Accrual Basis of Accounting I Accounting Basic I Accounting Universe

The accrual basis of accounting, as per IAS 1 (International Accounting Standard 1), refers to the method of accounting where transactions and other events are recognized when they occur (and not when cash or its equivalent is received or paid). These transactions and events are recorded in the accounting records and reported in the financial statements of the periods to which they relate. This method is fundamental to the preparation of financial statements under the International Financial Reporting Standards (IFRS).

IAS 1 outlines the accrual basis of accounting in the context of general-purpose financial statements, emphasizing that:

1. **Revenue and Expenses Recognition**: Revenue is recognized when it is earned, and expenses are recognized when they are incurred, regardless of when the cash transactions occur.

2. **Asset and Liability Recognition**: Assets are recognized when it is probable that future economic benefits will flow to the entity and the asset has a cost or value that can be measured reliably. Liabilities are recognized when an outflow of resources embodying economic benefits is probable and the amount of the obligation can be measured reliably.

The accrual basis ensures that financial statements reflect all resources that have been received and consumed, as well as all obligations incurred during a period, thus providing a more accurate picture of an entity's financial position and performance.

In summary, IAS 1 requires the use of the accrual basis of accounting to ensure that financial statements are complete, reliable, and present a true and fair view of the entity’s financial performance and position.

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Going Concern Concept I Definition & Explanation I Accounting Universe

The going concern concept is a fundamental principle in accounting, particularly addressed in IAS 1 (International Accounting Standard 1) – Presentation of Financial Statements. According to IAS 1, the going concern concept is the assumption that an entity will continue its operations for the foreseeable future and has no intention or need to liquidate or curtail materially the scale of its operations.

Key points regarding the going concern concept according to IAS 1 include:

1. **Assessment of Going Concern**: Management is required to assess the entity’s ability to continue as a going concern when preparing financial statements. This assessment should cover a period of at least twelve months from the end of the reporting period.

2. **Disclosure Requirements**:

   - If there are significant doubts about the entity’s ability to continue as a going concern, these doubts must be disclosed in the financial statements.

   - If management concludes that the entity is not a going concern, the financial statements should not be prepared on a going concern basis. The basis of preparation used must be disclosed, along with the reasons why the entity is not considered a going concern.

3. **Considerations for the Assessment**: Factors that management should consider in their assessment include:

   - Current and expected profitability.

   - Debt repayment schedules and sources of financing.

   - Cash flow projections.

   - Existing and potential sources of funding.

   - Any other relevant information that could impact the entity’s ability to continue operations.

4. **Revisions and Updates**: If new information arises that impacts the entity’s ability to continue as a going concern, the assessment must be revised and the financial statements updated accordingly.

In summary, the going concern concept under IAS 1 ensures that financial statements are prepared on the assumption that the entity will continue to operate for the foreseeable future unless there is evidence to the contrary. This principle is critical for providing a realistic and fair view of the entity's financial position and performance. 

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International Accounting Standard 02 (Part 03) I Easy IAS & IFRS I Accounting Universe

IAS 2 key guidelines for the inclusion and exclusion of costs in the valuation of inventories as per accounting standards, specifically IAS 2, which deals with inventories.

### Inclusion of Other Costs 

Other costs are included in the cost of inventories only if they contribute to bringing the inventories to their current location and condition. Examples include:

- **Non-production overheads**: These are indirect costs that are not directly tied to production but are necessary for the production process.

- **Design costs for specific customers**: Costs incurred for designing products tailored to specific customer needs.

### Exclusion of Certain Cost 

Certain costs are excluded from inventory valuation and are instead recognized as expenses in the period they are incurred:

- **Abnormal amounts of wasted materials, labor, or other production costs**: Excess costs due to inefficiency or waste.

- **Storage costs**: Costs for storing inventory unless storage is a necessary step in the production process before a further stage of production.

- **Administrative overheads**: General administrative expenses not related to bringing the inventory to its current location and condition.

- **Selling costs**: Costs related to the sale of inventory, such as marketing and sales commissions.

### Borrowing Costs

IAS 23 addresses borrowing costs, specifying limited circumstances where borrowing costs can be included in the cost of inventories. These are generally situations where borrowing costs are directly attributable to the acquisition, construction, or production of qualifying assets.

### Deferred Settlement Terms 

When inventories are purchased on deferred payment terms, any financing element (i.e., the difference between the purchase price under normal credit terms and the amount paid) is recognized as interest expense over the financing period.

### Agricultural Produce 

Inventories of agricultural produce harvested from biological assets are initially measured at fair value less costs to sell at the point of harvest, in accordance with IAS 41 Agriculture. This initial measurement becomes the cost of these inventories.

### Techniques for Measurement of Cost 

Two techniques for inventory cost measurement are discussed:

1. **Standard Cost Method**:

   - Uses pre-determined costs based on normal levels of materials, labor, and efficiency.

   - These standard costs are regularly reviewed and adjusted to reflect current conditions.

2. **Retail Method**:

   - Commonly used in the retail industry for large quantities of items with similar margins.

   - Cost is determined by reducing the sales value of inventory by the gross margin percentage.

   - The gross margin percentage considers markdowns and is often averaged across retail departments.

These methods are accepted for convenience if they reasonably approximate the actual cost.

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International Accounting Standard 02- Part 1 

International Accounting Standard 02- Part 2 

International Accounting Standard-02 (Part 2) I Easy IAS & IFRS I Accounting Universe

The guidance provided outlines how inventories should be measured and what constitutes the cost of inventories. Here’s a breakdown of the key points:

### Measurement of Inventories

- **Lower of Cost and Net Realisable Value**: Inventories should be valued at the lower of their cost or the amount they can be sold for, net of selling costs.

### Components of Inventory Cost

1. **Costs of Purchase**:

   - **Purchase Price**: The amount paid to acquire the inventories.

   - **Import Duties and Other Taxes**: Includes all non-recoverable taxes incurred to bring the inventories to their location.

   - **Transport, Handling, and Other Direct Costs**: Any additional costs directly attributable to acquiring the goods.

   - **Deductions**: Trade discounts, rebates, and similar reductions are subtracted to determine the actual cost.

2. **Costs of Conversion**:

   - **Direct Labour**: Costs that are directly tied to the production of inventory items.

   - **Fixed Production Overheads**: These are indirect costs such as depreciation, maintenance of factory buildings and equipment, and costs of factory management that remain relatively constant regardless of production levels.

   - **Variable Production Overheads**: Indirect costs that fluctuate with the level of production, such as indirect materials and indirect labor.

### Allocation of Overheads

- **Normal Capacity**: The allocation of fixed overheads is based on the expected average production under normal circumstances, accounting for planned maintenance.

- **Low Production or Idle Plant**: Fixed overheads are not increased per unit in times of low production or idle capacity. Unallocated overheads during such times are expensed.

- **High Production**: During periods of unusually high production, fixed overheads allocated per unit are decreased to prevent overvaluation of inventories.

- **Variable Overheads**: These are allocated based on the actual usage of production facilities.

### Joint and By-Products

- **Joint Products**: When a production process yields multiple products simultaneously, and costs cannot be distinctly identified, they are allocated based on a rational and consistent method, such as relative sales values.

- **By-Products**: These are typically minor in value. Often measured at net realizable value, this amount is deducted from the cost of the main product, ensuring the main product’s cost is not materially misstated.

So the principle behind these guidelines is to ensure inventories are reported at a value that reflects their true economic benefit and costs. By valuing at a lower cost and net realizable value, potential losses are anticipated. Including all relevant costs ensures comprehensive valuation and proper allocation of overheads and maintains accuracy in production cost accounting. Handling joint and by-products in a rational manner ensures fair value distribution among products derived from the same process.

International Accounting Standard 02 (Part 1) Click Here   

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Components of Financial Statement I Accounting Basic I Accounting Universe

According to IAS 1 (International Accounting Standard 1), "Presentation of Financial Statements," the components of a complete set of financial statements are:

1. **Statement of Financial Position (Balance Sheet):**

    - **Assets:** Current and non-current assets such as cash, receivables, inventory, property, plant, and equipment.

    - **Liabilities:** Current and non-current liabilities including accounts payable, loans, and other obligations.

    - **Equity:** Equity attributable to owners of the parent and non-controlling interests, including issued capital, reserves, and retained earnings.

2. **Statement of Profit or Loss and Other Comprehensive Income (Income Statement):**

    - **Profit or Loss:** Revenues, expenses, gains, and losses.

    - **Other Comprehensive Income:** Items of income and expense that are not recognized in profit or loss, such as revaluation surplus, foreign currency translation adjustments, and gains or losses on remeasuring financial assets.

    This statement can be presented in one of two ways:

    - A single statement of profit or loss and other comprehensive income.

    - Two separate statements: an income statement (showing components of profit or loss) and a statement of comprehensive income (beginning with profit or loss and showing components of other comprehensive income).

3. **Statement of Changes in Equity:**

    - Shows the reconciliation between the opening and closing balances of equity, detailing changes due to profit or loss, other comprehensive income, transactions with owners (such as dividends and issuance of shares), and changes in ownership interests in subsidiaries.

4. **Statement of Cash Flows:**

    - **Operating Activities:** Cash flows from primary revenue-generating activities, including receipts from customers and payments to suppliers and employees.

    - **Investing Activities:** Cash flows from the acquisition and disposal of long-term assets and investments.

    - **Financing Activities:** Cash flows from transactions affecting the equity and borrowings of the entity, such as issuing shares, borrowing, and repayment of loans.

5. **Notes to the Financial Statements:**

    - Provide information about the basis of preparation of the financial statements and specific accounting policies used.

    - Disclose additional information necessary for a fair presentation, including descriptions of items in the financial statements, risk management policies, and other relevant details.

6. **Statement of Financial Position at the Beginning of the Earliest Comparative Period:**

    - Required when an entity applies an accounting policy retrospectively, makes a retrospective restatement of items in its financial statements, or reclassifies items in its financial statements.

These components ensure that financial statements provide a comprehensive and clear view of the financial performance, position, and cash flows of an entity, enabling stakeholders to make informed decisions.

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Who Needs Financial Information? I Accounting Basic I Accounting Universe

Users of financial statements include a variety of stakeholders, each with distinct interests and purposes. Key users include:

1. **Investors and Shareholders**: To assess the profitability, financial health, and future prospects of the company, guiding their investment decisions.

2. **Creditors and Lenders**: To evaluate the company's creditworthiness and ability to repay loans.

3. **Management**: To make informed business decisions, plan strategies, and manage operations effectively.

4. **Employees**: To understand the company's stability and profitability, which can impact job security and remuneration.

5. **Suppliers and Trade Creditors**: To assess the company's financial stability before extending credit or entering into long-term contracts.

6. **Customers**: To ensure the company can continue providing goods or services.

7. **Regulatory Authorities**: To ensure compliance with laws and regulations.

8. **Analysts and Financial Advisors**: To provide insights and recommendations to their clients.

9. **Public**: To gauge the company's economic contribution and social responsibility.

10. **Potential Investors or Acquirers**: To evaluate investment or acquisition opportunities.

Each of these users relies on financial statements to make informed decisions related to their specific interests in the company.

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International Accounting Standard 02 I Objective & Scope I (Easily Explained)

Objective of International Accounting Standard 02:

The Standard on accounting for inventories primarily addresses how to properly account for the costs associated with inventories. Here’s a detailed breakdown of its objectives and provisions:

### Primary Objective

The main goal of this Standard is to ensure that inventories are accounted for correctly, ensuring that the costs associated with them are recognized as assets. These costs are then carried forward in financial statements until the revenues associated with those inventories are recognized. This approach aligns inventory costs with revenues, ensuring an accurate representation of financial performance and position.

### Key Issues Addressed

1. **Amount of Cost to be Recognized as an Asset**: The Standard determines how much of the cost related to inventories should be recognized as an asset on the balance sheet. This involves calculating the costs incurred to bring the inventories to their present location and condition.

2. **Cost Recognition as Expense**: It also dictates how and when these costs should be recognized as an expense. This generally occurs when the related revenues are recognized, ensuring that expenses and revenues are matched in the same accounting period.

3. **Write-down to Net Realisable Value**: The Standard provides guidance on writing down inventories to their net realizable value if the expected selling price (less any costs to sell) is lower than the cost. This ensures inventories are not overstated on the balance sheet.

### Determination of Cost

The Standard provides guidance on how to determine the cost of inventories. This cost typically includes:

- **Purchase Costs**: Including purchase price, import duties, and other taxes (excluding recoverable taxes), transportation, handling, and other costs directly attributable to the acquisition of finished goods, materials, and services.

- **Conversion Costs**: Including costs directly related to the units of production, such as direct labor, and a systematic allocation of fixed and variable production overheads.

- **Other Costs**: Any other costs incurred in bringing the inventories to their present location and condition.

### Cost Formulas

The Standard specifies which cost formulas can be used to assign costs to inventories:

- **Specific Identification**: Used when specific costs are attributable to identified items of inventory.

- **First-In, First-Out (FIFO)**: Assumes that the earliest goods purchased or produced are the first to be sold or used.

- **Weighted Average Cost**: Calculates the cost of each item based on the weighted average of the cost of similar items at the beginning of a period and the cost of similar items purchased or produced during the period.

### Subsequent Recognition

Once the cost of inventory is determined, the Standard guides how to recognize it as an expense. Typically, this recognition occurs:

- When the inventory is sold, the cost is matched with the revenue generated.

- If the inventory is written down to its net realizable value, the expense is recognized at the time of the write-down.

### Practical Application

In practice, this Standard ensures that:

- Financial statements accurately reflect the cost of inventories.

- There is consistency and comparability in financial reporting.

- Inventories are not overstated, preventing inflated asset values and ensuring a true representation of financial health.

By providing these guidelines, the Standard helps businesses and accountants handle inventory costs in a way that supports accurate and transparent financial reporting.

Scope of International Accounting Standard 02:

IAS 2 provides guidelines for accounting for inventories, which include:

- **Finished Goods**: Assets held for sale in the ordinary course of business.

- **Work in Process**: Assets in the production process intended for sale.

- **Raw Materials**: Materials and supplies consumed in production.

### Exclusions from IAS 2 Scope

Certain types of inventories are excluded from the scope of IAS 2:

1. **Work in Process under Construction Contracts**:

   - Governed by **IAS 11 Construction Contracts**.

   - These are contracts specifically negotiated for the construction of an asset or a combination of assets.

2. **Financial Instruments**:

   - Covered by **IAS 39 Financial Instruments: Recognition and Measurement**.

   - Financial instruments include financial assets and liabilities such as stocks, bonds, and other securities.

3. **Biological Assets Related to Agricultural Activity and Agricultural Produce at the Point of Harvest**:

   - Addressed by **IAS 41 Agriculture**.

   - Biological assets include living plants and animals; agricultural produce refers to the harvested product.

### Measurement Exclusions within the Scope of IAS 2

While the following inventories fall within the general scope of IAS 2, the standard excludes them from its measurement requirements:

1. **Producers of Agricultural and Forest Products, Agricultural Produce after Harvest, and Minerals and Mineral Products**:

   - These inventories are measured at **net realizable value (NRV)** in accordance with well-established industry practices.

   - **Net Realizable Value** is the estimated selling price in the ordinary course of business minus any costs of completion and disposal.

   - When these inventories are measured at NRV, any changes in NRV are recognized in profit or loss in the period of the change.

2. **Commodity Brokers and Dealers**:

   - These entities measure their inventories at **fair value less costs to sell**.

   - **Fair Value** is the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date.

   - Any changes in fair value less costs to sell are recognized in profit or loss during the period of the change.

### Practical Implications

- **For Producers of Agricultural and Mineral Products**:

  - They follow industry-specific practices for measuring inventory, which can differ from the cost-based measurement typically required by IAS 2.

  - This allows them to present a more accurate financial picture based on current market conditions and industry norms.

- **For Commodity Brokers and Dealers**:

  - These entities can reflect real-time market conditions in their financial statements by measuring inventories at fair value and less costs to sell.

  - This method is more relevant to their business model, which relies on short-term price fluctuations and trading margins.

We can say that IAS 2 provides a framework for accounting for most types of inventories but makes specific exclusions and measurement exceptions to accommodate unique industry practices and more accurately reflect the economic realities of certain sectors. These adjustments help ensure that financial statements are relevant and reliable and provide a true representation of the financial position and performance of the entities. 

International Accounting Standard (Part 2). Click Here 

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