1. Financial Accounting II Lecture 35

2. Expenses have been distributed in five major classifications that are to be presented on the face of the Income Statement:
Cost of Goods Sold
Administrative Costs
Distribution Costs (Selling Expenses)
Finance Costs
Other Expenses

3. Cost of Goods Sold
Cost of Goods Sold is the direct cost of manufacturing the goods that were sold by the entity during the reporting period.

4. Cost of goods sold includes: Cost of materials used Direct labour
Overheads such as supervisory staff costs, factory costs.

5. Cost of Goods Sold
Total cost incurred during the period is not treated as expense for the period.

6. Administrative Costs
Administrative costs include expense incurred on administration and management of the business.

7. IAS 2 “Inventories”
IAS 16 “Property Plant and Equipment”
IAS 17 “Leases”
IAS 23 “Borrowing Costs”
IAS 28 “Investments in Associates”
IAS 38 “Intangible Assets”

8. IAS 2 “Inventories”
Inventories are carried in the books of accounts according to the methods of valuation given in IAS 2.

9. IAS 2 “Inventories”
When these items of inventory are consumed or there value is changed, the resulting difference is charged to Income.

10. Disclosure of Inventories relating to Income Statement
IAS 2 “Inventories”
Disclosure of Inventories relating to Income Statement

11. IAS 2 “Inventories”
The amount of any reversal of any write down that is recognized as the income.

12. IAS 2 “Inventories”
The financial statements should also disclose the cost of inventories recognized as expense during the period.

13. IAS 16 “Property Plant and Equipment”
Property plant and equipment is carried in the books of accounts in accordance with the requirements of IAS 16.

14. Finance Leases (in the case of lessee)
IAS 17 “Leases”
Finance Leases (in the case of lessee)
Rental is apportioned between principal repayment and markup and the markup is treated as expense for the period.

15. IAS 17 “Leases”
Any running and maintenance cost borne by lessee is also charged as expense in the income statement.

16. IAS 23 “Borrowing Costs”
The treatment of borrowing costs is governed by IAS 23 “Borrowing Costs”.
The standard generally requires that the borrowing costs should be charged as an expense.
However it allows capitalization of these costs as an alternate treatment, if certain conditions are met.

17. IAS 28 “Investment in Associates”
Under IAS 28 investment in associates is recorded using equity method. Under equity method:
The investment in associate is initially recorded at cost which is subsequently adjusted for investors share of profits or losses of associate.
The investor’s share of profit / loss is recognized as income / expense in the books of investor.

18. Investment in Associates
Investment in associates are also subject to IAS 36 “Impairment of Assets” and IAS 39 “Financial Instruments Recognition and Measurement”, and any impairment in the value of the investment in associate is also recorded as expense in the period in which the impairment takes place.

19. IAS 38 – “Intangible Asset”
Intangible asset is amortized over its useful life and the amortization is charged as expense for the period. (the maximum useful life for an intangible asset is 20 years).

20. IAS 38 – “Intangible Asset”
Subsequent expenditure on an intangible asset after its purchase or its completion should be recognized as an expense when it is incurred, unless it is probable that this expenditure will enable the asset to generate future economic benefits in excess of its originally assessed standards.

21. IAS 38 – “Intangible Asset”
Expenditure on research (or from research phase of an internal project) should be recognized as an expense when incurred.

22. Other IAS also effect recognition, presentation and disclosure of expenses.
Generally these IAS include
IAS 11 “Construction Contracts” – specifies the recognition of revenue and related costs in case of construction contracts spread over more than one accounting periods.

23. IAS 12 “ Income Taxes” – specifies the procedure for calculation of recording and reporting of income tax.

24. IAS 19 “Employee Benefits” – specifies calculation, recording and reporting of retirement benefit related costs of the entity.

25. IAS 20 “Accounting for Government Grants and Disclosure of Government Assistance” – recording of receipts of government grants and assistance received and costs incurred in relation to fulfilling the conditions attached with the grants.

26. IAS 21 “The Effects of Changes in Foreign Exchange Rates” – Recording and disclosure on gains / losses arising from foreign currency transactions.

27. IAS 36 “Impairment of Assets”
IAS 39 “Financial Instruments Recognition and Measurement”