1. Accounting and Reporting on an Accrual Accounting Basis
Chapter 2
Accounting and Reporting on an Accrual Accounting Basis

2. By the end of this chapter, you should be able to:
explain historical cost and accrual concept;
adjust cash receipts and payments in accordance with IAS 18 Revenue;
account for the amount of non-current assets used during the accounting period;
prepare a statement of income and a statement of financial position;
reconcile cash flow accounting and accrual accounting data.

3. Objective of financial statements
To provide information about
The financial position
The financial performance
Capability of an enterprise to adapt
Changes in the amount due to equity owners
That is useful to a wide range of users in
making economic decisions (IASB)

4. Common information needs for decision making
All the information needs of all
users cannot be met
Some needs are common to all users, eg. interest in the financial position, performance and adaptability of the enterprise as a whole.
Which user is the primary target?
Investors are providers of risk capital, so financial statements that meet their needs would also meet the needs of other users.

5. Decision makers need to assess the ability to generate cash
Economic decisions require an evaluation of
A business’s ability to generate cash and
The timing and certainty of its generation
To make the evaluation, users need information that focuses on:
the financial position,
financial performance
cash flows

6. Financial information to evaluate the ability to generate cash differs from financial information on actual cash flows . . .
in that, in addition to the cash flows and statement of financial position it includes within its definition of performance a reference to profit
This information is required to assess changes in the economic resources that the business is likely to control in the future – i.e
predicting the ability of the business to generate cash flows from its existing resource base.

7. A complete set of financial statements includes
A statement of financial position as at the end of the period - Balance Sheet
A statement of comprehensive income for the period - Income Statement
A statement of changes in equity for the period
A statement of cash flows for the period
Notes, comprising a summary of significant accounting policies and other explanatory information.

8. HCA = Historical cost accounting
HCA Accounting
HCA = Historical cost accounting
HCA is useful for stewardship purposes
Transactions reported are the amount at the date transaction occurred
Amounts are objective and verifiable
Basis for determining outcome of agency agreements, for example loan covenants
However, may not be as useful as inflation adjusted data for decision making.

9. Accrual accounting
Includes transactions affecting the current accounting period that have not yet involved the movement of cash –
Revenue earned replaces cash receipts
Expenses incurred replaces cash payments
Sacrifice of non-current assets – depreciation IAS16

10. Accrual accounting
When to recognize transaction within the accrual period?
Suppliers : Payables
Customers: Receivables
Employees: Payables
Insurance, taxes, interest: Payables/Receivables
Revenue earned, if unrealized (unearned
Expenses incurred or not incurred.

11. Subjective judgements – the matching principle
Financial statements must include costs related to the achievement of the reported income
Payments made this period for expenses that relate to the next period are deducted from the cash paid to arrive at the expense for the period eg. rent
Payments to be made in the next period for expenses incurred in the current period are added to the cash paid to arrive at the expense for the period eg. electricity.

12. illustration

13. Illustration – first 6 months actual cash flows for monthly sales
Figure 1.7 Monthly sales, purchases and expenses for 6 months
ended 30 June 20X1

14. Illustration – income statement adjusted refer to Fig 1.7
earned
incurred
Incurred, 6 months
Figure 2.3 Statement of income for the 6 months ended 30 June 20X1

15. Financial position applying IASB definitions
An asset is defined as a resource
Controlled by the enterprise
As a result of a past event
From which future economic benefits are expected to flow

16. Financial position applying IASB definitions
A liability is defined as a present obligation
Arising from a past event
Whose settlement is expected to result in an outflow of resources

17. Treatment of non-current assets
The Matching Principle approach is to:
Estimate how much of initial cost of the asset has been consumed in the period – this is known as depreciation
Apply IAS 16 Depreciation – this IAS will be discussed in detail in the PPE chapter.

18. IAS 16 states
Depreciation is the systematic allocation of the depreciable amount over useful economic life
Depreciable amount is the cost of an asset less its residual value (value remaining at the end of the asset’s useful life)
The depreciation method used should follow the pattern in which the asset’s economic benefits are used, and assumes the business will continue in operational existence for foreseeable future – i.e. the going concern assumption is applied.

19. References Elliott, Barry, Elliott Jamie,
Financial Accounting and Reporting
18th Edition chapter 2