(a) Your office equipment will be used, on average, for five years, so you depreciate it by 20% a year. This year your business profitability is down and you think you can squeeze an extra year's life out of your equipment. Is it acceptable not to charge any depreciation this year?
(b) You have recently paid CU4.95 for a waste paper bin which should be used for about five years.
Should you treat it as a non-current asset?
See Answer at the end of this chapter.
ACCOUNTING CONCEPTS AND CONVENTIONS 7
1 Use BAS treatment that specifically applies
Purpose of financial statements:
–
– Help predict future cash flows Provide information for economic decisions – Show results of stewardship Content:
Self-test
Answer the following questions.
1 Which of the following assumptions are included in BAS 1?
A Money measurement B Objectivity
C Going concern D Business entity
2 Only items which have a monetary value can be included in accounts. Which accounting concept is this?
A Historical cost B Money measurement C Realisation
D Business entity
3 Moxon buys a secret formula in 20X1, confidently expecting to use it to increase sales and profits in 20X3, 20X4 and 20X5.
Strict application of the accruals concept requires the cost to be charged to profit in which THREE of the following years?
4 'A degree of caution is required when making judgements under conditions of uncertainty to ensure that income and assets are not overstated and expenses and liabilities are not understated.'
Which accounting concept or principle does this describe?
A Accruals B Going concern C Prudence D Comparability
Which accounting concepts or characteristics are being applied when each of the following items is included in the financial statements?
A B C D
Going concern Accruals Reliability Comparability 5 Non-current asset
6 Inventory
7 Annual depreciation charge
8 Of which of the following qualitative characteristics is the principle of substance over form a key part?
A Relevance B Reliability C Comparability D Understandability
9 Of which of the following qualitative characteristics is the principle of materiality a key part?
A Relevance
ACCOUNTING CONCEPTS AND CONVENTIONS 7
10 In relation to offsetting, identify whether each of the following statements is true or false.
(a) Gains and losses may never be offset.
A True B False
(b) An asset may be offset against a provision or allowance related to it A True
B False
Now, go back to the Learning Objectives in the Introduction. If you are satisfied that you have achieved these objectives, please tick them off.
Technical reference
1 Objectives and scope of BAS 1
To prescribe the basis for presentation of general purpose financial statements, to ensure compatibility both with entity's financial statements of previous periods and with the financial statements of other entities
BAS 1 para 1
To be applied to all general purpose financial statements prepared and presented
in accordance with Bangladesh Financial Reporting Standards (BFRSs) BAS 1 pare 2
General purpose financial statements are those intended to meet the needs of users who are not in a position to demand reports tailored to meet their particular information needs
BAS 1 para 3
2 The purpose of financial statements
To provide information about the financial position, performance and cash flows of
an entity that is useful to a wide range of users in making economic decisions BAS 1 para 7 – To show the results of management's stewardship of the resources entrusted
to it
– To assist users in predicting the entity's future cash flows and, in particular, their timing and certainty
– To provide information about the entity's assets, liabilities, equity, income and expenses (including gains and losses), other changes in equity and cash flows
3 Components of financial statements
A balance sheet, an income statement, an accounting policies note, a statement of
change in equity, a cash flow statement and explanatory notes BAS 1 para 8 4 Fair presentation (BAS 1)
The faithful representation of the effects of transactions, other events and conditions in accordance with the definitions and recognition criteria in BAS Framework. The application of BASs, with additional disclosure when necessary, is presumed to result in financial statements that achieve a fair presentation.
BAS 1 para 13
Compliance with BASs must be explicit and complete BAS 1 para 14
For there to be fair presentation: BAS 1 para 15
– Accounting policies must be selected and applied in accordance with BAS 8 – Information must be presented in a manner which provides relevant, reliable,
comparable and understandable information
– To enable users to understand the impact of particular transactions, events and conditions on the entity's financial position and performance additional disclosures may be required
Use of an inappropriate accounting treatment cannot be rectified either by
disclosure of accounting policies or notes/explanatory material BAS 1 para 16
In some circumstances departure from the BASs may be required to achieve a fair presentation
ACCOUNTING CONCEPTS AND CONVENTIONS 7
5 BAS 8 and accounting policies
The objective of BAS 8 is to enhance the relevance and reliability of financial
statements, and their comparability over time and with those of other entities BAS 8 para 1
BAS 8 must be applied in selecting and applying accounting policies, and in
accounting for changes in accounting policies selected BAS 8 para 3
Accounting policies are the specific principles, bases, conventions, rules and
practices applied by an entity in preparing and presenting financial statements BAS 8 para 5
Where a BAS specifically applies to a transaction or event, the accounting policy
applied must be consistent with that BAS BAS 8 para 7
Where there is no specific requirement in a BAS, management should use its judgement in developing policies so that information provided by the financial statements has the qualitative characteristics set out in BAS Framework
BAS 8 para 10
In making this judgement management should refer to and apply the requirements and guidance contained in BASs dealing with similar or related issues, and then the definitions etc in BAS Framework
BAS 8 para 11 and 12
Accounting policies must be selected consistently for similar transactions and
events BAS 8 para 13
6 Underlying assumptions
Financial statements shall be prepared on a going concern basis unless management either intends to liquidate the entity or to cease trading, or has no realistic alternative but to do so. Assessment of whether the going concern assumption is appropriate must take into account all available information for at least 12 months from the balance sheet date. Any uncertainty must be disclosed.
BAS 1 para 23
An entity should prepare its financial statements using the accrual basis of accounting, recognising the elements of financial statements in line with BAS Framework
BAS 1 para 25 and 26
To maintain consistency, the presentation and classification of items in the financial statements should stay the same from one period to the next, unless there is significant change in the nature of the operations, or a review of the financial statements indicates a more appropriate presentation, or a change in presentation is required by a BAS
BAS 1 para 27
Omissions or misstatements of items are material if they could, individually or collectively, influence the economic decisions of users taken on the basis of the financial statements. Materiality depends on the size and nature of the omission or misstatement judged in the surrounding circumstances. The size or the nature of an item, or a combination of both, could be the determining factor
BAS 1 para 11
Each material class of similar items shall be presented separately in the financial statements. Items of a dissimilar nature or function shall be presented separately unless they are immaterial, but a specific disclosure requirement in a BAS need not be satisfied if the information is immaterial
BAS 1 para 29 and 31
If an item is not individually material it is aggregated with other items on the face
of the financial statements, though it may be separately classified in the notes BAS 1 para 30
Assets and liabilities, or income and expenses, should be reported separately; they may not be offset against each other unless such treatment is required or permitted by another BAS
BAS 1 para 32
Items may only be offset when a BAS requires/permits it, when gains, losses and BAS 1 para 33
Comparative information shall be disclosed for the previous period for all numerical information, unless another BAS permits/requires otherwise. This assists users in assessing trends for predictive purposes
BAS 1 para 36 and 40
When the presentation or classification of items is amended, comparative amounts
should be reclassified unless this is impractical BAS 1 para 38
Substance over form: transactions and other events are accounted for and presented in accordance with their substance and economic reality and not merely their legal form. Doing so enhances faithful presentation and reliability
BAS Framework para 35
Neutrality: information must be neutral, that is free from bias. Financial
statements are not neutral if, by the selection or presentation of information, they influence the making of a decision or judgement in order to achieve a
predetermined result or outcome
BAS Framework para 36
Prudence: the inclusion of a degree of caution in the exercise of the judgements needed in making the estimates required under conditions of uncertainty, such that assets or income are not overstated and liabilities or expenses are not understated, and so financial statements retain their reliability
BAS Framework para 37
Completeness: information must be complete within the bounds of materiality and cost. Omitting something can cause the information to be unreliable. The aim should always be to satisfy the economic decision-making needs of the users
BAS Framework para 38
7 Constraints on relevant and reliable information
Undue delay in reporting information can make it lose relevance, but reporting too soon may make the information unreliable. The aim should always be to satisfy the economic decision-making needs of the users
BAS Framework para 43
The benefit derived from information should exceed the cost of providing it BAS Framework para 44
ACCOUNTING CONCEPTS AND CONVENTIONS 7
Answers to Self-test
1 C Only going concern is included in BAS 1, the others are assumptions and concepts generally used in accountancy, but not mentioned in BAS 1.
2 B This is the definition of the money measurement concept.
3 C,D,E
To match the costs to the sales the cost should be charged in the same years as the sales (i.e.
20X3, 20X4 and 20X5)
4 C
5 A Going concern. Otherwise non-current assets would be stated at net realisable value 6 B Accruals. To match cost of sales to sales
7 B Accruals. To match cost of non-current assets to the periods during which non-current assets are used.
8 B
9 A
10 B,A Gains and losses may be offset if they are immaterial. Paragraph 33 of BAS 1 specifically allows the offsetting of assets with related provisions or allowances
Answers to Interactive questions
Answer to Interactive question 1
(a) If the business is to be closed down, the remaining three machines must be valued at the amount they will realise in a forced sale, i.e. 3 CU60 = CU180.
(b) If the business is regarded as a going concern, the machines unsold at 31 December will be valued as an asset at cost, 3 CU100 = CU300.
Answer to Interactive question 2
(a) No, because of the need for consistency. Once the depreciation policy has been established, it should not be changed without good cause.
(b) No, because of the materiality concept. The cost of the bin is very small. Rather than cluttering up the balance sheet for five years, treat the CU4.95 as an expense in this year's income statement.