LCCI International Qualifications

International Accounting Standards (IAS) Guidance: Terminology and Presentation

January 2010

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Contents
1.0 2.0 3.0 4.0 Introduction ............................................................................................................................ 2 Terminology and statements related to Level 1 .................................................................... 2 Terminology and statements related to Level 2 .................................................................... 5 Terminology and statements related to Level 3 .................................................................. 10

1.0

Introduction

International Accounting/Reporting Standards (IFRS / IAS) are widely used throughout the world. As of December 2009, 114 countries had either adopted IFRS or were in the process of doing so.

2.0
2.1

Terminology and statements related to Level 1

Terminology The table below shows the differences in basic terminology: UK Term Fixed Assets Stock Debtors Creditors The Profit and Loss Account Sales Balance Sheet Provision for doubtful debts International IAS Term NON-CURRENT ASSETS INVENTORY RECEIVABLES PAYABLES INCOME STATEMENT REVENUE STATEMENT OF FINANCIAL POSITION ALLOWANCE FOR DOUBTFUL DEBTS

2.2

Presentation of the Income Statement and the Statement of Financial Position

Whilst there are no compulsory requirements for the presentation of the accounts of sole traders, it is recommended that candidates become familiar with preparing accounts in a way more like that used in IAS.

2.3

Treatment of Discount Allowed

Revenue is reported at the amount receivable. Hence, allowance for discounts given to customers for prompt payment should be deducted from revenue.

2.4

Format of Income Statement for a sole trader

A typical sole trader Income Statement might be as follows: Peter Piper Income Statement for the year ended 31 March 20X0 $ Revenue Less Cost of goods sold Opening inventory Add Purchases 2,200 13,100 15,300 Less Closing inventory Gross profit Less Expenses: Motor expenses Rent and rates Light and heat Loan interest Sundry expenses Profit for the year 1,000 1,500 1,300 50 200 4,050 1,050 2,100 13,200 5,100 $ 18,300

2.5

Format of the Statement of Financial Position of Sole Trader

A typical sole trader statement of financial position might be as follows: Peter Piper Statement of Financial Position at 31 March 20X0 $ Non-current Assets Plant and equipment Motor vehicles Current Assets Inventories Trade receivables Other receivables Cash Total Assets Capital Opening balance Add Net profit Less Drawings Non-current liabilities Bank loan Current Liabilities Trade payables Accruals Bank overdraft 2,400 400 980 2,100 4,200 150 70

$ 17,600 2,500 20,100

6,520 13,580

3,100 2,100 5,200 400 4,800 5,000

3,780 13,580

2.6

Summary

The impact of international accounting standards at this level is mainly presentational and candidates preparing accounts under recognisable formats will not be penalised as IAS does not apply to sole traders. However, candidates are expected to use the appropriate terminology. Candidates wishing to progress to higher levles are advised to become used to the formats.

3.0
3.1

Terminology and statements related to Level 2

Introduction

The points raised in Level 1 above will all be relevant to Level 2, reflecting as such the cumulative requirements of the LCCI syllabuses. Students are expected to use the appropriate terminology from Level 1 at Level 2.

3.2

Partnerships

Profit and Loss Accounts will be named INCOME STATEMENTS and will use the terminology: revenue, opening inventory and closing inventory. No other changes are required. The Statement of Financial Position (formerly Balance Sheet) will be laid out similarly to Peter Piper's statement of financial position on page 4, with the partners Capital and Current accounts being placed above Non-current and Current liabilities.

3.3

Club Accounts

Club Accounts are affected as follows: The Bar Trading Account will use the terminology: revenue, opening inventory and closing inventory. No other changes are required. The Income and Expenditure Account will remain unchanged. The Statement of Financial Position will be laid out similarly to Peter Piper's Statement of Financial Position above, with the Accumulated Fund being placed above Non-current and Current Liabilities. 3.4 Limited Liability Companies

The accounts of limited liability companies are affected much more substantially, and candidates preparing for examinations under IAS will be expected to comply with the basic layouts given below. However, candidates and tutors should be re-assured that most of marks in LCCI examinations are awarded for correct numbers and markers are given

strict instructions to allow for the fact that English is not the first language of the majority of candidates. Companies will not be given the designations Limited and plc, although examiners will make clear that a company is involved and where necessary say whether it is private or public. Preference share capital is described as preferred share capital and redeemable preferred share capital is shown as a Non-current liability or (less often) a Current liability in the Statement of Financial Position. Irredeemable preferred share capital is shown as part of shareholders equity.

3.5

Format of the Income Statement of a limited company

A typical income statement of a limited company at this level might be as follows: Peter Pope Ltd Income Statement for the year ended 31 March 20X0 $ Revenue Less Cost of goods sold Opening inventory Add Purchases 2,200 13,100 15,300 Less Closing Inventory Gross profit Less Expenses: Motor expenses Rent and rates Light and heat Loan interest Sundry 1,000 1,500 1,300 50 200 4,050 Profit for the year 1,050 2,100 13,200 5,100 $ 18,300

3.6

Presentation of Dividends

Dividends paid by limited companies are no longer reported in the income statement. They are reported in the Statement of Changes in Equity. Dividends proposed by the directors at the end of the year are not adjusted for in the accounts but are explained in the notes to the financial statements.

3.7

Statement of Changes in Equity

The Statement of Changes in Equity reflects information about the increase or decrease in net assets or wealth of equity shareholders. The information that is likely to appear in the Statement of Changes in Equity includes: Profit or loss for the period Additional shares issued during the period Dividends paid during the year

3.8

A typical Statement of Changes in Equity

A typical Statement of Changes in Equity might be as follows: Peter Pope Statement of Changes in Equity for the year ended 31 December 20X0 Share Capital $ Balance at 1 January 20XO Changes in equity for 20XO Issue of share capital Dividends Balance at 31 December 20XO xxx ----xxx (xxx) xxx (xxx) xxx xxx Retained earnings $ xxx Total equity $ xxx

3.9

A typical Statement of Financial Position

A typical Statement of Financial Position for a limited company is as follows: Peter Pope Statement of Financial Position at 31 March 20X0 $ Non-current Assets Plant and equipment Motor vehicles Current Assets Inventories Trade receivables Other receivable Cash Total Assets Equity and Liabilities Capital and reserves Ordinary share capital Share premium Accumulated profits Equity Non-current liabilities Redeemable preferred share capital Bank loan Current Liabilities Trade payables Accruals Bank overdraft Total Equity and Liabilities 2,000 1,000 2,400 400 1,820 2,100 4,200 150 70

$ 17,600 2,500 20,100

6,520 26,620

10,000 5,000 4,000 19,000

3,000

4,620 26,620

3.10

Manufacturing Accounts

The layout of the manufacturing accounts of a manufacturing firm would not be greatly affected. However, the income statement section will be slightly different because of the changes in terminology referred to above. 3.11 Summary

Changes at this level are mainly presentational and specific formats only apply to company accounts. Candidates are expected to implement the presentation requirements. However, once again, candidates wishing to progress to higher levels are advised to become used to the formats.

4.0
4.1

Terminology and statements related to Level 3

Introduction

Points raised in the sections on the Levels 1 and 2 syllabuses above will all be relevant at Third Level, reflecting as such the cumulative requirements of the LCCI syllabuses. Students are expected to use the appropriate terminology and presentational requirements from Levels 1 and 2 at Level 3.

4.2

Group Accounts

Minority Interest is called Non-controlling Interest. 4.3 Accounting treatment of positive and negative goodwill

Examination questions will state how negative or positive goodwill arising on the acquisition of a subsidiary should be treated. 4.4 A typical Consolidated Income Statement

A typical Consolidated Income Statement might look as follows: Peter Pope Consolidated Income Statement for the year ended 31 March 20X0 $ Revenue Cost of sales Gross profit Distribution costs Administrative expenses Other operating income Profit from operations Interest payable Profit before taxation Taxation Profit for the year Profit attributable to: Owners of the parent Non-controlling interest

$ 18,300 13,200 5,100

1,200 1,000 (2,200) 2,900 1,100 4,000 500 3,500 100 3,400 3,100 300 3,400

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4.5

A Typical Consolidated Statement of Financial Position

A typical Consolidated Statement of Financial Position at this level might be as follows: Peter Pope Consolidated Statement of Financial Position at 31 March 20X0 $ Non-current Assets Plant and equipment Motor vehicles Goodwill Current Assets Inventories Trade receivables Other receivables Cash Total Assets Equity and Liabilities Capital and reserves Ordinary share capital Share premium Accumulated profits Non controlling interest Equity Non-current liabilities Redeemable preferred share capital Bank loan Current Liabilities Trade payables Other payables Bank overdraft Total equity and liabilities 5,100 5,000 1,400 400 1,820 2,100 4,200 150 70 $ 17,600 2,500 20,100 5,000

6,520 31,620

10,000 5,000 2,000 17,000 1,000 18,000

10,100

3,620 31,620

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Cash flows 4.6 Statement of Cash Flows- IAS 7

The Cash Flow Statement is called Statement of Cash Flows. IAS 7 requires reporting entities to report their cash flows under three separate headings. These are net cash flows from operating activities, investing activities and financing activities. 4.7 A typical Statement of Cash Flows

A typical Statement of Cash Flows prepared in accordance with IAS 7 might be as follows: Paul Tongas Statement of Cash Flows for the year ended 31 March 20X0 Cash flows from operating activities $ Profit for the period Depreciation of non-current assets Interest expense Investment income Operating profit before working capital changes Decrease in trade receivables Increase in inventories Decrease in trade payables Cash generated from operations Interest paid Net cash flow from operating activities Cash flows from investing activities Acquisition of shares in other entities Cash paid for property plant and equipment Proceeds from sale of property, plant and equipment Interest received Dividend received Net cash used in investing activities Cash flows from financing activities Proceeds from issue of shares Proceeds from long term borrowings Dividends paid Net cash used in financing activities Net increase in cash and cash equivalents Cash and cash equivalents at the beginning of the period Cash and cash equivalents at the end of the period xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx $ xxx xxx xxx (xxx) xxx xxx xxx xxx xxx

xxx (xxx) (xxx)

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The example given is designed to show the possibilities likely in an LCCI International Qualifications examination and contains more figures than a typical question. However, as in previous sittings, examiners may ask for separate calculations of the net cash flow from operating activities, net cash flow from investing activities and net cash flow from financing activities.

4.8

Summary of relevant accounting standards

An accounting standard is a statement on how certain transactions or items are to be treated in financial statements in order that the statements give a true and fair view. Accounting standards are used in the preparation of financial statements. They are the rules for the treatment of certain items that appear in financial statements.

IAS 2 Inventories Inventories are valued at the lower of cost and net realisable value. Costs include purchase cost, conversion costs and other costs incurred in bringing the inventory to its present location and condition. IAS 7 Statement of Cash Flows Cash flows are reported under three main headings: operating activities, investing activities and financing activities. The cash generated from operations is reported using either the direct or indirect method. IAS 16 Tangible non-current assets are assets that have a physical substance and are held for use in the production or supply of goods or services, for rental to others or for administrative purpose and are expected to be utilised in more than one reporting year. A tangible non-current should be depreciated over its useful economic life. IAS 27 Consolidated financial statements are financial statements of a group (parent and subsidiary) presented as those of a single entity. Non-controlling interests are reported in equity in the consolidated Statement of Financial Position.

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IFRS 3 Goodwill arising from consolidation is measured as the difference between the cost (fair value of the purchase consideration) of an acquired entity and the aggregate of the fair values of the entitys identifiable assets and liabilities. Purchased goodwill may be either positive or negative.

4.8

Summary

Whilst the IAS syllabus makes more reference to specific standards, examiners will not test detailed awareness; the paper will remain largely computational. However, once again candidates wishing to progress to Level 4 are advised to become used to the formats. Note that the examination papers for 2010 will continue to use the terms Balance Sheet and Minority Interest. The new terms, Statement of Financial Position, Non-controlling Interest will be used in examination papers set in 2011 onwards. Also, the Statement of Changes in Equity will be examined from 2011 onwards.

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