(ANSWER ALL UPDATED) Applied Accounting Theory (506) For Final Exam
(ANSWER ALL UPDATED) Applied Accounting Theory (506) For Final Exam
(ANSWER ALL UPDATED) Applied Accounting Theory (506) For Final Exam
1. Discuss IFAC code of ethics for professional accountants relating to integrity and
objectivity, resolution of ethical conflicts. professional competence, confidentiality.
publicity, and independence .
This Code of Ethics for Professional Accountants establishes ethical requirements for professional
accountants. A member body of IFAC or firm may not apply less stringent standards than those
stated in this Code. However, if a member body or firm is prohibited from complying with certain
parts of this Code by law or regulation, they should comply with all other parts of this Code. A
professional accountant is required to comply with the following fundamental principles:
(i) Integrity
A professional accountant should be straightforward and honest in all professional and business
relationships.
• The principle of integrity imposes an obligation on all professional accountants to be
straightforward and honest in all professional and business relationships. Integrity also implies
fair dealing and truthfulness.
• A professional accountant shall not knowingly be associated with reports, returns,
communications or other information where the professional accountant believes that the
information:
o Contains a materially false or misleading statement;
o Contains statements or information furnished recklessly; or
o Omits or obscures information required to be included where such omission or obscurity
would be misleading
(ii) Objectivity
A professional accountant should not allow bias, conflict of interest or undue influence of others
to override professional or business judgments. The principle of objectivity imposes an obligation
on all professional accountants not to compromise their professional or business judgment because
of bias, conflict of interest or the undue influence of others.
A professional accountant may be exposed to situations that may impair objectivity. It is
impracticable to define and prescribe all such situations
(b) To act diligently in accordance with applicable technical and professional standards when
providing professional services.
• The maintenance of professional competence requires a continuing awareness and an
understanding of relevant technical, professional and business developments.
(iv) Confidentiality
A professional accountant should respect the confidentiality of information acquired as a result of
professional and business relationships and should not disclose any such information to third
parties without proper and specific authority unless there is a legal or professional right or duty to
disclose. Confidential information acquired as a result of professional and business relationships
should not be used for the personal advantage of the professional accountant or third parties.
Having considered the relevant factors, a professional accountant shall determine the appropriate
course of action, weighing the consequences of each possible course of action. If the matter
remains unresolved, the professional accountant may wish to consult with other appropriate
persons within the firm or employing organization for help in obtaining resolution.
Where a matter involves a conflict with, or within, an organization, a professional accountant shall
determine whether to consult with those charged with governance of the organization, such as the
board of directors or the audit committee.
IAS 33 was reissued in December 2003 and applies to annual periods beginning on or after 1
January 2005.
Profit or loss from continuing operations attributable to the ordinary equity holders of the parent
entity; and profit or loss attributable to the ordinary equity holders of the parent entity for the
period for each class of ordinary shares that has a different right to share in profit for the period.
If an entity presents the components of profit or loss in a separate income statement, it presents
EPS only in that separate statement. [IAS 33.4A]
Basic and diluted EPS must be presented with equal prominence for all periods presented. [IAS
33.66]
Basic and diluted EPS must be presented even if the amounts are negative (that is, a loss per
share). [IAS 33.69]
If an entity reports a discontinued operation, basic and diluted amounts per share must be
disclosed for the discontinued operation either on the face of the of comprehensive income (or
separate income statement if presented) or in the notes to the financial statements. [IAS 33.68
and 68A]
Basic EPS
Basic EPS is calculated by dividing profit or loss attributable to ordinary equity holders of the parent
entity (the numerator) by the weighted average number of ordinary shares outstanding (the
denominator) during the period. [IAS 33.10]
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The earnings numerators (profit or loss from continuing operations and net profit or loss) used for
the calculation should be after deducting all expenses including taxes, minority interests, and
preference dividends. [IAS 33.12]
The denominator (number of shares) is calculated by adjusting the shares in issue at the beginning
of the period by the number of shares bought back or issued during the period, multiplied by a
time-weighting factor. IAS 33 includes guidance on appropriate recognition dates for shares issued
in various circumstances. [IAS 33.20-21]
Contingently issuable shares are included in the basic EPS denominator when the contingency has
been met. [IAS 33.24]
Diluted EPS
Diluted EPS is calculated by adjusting the earnings and number of shares for the effects of dilutive
options and other dilutive potential ordinary shares. [IAS 33.31] The effects of anti-dilutive
potential ordinary shares are ignored in calculating diluted EPS. [IAS 33.41]
Quantitative disclosures
The quantitative disclosures provide information about the extent to which the entity is exposed
to risk, based on information provided internally to the entity's key management personnel.
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Credit risk
Credit risk is the risk that one party to a financial instrument will cause a loss for the other party
by failing to pay for its obligation. [IFRS 7. Appendix A] Disclosures about credit risk include: [IFRS
7.36-38]
• maximum amount of exposure (before deducting the value of collateral), description of
collateral,
• information about credit quality of financial assets that are neither past due nor impaired,
and
• information about credit quality of financial assets whose terms have been renegotiated for
financial assets that are past due or impaired, analytical disclosures are required [IFRS
7.37] information about collateral or other credit enhancements obtained or called [IFRS
7.38]
Liquidity risk
Liquidity risk is the risk that an entity will have difficulties in paying its financial liabilities. [IFRS 7.
Appendix A] Disclosures about liquidity risk include: [IFRS 7.39]
• a maturity analysis of financial liabilities description of approach to risk management
Legal framework
The Companies Act of 1994 provides basic requirements for financial reporting by all companies
in Bangladesh. It is silent about either Bangladesh Financial Reporting Standards (BFRS/BAS) or
International Financial Reporting Standards (IASs/IFRSs).
• Listed companies.
The Securities and Exchange Commission of Bangladesh regulates financial reporting by listed
companies. SER 1987 requires compliance with IASs/IFRSs as adopted in Bangladesh (these are
known as Bangladesh Financial Reporting Standards and include Bangladesh Accounting
Standards). Banks. The Bank Company Act of 1991 mandates reporting formats and disclosures
based on BAS 30, which is similar to IAS 30. The Act is silent about other BAS/BFRS, and
compliance with BAS/BFRS by banks is mixed.
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• Insurance companies.
The Insurance Act 1938 does not mandate compliance with BAS/BFRS. In practice, insurance
companies often do not follow BAS/BFRS.
• Other companies.
Neither the law nor the by-laws of the Institute of Chartered Accountants of Bangladesh mandates
compliance with BAS/BFRS by unlisted companies. Actual compliance varies widely and the ICAB
has published the Bangladesh Financial Reporting Standard for Small and Medium-sized Entities
(BFRS for SMEs) (see below).
6. Discuss the conceptual framework for the financial reporting giving emphasis on
the main objective of general purpose financial reporting, qualitative characteristics
of useful financial information, and financial statements.
• Investors,
• Lenders, and
• Other creditors
To help them make various decisions (e.g., about trading with debt or equity instruments of a
reporting entity).
General-purpose reports that should contain the following information about the reporting entity:
Its an emphasis on accrual accounting to reflect the financial performance of an entity. It means
that the events should be reflected in the reports in the periods when the effects of transactions
occur, regardless the related cash flows.
However, the information about past cash flows is very important to assess management’s ability
to generate future cash flows.
Relevance
Information is relevant if it has the ability to influence the economic decisions of users and is
provided in time to influence those decisions. Relevance has two characteristics: a predictive value
and a confirmatory value. Users can make a reasoned evaluation of how management might react
to certain future events, whilst information about past events will help them to confirm or adjust
their previous assessments.
Information about an entity’s financial position and past performance is often used as the basis
for making predictions about its future performance. It is therefore important how information is
presented. For example, unusual and infrequent items of income and expense should be disclosed
separately.
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Reliability
Information may be relevant, but unless it is reliable as well it is of little use. Information is
considered to be reliable if it does not contain substantial errors that would affect the economic
decisions of users and if it represents faithfully the entity’s transactions.
Faithful representation requires that transactions are accounted for, and presented in accordance
with, their substance and economic reality, even where this is different from their legal form.
Management should present information which is neutral, i.e. free from bias. To be reliable,
information should also be complete.
Comparability
For financial information to be useful, it is important that it can be compared with similar
information of previous periods or to that produced by another entity. For information to be
comparable, it should be consistently prepared; this can be achieved by an entity adopting the
same accounting policies from one period to the next as explained in IAS 8 Accounting policies,
changes in accounting estimates and errors.
Understandability
Information in financial statements should be understandable to users. This will, in part, depend
on the way in which information is presented. Financial statements cannot realistically be
understandable to everyone, and therefore it is assumed that users have:
• a reasonable knowledge of business and accounting; and
• a willingness to study with reasonable diligence the information provided.
1. Fundamental, and
2. Enhancing.
• Relevance: capable of making a difference in the users’ decisions. The financial information
is relevant when it has predictive value, confirmatory value, or both. Materiality is closely
related to relevance.
• Faithful representation: The information is faithfully represented when it is complete,
neutral and free from error.
• that engages in business activities from which it may earn revenues and incur expenses
(including revenues and expenses relating to transactions with other components of the same
entity);
• whose operating results are reviewed regularly by the entity’s chief operating decision maker
to make decisions about resources to be allocated to the segment and assess its performance;
and
• for which discrete financial information is available. Not all operations of an entity will
necessarily be an operating segment (nor part of one).For example, the corporate
headquarters or some functional departments may not earn revenues or they may earn
revenues that are only incidental to the activities of the entity. These would not be operating
segments. In addition, IFRS 8 states specifically that an entity’s post-retirement benefit plans
are not operating segments.
Segment information is required to be disclosed about any operating segment that meets any of
the following quantitative thresholds:
• its reported revenue, from both external customers and intersegment sales or transfers, is10
per cent or more of the combined revenue, internal and external, of all operating segments;
or
• the absolute measure of its reported profit or loss is 10 per cent or more of the greater, in
absolute amount, of (i) the combined reported profit of all operating segments that did not
report a loss and (ii) the combined reported loss of all operating segments that reported a
loss; or
• its assets are 10 per cent or more of the combined assets of all operating segments. If the
total external revenue reported by operating segments constitutes less than 75 per cent of
the entity’s revenue, additional operating segments must be identified as reportable segments
(even if they do not meet the quantitative thresholds set out above) until at least75 per cent
of the entity’s revenue is included in reportable segments.
IFRS 8 has detailed guidance about when operating segments may be combined to create a
reportable segment. This guidance is generally consistent with the aggregation criteria in IAS 14.
The core principle of IFRS 8 is that an entity shall disclose information to enable users of its
financial statements to evaluate the nature and financial effects of the business activities in which
it engages and the economic environments in which it operates. The main features are:
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o that engages in business activities from which it may earn revenues and incur expenses
(including revenues and expenses relating to transactions with other components of the
same entity);
o whose operating results are regularly reviewed by the entity’s chief operating decision
maker to make decisions about resources to be allocated to the segment and assess its
performance; and
o for which discrete financial information is available.
• IFRS 8 adopts a ‘through the eyes of management approach’, which means that the operating
segments for accounting purposes should be the same as those used for internal management
purposes. The same accounting policies should be used in the IFRS segment report as in the
internal reporting system. Many companies seem to have applied IAS 14 in such a way that
the reporting segments are very close to their internal management organization.
Commentators have however different views as to the impact of the requirement to use
internal accounting policies..
• IAS 14 requires an analysis by geographical segment, but it can be limited if it is designated
as only secondary segmental information. IFRS 8 requires a geographic analysis if designated
as an operating segment. Otherwise, IFRS 8 will require information at entity-wide level on
revenue and certain non-current assets (if the disclosure information is available or not
burdensome to collect). Information required on the entity-wide level by IFRS 8 and on
secondary segment by IAS 14 is in many cases quite similar.
• The information to be provided by business segment is different under IAS 14 and IFRS 8.
Under IAS 14, revenue, result, assets, liabilities, and cost of new property, plant or equipment
(PPE) and intangible assets acquired all needed to be shown by business segment when
designated as primary segmental information. Under IFRS 8, more detailed information has
to be provided, but only to the extent that it is regularly provided to the chief operating
decision-maker.
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• Because of changes made to IAS 34 Interim Financial Reporting by IFRS 8, more segment
information is now required in interims than it was the case before.
The auditor’s report when the audit has been conducted in accordance with the ISAs includes the
following elements:
(a) Title;
• The auditor’s report should have a title that clearly indicates that it is the report of an
independent auditor.
• A title indicating the report is the report of an independent auditor, for example,
“Independent Auditor’s Report,” affirms that the auditor has met all of the ethical
requirements, including that of independence and, therefore, distinguishes the auditor’s
report from reports issued by others.
(b) Addressee;
The introductory paragraph in the auditor’s report should identify the entity whose financial
statements have been audited and should state that the financial statements have been audited.
The report should specifically identify the title of each of the financial statements that comprise
the complete set of general purpose financial statements, the date and period covered by those
financial statements, and refer to the related notes.
(d) A description of management’s responsibility for the preparation and the fair
presentation of the financial statements;
The auditor’s report should state that management is responsible for the preparation and the fair
presentation of the financial statements in accordance with the applicable financial reporting
framework and that this responsibility includes:
• Maintaining internal control relevant to the preparation of financial statements that are free
from material misstatement, whether due to fraud or error;
• Selecting and applying appropriate accounting policies that are consistent with the applicable
financial reporting framework; and
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• The auditor’s report should include a statement that the responsibility of the auditor is to
express an opinion on the financial statements based on the audit.
• The auditor’s report states that the auditor’s responsibility is to express an opinion on the
financial statements based on the audit in order to contrast it to management’s
responsibility for the preparation and the fair presentation of the financial statements
(f) An opinion paragraph containing an expression of opinion on the financial statements and
a reference to the applicable financial reporting framework used to prepare the financial
statements (including identifying the country of origin4 of the financial reporting framework when
IFRS or International Public Sector Accounting Standards (IPSAS) are not used);
• An unqualified opinion should be expressed when the auditor concludes that the financial
statements give a true and fair view (or are presented fairly, in all material respects) in
accordance with the applicable financial reporting framework.
• An unqualified opinion indicates implicitly that any changes in accounting policies or in the
method of their application, and the effects thereof, have been properly determined and
disclosed in the financial statements.
(g) Where relevant, reporting on any other reporting responsibilities in addition to the
responsibility to report on the financial statements;
• When the auditor addresses other reporting responsibilities within the auditor’s report on
the financial statements, these other reporting responsibilities should be clearly identified
and distinguished from the auditor’s responsibilities for, and opinion on, the financial
statements.
The auditor should date the report as of the date on which the auditor has obtained sufficient
appropriate audit evidence to support the auditor’s opinion.
The report should name a specific location, ordinarily a city, in the jurisdiction where the auditor
practices.
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At the end of financial year, the directors draft a short statement on the overall activities of the
company which is called director’s report. This is attached to the company’s annual report. Such a
report indicates whether there had been any change in the company’s nature of business. It is an
instrument through which the Board describes the business performance during last financial year
and prospect in the years to come.
The directors of a company are required to prepare a directors’ report at the end of each financial
year. This legislation is part of a general move towards greater corporate transparency.
By knowing this information, shareholders can make better informed decisions and can hold the
directors of the company to greater account.
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9. a) State the Financial capital and Physical capital concepts of financial reporting
based on the framework.
This is carried forward from previous versions of Framework, so there’s nothing new here.
Let me recap shortly. The Framework explains two concepts of capital:
• Financial capital – this is synonymous with the net assets or equity of the entity.
Under the financial maintenance concept, the profit is earned only when the amount of net assets
at the end of the period is greater than the amount of net assets in the beginning, after excluding
contributions from and distributions to equity holders.
The financial capital maintenance can be measured either in Nominal monetary units, or
Units of constant purchasing power.
• Physical capital – this is the productive capacity of the entity based on, for example,
units of output per day.
Here the profit is earned if physical productive capacity increases during the period, after
excluding the movements with equity holders.
The main difference between these concepts is how the entity treats the effects of changes in
prices in assets and liabilities.
1. Historical cost – this measurement is based on the transaction price at the time of
recognition of the element; A historical cost is a measure of value used in accounting in which
the value of an asset on the balance sheet is recorded at its original cost when acquired by
the company. The historical cost method is used for fixed assets in the United States under
generally accepted accounting principles (GAAP).
2. Current value – it measures the element updated to reflect the conditions at the
measurement date. Here, several methods are included:
• Fair value;
• Value in use;
• Current cost.
1. Present Value - Present value (PV) is the current value of a future sum of money or stream
of cash flows given a specified rate of return. Future cash flows are discounted at the discount
rate, and the higher the discount rate, the lower the present value of the future cash flows.
Determining the appropriate discount rate is the key to properly valuing future cash flows,
whether they be earnings or debt obligations.
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2. Net Realizable Value - Net realizable value (NRV) is the value of an asset that can be
realized upon the sale of the asset, less a reasonable estimate of the costs associated with
the eventual sale or disposal of the asset. NRV is a common method used to evaluate an
asset's value for inventory accounting. NRV is a valuation method used in both Generally
Accepted Accounting Principles (GAAP) and International Financial Reporting Standards
(IFRS).
The Framework then gives guidance on how to select the appropriate measurement basis and
what factors to consider (especially relevance and faithful representation).
What we personally find really useful is the guidance on measurement of equity. The issue here
is that the equity is defined as “residual after deducting liabilities from assets” and therefore total
carrying amount of equity is not measured directly. Instead, it is measured exactly by the formula: