module Definitions/Description
Accounting for hedging relationships
The criteria that should be met are that:
- The ‘relationship consists only of eligible hedging instruments and eligible hedged items’
- There is formal designation and documentation at the inception of the hedging relationship
about the hedging relationship and the entity’s risk management objective and strategy for
undertaking the hedge
- There is an economic relationship between the hedged item and the hedging instrument’
- Tthe effect of credit risk does not dominate the value changes that result from that economic
relationship’
- The hedge ratio of the hedging relationship is the same as the ratio between the hedged item
and the quantity of the hedging instrument that ‘the entity actually uses to hedge that quantity of
hedged item
Accounting for hedging relationships 351 6
Hedge ratio
- The hedge ratio cannot be set in such a way that it would give rise to an accounting outcome
that is inconsistent with the purpose of hedge accounting.
Principles - based approach
- The hedge accounting model in IFRS 9 employs a principles-based approach that is based on
an entity’s risk management strategy
This means that the entity’s financial statements should be more reflective of the entity’s actual
risk management activities
- Reflecting the economic substance and actions of an entity in relation to transactions is one of
the primary goals of financial reporting.
Refer to Figure 6.9 (pg 351)
Accounting for share-based payments
Share- based payment transactions may be:
Accounting for share-based payments 49 1
1. Cash - settled
2. Equity - settled
Accounting for time value of options
An option’s price is made up of two components:
1. An intrinsic value
- This is the difference between the current spot price of the option’s underlying item and the strike
price in the option
Formula:
Intrinsic value of an option
= Stirke price - Current spot price
2, The time value of the option
- The amount of time remaining until the option’s expiry and the probability of the option
expiring on favourable terms.
Time value of the option
- An option’s time value gradually decreases as the option approaches its exercise date.
Accounting for time value of options 359 6
- IFRS 9, paragraph 6.5.15, permits the time value component of an option to be accounted for
as a cost of hedging
- Depending on whether the hedged item is transaction based (e.g. a hedge of a forecast
transaction) or time-period-based (e.g. a hedge of interest rate risk on a three-year loan).
Transacted-related hedged item (eg, sales)
- The time value of the e of the hedging instrument (e.g. foreign exchange option) is reversed
from equity at the same time as the transaction is recognised.
- The reversal may be to profit or loss, or as an adjustment to the carrying value of the
hedged item.
Time period-related hedged item (eg, debt)
- The ime value of the hedging instrument (e.g. an interest rate cap) is reversed over the same
period as those of the hedged item, specifically the period when cash flows from the hedged item
affect profit or loss.
- This is usually done on a straightline basis.
, Term Page Module Definitions/Description
Selection of accounting policies
Hierarchy:
- IAS 8 requires management to select and apply accounting policies using a hierarchy
If an IFRS specifically applies to a transaction, other event or condition
- The accounting policy or policies applied to that item must be determined by applying the IFRS
Reference to guidance associated with a relevant IFRS
- The accounting policy must be determined by reference to any implementation guidance
associated with a
relevant IFRS where it is mandatory
- Must comply with any relevant accounting standards (and consider any relevant implementation
Accounting Policies guidance issued by the IASB)
69 2
(Selection of) and IASB Interpretations.
If an IFRS DOES NOT specifically applies to a transaction, other event or condition
- Management is required to use professional judgement and develop and apply accounting
policies that result
in information that is:
1. Relevant
2. Reliable
- Management is required to consider the applicability of other sources in the following priority
order:
1. The requirements in the IFRSs that deal with similar and related issues
2. The Conceptual Framework’s definitions, recognition criteria and measurement concepts for
assets, liabilities, income and expenses
Accounting policies
- The specific principles, bases, conventions, rules and practices applied by an entity in
preparing and presenting financial statements (IAS 8, p5)
Accounting Policies 69 2
Examples of accounting policies:
- Whether to capitalise or expense borrowing costs
- Whether to value non-current asets at cost or fair value
Changes in accounting policy
Reasons for change in accounting policy (IAS 8)
- Required by an IFRS; or
- Results in the financial statements providing reliable, and more relevant information about the
effects of the transactions, other events or conditions on the entity’s financial position, financial
performance, or cash flows
Not changes in accounting policies (IAS 8)
- The application of an accounting policy for transactions, other events or conditions that differ in
substance from those previously occurring
- The application of a new accounting policy for transactions, other events or conditions that did
not occur previously or were immaterial
Trransitional provisions in the IFRS
- To be applied when an entity changes an accounting policy because of a new IFRS
No transitional provisions in the IFRS/Voluntary change in accounting policy
- The accounting policy change must be made retrospectively
Accounting Policies
71, 113 2
(Changes) Retrospective application for voluntary changes in accounting policies
- Ensures that the prior period comparatives are comparable to the current period financial
statements
- Requires that two adjustments must be made to the financial statements
1. Opening balance of each component of equity affected by the change
- Adjusted for the earliest prior period presented in the financial statements
2. Restate the other comparative amounts disclosed for each prior period presented
- Restated as if the new policy had alwaus been applied by the new entity (IAS 8, p22)
Impracticable cases
- Impractical to adjust comparative information for one or more prior periods (IAS 8, p23)
Example: The data is no longer available/not able to be collected
- The new accounting policy must be applied from the earliest date practicable (ie, the current
reporting period) and a corresponding adjustment must be made to each affected component of
equity (IAS 8, p24)
Example: If it is not possible to determine exactly when the initial transaction was recorded
in the financial statements
- Catch-up revenue/expense amendments
- Can be adjusted through opening retained earnings of the current reporting period
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